FNBU 3221 Chapter 4: Chapter 4

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17 Feb 2017
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Chapter 4
Long-range planning is a means of systematically thinking about the future & anticipating
possible problems before they arrive
Financial planning establishes guidelines for change & growth in firm & is concerned w/
major elements of firm’s financial & investment policies w/out examining individual
components of those policies in detail
Managers must establish basic elements of firm’s financial policy to develop explicit
financial plan
o Firm’s needed investment in new assets
o Degree of financial leverage firm chooses to employ
o Amount of cash firm thinks is necessary & appropriate to pay shareholders
o Amount of liquidity & working capital firm needs on ongoing basis
What is Financial Planning?
Growth as a financial management goal
o Growth not appropriate goal for financial manager by itself (growth desirable
consequence of good decision making, not end unto itself)
Dimensions of financial planning
o Planning horizon: long-range time period on which financial planning process focuses
(usually next 2-5 years)
1st dimension of planning process that must be established
o Aggregation: process by which smaller investment proposals of each of firm’s
operational units are added up & treated as 1 big project
Level of aggregation is 2nd dimension of planning process that needs to be
determined
o Financial plan requires inputs in form of alternative sets of assumptions about
important variables
What can planning accomplish?
o Examining interactions
o Exploring options
o Avoiding surprises & developing contingency plans
o Ensuring feasibility & internal consistency
Financial Planning Models: A First Look
A financial planning model: the ingredients
o Sales forecast
o Pro forma statements
Forecast balance sheet, income statement, & statement of cash flows
o Asset requirements
Projected balance sheet will contain changes in total fixed assets & net
working capital @ minimum
o Financial requirements
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Document Summary

Long-range planning is a means of systematically thinking about the future & anticipating possible problems before they arrive. Financial planning establishes guidelines for change & growth in firm & is concerned w/ major elements of firm"s financial & investment policies w/out examining individual components of those policies in detail. Growth as a financial management goal: growth not appropriate goal for financial manager by itself (growth desirable consequence of good decision making, not end unto itself) Dimensions of financial planning: planning horizon: long-range time period on which financial planning process focuses (usually next 2-5 years) 1st dimension of planning process that must be established: aggregation: process by which smaller investment proposals of each of firm"s operational units are added up & treated as 1 big project. Level of aggregation is 2nd dimension of planning process that needs to be determined: financial plan requires inputs in form of alternative sets of assumptions about important variables.

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