INTRODUCTION

• Lack of effective long-range planning is a commonly cited reason for financial distress and failure.

• LONG-RANGE PLANNING – Is a means of systematically thinking about the future and anticipating possible problems before they occur.

• PLANNING – Is a process that at best helps the firm avoid stumbling into the future backward.

FINANCIAL PLANNING

• Formulates the way in which financial goals are to be achieved.

• A statement of what is to be done in the future.

• Involves making projections of sales, income, and assets based on alternative production and marketing strategies and then deciding hot to meet the
forecasted financial requirements.

• This requires that decisions made far in advance of their implementation. For instance, if a firm wants to build a factory in 2018, it might have to begin lining
up contractors and financing in 2016 or even earlier.

• SHORT-RUN PLANNING – Usually covers the coming 12 months.

• LONG-RUN PLANNING – Takes to be the coming two to five years.

• PLANNING HORIZON – Is the time period, this is the first dimension of the planning process that must be established.

• AGGREGATION – The 2nd dimension of the planning process that needs to be determined.

- Involves the determination of all of the individual projects together with the investment required that the firm will undertake and adding up these
investment proposals to determine the total needed investment which is treated as one big project.

BENEFITS THAT CAN BE DERIVED FROM FINANCIAL PLANNING

• PROVIDES A RATIONAL WAY OF PLANNING OPTIONS OR ALTERNATIVES.

- Financial plan allows the firm to develop, analyze and compare many different business scenarios in an organized and consisted way. Various investment
and financing options can be explored, and their impact on the firm’s shareholders can be evaluated. Options such as introducing new products or
closing plants might be evaluated.
• INTERACTIONS OR LINKAGES BETWEEN INVESTMENT PROPOSALS ARE CAREFULLY EXAMINED.

- Example, if the firm is planning on expanding or undertaking new investments and projects, all other relevant variables such as source, terms and timing
of financing are thoroughly examined.

• POSSIBLE PROBLEMS RELATED TO THE PROPOSAL PROJECTS ARE IDENTIFIED ACTIONS TO ADDRESS THEM ARE STUDIED.

- Means that financial planning should identify what may happen to the firm if different events take place. It should address what actions the firm will take
if expectations do not materialize and more generally, if assumptions made today about the future are seriously in error. One objective of financial
planning is to avoid surprises and develop contingency plans.

• FEASIBILITY AND INTERNAL CONSISTENCY ARE ENSURED.

- Financial planning is a way of verifying that the goals and plans made for specific areas of a firm’s operations are feasible and internally consistent.

• MANAGERS ARE FORCED TO THINK ABOUT GOALS AND ESTABLISH PRIORITIES.

- Through financial planning, directions that the firm would take are established, risks are calculated and educated alternative courses of action are
considered thoroughly.

COMMON ELEMENTS OF FINANCIAL PLANNING MODELS

1. Economic environment assumption – The plan will have to state explicitly the economic environment in which the firm expects to reside over the life of the
plan. The more important economic assumption that will have to be made are the inflation rates, level of interest rates and the firm’s tax rate.

2. Sales forecast - An externally supplied sales forecast considered the “driver” shall be the “heart” of all financial plans. The user of the planning model will
supply this value and most other values will be calculated based on it. Planning will focus on projected future sales and the assets and financing needed to
support those sales. Oftentimes, the sales forecast will be given as the growth rate in sales rather than as an explicit sales figure.

DETERMINANTS OF GROWTH RATES

• A firm’s ability to sustain growth depends explicitly on the following factors:

a) PROFIT MARGIN – Is a measure of a company’s earnings related to its revenue. An increase in profit margin will increase the firm’s ability to generate
funds internally and thereby increase its sustainable growth.

b) DIVIDEND POLICY - outlines how a company will distribute it dividends to its shareholders. A decrease in the percentage of net income paid out as
dividends will increase the retention ratio. This increases internally generated equity and thus increases sustainable growth.
 c) FINANCIAL POLICY – Are the rules or principles of your business’s accounting and financial practices. Serve as a framework of guidelines when making
decisions and regulations that are related to the financial system of the organization. An increase in the debt- equity ratio increases the firm’s financial leverage.
Because this makes additional debt financing available, it increases the sustainable growth rate.

d) TOTAL ASSET TURNOVER – Is a financial efficiency ratio that measures a company’s ability to generate sales from its assets.

