Long Term Financial Planning - Coursework Example

Long Term Financial Planning Assignment Student’s Name Institution Long Term Financial Planning Assignment It is important for companies to plan for both their short and long term operations. Short-term planning is only meant to cover a period not exceeding 12 months. It is meant to ensure that companies have sufficient cash resources in order to pay for its immediate short-term borrowings and thus, lending is agreed to guarantee operations to its best advantage. However, long-term financial planning is meant to guide into achieving long-term’s objectives and goals and thus, the investments are directed to meeting these goals as finance is raised (Financial Planning Is a Long-Term Proposition, 2014). In the course of planning for long term purposes, a company is expected to consider possible aspects of dividends policies and, also level of external financing that will be required. A company is expected to analyze the necessary debt ratios for these operations (Financial Planning Is a Long-Term Proposition, 2014). It is essential to comprehend that a conservative capital structure might translate to a higher reliance on new share issues. A long financial plan, for this case, is used for purposes of enforcing consistencies in a way that provides solutions to possible challenges in order to uphold decisions made (Grimes, 2013). Subsequently, the focus on establishing a given framework of consistent goals and objectives, the long term financial plan ensures that the analysis of a company’s performance is directed towards attaining these objectives. The aspect of long term financial planning is basically focused on the bigger picture of company’s operations. Most of the entity’s capital expenditures are proposed and implemented by the underlying company managers (Grimes, 2013). On a contrary, the final long term budget should always depict the strategic plans as directed by the senior management. Businesses enjoy positive net present values of their respective investments in cases where a company portrays an actual competitive advantage (Grimes, 2013). Long term strategic plans focuses on the identification of business investments with positive NPVs and thereafter, ascertains their expansion. The financial plan is also meant to recognize businesses to sell or liquidate and, also those that should be allowed to operate. Long strategic plans involve aspects of capital budgeting on a wider scale (Grimes, 2013). In this case, long term financial planners try to examine investments by their respective lines of businesses and thus, avoid possible derailments due to unattended details. A recent example is when Verizon announced that it was going to spend billions of dollars to launch fibre-optic based broadband technology to most of its residential customers as a way of conforming to objectives of a long term financial plans (Alhenawi & Elkhal, 2013). In most cases, long term financial planners do not rely on a project-by-project basis so that smaller projects are accumulated and treated as a single project. At the very onset of a long term financial planning process, a company’s staff management might require each of the departments to submit, let’s say, three alternatives on business plans extending to at least 5 years of operations (Alhenawi & Elkhal, 2013). They might go ahead to develop an aggressive growth plan calling for heavy capital investments and intensive growth of existing markets. They might also go ahead to oversee the normal growth planning for which departments develops with its markets but taking caution not to overstate expenses with its immediate competitors. Subsequently, there is also a chance to plan for retrenchment of workers in case it is evident that the markets have reduced not to support past demands (Alhenawi & Elkhal, 2013). These forms of long term financial planning are meant to ensure protection in cases of lean economic times. Thus, the long term financial plan for this case will involve a detailed summary of all capital expenditures, working capitals needed and also, significant strategies needed for raising funds for these investments (Alhenawi & Elkhal, 2013). Many firms engage in spending lots of their time and resources in building extensive financial plans for different purposes. There are numerous for these firms incurring costs and resources for purposes of formulating long term financial plans. First, they embark on long term financial planning in order to consider the available options (Botos, 2014). They spend a lot of time to widen their thinking capacities in regards to exploiting possible opportunities that might arise for a company to exploit and transform into new operational era. Planners, in this case, may recommend that a company make an entrance into a given marketing niche for strategic purposes (Botos, 2014). Entrance into these new markets might not necessary arise from positive NPVs but because it focuses on establishing the company in a relatively newer market and develop considerable options for valuable follow-on potential investments (Botos, 2014). Secondly, the need for propagating for financial plans lies in enhancing consistency and, also ascertaining feasibility. Long term financial plans depict a possible linkage between a company’s plans for growth and the