A Financial Plan Based on Management's Strategic Intent - Term Paper Example

? CONSTRUCT AND ANALYZE A FINANCIAL PLAN BASED ON MANAGEMENT'S STRATEGIC INTENT Outline 0 Executive summary 2.0 Annual Budgeted income statement 3.0 Annual Budgeted Balance sheet 4.0 Annual Budget Cash flow Statement 5.0 Selected Financial Ratio’s 6.0 CVP analysis for the full year 7.0 Appendices 1.0 EXECUTIVE SUMMARY This financial statement and balance sheet explains why and how managers project financial statements into the future. Forecasting a firm's financial statements can help both financial managers and general managers. Financial statements help the financial manager plan the firm's financial needs.  With an estimate of future income statement and balance sheet accounts, a manager can tell how much financing might be needed, and when it might be needed. Thus, one purpose of strategic intent is to forecast a firm's financial statements under some specific conditions.  Since total assets must equal the sum of total liabilities and owner's equity, any imbalance will require management action. Having forecasted the amount and timing of the imbalance, a financial manager can arrange for financing (such as bank loans or stock offerings) or investment (such as marketable securities) long before the need becomes critical. Strategic intent statements help general managers in overall planning (employment and inventory levels, for example) and problem solving. As forecasts are developed, a manager can analyze the results to identify potential trouble spots and plan accordingly. Finding problems and trying out solutions on paper, months in advance, is much preferred to learning about the problem first hand in real time. Similarly, by “seeing” into the future with strategic intent statements, a manager can anticipate opportunities and prepare to exploit them long before the window of opportunity begins to close. In addition to being a planning tool, strategic intent statements, in tandem with actual results, can be used to evaluate performance and make midstream corrections. Variance analysis, a comparison of the plan with actual performance, helps a manager analyze firm performance during the budget period, gauge strengths and weaknesses, and make interim adjustments to the plan. The accuracy of strategic intent statements is limited by the validity of the assumptions used in creating them. Often a series of statements is developed by making different assumptions about sales and about the relationship between sales and the balance sheet accounts. This is called a sensitivity analysis. The resulting set of statements suggests the most likely outcomes for the firm and a range of financing needs. After building a balance sheet statement based on expected sales, a manager can then use sensitivity analyses to answer questions such as how the company's financial needs will change if sales are 10 percent below their expected level, etc. Since the hotel industry is a fairly competitive one, the hotel managers need to be excellent. With the income and financial statements at their disposal, the managers will make strategic decisions that will be founded on fact since Proforma balance sheets are created by forecasting the individual account balances at a future date and then aggregating them into a financial statement format. Account balances are forecasted by identifying the forces that influence them and projecting how the accounts will be influenced in the future by such forces. Sales, company policy, and restrictive debt covenants are often significant forces. An annual data has been provided which has to be focused for 36 months and monthly income statements and balance sheets and a strategic intent provided as well. With such information at their disposal, the managers will make a firm strategic decision on their new acquisition. 2.0 ANNUAL BUDGETED INCOME STATEMENT INCOME STATEMENT Total revenues $ Annual room revenues 209,523 Annual food and beverages 113668 Other revenue 328433 Total 14792023 Variable cost annual 8,531,040 Fixed cost annual 8,728,500 Total 9,582,604 Operating income 5,210,419 Loan at 31st dec 306544*7/100=21458 Income before tax 5188960.92 Less corporate tax 30% 1563125.7 Net income 3625835.22 On the budgeted financial income, the total revenues represent the overall income generated from room, food and beverages as well as other sources. The variable and fixed costs represent total costs calculated annually using various indicators. Loan as at 31st December was 306544 which when calculated it results to 21458. To get Net Income it’s necessary to deduct the corporate tax 30% which will be calculated from the operating income to get the exact value 3.0 ANNUAL BUDGET BALANCE SHEET Balance sheet as per 31st December Current assets $ $ Cash at bank 105189 Accounts receivable 104639 Inventories 13483 Total Assets 223311 Long term assets Property and equipment 7846829 Total assets 8,070,140 Current liabilities Accounts payable 194,973 Business tax Owned 40,087 Total current liabilities 235,060 Long-term liabilities Long-term debt 306,544 541,604 Owner’s equity Share capital 7,500,000 Retained Earnings 28536 Total owners equity 752836 Total current liabilities + Owners