Chapte
6
Slides Developed by:
Terry Fegarty
Seneca College
Financial Planning
Chapter 6 – Outline (1)
• Business Planning




Component Parts of a Business Plan
The Purpose of Planning and Plan Information
Four Kinds of Business Plan
Financial Plans as a Component of a Business Plan
• Making Financial Projections
 Planning for New and Existing Businesses
 The General Approach and Planning Assumptions
 The Procedural Approach and the Debt/Interest
Problem
 Percentage of Sales Method
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2
Chapter 6 – Outline (2)
 External Funding Requirement
 The Sustainable Growth Rate Plans With More
Complicated Assumptions
 Planning at the Department Level
 The Cash Budget
 Receivables and Payables—Forecasting with Time
Lags
 Debt and Interest
• Management Issues in Financial Planning
 Risk in Financial Planning in General
 Financial Planning and Computers
© 2006 by Nelson, a division of Thomson Canada Limited
3
Business Planning
• A business plan is a model of what
management expects a business to become in
the future
 Expressed in words and financial projections
• Financial statements are pro forma
 What the firm’s financial statements will look like if
the planning assumptions are true
• A good business plan should be comprehensive
 Includes projections concerning products, markets,
employees, technology, facilities, capital, revenue,
profitability, etc.
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4
Component Parts of a Business
Plan(1)
• Typical outline
 Contents
 Executive summary
 Mission and strategy statement
• Basic charter and long-term direction
 Market analysis
• Why the business will succeed against its competitors
 Operations of the business
• How the firm creates and distributes its products/services
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5
Component Parts of a Business
Plan (2)
 Management and staffing
• Firm’s projected personnel needs
 Financial projections
• Projects the firm’s financial statements into the
future
• The firm’s financial plan
• Main focus of this chapter
 Contingencies
• What the firm will do if things don’t go as planned
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6
The Purpose of Planning and Plan
Information
• Major audience of business plan includes
 Firm’s own management
•
•
•
•
Planning process helps pull management team together
Provides a road map for running the business
Provides a statement of goals
Helps predict financing needs
• Especially important for firms that use outside financing
 Outside investors
• Tells equity investors what returns they can expect
• Tells debt investors where firm will get the money to repay
loans
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7
Four Kinds of Business Plan
• Four variations on basic idea of business
planning




Strategic planning
Operational planning
Budgeting
Forecasting
• All contain financial projections
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8
Four Kinds of Business Plan
• Four variations on basic idea of business
planning
 Strategic planning
• Addresses broad, long-term issues; contains
summarized, approximate financial projections
• Three to five-year horizon is common
• Deals with concepts expressed mainly in words;
numbers are summarized
• Firm analyzes itself, the industry and the competitive
situation
• Firm states its mission and goals
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9
Four Kinds of Business Plan
• Four variations on basic idea of business
planning
 Operational planning
• One-year planning horizon
• States goals and managers responsible for
meeting the goals
• Translates business ideas (day-to-day operations)
into detailed, annual projections
• Includes projected income statements and
balance sheets
• Even mix of words and numbers
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10
Four Kinds of Business Plan
• Four variations on basic idea of business
planning
 Budgeting
• Short-term updates of the annual plan when
business conditions change rapidly
• Typically covers a quarter (3 months)
• Predominately financial projections
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11
Four Kinds of Business Plan
• Four variations on basic idea of business
planning
 Forecasting
• Very short-term projections of profit and cash flow
• Consist almost entirely of numbers
• Most large firms perform monthly cash forecasts
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12
Four Kinds of Business Plan
• The Business Planning Spectrum
 Most large companies produce all the parts of a
business plan
 Strategic plan and operating plan are updated
annually
 4 quarterly budgets and 12 monthly forecasts
 Small businesses tend to develop a single business
plan when in need of funding
• Contains strategic, operating and budgeting elements
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13
Figure 6.2:
The Business Planning
Spectrum
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14
Financial Plans as a Component of
a Business Plan
• Financial plan is a set of pro forma
financial statements projected over the
time periods covered by the business
plan
• Financial statements are a piece of the
projection, but not usually the center of
the projection
 However, with annual operating plans the
financial projections are the centerpiece
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15
Planning for New and Existing
Businesses
• Harder to forecast an operation that is very
new or not yet begun
 No history on which to base projections
• The Typical Planning Task
 Most financial planning involves forecasting changes
in ongoing businesses based on planning
assumptions
 Pro forma statements must reflect the assumptions
made such as
• Unit sales will rise by 10% annually
• Overall labour costs will rise by 4%, etc.
