Financial Planning

Financial planning is important in ensuring that corporate investment is financed appropriately, as well
as seeing to it that money is spent in worthwhile investments. Achieving the goals of corporate finance
requires that any corporate investment be financed appropriately. The sources of financing are capital
self-generated by the firm and capital from external sources, obtained by issuing new debt and equity.
The financing mix will impact the valuation of the firm (as well as the other long-term financial
management decisions).

Sales forecasting is the process of estimating future sales. Accurate sales forecasts enable companies to
make informed business decisions and predict short-term and long-term performance. Companies can
base their forecasts on past sales data, industry-wide comparisons, and economic trends.

It is easier for established companies to predict future sales based on years of past business data. Newly
founded companies have to base their forecasts on less-verified information, such as market research
and competitive intelligence to forecast their future business.

Sales forecasting gives insight into how a company should manage its workforce, cash flow, and
resources. In addition to helping a company allocate its internal resources effectively, predictive sales
data is important for businesses when looking to acquire investment capital.

Sales forecasting allows companies to:

Predict achievable sales revenue;

Efficiently allocate resources;

Plan for future growth.

AFN stands for "additional funds needed. AFN is a way of calculating how much new funding will be
required, so that the firm can realistically look at whether or not they will be able to generate the
additional funding and therefore be able to achieve the higher sales level. Determining the amount of
external funding needed is a key part of calculating AFN. This can be determined by mathematical
formulas which use inputs that can be found in a company's financial statements.

The simplified formula is:

AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained
earnings.
If this value is negative, this means the action or project which is being undertaken will generate extra
income for the company, which can be invested elsewhere.

The more formal equation for AFN is

AFN = (A*/S0) ΔS – (L*/S0) ΔS – MS1(RR)

A- Assets tied directly to sales

L-spontaneous liabilities that are affected by sales

S0=the previous year's sales

S1=total projected sales for next year

ΔS=the change in sales between S0 and S1

M=profit margin

MS1=projected net income

RR=the retention ratio from net income (equal to 1 minus the dividend payout ratio; disregard if
dividends are not declared).

The sustainable growth rate is the rate of growth that a company can expect to see in the long term.
Often referred to as G, the sustainable growth rate can be calculated by multiplying a company’s
earnings retention rate by its return on equity. The growth rate can be calculated on a historical basis
and averaged in order to determine the company’s average growth rate since its inception.

The sustainable growth rate is an indicator of what stage a company is in, in its life cycle. Understanding
where a company is in its life cycle is important. The position often determines corporate finance
objectives such as what sources of financing to use, dividend payout policies, or overall competitive
strategy.

The growth ratio can also be used by creditors to determine the likelihood of a company defaulting on
its loans. A high growth rate may indicate the company is focusing on investing in R&D and NPV-positive
projects, which may delay the repayment of debt. A high growth rate company is generally considered
riskier, as it likely sees greater earnings volatility from period to period.

A sensitivity analysis determines how different values of an independent variable affect a particular
dependent variable under a given set of assumptions. In other words, sensitivity analyses study how
various sources of uncertainty in a mathematical model contribute to the model's overall uncertainty.
This technique is used within specific boundaries that depend on one or more input variables.
Sensitivity analysis is used in the business world and in the field of economics. It is commonly used by
financial analysts and economists, and is also known as a what-if analysis.

Financial statements are reports prepared by a company’s management to present the financial
performance and position at a point in time. A general-purpose set of financial statements usually
includes a balance sheet, income statements, statement of owner’s equity, and statement of cash flows.
These statements are prepared to give users outside of the company, like investors and creditors, more
information about the company’s financial positions. Publicly traded companies are also required to
present these statements along with others to regulatory agencies in a timely manner.

What Does Financial Statements Mean?

Financial statements are the main source of financial information for most decision makers. That is why
financial accounting and reporting places such a high emphasis on the accuracy, reliability, and
relevance of the information on these financial statements.

Example

The balance sheet a summary of the company position on one day at a certain point in time. The
balance sheet lists the assets, liabilities, and owners’ equity on one specific date. In a sense, the balance
sheet is a picture of the company on that date. Investors and creditors can use the balance sheet to
analyze how companies are funding capital assets and operations as well as current investor
information.

The income statement shows the revenue and expenses of the company over a period of time. Most
companies issue annual income statement, but quarterly and semi-annual income statements are also
common. Users can analyze the income statement to see if companies are operating efficiently and
producing enough profit to fund their current operations and growth.

The statement of owner’s capital summarizes all owner investments and withdrawals from the company
during a period. It also reports the current income or loss recorded in retained earnings.

The purpose of the financial forecast is to evaluate current and future fiscal conditions to guide policy
and programmatic decisions. A financial forecast is a fiscal management tool that presents estimated
information based on past, current, and projected financial conditions. This will help identify future
revenue and expenditure trends that may have an immediate or long-term influence on government
policies, strategic goals, or community services. The forecast is an integral part of the annual budget
process. An effective forecast allows for improved decision-making in maintaining fiscal discipline and
delivering essential community services.