What is Financial Planning? An Overview of Financial Planning

Financial planning is important to manage a firm’s income, spending, debt and investment. Without financial planning, value creation is impossible. If a company wants to create value and become financially successful, it has to create a financial plan.

Financial Planning Process

• Define corporate objectives
• Establish corporate goals
• Declare corporate strategies
• State corporate policies
  • Marketing
  • Manufacturing
  • Working capital policy
  • Dividend policy
• Prepare strategic plans
• Create financial budgets
  • Projected financial statements
  • Capital budget
  • Cash budget
  • External financing plan

Components of a Financial Planning Model

• Macroeconomic variables (Industry growth, inflation rate, FX forecasts, interest rate forecasts)
• Industry variables (Industry growth rate, market share)
• Firm variables (capacity constraints, restrictions on debt policy, current ratio and coverage ratios, constraints in funds availability)
• Sales forecasts

Outputs of Financial Planning

• Projected Balance Sheet
• Projected Income Statement
• Cash Flow Statement
• Cash Budget

KEY TAKEAWAYS

• Projected financial statements are used to analyze the effects of the operating plans on the projected financial ratios and determine the amount of external funds needed.
• Projected statements can be analyzed to determine how much value is created for shareholders.
• An analysis of a forecasted cash flow statement is valuable in planning intermediate and long term financing of a firm. It reveals a firm’s need for funds.
• Cash budget is used to predict when and in what quantity payments of cash will be made.
• Cash budgeting involves projection of cash inflows, outflows and financing needs.

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