ACFI201 - 2

A model of what management expect a business to become in the future. Goon plans are comprehensive and all financial statements are pro forma.

• Planning process helps pull management together
• Provides a road map for running the business
• Provides a statment of goals.
• Tells equity investors what reutrns they can expect
• Tells debt investors how the firm will repay their loan

• Operational
• Strategic
• Budgeting 
• Forecasting

• Deals with the overall direction of the firm
• Addresses broad, long term issues
• Contains summarized, approximate financial projections (usually 5 years)

• Subset of Strategic Planning
• Translates business ideas into concrete short term projections
• Details where the firm wants to be at some fture point in time and the resources required to get there
• Specifies how much the firm will sell to whom and at what prices

• Short term updates of the annual plan - usually covers a calendar quarter
• Used in industries in which business conditions change rapidly

• Very short term projections of profit and cash flow.
• Projects sale revnues and expenses in the planing period
• Estimates currrent assets and fixed assets necessary to suppport projected sales
• Determine the firms financing needs throughout the planning period

• Alows managers to make educated guesses about they future financial condition of the firm
• Allows managers to be more effective in monitoring the firms financial affairs and ths lead to increase profits and reduce risk.

• Major New Investements (capital budgeting, determing profitability)
• Routine Operational Requirements (Determing short term financing needed)
• Long term financial requirements (determing total assets less existing finance)

• Percentage of Sales
• Cash Budgets
• Pro Forma Financial Statements
• Computerized financial Forecasting Methods
• Regression Analysis

• 1. Convert each CA and L that varies with sales to a % of current sales
• 2. Project level of each A and L by  using its % of sales * projected sales (some may remain unchanged if don't vary with sales)
• 3. Project new RE
• 4. Project firms need for discretionary financing

Trade Credit and other accounts payable that arise spontaneously in the firms day to day operations

Sources of Financing that require an explicit decision on the part of the firms management every time funds are raised.

• 1. That most balance sheet accounts are tied directly to sales
• 2. The current levels of all assets are optimal for the current sales levels.

• Regression analysis is the use of techniques for modeling and analyzing several variables, when the focus is on the relationship betwee a dependent and one or more independent variables.
• Helps explain how the dependent variable will change in response to a change in the independent variable.

• Assumes the firms past financial condition is an accurate indicator of its future
• Accounts can be manipulated to take a certain value desired
• Economies of scales can mean that an increase in sales does not require a proportional increase in assets (eg inventory)
• Lumpy Assets (eg large scale fixed assets)
• Excess Capacity - current level of assets able to generate greater sales

• Deterministic
• Sensitivity Analysis
• Probabilistic
• Optimization

Gives a single number forecast of a financial variable or variables without stating anything about its probability of occuring eg budget

Consists of rerunning the model to dtermine the effect on the output variables of changes in the input variables eg sales with/without a product

Provides more useful information than other models as it yields output in the form of probability distributions rather than a single estimate

Determines the values of financial decision variables that optimize some objective function such as profits or costs.