Long Range Financial Planning

Justin Byrd and John Hanna

Presentation Topics

Planning and the Strategic Plan Trend of revenue and profits Capital investments Cash flows and financing requirements Key statistics Risk Analysis Breakdown by business unit, product line,

and geography Financial position

Planning and the Strategic Plan

Overview of planning process Strategic plan▪ Outlines in general terms the characteristics

and objectives of the firm Development plan▪ Includes new products, services, and markets

in which company plans to engage Operations plan▪ Focuses on existing products and markets

Planning and the Strategic Plan

Strategic plan begins with present and extends as far into future as useful for planning purposes Usually three to five years

Focus on needs, threats, and opportunities facing company

Plan should contain:▪ Statement of Purpose▪ Actions to take▪ Resources to use▪ Goals to meet▪ Time schedules to follow▪ Assumptions made

Planning and the Strategic Plan Important factors for plan decision

makers Economic consensus Planning assumptions Growth strategy Prior year comparison SWOT analysis Business goals Profit plans Financial summaries

Trends of Revenues and Profits Business plan should provide target sales level or

average growth rate to be achieved Growth projections

Adjustments should be made annually, tying revenue to:▪ Changes in demand and new products on market▪ Creation of new business units▪ New geographical areas reached

Profit projections Margin and profit projections should be linked to anticipated

costs of:▪ Creating new products▪ Capital expenditures▪ Marketing campaigns▪ Other growth-related costs

Capital Investments

Long-range plan should indicate key capital investments required to attain revenue and profit projections Important to consider alternative project

management styles

Capital Investments

Investment amount should include working capital requirements▪ Cash invested in receivables+inventories-accounts

payables Should account for events changing

investment revenues and expenses each period

Current market trend Shrinking working capital through reduction

of inventories and receivables Handout and Case Study

Capital Investments

Case study Reduced inventory allowed for

significant decrease in depreciation expense

JIT benefits Lowered holding costs▪ Smaller, more frequent orders

Reduced lead time▪ Ordered when needed

Safety stock reduction

Capital Investments

Capital requirements Should be listed by product, business

unit, or geographical areas

Cash Flows and Financing Requirements

Crucial aspect due to management’s needing to know about risk of future indebtedness May need to issue stocks or bonds to finance

operations▪ Issues associated with debt and equity financing

If future indebtedness is more or less than management finds optimal, then management should perform and an analysis of potential courses of action Ernst and Young survey

Cash Flows and Financing Requirements

Cash Flows and Financing Requirements

Product profitability Assumptions are key component of

projected cash flows Analyses should be carried out on both

individual projects and the company as a whole▪ Should contain both:▪ assumptions regarding expected competition and

other factors that may reduce margins ▪ assumptions including cost reductions and boosts in

revenue that may augment margins

Risk Analysis

The long-range financial plan should contain a thorough investigation of the risks that could occur as a result of the business plan composed by the company. Here are some of the risks…

Competitive Response Competitors will respond to any new product in a

geographical area Response could be price cuts, lawsuits, stricter

regulations

Risk Analysis

Capital Cost Overruns Construction projects that exceed their

budgets▪ Yankee Stadium, Oklahoma State renovations

(T Boone Pickens) Funding requirements

Nationalization of Facilities Management may want to relocate its

facilities if the host country has a tendency of nationalizing certain industries with little or no compensation to the owners

Risk Analysis

Examples: Nationalization of Industry 1968- Cuban Nationalization of all privately owned business 1972-Chilean nationalization of copper mining industry 2007- Venezuela seized operational control of Orinico Belt

crude projects from many of the world’s largest oil companies 2009- Many consider US government’s bailout of banking

industry of over $600 billion a nationalization of large banks

Risk Analysis

Ecological Costs Chemical waste from manufacturing

could result in fines or lawsuits which would destroy any potential profits

Certain industries spurn lawsuits due to products being unsafe▪ Tobacco, asbestos, alcohol, etc.

Risk Analysis

Sales Fluctuations Sometimes inaccurate, be aware of best

and worst-case scenarios▪ Significant losses, or expanding facilities▪ Seasonal Fluctuations

Risk Analysis

Raw Material Scarcity Some raw materials are in short supply or tightly

controlled▪ Oil, computer chips, energy, etc.