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16
The General Approach and Planning
Assumptions
• What We Have and What We Need to Project
 We must forecast future financial statements, based
upon last period’s results and our planning
assumptions
• Planning Assumption
 An expected condition that dictates the size of one or
more financial statement items
• Could be planned management actions such as cost control
• Could be items outside management control such as interest
rate levels or demand by consumers
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17
Planning
Assumptions
Example
Example 6.1:
Q: This year Crumb Baking Corp. sold 1 million coffee cakes per month at
$1 each for a total of $12 million.
The firm had year-end receivables equal to two months of sales, or $2
million.
Crumb’s operating assumptions for next year are:
Price will be decreased by 10%
Sales volume will increase to 15 million units
Only one month of sales will be in receivables at year end.
Forecast next year’s revenue and ending receivables balance.
Assume sales are evenly distributed over the year.
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18
Planning
Assumptions
Example
Example 6.1:
A: The first two assumptions establish the revenue forecast.
Next year, the firm expects to sell 15 million coffee cakes at
$0.90 each, for total revenue of $13,500,000.
The third assumption regarding receivables requires the use of
the total revenue forecast.
Receivables are expected to be $13,500,000  12, or
$1,125,000.
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19
The Procedural Approach and the
Debt/Interest Problem
• The Procedural Approach
 Financial plans are built line-by-line
beginning with revenues
• First, all income statement (IS) items are
projected, stopping just before interest expense
line
• Then all balance sheet (BS) items are projected
except long-term debt and equity
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20
The Procedural Approach and the
Debt/Interest Problem
• Debt/Interest Planning Problem
 The next items needed are interest expense (IS) and
debt (BS)
 However, this causes a dilemma because
• Planned debt is required to forecast interest, but interest is
required to forecast net income, retained earnings and debt
• Results in a circular argument
• Every financial plan runs into this technical
problem
• Can be resolved using an iterative approach
beginning with a guess at the solution
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21
Figure 6.5:
The Debt/Interest
Planning Problem
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22
An Iterative
Numerical Approach
Example 6.2:
Example
Q: Complete the financial plan for Graybarr Inc., assuming that
Graybarr pays interest at 10% and has a tax rate of 40%. No
dividends are to be paid and no new shares are to be sold.
Financial Plan for Graybarr Inc. ($000)
Income Statements
Balance Sheets
Next
Next Year
Beginning
Revenue
$
10,000 ASSETS
Cost/Expenses $
9,000
Total Assets
$
1,000
EBIT
$
1,000 LIABILITIES AND EQUITY
Interest
?
Current Liabilities $
300
EBT
?
LT Debt
$
100
Tax
?
Equity
$
600
NI
?
Total L&E
$
1,000
© 2006 by Nelson, a division of Thomson Canada Limited
Year
Ending
$
3,000
$
700
$
?
?
3,000
23
An Iterative
Numerical Approach
Example 6.2:
Example
A: The huge increase in assets will cause the company’s debt to
increase at a dramatic rate. The first iteration:
Financial Plan for Graybarr Inc. ($000)
Income Statements
Balance Sheets
Next
Next Year
Beginning
Revenue
$
10,000 ASSETS
Cost/Expenses $
9,000
Total Assets
$
1,000
EBIT
$
1,000 LIABILITIES AND EQUITY
Interest
$
200
Current Liabilities $
300
EBT
$
800
LT Debt
$
100
Tax
$
320
Equity
$
600
NI
$
480
Total L&E
$
1,000
2: Compute
NI.
1: Guess at the firm’s interest
expense. Most firms use last
year’s value as a guess.
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Year
Ending
$
3,000
$
$
$
$
700
1,220
1,080
3,000
3:
Calculate
Ending
equity as
beginning
equity plus
NI less
dividends.
4: Calculate Ending
LT debt as total L&E
less ending equity
less ending current
liabilities.
24
An Iterative
Numerical Approach
Example 6.2:
Example
A: Average debt: ($100,000 + $1,220,000)  2 = $660,000.
Calculated interest: 10% × $660,000 = $66,000
Initial guess: $200,000.
