1. Financial planning rules :
Financial plans begin with the firm’s product develoment and sales objectives. Sales have to be determined by markets studies. But it is not sufficient enough. Bankers want to compare future cash flows from the project with present cash flows from competitors.
Generally speaking future creditors may ask the firm to submit three alternative busines plans covering the next five years :
1. A best-case or agrgressive growth plan calling for heavy capital investment, new products, and an increased market share.
2. A normal growth plan in which the division grows with its markets but not at the expense of its competitors.
3. A plan of retrenchment designed to minimize capital outlays . this is planning for lean economic times.
Of course, the planners might also look at the opportunities for moving into a wholly new area where the company can exploit its existing strengths. Often they may recommend entering the market for strategic reasons, that is, not because the immediate investment is profitable but because it establishes the firm in the market and creates options for possibly valuable follow-on investments. In other words, there is a two-stage decision. At the second stage ( the follow-on project) the financial manager faces a standard capital budgeting problem. But at the first stage projects may be valuable primarily for the options they bring with them. But at the first stage projects may be valuable primarily for the options they bring with them.
To see the financial consequences of the business plan, you need to develop forecasts of future cash flows. If the likely operating cash flow is insufficient to cover both the planned dividend payments and the investment in working capital and fixed assets, then the firm needs to ensure that it can raise the balance by borrowing or by the sale of additional shares or by delaying some investments of fixed assets.
Cash flow forecasts...