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.
