Corporation
LO2
A business created as a distinct legal entity
owned by one or more individuals or entities.

Advantages
◦ Limited liability
◦ Unlimited life
◦ Separation of ownership
and management
◦ Transfer of ownership is
easy
◦ Easier to raise capital

Disadvantages
◦ Separation of ownership
and management
◦ Double taxation (income
is taxed at the corporate
rate and then dividends
are taxed at the personal
rate)
1-1
LO1
Financial Manager
Financial managers try to answer some or
all of these questions
 The top financial manager within a firm is
usually the Chief Financial Officer (CFO)

◦ Treasurer – oversees cash management,
capital expenditures and financial planning
◦ Controller – oversees taxes, cost accounting,
financial accounting and data processing
1-2
LO1
Financial Management Decisions

Capital budgeting
◦ What long-term investments or projects
should the business take on?

Capital structure
◦ How should we pay for our assets?
◦ Should we use debt or equity?

Working capital management
◦ How do we manage the day-to-day finances of
the firm?
1-3
Areas of Financial Management
4
LO5
Cash Flows to and from the Firm
1-5
Chapter 17
FINANCIAL PLANNING
AND CONTROL
6
Chapter 17 Outline
1.
2.
3.
4.
5.
What is financial planning
Financial planning models
The percentage of sales approach
External financing and growth
Caveats in financial planning
7
What is Financial Planning?

Financial planning formulates the way
financial goals are to be achieved

Financial plan – a statement of what is to
be done in the future

What is the goal of financial management?
8
Short vs. Long-term Financial Planning

Short-term planning – analysis of decisions
that affect current assets and current
liabilities:
o
o

Cash and liquidity management
Credit and inventory management
Long-term planning – focuses on the “big
picture”:
o
o
o
Capital budgeting
Dividend policy
Financial structure
9
Dimensions of Financial Planning
1.
2.
3.
Financial horizon – the long-range time
period the financial planning process
focuses on, usually the next 2-5 years
Aggregation – process by which smaller
investment proposals of each of a firm’s
operational units are added up and
treated as one big unit
Alternative set of assumptions about
important variables (scenario analysis)
10
Aims of Financial Planning (1)
1.
2.
3.
Examining interactions – make explicit the
linkages between investment proposals for
the different operating activities of the firm
and financing choices available to the firm
Exploring options – develop, analyze and
compare many different scenarios in a
consistent way
Avoiding surprises – identify what may
happen to the firm if different events take
place
11
Aims of Financial Planning (2)
4.
Ensuring feasibility and internal consistency
– are the company’s goals compatible?
5.
Communication with investors and lenders
12
Financial Planning Model: Elements (1)
1.
2.
3.
Sales forecast – given as a growth rate in
sales
Pro forma statements – a financial plan
has a forecasted balance sheet, an
income statement, and a statement of
cash flows
Asset requirements – firms’ total capital
budget consists of changes in total fixed
assets and net working capital
13
Financial Planning Model: Elements (2)
4.
5.
6.
Financial requirements – how to raise the
capital; dividend policy and debt policy
Cash surplus or shortfall (“plug”) – the
designated source of external financing
needed to deal with any shortfall in
financing and to bring the balance sheet
into balance
Economic assumptions – level of interest
rates, the firm’s tax rate and sales
forecast
14
Simple Financial Planning Model

All variables are tied to sales and this
relationship is optimal

The growth in assets requires the
management to decide how to finance the
growth (debt vs. equity)
o
o
Dividend policy
Financing policy
15
Simple Balance Sheet Format
16
Simple Financial Planning Model:
example (1)
COMPUTERFIELD CORPORATION
Financial Statements
Income statement
Sales
$1,000
Costs
800
Net Income
$200
Balance sheet
Assets
Total
$500
$500
Debt
$250
Equity
250
Total
$500
17
(2)
If sales increase by 20% - income statement
Pro forma income statement
Sales
Costs
1200
960
(1000)
(800)
Net Income
240
(200)
18
(3)
If sales increase by 20% - balance sheet
Pro forma balance sheet (debt as the plug variable)
Assets
Debt
110 (-140)
600
Equity 490 (+all NI)
Total
600
Total
600
Pro forma balance sheet (dividends as the plug variable)
Assets
Debt
300
600
Equity
300 (+50)
Total
Total
600
19
Dividends as the plug
variable
Retained earnings 50
NI=240 Dividends =190
Dividend payout ratio = Cash dividends/Net
income = $ 190/$240 *100= 79.17%
Retention ratio (plowback ratio) = Retained
earnings/Net income = $50/$240*100 =
20.83%
or retention ratio = 1- dividend payout ratio =
1-0.7917= 0.2083
20