Question

explain what a financial plan is and why financial planning is so important

• discuss how management uses financial planning models in the planning process, and explain the importance of sales forecasts in the construction of financial planning models.

• illustrate how the relationship between projected sales and balance sheet accounts can be determined

discuss what factors determine a company’s sustainable growth rate, assess why it is of interest to management

Discuss how dividend policy and capital structure impact financing decisions in the context of strategic financial planning

Answer 1

Financial Plan and its Important

The financial plan is a set of actionable goals derived from the firm's strategic plan and other planning documents, such as the investment and financing plans. The financial plan is foceses on selecting the best investment opportunities and determining how they will be financed. The financial plan is a blue print for the firm's future. Financial planning is important to management because the plan communicates the firm's strategic goals through out the organisation, builds support for the firm's strategies, and help align operating unit goals with the firm's strategic goals.

how management use financial planning models in the planning process, and explain the importance of sales forecasts in the construction of financial planning models.

Financial models are the analytical part of the financial planning process. A planning model is simply a series of equations that model a firm's financial statement and balancesheet. Once the model is constructed, management can generate projected fianancial statement to determine the financial impact of proposed strategic initiatives on the firm.

For most financial models, a forecast of the firm's sales is the most important input variable. The sales forecast is the key driver in financial planning models because many items on the income statement and balancesheet vary directly with sales. Thus, once sales are forecasted, it is easy to generate projected financial statements using the hidtorical relation between a particular account and sales.

How Relationship between projected sales and balance sheet accounts can be determined

Historical financial data can be examined to determine whether and how a variable changes with sales. ONe way to do this is to prepare a table that shows four or five years of historical financial statement account data as a percent of sales. Then fit trend lines to the data to see what type of relation exist between that variable and sales. Many income statement and balancesheet vary directly with sales, but other may vary in a nonlinear manner. The analysis in the Blackwell Sales Company example illustrates how to analyze a strategic investment decision.

factors determine a company’s sustainable growth rate, assess why it is of interest to management

A firm's sustainable growth rate (SGR) is the Maximum rate which the firm, can grow without external equity funding and with leverage held constant. The determinants of a firm's SGR are

(1)Profit margins(the greater a firm's profit margin, the greater the firm's SGR)

(2)Asset Utilization (the more effectively a firm uses its assets, the higher its SGR)

(3)Financial Leverage(as firm increases its use of leverage, its SGR increases)

(4)Payout policy(as a firm decreases its payout ratio, its SGR increases)

(5)Economic conditions (the more favorable the economic environment, the higher the firm's SGR)

Management may be interested in knowing the SGR for two Reasons,

!. The SGR rate of growth at which a firm's capital structure (debt to equity) will remain constant without the firm selling or repurchasing stock.

2. I If a firm's actual groeth rate exceeds its SGR, the firm could face cash shortage problems in the future unless it can sell new equity.

Dividend policy and capital structure impact financing decisions in the context of strategic financial planning

The dividend policy is important because it outlines the magnitude, method, type and frequency of dividend distributions. At the highest level of decision making, companies have two basic options regarding what to do with their profits: retain or distribute the earnings.

In finance, capital structure refers to the way a firm finances its assets through some combination of sources. Based on many kinds of financial decisions, firms could shape different capital structures.