Perform a second iteration using an interest guess of
$66,000
Financial Plan for Graybarr Inc. ($000)
Income Statements
Balance Sheets
Next
Next Year
Beginning
Revenue
$
10,000 ASSETS
Cost/Expenses $
9,000
Total Assets
$
1,000
EBIT
$
1,000 LIABILITIES AND EQUITY
Interest
$
66
Current Liabilities $
300
EBT
$
934
LT Debt
$
100
Tax
$
374
Equity
$
600
NI
$
560
Total L&E
$
1,000
Year
Ending
$
3,000
$
$
$
$
700
1,140
1,160
3,000
Using the
guess of
$66,000, the
average LT
debt is
$620,000 and
the calculated
interest is
$62,000, a
difference of
only $4,000.
A third iteration using $62,000 would finalize the forecast with
LT Debt = $1,137,000
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25
Percentage of Sales Method
• A short-cut, less exact, easier method of
forecasting financial statements (The
“quick and dirty” approach)
• Based upon forecast for the firm’s sales
growth rate
• Assumes most financial statement line
items will vary directly with sales
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26
Example 6.3:
Percentage of Sales
Method
Example
Q: The Overland Manufacturing Company expects next year’s
revenues to increase by 15% over this year’s. No new
capital assets beyond normal replacements will be needed.
This year’s income statement and ending balance sheet:
Overland Manufacturing Company This Year ($000)
Income Statement
Balance Sheet
Revenue
$
13,580 ASSETS
COGS
$
7,470
Cash
$
Gross Margin
$
6,110
Accounts receivable $
Expenses
$
3,395
Inventory
$
EBIT
$
2,715
Current assets
$
Interest
$
150
Net capital assets
$
EBT
$
2,565
Total Assets
$
Tax
$
1,077 LIABILITIES AND EQUITY
NI
$
1,488
Accounts payable
$
Accruals
$
Current Liabilities $
LT Debt
$
Equity
$
Total L&E
$
348
1,698
1,494
3,540
2,460
6,000
125
45
170
1,330
4,500
6,000
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27
Example 6.3:
Percentage of Sales
Method
Example
Assume the firm pays income taxes at a rate of 42%,
borrows at 12% interest, and expects to pay no dividends.
Project next year’s income statement and balance sheet by
using the modified percentage of sales method.
A: We’ll increase everything except net capital assets by 15%.
Overland Manufacturing Company This Year ($000)
Income Statement
Balance Sheet
Revenue
$
15,617 ASSETS
COGS
$
8,591
Cash
$
Gross Margin $
7,027
Accounts receivable $
Expenses
$
3,904
Inventory
$
EBIT
$
3,122
Current assets
$
Interest
Net capital assets
$
EBT
Total Assets
$
Tax
LIABILITIES AND EQUITY
NI
Accounts payable
$
Accruals
$
Current Liabilities $
LT Debt
Equity
Total L&E
$
400
1,953
1,718
4,071
2,460
6,531
144
52
196
6,531
© 2006 by Nelson, a division of Thomson Canada Limited
All highlighted
items were
increased by
15%.
At this point we are at the
debt/interest impasse. We’ll
guess at interest (using last
year’s interest of $150,000 as
a starting point) and work
through the procedure.
28
Example 6.3:
Example
A:
Percentage of Sales
Method
Overland Manufacturing Company This Year ($000)
Income Statement
Balance Sheet
Next Year
This Year
Revenue
$
15,617 ASSETS
COGS
$
8,591
Cash
$
348
Gross Margin $
7,027
Accounts receivable $
1,698
Expenses
$
3,904
Inventory
$
1,494
EBIT
$
3,122
Current assets
$
3,540
Interest
$
150
Net capital assets
$
2,460
EBT
$
2,972
Total Assets
$
6,000
Tax
$
1,248 LIABILITIES AND EQUITY
NI
$
1,724
Accounts payable
$
125
Accruals
$
45
Current Liabilities $
170
LT Debt
$
1,330
Equity
$
4,500
Total L&E
$
6,000
Next Year
$
$
$
$
$
$
400
1,953
1,718
4,071
2,460
6,531
$
$
$
$
$
$
144
52
196
112
6,224
6,531
EAT was computed
using an Interest of
$150,000. The
resulting NI was added
to Equity and the LT
Debt figure was a
plug, calculated by
subtracting Equity and
Current Liabilities from
Total L&E.
Taking the average debt at 12% yields a calculated interest of
$86,000 which is considerably less than the $150,000
assumed.
2 more iterations should yield a final projection of $84,000.
