Financial planning

Steps in the planning process

Projected financial statements

The projected financial statements
 normally comprise:

   - Projected income statement

                - Projected statement of financial position   

     (balance sheet)

                - Projected cash flow statement

Preparing projected financial statements

      External variables:

                Tax rate, Interest rates for borrowings, Inflation rate

      Internal variables:

                Capital expenditure commitments, Financing agreements, Inventories holding policies, Credit period allowed to customers, Payment policies for trade payables, Accounting policies, Dividend policy

Steps in preparing projected financial statements

 Preparing projected financial statements

      Projected financial statements may cover a short-term or long-term horizon:

      Short-term usually involves detailed forecasts of income, cash flows and financial position

      Long-term usually involves making simplifying assumptions

Sources of cash inflows and outflows 

Forecast financial statements and decision-making

      How were the projections developed?

      What underlying assumptions have been made and are they valid?

      Have all relevant items been included?

      Are the cash flows satisfactory?
 Can they be improved by changing policies or plans?

      Is there a need for additional financing?
Is it feasible to obtain the amount required?

      Can any surplus funds be profitably reinvested?

      Is the level of projected profit satisfactory in relation to the risks involved? If not, what could be done to improve matters?

      Are the sales and individual expense items at a satisfactory level?

      Is the financial position at the end of the period acceptable?

      Is the level of borrowing acceptable?
Is the business too dependent on borrowing?

Percent-of-sales method

Deducing the net cash flows from operations

Projected financial statements and risk

      Risk assessment may be undertaken using:

                Sensitivity analysis

                Scenario analysis

      Sensitivity analysis: A method to evaluate the key variables affecting a project to see how changes in each variable might influence the outcome.

      Scenario analysis: A method of dealing with risk that involves changing a number of variables simultaneously so as to provide a particular scenario for managers to consider.