Financial Planning and infrastructure technologies to purify air and water.
forecasting Immelt expects to “do good by doing good.”
Strategic Planning • Financial Plan The document that includes
• Management textbooks often list the following as assumptions, projected financial statements, and
the key elements of a strategic plan: projected ratios and ties the entire planning
• Mission Statement A condensed version of a process together.
firm’s strategic plan. First, assumptions are made about the future levels
The BOD wants the various businesses to achieve of sales, costs, interest rates, and so forth, for use
high growth rates, high profit margins, and high in the forecast.
rates of return on invested capital, all with the Second, a set of projected financial statements is
ultimate goal of increasing stock price. developed.
*Corporate Scope -Defines a firm’s lines of business Third, projected ratios Fourth, the entire plan is
and geographic areas of operation. reexamined, the assumptions are reviewed, and
In any event, the stated corporate scope should be the management team considers how additional
logical and consistent with the firm’s capabilities changes in operations might improve results.
• Statement of Corporate Objectives Sets forth
• This last step requires reconsideration of all the
specific goals to guide management.
earlier parts of the overall plan, from the mission
A firm’s statement of corporate objectives is that
statement to the operating plan. Thus, the financial
part of the corporate plan that sets forth the
plan ties the entire planning process together.
specific goals that operating managers are expected
• Financial planning is often called “value-based
to meet.
management,” meaning that the effects of various
Like most firms, GE has both qualitative and
decisions on the firm’s financial position and value
quantitative objectives.
are studied by simulating their effects within the
For example, here is a key statement from Immelt’s
firm’s financial model.
2006 letter to stockholders:
We expect our businesses to achieve 10%þ The Financial Planning Process
earnings growth most years, with long-term returns • 1. Project financial statements and use these
on equity of 20%. We expect our businesses to be projections to analyze the effects of the operating
industry leaders in market share, value, and plan on projected profits and various financial ratio.
profitability. • 2. Determine the funds needed to support the
five-year plan. This includes funds for plant and
• Corporate Strategies Broad approaches
equipment as well as for inventories and
developed for achieving a firm’s goals.
receivables, for R & Dprograms, and for major
GE has several broad corporate strategies. One is to
advertising campaigns.
be highly diversified by both products and
• 3. Forecast funds availability over the next five
geographic scope in order to achieve earnings
years.This involves estimating the funds to be
stability and financial strength. Its management
generatedinternally as well as those to be obtained
believes that financial strength will lead to a low
from external sources
cost of capital, which will benefit all its units. Also,
since GE’s management believes that the company • 4. Establish and maintain a system of controls to
should be at the forefront in addressing govern the allocation and use of funds within the
environmental issues, it is investing heavily in firm. In essence, this involves making sure that the
basic plan is carried out properly.
• 5. Develop procedure for adjusting the basic plan write-offs of spoiled inventory
if the economic forecasts upon which the plan was • This would result in low profits and a depressed
base do not materialize. Thus Step 5 is really a stock price. Moreover, if Allied financed its
“feedback loop” that triggers modifications to the expansion with debt, high interest charges would
financial plan. compound the firm’s problems.
• 6. Establish a performance based management
• The sales forecast is the most important input in
compensation system.
the firm’s forecast of financial statements, including
The Sales Forecast the projected EPS,
• Financial plans generally begin with a sales
Financial Statement forecasting:
forecast, which starts with a review of sales during
The percent of Sales Method
the past 5 year.
• Percent of sales Method- A method of
EX:
forecasting future financial statements that
Year Sales
expresses each account as a percentage of sales.
2015 $2,058
These percentages can be constant, or they can
2016 2,534
change over time.
2017 2,472
• This is the most common used technique, which
2018 2,850
begins with the sales forecast expresses as an
2019 3,000
annual growth rate in dollar sales revenues.
-------------------------
2020 3,300 (Projected) Example:
Year 2015 2016 2017 2018 2019
Allied had its ups and downs from 2015 to 2019. In
2020 2021 2022
2017, poor weather in California’s fruit-producing
Growth rate 10% 10% 10% 10% 9% 8%
regions resulted in below-average crops, which
7% 7%
caused 2017 sales to fall below the 2016 level. Then
in sales
a bumper crop in 2018 pushed sales up by 15%, an
The 2020 year period is called the explicit forecast
unusually high growth rate for a mature food
period, with the 2020 year being the forecast
processor. Due to planned new products, planned
horizon.
increased production, planned distribution
capacity, a new advertising campaign, and other Why make a Financial Plan?
factors, management expects the growth rate to • Financial plan are important for the following
increase slightly, to 10%, in 2020. Therefore, sales reasons:
should rise from $3,000 million to $3,300 million. a. Control – a financial plan lets you know your
financial situation and enables you to control your
• If the sales forecast is off, the consequences can
spending.
be serious. First, if the market expands by more
b. Security – A financial plan enables you to build-
than Allied expects, it will not be able to meet
up your emergency fund to cope with unforeseen
demand, its customers will buy from competitors,
expenses such as sickness or sudden job loss.
and it will lose market share.
c. Freedom from worry – you get a sense of
• On the other hand, if its projections are overly
financial certainty because you are preparing for
optimistic, Allied could end up with too much plant,
the future.
equipment, and inventory, leading to low turnover
ratios, high costs for depreciation and storage, and
• D. sustainability – a financial plan allows you to Tips to save successfuly
prepare for retirement. A retirement fund will help • Create and follow a reasonable budget List
you live comfortably even when you no longer earn expenses. Allocate reasonable budget for each.
income. Use it to guide your spending.
• E. freedom from debt – a financial plan will • Save first Set aside a portion of your income in a
enable you to avoid unnecessary debt due to savings account. Spend the remainder on your
unnecessary wants needs.
• F. realizing dreams – a financial plan motivates • Spend less than what you earn Live below your
you to save a portion of your income to help means. Prioritize needs. Cut down on wants
achieve your life goals.
The Financial Planning Cycle
1. Know your situation
a. Who are you and what do you have?
Assess your current financial situation. List your
sources of income, assets owned, expenses or
borrowings and any personal circumstances that
may affect your financial position.
2. Set your financial goals
a. What do you want to achieve?
b. When do you want to achieve it?
c. How much do you need?
• Set your financial goals. Be REALISTIC, SPECIFIC,
and TIMEBOUND. You can save for your college
education, a house, a retirement fund, or a dream
vacation.
3. Create a financial plan
a. How do you achieve your financial goals?
determine how much money you can save each
month to build your financial goal. Research
different modes of savings or investing to safekeep
or grow your money. Save for planned expenses;
and set aside an emergency fund for unplanned
expenses.
• 4. Execute the plan
a. What should you do to achieve your financial
goals?
Adjust your lifestyle when needed. Prioritize
spending on needs and important expenses. Delay
spending on your wants. Save early. Save regularly.
Invest wisely. Discipline is key.