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29
Percentage of Sales Method—
Algebraic Approach
• Algebraic Approach
 Forecast total assets - forecast current
liabilities - last years equity + forecast
dividends
= forecast debt + (1-T)[EBIT – Int%(.5)(last
year’s debt + forecast debt)]
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30
Example 6.3:
Percentage of Sales
Method
• Algebraic Approach For Example 6.3
Example
 $6,531 – $196 – $4,500 + 0 = forecast debt + (1.42)[3,122 - .12($1330 + forecast debt/2)]
 $1,835 = forecast debt + $1,810.76 – $46.284 - .0348
forecast debt
 $70.524 = .9652 forecast debt
 forecast debt = $73.07
 interest cost
= .12($1,330 + $73)/2 = 84
 equity = $4,500 + $1,762 = $6,262
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31
Percentage of Sales Method—
Spreadsheet Approach
Example
• Spreadsheet Approach for Example 6.3






Use the Goal Seek function in Excel.
Set cell for E16 (Total L&E)
To value: $6,531 (the value for total assets)
By changing cell: E14 (Long term debt)
Click OK.
Goal Seek will then solve for the Long term debt
and the income statement and balance sheet
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32
Percentage of Sales
Method
Example
Example 6.3:
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33
Example
Example 6.3:
Percentage of Sales
Method
Overland Manufacturing Company Next Year ($000)
Income Statement
Balance Sheet
Revenue
$
15,617 ASSETS
COGS
$
8,591
Cash
$
Gross Margin $
7,026
Accounts receivable $
Expenses
$
3,904
Inventory
$
EBIT
$
3,122
Current assets
$
Interest
$
84
Net capital assets
$
EBT
$
3,038
Total Assets
$
Tax
$
1,276 LIABILITIES AND EQUITY
NI
$
1,762
Accounts payable
$
Accruals
$
Current Liabilities $
LT Debt
$
Equity
$
Total L&E
$
400
1,953
1,718
4,071
2,460
6,531
144
52
196
73
6,262
6,531
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34
External Funding Requirement
• Forecasting Cash Needs
 A growing firm must buy assets to support growth
 Some funds will be generated internally via
• Current liabilities
• Retained earnings
 When a plan shows increasing debt, the implication
is that additional external financing will be needed
 A key reason for doing financial projections is to
forecast the firm’s External Funding Requirement
 Funds can be obtained by
• Issuing debt or bank financing
• Issuing new shares
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35
External Funding Requirement
• External Funding Requirement (EFR)
growth in assets
– growth in current liabilities
– earnings retained
= external funding requirement
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36
External Funding Requirement (EFR)
• If we assume that Net capital assets will grow
at the same rate as sales growth (g), then
 Growth in assets = g  Assetsthis year
 Growth in current liabilities = g x Current liabilitiesthis
year
 NInext year = ROS  (1 + g)Salesthis year
 d = dividends/net income
 Earnings retained = (1 – d) NInext year
EFR=g[Assetsthis year-Current liabilitiesthisyear
- NI(1-d)] - NI(1-d)
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37
Example 6.4:
External Funding
Requirement
Q: Reforecast the external funding requirements of the Overland
Example
Manufacturing Company (Example 6.3) assuming net capital assets
and NI grow at the same rate as sales (15%). Assume the firm plans
to pay a dividend equal to 25% of earnings next year.
Overland Manufacturing Company This Year ($000)
Income Statement
Balance Sheet
Revenue
$
13,580 ASSETS
COGS
$
7,470
Cash
$
Gross Margin $
6,110
Accounts receivable $
Expenses
$
3,395
Inventory
$
EBIT
$
2,715
Current assets
$
Interest
$
150
Net capital assets
$
EBT
$
2,565
Total Assets
$
Tax
$
1,077 LIABILITIES AND EQUITY
NI
$
1,488
Accounts payable
$
Accruals
$
Current Liabilities $
LT Debt
$
Equity
$
Total L&E
$
348
1,698
1,494
3,540
2,460
6,000
125
45
170
1,330
4,500
6,000
© 2006 by Nelson, a division of Thomson Canada Limited
The line items
needed to apply the
EFR equation are
highlighted. We also
need the expected
revenue growth of
15% and the
dividend payout ratio
of 25%.
38
Example 6.4:
External Funding
Requirement
A: Applying the EFR equation we have:
Example
EFR = g[Assetsthis year - Current liabilitiesthis year - NI(1 – d)] - NI(1 – d)
= 0.15[$6,000 – 170 - $1,488(1 - 0.25)] - $1,488(1 - 0.25)
= -$408.9
A negative EFR figure means no additional outside
funds are needed. A negative result says that Overland
will generate enough funds during the period to reduce
its debt by about $409,000.
