Question

Assume that a firm is developing its long-run financial plan. What period should this plan cover—one month, six months, one year, three years, five years, or some other period? Justify your answer. Explain how dependability would impact your plan.

Answer 1

In terms of long run financial plan it is generally recommended to have a five-year horizon planning for any company.

The reason for this is that we can only forecast so much. Extending this period would increase the uncertainty in terms of the overall climate i.e. political, global, macro and micro economic etc.

Forecasting too short a time would mean that we would have very less time to execute and such would not be a long-run plan. It would become a short-run plan. Also a 5 year horizon gives clarity as to the scale and all the other deliverables that the business would provide. It gives a certain vision and also time for delivering. We would be preparing financial models where highly realistic assumptions would have to be taken. All the scenarios i.e. best case, moderate case and worse case would be imagined and a sensitivity analysis would be done to understand the outcome at the end of 5 years. The plan would then be executed keeping in mind all the three cases. We would try to get the best possible outcome. However since that is not guaranteed we have back-up plans as well as worse case scenarios where even if the plan goes wrong, we have something to bank on. Only when this is approved do we move ahead in terms of the execution.