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.
Financial Planning Model Elements
Sales Forecast – many cash flows depend directly on the level of sales (often estimated using sales growth rate)
Pro Forma Statements – setting up the plan using projected financial statements allows for consistency and ease of interpretation
Asset Requirements – the additional assets that will be required to meet sales projections
Financial Requirements – the amount of financing needed to pay for the required assets
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.
Economic Assumptions – explicit assumptions about the coming economic environment
Internal Growth Rate
The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing.
Relying solely on internally generated funds will increase equity (retained earnings are part of equity) and assets without an increase in debt. Consequently, the firm’s leverage will decrease over time. If there is an optimal amount of leverage, then the firm may want to borrow to maintain that optimal level of leverage. This idea leads us to the sustainable growth rate.
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