equity 8,070,140 4.0 ANNUAL BUDGET CASH FLOW STATEMENT Statement of Cash Flows For the Year Ending December 31 (000) Cash flows from operating activities: Net income Adjustment to determine cash flow: depreciation receivable inventory accounts payable Total adjustments Net cash $3.0 (0.8) (2.0) 2.1 $18.9 2.3 $21.2 Investment cash flow plant and equipment Net cash flows from investing activities ($16.0) ($16.0) financed cash flow: payable Divided from market share Net cash $2.3 1.6 (5.9) (2.0) 5.0 SELECTED FINANCIAL RATIO’S In this case working capital ratio was a negative figure because the hotel current liabilities are more than current assets, the hotel as a bank loan. Though after forecast the value increased this is probably due to decrease in the bank overdraft and increase in a long term debt (loan). The working capital as part of the business ratios is utilized as measurement equipment to analyze the requirements of the hotel, the working capital ration changes from period to period due to change in the operation requirements. It is advisable to reduce investments in working capital this will in turn ensure reduction of the working capital ratio which will in turn minimize cash flow and the return on investment   Working capital in this case 36 months In (000) 31st after 36 months Working capital 204.3 16.8 Short-term and long term debt 233.7 408.6 Working capital in the running Of hotel 433.6 393.8 Annualized sales (quarterly * 4) 5385.7 49678.9    6.0 CVP ANALYSIS FOR THE FULL YEAR Indeed managers ought to approximate future costs, revenues and profits by so doing it will assist them to plan and control future operations in the hotel. They will apply CVP analysis to determine levels of running the hotel in order to avoid loss, gain profit and manager the operation of the hotel. They will also be in a position to evaluate business risk In this case, we shall determine CVP of this hotel business basing on the principal equation Profit= total revenue-less total costs Whereby Total cost= variable costs + fixed costs Therefore from the cash flow statement Profit = 14, 792,023 (total revenue) - 9,582,604 (total cost) = 5,210,419 As estimated from the cash flow statement, this hotel has a high level of fixed costs , this in turn signify that huge losses are likely to result especially the revenue is lowered by a huge margin or below the break-even point. In formula illustrates the basic principles of CVP model which is greatly applied in the hotel industry to estimate the break-even point which is a critical tool in analyzing the CVP of a business. 7.0 Appendices Monthly income statement for 36months (000) 1st 2nd year 3ndyear Sales $201.0 $283.0 $319.0 Cash A/Receivable Inventory A/Payable 10.3 20.7 27.1 16.5 17.5 31.4 36.2 25.8 15.3 37.6 45.3 28.4 Net Income 10.7 17.3 15.3 Monthly Balance Sheet for 36 months (000) ACCOUNT TRIAL FORECAST FINAL FORECAST ASSUMPTIONS AND CALCULATIONS Cash A/Receivable Inventory Current Assets 18.5 38.4 47.3 104.2 18.5 38.4 47.3 104.2 Current ratio ? 1.2 Net equipment Total Assets 135.0 239.2 135.0 239.2 Debt ratio ? .46 A/Payable N/Payable Current Liabilities 30.5 54.0 84.5 30.5 56.3 86.8 LTD Total Liabilities 19.6 104.1 23.2 110.0 Common Stock 30.0 30.0 R/E Total Liability and Equity 96.2 230.3 99.2 239.2 External Fin. Required 8.9 239.2 Reference Brian J. Terry (1997). The international handbook of corporate finances. New York: Glenlake Publishing Company. Harry, C. B. (2008). Corporate Finance and Accounting. Boston: BiblioBazaar, LLC Joel, M.S, & Donald, H. C. (2003). The revolution in finance planning. New York: Wiley-Blackwell. Jonathan, B. B, & Paul J. M. (1999). A history of finance. New York: Cambridge University Press. Michael, C. E, & Eugene F. B. (2009). Corporate Finance: A Focused Approach. Brigham: Cengage Learning, Inc. Richard, A. B, Stewart C. M, & Franklin A. (2006). Principles of finance planning. New York: McGraw-Hill/Irwin. Vanessa Finch. (2002). Corporate insolvency law: perspectives and principles. New York: Cambridge University Press. Appendix QUICK AND DIRTY APPROACH FORECASTING This is a short- cut method of forecasting in which total revenues are estimated using constant percent sales. Using this method, the amount of external financing over a given particular one year can be calculated using this method. Though, this technique has been widely used it’s not accurate in situations where the percent of sales varies considerably. In such cases the formula should be adjusted for the successive accumulation of retained earnings from the profits in case the forecast is longer than one year. When using this method, the sources of funds must always equal the uses of funds. In case of any imbalance it is always important that it is covered by the external funds needed as shown below External Funds = Forecasted - Forecasted Needed Uses Sources Apart from the above expression, there is another way of expressing this relationship to associate the net sources and uses of funds with forecast change in assets, liabilities, and retained earnings expressed as . External Forecasted Forecasted Forecasted Funds = Change in - Change in - Change in Needed Variable Variable Retained Assets Liabilities Earnings Read More