Financial Planning

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Part One
I. Overview of the Planning Process
A long-term financial plan begins with strategy. Typically, the senior management team conducts an analysis of the markets in which the firm competes. Managers try to identify ways to protect and increase the firm’s competitive advantage in those markets. For example, the first priority of a firm that competes by achieving the lowest production cost in an industry might be to determine whether it should make additional investments in manufacturing facilities to achieve even greater production efficiencies. Of course, being the low-cost producer is difficult if the firm’s fixed assets are chronically underutilized. This type of firm therefore will spend a great deal of time and energy trying to forecast market demand and developing contingency plans for the possibility that the expected demand does not materialize. If a firm’s competitive advantage derives from the value of its brand, it might begin by assessing whether new or expanded marketing programs might increase the value of its brand relative to those of its competitors.

I. A. Successful Long-term Planning
Long-term planning requires more than paying close attention to the firm’s existing markets. Even more important is the ability to identify and prioritize new market opportunities. Managers must understand how investors determine the value of stocks and bonds if they are to identify, evaluate, and implement projects that meet or exceed investor expectations through strategic planning. Strategic Plan – A multiyear action plan for the major investments and competitive initiatives that a firm’s senior managers believe will drive the future success of the enterprises. -

Corporate Purpose – general objectives of a firm as enlisted in its articles of incorporation
Corporate Scope – defines a firm’s lines of business and geographic area of operations.
Corporate Objectives – set specific goals to guide management
Corporate Strategies – ways by which the company establish techniques to achieve its goals. Successful long-term planning means asking and answering questions such as the following:
In what emerging markets might we have a sustainable competitive advantage?
How can we leverage our competitive strengths across existing markets in which we currently do not compete?
What threats to our current business exist, and how can we meet those threats?
Where in the world should we produce? Where should we sell?
Can we deploy resources more efficiently by exiting certain markets and using those resources elsewhere?

I. B. The Role of Finance in Long-Term Planning
Finance plays several roles in long-term planning:
Financial managers draw on a broad set of skills to assess the likelihood that a given strategic objective can be achieved.
The responsibility to assess the feasibility of a strategic action plan given a firm’s existing and prospective sources of funding falls primarily to the finance function.
Finance clearly plays an important control function as firms implement their strategic plans.
A major contribution of finance to the strategic planning process involves risk management. II. PLANNING FOR GROWTH
Growth - progress of a company measured by increase in its market value, its asset base, the number of people it employs, or any number of other values.
Sustainable Growth
Most firms strive to grow over time, and most firms view rapid growth as preferable to slow growth. However, firms can focus on one or a number of possible growth targets.

Popular Growth Targets
Return on Investment
Measures the firm’s overall effectiveness in using its asset to generate returns to common stockholders.
Firm’s earnings available for common stockholders divided by its total assets.

Economic Value Added
Developed by consultants Stern, Stewart & Co. in 1982
Difference between net operating profits after taxes ( NOPAT) and the cost of funds....
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