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The planning process starts

with development of a firm’s
mission, management set
goals which are transformed
into strategies. To support
strategies, policies and
The Planning System
• A long term financial plan entails planning in fairly
aggregate terms for a period of 3 to 10 years and
represents what a firm intends to do in the future.
• There is considerable variation in terms of
sophistication, details, scope, degree of formality.
• Sales forecast are made for 3-5 years to aid
investment planning.
• Shorter duration sales forecast are used for
facilitating working capital requirements.
Factors Affecting Financial Plan

• Assumptions about the economic

environment -interest rates, tax structure,
inflation, growth rate of economy, exchange rate
• Sales Forecast: Most financial variables relate to
sales figures and thus become the starting point of
financial forecast exercise.
• Pro-forma Statements: Projected Income
statement and Balance Sheet.
• Asset Requirements: Fixed Asset and Working
• Financing Plan: Alternative sources of finance are
Benefits of Financial Planning

• It helps to identify advance actions to be taken.

• Identifies a number of options that can be exercised
under different conditions.
• Facilitates interaction between investment &
financing decisions.
• Establishes link between present & future decisions.
• Ensure strategic plan is financial viable.
• Helps in control function by setting benchmarks for
Performance Appraisal.
Estimation of Financial
• Sales Forecast: 3 to 5 years
The sales forecasting techniques: Qualitative techniques,
Time Series Projection
• Pro-forma Profit & Loss A/c: Percentage to Sales
Method, Budgeted Expense Method, Combination Method
• Pro-forma Balance Sheet: Using the percent of sales
method to project some items, Use specific information-
‘Investments’, Miscellaneous Expenditure and losses,
Obtain projected Reserves & Surplus, Projected value of
loan funds could be adjusted as per schedule of
Repayment, The total of Asset & liabilities side to be
adjusted for difference by incorporating external fund
required/surplus available funds.
Key Growth Rates
• Firms state corporate goals in terms of growth rates.
Growth is an intermediate goal which
contributes to value creation
• Internal Growth Rate: Maximum growth rate with no
external financing.

• Sustainable Growth Rate: Max. growth rate possible

with retained earnings matched with debt financing in
line with debt – equity policy of the firm.