3. Pro forma statement or projected statements – Are financial reports for a business on hypothetical scenarios. These are calculated based on projections and
assumptions about future financial results. A financial plan will have a forecast statement of financial position, income statement of cash flows and statement of
stockholders’ equity. This pro forma statement will summarize the different events projected for the future.

4. Asset requirement – Refers to a minimum amount one must invest in order to participate in an activity. It describe the projected capital spending and the
proposed uses of network capital.

5. Financial requirements – Refers to the specific amount of actual or estimated funds needed to carry out a plan, project or program. These are used to
purchase assets, goods, raw materials, and for other flow of economic activities.

6. Additional funds needed (AFN) – Means that the additional amount of funds that the company needs to carry out its business plan effectively. These plan
could relate to capacity expansion, diversification, geographic spread, innovation and research. After the firm has a sales forecast and an estimate of the
required spending on assets, some amount of new financing will often be necessary because projected total assets will exceed projected total liabilities and
equity. In other words, the statement of financial position will no longer balance.

FINANCIAL CONTROL

• Are policies and procedures developed by an organization to manage its financial resources and operate efficiently.

• Essential for cash flow management, budgeting, and the prevention of any fraud or theft. This enable the business to track and oversee its financial activities to
grow and prosper.

FINANCIAL FORECASTING ANALYSIS

• Is the process of estimating or predicting the future financial performance of a company or project. It is based on historical data, trends and other business
intelligence.

• Begins with projections of sales revenues and production costs.

• BUDGET – is a plan which sets forth the projected expenditures for a certain activity and explains where the required funds will come from.

• PRODUCTION BUDGET – presents a detailed analysis of the required investments in materials, labor, and plant necessary to support the forecasted sales level.
WORKING CAPITAL MANAGEMENT

• Involves finding the optimal levels of cash, marketable securities, accounts receivable and inventory and then financing that working capital at the least cost.

• Business strategy designed to ensure that a company operates efficiently by monitoring and using its current assets and liabilities to their most effective use.

TRACING CASH AND NET WORKING CAPITAL

• OPERATING CYCLE – The length of time in which the firm purchases or produce inventory, sell it and receive cash.

• Consist of a time period between the procurement of inventory of raw materials and turns then into finished goods, sell them and receive payment for them.

CASH CONVERSION CYCLE

• The length of time funds are tied up in working capital or the length of time between paying for working capital and collecting cash from the sale of inventory.

a. Inventory Conversion Period – The average time required to purchase merchandise or to purchase raw materials and convert them into finished goods and
then sell them.

b. Average Collection Period – The average length of time required to convert the firm’s receivables into cash, that is, to collect cash following a sale.

c. Payables Deferral Period – The average length of time between the purchase of materials and labor or merchandise and the payment of cash for them.

Remedies that may be adopted to reduce the length of operating cycle period.

1. PRODUCTION MANAGEMENT – This means there should be proper production planning and coordination at all levels of activity. A continuing assessment of
manufacturing cycle, proper maintenance of plant, equipment and infrastructure facilities and improvement of manufacturing system.

2. PURCHASING MANAGEMENT- Here purchasing manager should ensure the availability of the right type, quantity and quality of materials/merchandise
obtained at the right price, time and place through proper logistics management.

3. MARKETING MANAGEMENT – The sale and production policies should be synchronized. Production of quality products at lower cost enhances their
marketability and salability. Marketing people should strive to continually develop effective advertisement, sales promotion activities, effective salesmanship
and appropriate distribution of channels.

4. CREDIT AND COLLECTION POLICIES – Sound credit and collection policies will enable the finance manager to minimize investment in working capital
particularly on inventory and receivables.

5. EXTERNAL ENVIRONMENT – Here the financial manager should be aware and sensitive to fluctuations in demand, entrants of new competitors, government
fiscal and monetary policies, price fluctuations to be able to anticipate and minimize and adverse impact of the changes to the company.