Sales may fall short since supply may not equal demand

Deterioration of Margins Competing products may advance into the market

causing margins to lessen The company should look at these issues and

determine national and international competitors who may threaten in the market

Risk Analysis

Technological Advances Obsolete Products Trade literature can show news of

experimental technology since technological advances may be hard to predict

Forecast a decline▪ Netflix vs. Blockbuster

Breakdown by Business

The long-range financial plan should contain aspects such as revenue, margin, profit, and capital expenditure breakdowns

Detailed breakdowns include Business Unit Product Line Geography

Business Unit

Broken down by the individual product Can highlight forecasted problems in a specific

business sector that management can correct

Product Line

This type of business plan is based on the output of a new product line within a company

Marketing, advertising, R&D, capital costs, etc should be included in a summary of the new product

Attached commentary should explain maximum/minimal sales levels, capital cost overruns, competitive responses to the new product line

Geography

May include expansion into various geographical areas The costs associated with advertising and marketing

should be itemized If the facilities are built in foreign countries then the

capital costs should be itemized as well as the working capital cost of the expansion

The breakdown should include these numbers as well as risk assessments concerning the foreign entity, maximum vs. minimum sales forecasts, and capital cost overrun

Examples: Manufacturing industries (Autos, Furniture, etc.)

Financial Position

The overall financial position of the company obviously will not be 100% accurate for the long-range plan

The long-range plan serves as a guide to forecast profits for investors, potential investors, and lenders

Financial Position

The long-range plan should include Balance Sheet P&L Statement

Should extend the statements by similar amounts or percentages

The company may also chose to include a statement of financial highlights which usually includes sales, earnings, ROE, select important expenses, and projected backlogs

Financial Position

Lastly, the main aspect of the financial highlights would be the projected earnings per share and projected net earnings

Sample Pro Forma B/SElvis Products International

Balance SheetAs of Dec. 31, 2008

Assets 2009* 2008% 2008 2007% 2007 Cash and Equivalents 52.00 1.35% 52.00 1.68% 57.60 Accounts Receivable 444.51 10.44% 402.00 10.23% 351.20 Inventory 914.90 21.71% 836.00 20.84% 715.20Total Current Assets 1411.40 33.51% 1290.00 32.75% 1124.00 Plant & Equipment 527.00 13.69% 527.00 14.31% 491.00 Accumulated Depreciation 186.20 4.32% 166.20 4.26% 146.20Net Fixed Assets 340.80 9.37% 360.80 10.05% 344.80Total Assets 1752.20 42.88% 1650.80 42.80% 1468.80

Liabilities and Owner's Equity Accounts Payable 189.05 4.55% 175.20 4.24% 145.60 Short-term Notes Payable 225.00 5.84% 225.00 5.83% 200.00 Other Current Liabilities 163.38 3.64% 140.00 3.96% 136.00Total Current Liabilities 577.43 14.03% 540.20 14.03% 481.60 Long-term Debt 424.61 11.03% 424.61 9.42% 323.43Total Liabilities 1002.04 25.06% 964.81 23.46% 805.03 Common Stock 460.00 11.95% 460.00 13.40% 460.00 Retained Earnings 300.04 5.87% 225.99 5.94% 203.77Total Shareholder's Equity 760.04 17.82% 685.99 19.34% 663.77Total Liabilities and Owner's Equity 1762.08 42.88% 1650.80 42.80% 1468.80

* ForecastedOther Information Forecast Actual ActualSales 4300.00 3850.00 3432.00Dividend 22.00

Sample Pro Forma P&L ACME Corporation

Pro-forma Income Statement

For the Year Ended Dec. 31, 2008 ($ 000's)

2009%* 2009* 2008% 2008 2007% 2007

Sales 100.00% 4,300.00 100.00% 3,850.00 100.00% 3,432.00

Cost of Goods Sold 83.93% 3,609.11 84.42% 3,250.00 83.45% 2,864.00

Gross Profit 690.89 15.58% 600.00 16.55% 568.00

Selling and G&A Expenses 7.79% 334.80 8.58% 330.30 6.99% 240.00

Fixed Expenses 100.00 2.60% 100.00 2.91% 100.00

Depreciation Expense 20.00 0.52% 20.00 0.55% 18.90

EBIT 236.09 3.89% 149.70 6.09% 209.10

Interest Expense 76.00 1.97% 76.00 1.82% 62.50

Earnings Before Taxes 160.09 1.91% 73.70 4.27% 146.60

Taxes @ 40% 64.04 0.77% 29.48 1.71% 58.64

Net Income 96.05 1.15% 44.22 2.56% 87.96

*Forecasted

Long-Range Financial Plan

Questions?

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