What is corporate Financial Planning?
In general usage, a financial plan can be a budget, a plan for spending and saving future income. Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives.
Corporate Financial Planning is the method by which financial goals are to be achieved. Financial planning is the process of successfully meeting financial needs of life through the proper management of finances.
Corporate Financial Planning is the process of determining a company's financial needs or goals for the future and how to achieve them.
Benefits of Corporate Financial Planning
Corporate financial planning involves deciding what investments and activities would be most appropriate under both the company's individual and broader economic circumstances.
All things being equal, short-term financial planning involves less uncertainty than long-term financial planning because, generally speaking, market trends are more easily predictable in the short term.
Likewise, short-term financial plans are more easily amendable in case something goes wrong.
It is the roadmap to Financial Health, & Sustainable Wealth creation.
Elements of Corporate Financial Planning
01. Sales Forecast – many cash flows depend directly on the level of sales (often estimated using sales growth rate)
02. Pro Forma Statements – setting up the plan using projected financial statements allows for consistency and ease of interpretation
03. Asset Requirements – the additional assets that will be required to meet sales projections
04. Financial Requirements – the amount of financing needed to pay for the required assets
05. Plug Variable – determined by management deciding what type of financing will be used to make the balance sheet balance.
Plug variable(s): the source(s) of external financing (or dividends) needed to deal with any shortfall (or surplus) in financing and thereby bring the pro forma balance sheet into balance.
06. Economic Assumptions – explicit assumptions about the coming economic environment
Roles of Corporate Financial Planning
Examine interactions – help management see the interactions between decisions. The plan must make explicit the linkages between investment proposals and the firm’s financing choices
Explore options – give management a systematic framework for exploring its opportunities. The plan provides an opportunity for the firm to weigh its various options
Avoid surprises – help management identify possible outcomes and plan accordingly. Nobody plans to fail, but many fail to plan
Ensure feasibility and internal consistency – help management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another.
The different plans must fit into the overall corporate objective of maximizing shareholder wealth