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MSU HB 311 - Financial Planning Part 1
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HB 311 1st Edition Lecture 6 Current Lecture Business Plan Model of what management expects a business to become Questions o Where am I today o Where do I want to be o How do I get there Financial Statements are Pro Forma o What financial statements will be if planning assumptions are true Good business plans are comprehensive o Markets o Products o Employees o Technology Parts of a Business Plan Typical Outline Includes o Contents o Executive Summary o Mission and Strategy Statement Basic charter and long term direction o Market Analysis Why business will succeed against competitors o Operations of the business How firm creates and distributes its product service o Management and Staffing Firm s projected personnel needs o Financial Projections Projects firm s financial statements into the future o Contingencies What firm will do if things don t go as planned Purpose of Planning and Plan Information Firm s own management These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o Planning process helps pull management team together o Provides road map for running the business o Provides statement of goals o Help predict financing needs Outside Investors o Tells equity investors what returns can be expected o Tells debt investors how firm will repay loans Credibility and Supporting Detail Good business plan shows enough supporting detail to indicate it is the product of careful thinking May display summarized financial projections with enough detail to explain the projections Four Kinds Of Business Plan 1 2 3 4 Strategic Planning Operational Planning Budgeting Forecasting Strategic Planning addresses broad long term issues contains summarized approximate financial projections Five year plan is common Expressed in words Firm analyzes itself the industry and competitive situation Operational Planning Translates business ideas into concrete short term projections Specifies sales projections to whom and at what prices Equal mix of words and numbers Converts business strategies to functional strategies Budgeting Planning Gives short term updates of the annual plan in financial detail Usually covers a calendar quarter Used in industries in which business conditions change rapidly Mostly financial data with very few words Covers operational budgets cash budgets and capital budgets Forecasting Planning Very short term projections of profit and cash flow Where financial momentum will carry it in the coming weeks Covers cash forecasts or projections of short term cash needs Most large firms do monthly cash forecasts The Business Planning Spectrum Has broad long term planning on one end and numerical short term forecasting on the other end Planning Processes of Small and Large Businesses Small businesses tend to develop a single business plan containing both strategic and operating elements Financial Plan as a Component of a Business Plan Financial Plan is the financial portion of the business plan Contains a set of pro forma financial statements projected over the time period covered by the business plan Financial statements are a piece of the projection in a strategic plan and not the center of the projection Annual plans budgets and forecasts more financial in nature Planning for New and Existing Businesses Involves forecasting changes in business based on planning assumptions Projected statements reflect assumptions Forecasting examples o Unit sales will increase decrease by o Overall Labor Costs will rise fall by o Interest rates on borrowing will increase decrease by o Cost of food supplies will remain unchanged The General Approach and Assumptions What we have and what we need to project o Only need to project an income statement and balance sheet Planning Assumptions o Expected physical or economic condition that dictates the size of one or more financial statement items Quick Estimates Based on Sales Growth The percentage of sales method assumes all financial statement line items vary directly with sales revenue o Unrealistic assumption o Management virtually always has more insight Modified percentage of sales method assumes most but not all line items vary with sales


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MSU HB 311 - Financial Planning Part 1

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