Financial Planning - Term Paper Example

Under the traditional forecasting the fixed assets are increased as a percentage of sales. This cannot be entirely justified. It is possible that the fixed assets owned by the firm are sufficient in supporting the projected sales level i.e. if the company may have an excess capacity. In such cases the amount of fixed assets will not vary with the sales level rather it remains unchanged. The other expenses like cost of material, any other direct expense like wages etc are likely to increase as a proportion of sales only.

Similarly, spontaneous liabilities like accrued expenses and accounts payable are a form of current liabilities that can be reasonably expected to vary as per the sales level. Therefore, for these items the forecast made on the basis of sales appears to be justified. The other types of liabilities like long term debt, notes payable, paid-in capital and common stock cannot be assumed to fluctuate with the sales level. The amount of retained earnings can be assumed to be based on the net profit margin minus any planned dividend.

Hence it can be said that all the items cannot be anticipated to vary with the level of sales. Even though some items of the financial statements like accounts payable can be reasonable assumed to vary with sales others like fixed assets cannot be anticipated to vary with sales as there is a possibility of a firm having unused capacity which can take care of the forecasted sales rise (Keown, p.108). 2) a. In case of rapidly rising sales the firm’s cash position may or may not increase. In case of most of the rise being in the form of cash sales then the cash position will increase, however, if the same is in the form of credit sales then the cash position may not immediately increase. b. A delay in payable payment will increase the cash position of the business. c. A more liberal credit policy will decrease the cash position as this would mean ‘extended credit period’ thereby blocking the fund in sales for long periods of time. d. Holding of large inventory is likely to reduce the cash position as the company may not be able to use entire amount of inventory in its production activities.

Due to this the conversion of inventory into sales will take time with an immediate impact of reduced cash position. However an exception to this will be if the company is able to procure inventory on credit. e. A rise in the depreciation on fixed assets will not have any impact on the cash position. This is because depreciation does not involve any actual cash outflow for the business. f. Retention of higher percent of earnings would mean less cash dividend outflow. This is likely to increase the cash position of the business. 3) The recent financial crisis originated in USA and gradually spread across the worldwide financial markets.

This squeezed the ‘credit’ as the financial institutions across the globe became wary of lending. The crisis had its roots in the ‘housing bubble’ when the housing prices were booming in the domestic market in US. Induced by the increased demand for housing loans a number of derivative products like securitization, credit default swaps were issued. Buoyed by the low rate of interest and poor credit appraisal even the sub-prime borrowers were given loans. All was fine but once the rate of interest started rising these borrowers started defaulting.

The market participants panicked with the fall of the financial giants