Strategic Planning

An organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and asses and adjust the organizations direction in response to a changing environment.

Elements of Strategic Planning

Mission Statement A condensed version of a firms strategic plan. Corporate Scope Defines a firms lines of business and geographic areas of operation. Statement of Corporate Objectives Sets forth specific goals to guide management.

Corporate Strategies Broad approaches developed for achieving a firms goals. Operating Plan Provides management with detailed implementation guidance based on the corporate strategy to help meet the corporate objectives.

Financial Planning
The document that includes assumptions, projected financial statements, and projected ratios and ties the entire planning process together.

Financial Planning Process

Project financial statements and use these projections to analyze the effects of the operating plan on projected profits and various financial ratios. 2) Determine the funds needed to support the five-year plan. 3) Forecast funds availability over the next five years.
1)

Establish and maintain a system of controls to govern the allocation and use of funds within the firm. 5) Develop procedures for adjusting the basic plan if the economic forecasts upon which the plan was based do not materialize. 6) Establish a performance-based management compensation system.
4)

Forecasting Sales
A forecast of a firms unit and dollar sales for some future period. It is generally based on recent sales trends plus forecasts of the economic prospects. Prediction based on past sales performance and an analysis of expected market condition.

Importance of Sales Forecasting

Evaluation of past and current sales level and annual growth Compare your company to industry benchmarks Establish polices to monitor prices and operating costs Make a company aware of minor problems before they become major problems

Optimized cash flow Knowing when and how much to buy The ability to plan for production and capacity Ability to determine the expected return on investment

Factors Affecting Sales Forecast

Internal Factors
Labor problems Credit policy changes Sales motivation plans Inventory changes Price changes

Working capital shortages Change in distribution method Production capacity changes New product lines

External Factors
Seasonality of the business Direct and indirect competition Political events Styles or fashions

Consumer earnings Population changes Weather Productivity changes

Additional Funds Needed (AFN)

The amount of external capital (interest-bearing debt and preferred and common stock) needed to acquire the needed assets.

AFN Equation
An equation that shows the relationship of external funds needed by a firm to its projected increase in assets, the spontaneous increase in liabilities, and its increase in retained earnings.

AFN Equation

Capital Intensity Ratio

The ratio of assets required per dollar of sales.

Sales Growth
The difference of projected sales and the last year sales.

Spontaneously Generated Funds

Funds that arise out of normal business operations from its suppliers, employees, and the government (such as accounts payable and accrued wages and taxes) that reduce the firms need for external financing.

Retention Ratio
The proportion of net income that is reinvested in the firm and is calculated as 1 minus the dividend payout ratio.

Sustainable Growth Rate

The maximum achievable growth rate without the firm having to raise external funds. It is the growth rate at which the firms AFN equals zero.

Excess Capacity Adjustments

Changes made to the existing asset forecast because the firm is not operating at full capacity.

Full Capacity Sales=Actual Sales Percentage of Capacity at which FA were operated = $3 M 0.96 =$3,125,000

Target Fixed Asset/Sales=Actual FA Full capacity sales = $1, 000 $ 3,125 = 32%
Required level of FA= (target FA/sales)(projected sales) = 0.32($ 3,300 M) = $1, 056 M

Forecasted Financial Statements

Financial statements that project the companys financial position and performance over a period of years.

Part 1 - Inputs

Part 2 Forecasted Income Statement

Part 3 Forecasted Balance Sheet

Part 4 Ratios and EPS

Notes on Calculations

Regression Analysis
A statistical technique that fits a line to observed a data points so that the resulting equation can be used to forecast other data points.