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39
The Sustainable Growth Rate
• The rate at which a firm can grow without
selling new shares
 Results from growth in retained earnings (Net
income – dividends)
 Business operations create new equity equal to the
amount of current retained earnings, or (1 – d)NI
 Sustainable growth rate =
NI(1-d)
gs =
Equity
 Assumes that new long-term debt will need to be
raised to keep the debt/equity ratio constant
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The Sustainable Growth Rate
• Incorporating equations from the DuPont
equations into the gs equation we obtain
EAT sales assets
gs  1  d 


sales assets equity

Thus, a firm’s ability to grow depends on the
following




Its ability to earn profits on sales (ROS)
Its talent at using assets to generate sales (total
asset turnover)
Its use of leverage (equity multiplier)
The percentage of earnings retained (1 – d)
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41
Plans With More Complicated
Assumptions
• The percentage of sales method is appropriate
for quick estimates, but generally isn’t used
in formal plans because it glosses over too
much detail
• Real plans generally incorporate separate
planning assumptions for each important
financial item
 Assumption depends on the way the related item is
managed and on its accounting treatment
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42
Plans With More Complicated
Assumptions
• Direct planning assumptions reflect the
factors that will affect the forecasted
dollar value of a line item on the financial
statements. For example
 Capital assets are forecast by projecting
• New expenditures using the capital plan
• Amortization based upon total gross cost
 Lease expenses are based upon existing and
new lease contracts
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43
Plans With More Complicated
Assumptions
• Indirect planning assumptions are made
about financial ratios, which in turn lead
to line item values
 Accounts receivable are generally forecast by
making an assumption about the Average
Collection Period and calculating the implied
balance
 Inventory is generally forecast indirectly thru
the Inventory Turnover ratio
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44
Planning at the Department Level
• Operational plans
 Departmental detail supports the expense
entries on the planned income statement
• Manufacturing Departments
 A detailed manufacturing plan forecasts
spending levels in factory departments,
production quantities, and inventory levels at
the beginning and end of the year
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45
Detail for Annual
Planning at the Department Level
Figure 6.6:
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46
The Cash Budget
• Forecasting cash is an important part of
financial planning
• The cash budget is a detailed projection of
receipts and disbursements of cash
 Receipts generally come from cash sales, collecting
receivables, borrowing and selling shares
 Disbursements include paying for purchases,
wages, taxes and other expenses including rent,
utilities, supplies, etc.
• It also shows whether the company needs
short-term external financing during the budget
period.
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47
Receivables and Payables—
Forecasting with Time Lags
• Collections of receivables lag projected
credit sales
• Purchases may lead sales
• Payments for purchases may lag
purchases, depending on vendors’ credit
terms
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48
Receivables and Payables—Forecasting with
Time Lags—Example
Q:
A firm experiences the following time lags in its collections:
Months after sale
% collected
1
2
3
60%
30%
8%
Example
The firm expects its credit sales from January through March to be:
Credit sales
Jan
Feb
Mar
$500
$600
$700
Determine the company’s expected cash collections from receivables.
A:
Jan
Feb
Mar
500
600
700
Jan
300
150
40
Feb
360
180
48
420
210
56
510
640
258
Credit sales
Apr
May
Jun
Collections from sales in
Mar
Total collections
300
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56
49
Debt and Interest
• Forecasting short-term debt and interest
can be tricky if a company is funding
current cash needs directly by borrowing
 If the month’s cash flow is negative,
borrow
 If the month’s cash flow is positive, repay
prior loans
 The current month’s interest payment may
be based on the preceding month’s loan
balance
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50
Example 6.8:
Q:
The Cash Budget
The Pulmeri Company’s revenues (actual and forecast) for the six months ended June
30 are as follows ($000).
Revenue
Jan
Feb
Mar
Apr
May
Jun
5,000
8,000
9,000
5,000
8,000
9,000
Example
Pulmeri collects its receivables according to the following pattern.
Months after sale
% collected
1
2
3
65%
25%
10%
The firm purchases and receives inventory one month in advance of sales. Materials
cost about half of sales revenue. Invoices for inventory purchases are paid 50% in the
first and 50% in the second month after purchase.
