Question

I need to create a business plan for Johnson & Johnson, it does have to fit to their specific financial situations. Maybe just some examples? please help?

A. Financial Projections

How will you fund the business?

What is your desired debt and equity position?

Who will provide capital debt funds?

What role will leasing play in your financial strategy?

Will you use outside investors for equity capital?

How will you manage the financial risks your business faces?

What operating procedures, such as developing cash flow budgets or spending limits, will you have to ensure adequate money for debt repayment?

What are the important assumptions that underlie your projections? These assumptions may be associated with both external or internal factors.

What financial aspects of your business (equity, asset growth, ROA, ROE, etc.) will you monitor?

What procedures will be used for monitoring overall business performance?

What level of performance will your business shoot for? These should be targets for next year and in five years. They should be financial performance standards used to monitor the overall business.

What yield and output levels could you attain? What efficiency levels will you reach?

Answer 1

Firstly, I would like to know the nature of business plan for which financial projection is required. Assuming the project has mid-level financial projections, following would be my answers to your posed questions:

i) A business can be funded either by debt or equity. If J&J has unused debt capacity, go for debt. On the other hand, if its shareholders are willing to issue shares, you can rely on equity issue or retained earnings by having a quick glance at firm's balance sheet.

ii) Desired debt and equity depends on the past level that the firm has adhered to. Textbooks claim that it should be 1:1 but in real world, it can be higher. You can go through previous projects of same nature, that would be a good benchmark or simply compute present debt to equity of the firm.

iii) Debt could be raised by issuing bonds (debentures) or term loan from banks.

iv) Leasing is suitable in businesses where asset under consideration depreciates at an accelerating rate such as aviation. If you would have specified the nature, it would be easier to answer this question. Rate of depreciation for such block of assets will determine leasing decision.

v) You can use outside investors only if existing shareholders are willing to dilute their control in the company.

vi) Financial risk can be managed if you use a mix of debt and equity simultaneously. This will reduce your WACC (weighted average cost of capital) for the project.

vii) Cash budget for the time horizon of the project would be a good start to manage your debt repayments.

viii) Underlying assumptions for internal factors - easy clearance for procurement of  funds required for the project and a complete control over expenditures. External factors would be no change in interest rates if debt is used.

ix) You should monitor debt to equity ratio, operating leverage, financial leverage, ROA, Earnings per share, Price to earnings ratio.

x) You can conduct a ratio analysis for solvency and profitability ratios for overall business.

xi) You should use flexible budgeting for next years and coming five years which could trace the project trajectory at different levels of efficiency and taking into consideration the rate of inflation in different expenditures and sufficient change in revenue per unit.

xii) A set of efficiency ratios can be computed. Yield and output prediction would require employing techniques from cost accounting such as variance analysis, Economic order quantity, inventory forecasting.