4.

2 The Financial Planning Process

Financial planning is an important aspect of the firms operations because it provides road maps for guiding, coordinating, and controlling the firms actions to achieve its objective.

Aspects:

Cash Planning

Profit Planning

Cash Planning - involves preparations of the firms cash budget Profit Planning - Involves preparation of pro forma statements

4.2 The Financial Planning Process

 The financial planning process begins with long-term, or strategic, financial plans. These, in turn, guide the formulation of short-term, or operating, plans and budgets.

Generally, the short-term plans and budgets implement the firms long-term strategic objectives.

4.2 The Financial Planning Process

Long-term (Strategic) Financial Plans

- lay out a companys planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years

- are part on an integrated strategy that, along with production and marketing plans, guides the firm toward strategic goals

4.2 The Financial Planning Process

Short-term (Operating) Financial Plans

- specify short-term financial actions and the anticipated impact of those actions - Plans most often cover a 1- to 2-year period
Key Inputs Sales forecast Various forms of operating and financial data Key Outputs Operating budgets Cash budget Pro forma financial statements

4.2 The Financial Planning Process

4.3 Cash Planning: Cash Budgets

The cash budget, or cash forecast, is a statement of the firms planned inflows and outflows cash It is used by the firm to estimate its short-term cash requirements It is designed to cover a 1-year period, divided into smaller time intervals (monthly basis)

The Sales Forecast

This prediction of the firms sales over a given period is ordinarily prepares by the marketing dept Financial manager - estimates the monthly cash flows and determines the level of fixed assets required and the amount of financing, if any, needed to support the forecast level of sales and production

4.3 Cash Planning: Cash Budgets

External Forecast
- based on the relationships observed between the firms sales and certain key external economic indicators such as: GDP New housing starts Consumer confidence Disposable personal income

Internal Forecast
- based on a consensus of sales forecasts through the firms own sales channels - provide insight into sales expectations, and the external data provide a means of adjusting these expectations to take into account general economic factors

4.3 Cash Planning: Cash Budgets