Payroll is $2.5M per month, and general expenses are $1.5M per month. A $0.5M tax
payment is scheduled for mid-April. Pulmeri has a short-term loan outstanding that is
expected to stand at $5M at the end of March. Monthly interest is 1% of the previous
month end balance. Pulmeri does not require any balance in its cash account.
Prepare Pulmeri’s cash budget for the April May and June (its second quarter).
© 2006 by Nelson, a division of Thomson Canada Limited
51
Example 6.8:
The Cash Budget
A: First lay out revenue and collections according to the
historical pattern.
Example
Revenue
Jan
Feb
Mar
Apr
May
Jun
5,000
8,000
9,000
5,000
8,000
9,000
3,250
1,250
500
5,200
2,000
800
5,850
2,250
900
3,250
1,250
Collections from sales
made in
Jan
Feb
Mar
Apr
May
Second qtr. collections
© 2006 by Nelson, a division of Thomson Canada Limited
5,200
8,350
6,300
7,350
52
Example 6.8:
The Cash Budget
Example
A: Next, time inventory purchases (half of sales dollars) one month
prior to sale.
Time the payments so that 50% of the purchases are paid for in
the month after purchase, and the remainder 2 months after
purchase.
Jan
Purchases
Feb
Mar
Apr
May
4,500
2,500
4,000
4,500
2,250
2,250
Jun
Payment
Feb
Mar
1,250
Apr
1,250
2,000
May
Payment for materials
© 2006 by Nelson, a division of Thomson Canada Limited
2,000
2,250
3,500
3,250
4,250
53
Example 6.8:
The Cash Budget
Example
A: Summarize these results along with payroll and other
disbursements
Pulmeri Company
Cash Budget
Second Quarter 20x1
($000)
Jan
Feb
Mar
Apr
5,000
8,000
9,000
5,000
8,000
9,000
8,350
6,300
7,350
Materials purchases
3,500
3,250
4,250
Payroll
2,500
2,500
2,500
General expenses
1,500
1,500
1,500
Revenue
Collections
May
Jun
Disbursements
Tax payment
© 2006 by Nelson, a division of Thomson Canada Limited
500
54
Example 6.8:
The Cash Budget
Example
A: Calculate the interest charges , based upon 1%
of the prior month’s loan balance, and the net cash flow
Pulmeri Company
Cash Budget
Second Quarter 20x1
($000)
Jan
Feb
Mar
Apr
May
Jun
8,000
7,250
8,250
Cash flows before interest
350
(950)
(900)
Interest
(50)
(47)
(57)
Net cash flow
300
(997)
(957)
(4,700)
(5,697)
(6,654)
Disbursements
Cumulative cash flow/loan
(5,000)
© 2006 by Nelson, a division of Thomson Canada Limited
55
Management Issues in Financial
Planning
• The Financial Plan as a Set of Goals
 The financial plan can be a tool with which to
manage the company and motivate desirable
performance
 Problems arise when top management puts
in stretch goals
• A target for which the organization strives, but is
unlikely to achieve
• People may give up if they consider the goal impossible
© 2006 by Nelson, a division of Thomson Canada Limited
56
Risk in Financial Planning in
General
• Stretch planning and aggressive optimism can
lead to unrealistic plans that have little chance
of coming true
• Top-down plans are forced on the
organization by senior management and are
often unrealistically optimistic
 Middle and lower level managers often feel that such
plans are unrealistic
 The risk in financial planning is that the plan
overstates achievable performance
© 2006 by Nelson, a division of Thomson Canada Limited
57
Risk in Financial Planning in
General
• Underforecasting—The Other Extreme
 Underforecasting sets up a goal that is easy to
meet and ensures future success
 Bottom-up plans are consolidated from lower
management’s inputs and tend to understate what
the firm can do
• The Ideal Process
 Ideally the process is a combination of the topdown and bottom-up approaches
 The end result is a realistic compromise that is
achievable
© 2006 by Nelson, a division of Thomson Canada Limited
58
Risk in Financial Planning in
General
• Scenario Analysis—”What If”ing
 Many companies produce a number of plans
reflecting different scenarios—”what if”
 Gives planners a feel for the impact of their
assumptions not coming true
• Communication
 A business unit is expected to have confidence in its
plan
 A single plan tends to be published along with its
attendant risks
© 2006 by Nelson, a division of Thomson Canada Limited
59
Financial Planning and Computers
• Virtually all planning is done with the aid
of computers
• Computers make planning quicker and
more thorough, but don’t improve the
judgments at the heart of the plan
© 2006 by Nelson, a division of Thomson Canada Limited
60