relative financing requirements (Botos, 2014). For instance, a forecast of, let’s say, 30 per cent growth might need a company to provide securities to pay for all possible capital expenditures, while on the other hand, a 10 per cent growth might allow the company to finance capital expenditures using some of its retained earnings. For this case, long term financial plans should assist to assure company’s objectives and goals are mutually consistent at all times. For example, a CEO might propose a profit margin of 10 per cent and an immediate sales growth of 20 per cent however; the financial planners are expected to formulate ideas on whether the higher sales growth proposition will, indeed, need substantial price cuts that will help decrease the proposed profit margins (Botos, 2014). In essence, goals that are depicted in terms of accounting ratios are never operational unless they are translated into their relative meanings for purposes of effective decision-making process. Financial planners usually employ specific financial planning models in order to assist them with the exploration of consequences of alternative financial strategies. These models vary from simple ones to the ones that integrate intensive equations (Rhyne, 1986). Notwithstanding, financial models supplement the entire financial planning processess by ensuring that it is simple and affordable to develop forecasts of a company’s financial statements. They actually automate certain crucial steps of planning that will have otherwise be labour-intensive and time-consuming in nature. In fact, the programming of these financial planning models used to take lots of computer time and expertise focused resources (Rhyne, 1986). Nowadays, MS Excel is deemed the simplest form of models that can be used effectively to provide solutions to complex financial planning challenges. The diagram below shows an example of financial forecasts for both operational expenditures incurred and capital expenditure for the business There are financial planning models including three basic components; input, planning model and the immediate outputs (Rhyne, 1986). Input to any financial plan is made up of a company’s present financial statements and its immediate forecasts about a likely future. In most cases, the fundamental forecast is depicted as the likely fundamental growth in sales given that most of other important items like labour provisions and inventories are directly related to it. It is important to note that these forecasts forms a section of responsibilities allowed for financial managers (Rhyne, 1986). Markedly, the marketing section also plays a greater role in forecasting sales. Since sales are dependent on the current condition of the entire economy, bigger companies will always try to get forecasting solutions from other outsourced entities that deal in the preparation of macroeconomic and industry forecasts. A financial planning model is used for purposes of computing the relative implications of managers’ future forecasts for sales revenues, possible investments and the sources for finance (Rhyne, 1986). It is made up of intensive equations that relate to output variables to the imminent forecast. A likely example of such is when equations are used to portray significant changes in sales and how it can affect aspect of overall costs, working capital, fixed assets base and ultimate financial requirements (Rhyne, 1986). A financial model can be used to specify that the overall cost of goods generated might increase, let’s say, by about 10 per cent for every single dollar increase in subsequent sales. The output of a given financial model is made of a set of financial statements like the income, balance and cash flow statements (Rhyne, 1986). They are usually referred as pro-forma, which indicates that they are forecasts that focus on the inputs and the relative assumptions constructed into a given plan. In many cases, the output of financial models are always related to financial ratios that are used to portrays whether a firm is financially able and fit and healthy at both the beginning and end of its operations (Financial Planning Is A Long-Term Proposition, 2014). Below is an example of a graph showing possible forecast of income for a City of Port Lincoln From the discussion above, it can be ascertained that the formulation of long term financial plan is fundamental in effecting the goals and objectives of a given firm. Companies uses lots of resources and time in coming up with the plan. Long term financial plans are useful for making useful future strategic decisions. Nowadays, financial planners use financial planning models, which consist of input, financial model and output, to ensure that process is automated and efficient. References Alhenawi, Y., & Elkhal, K. (2013). Financial literacy of U.S. households: Knowledge vs. long-term financial planning. Financial Services Review, 22(3), 211-244. Botos, K. (2014). Finances and Life Cycles. Public Finance Quarterly (0031-496X), 59(4), 413-424. 'Financial Planning Is A Long-Term Proposition'. (2014). Money Today, 13. Grimes, P. (2013). Economic Assumptions in Long Term Financial Planning. Banking Ireland, 119(1), 13-15. Rhyne, L. C. (1986). The Relationship of Strategic Planning to Financial Performance. Strategic Management Journal, 7(5), 423-436. Read More