Long Term Financial Planning
Long-term Financial
Planning
FIN 3504
Pavel G. Savor
What is a Financial Plan?
A high-level description of how a firm will achieve its financial objectives
First step:
Second step:
Decide what are the appropriate general objectives
Growth ≠ value creation
Pick the planning horizon and the level of aggregation
Third step:
Come up with projections
Elements of Financial Policy
1. Investments
2. Capital structure
3. NWC management
4. Shareholder return (dividends and/or share buybacks)
These elements are interdependent
Future Is Uncertain
What will determine a firm’s performance
(relative to plan)?
Firm actions
Competitor actions
Macroeconomics trends
And many other things
Most likely future will be different from your expectations So Why Bother With Planning?
Explore the impact of different potential decisions
E.g., building a new plant, developing a new product, entering/exiting markets, etc.
Examine how various elements interact
Contingency planning
Feasibility analysis
Roadmap for action!
Elements of a Financial Plan: Inputs
Firm-level projections:
Economy-wide assumptions:
Sales (typically the driver)
Margins
Investments
Financing sources
Interest rates
Taxes
Choice of “plug”
Elements of a Financial Plan: Output
Pro forma financial statements
Full or partial
External financing needs
Dividends
Elements of a Financial Plan: Timeline
Economic
scenario
Sales + margin projections
Relation b/w sales and B/S items External financing plug
I/S through
EBITDA
B/S: Assets and current liabilities Operating CF
B/S: LT Debt and Equity
Elements of a Financial Plan: Timeline
Economic
scenario
Sales + margin projections
Relation b/w sales and B/S items External financing plug
B/S: Assets and current liabilities Operating CF
B/S: LT Debt and Equity
Where Do Projections Come From?
Economy-wide forecasts
GDP growth, interest rates, taxes
Planning
FIN 3504
Pavel G. Savor
What is a Financial Plan?
A high-level description of how a firm will achieve its financial objectives
First step:
Second step:
Decide what are the appropriate general objectives
Growth ≠ value creation
Pick the planning horizon and the level of aggregation
Third step:
Come up with projections
Elements of Financial Policy
1. Investments
2. Capital structure
3. NWC management
4. Shareholder return (dividends and/or share buybacks)
These elements are interdependent
Future Is Uncertain
What will determine a firm’s performance
(relative to plan)?
Firm actions
Competitor actions
Macroeconomics trends
And many other things
Most likely future will be different from your expectations So Why Bother With Planning?
Explore the impact of different potential decisions
E.g., building a new plant, developing a new product, entering/exiting markets, etc.
Examine how various elements interact
Contingency planning
Feasibility analysis
Roadmap for action!
Elements of a Financial Plan: Inputs
Firm-level projections:
Economy-wide assumptions:
Sales (typically the driver)
Margins
Investments
Financing sources
Interest rates
Taxes
Choice of “plug”
Elements of a Financial Plan: Output
Pro forma financial statements
Full or partial
External financing needs
Dividends
Elements of a Financial Plan: Timeline
Economic
scenario
Sales + margin projections
Relation b/w sales and B/S items External financing plug
I/S through
EBITDA
B/S: Assets and current liabilities Operating CF
B/S: LT Debt and Equity
Elements of a Financial Plan: Timeline
Economic
scenario
Sales + margin projections
Relation b/w sales and B/S items External financing plug
B/S: Assets and current liabilities Operating CF
B/S: LT Debt and Equity
Where Do Projections Come From?
Economy-wide forecasts
GDP growth, interest rates, taxes