Financial planning involves forecasting possible future states, evaluating their effects, and analyzing options and strategies for management. It uses historical financial data to develop assumptions about external factors like the economy and industry trends, and internal factors like sales, expenses, assets and liabilities. Goals and strategies are set, forecasts are made using models, and sensitivity analysis is performed to modify assumptions and achieve desired results. The outcome is pro forma financial statements that determine the company's projected financial position.

1. Small Business Finance
Ch 4: Financial Planning

2.  Financial planning involves forecasting, evaluating and
analyzing the options and strategies with respect to
finance during a specific period of time.
Financial Planning
Financial planning involves an analysis of possible events and how these events impact on firm
Financial planning involves in forecasting the possible state of nature
Evaluate effect of this state of nature
Analyze the option and build strategies to be consider by management in response to forecasting
state
On the basis of change in state management going set goal for future financial statement
•Income statement
•Balance sheet
•cash budget

3. Financial planning is too expensive
Financial planning is only for the wealthy
Financial planning takes too much time
 Lacks expertise
 Organization is not sophisticated and advanced.
 Waste of time.
Misconception About Financial Planning
Managers of small firms often have some misunderstandings regarding financial
planning.

4. Following are the benefits of finical planning
 Systematic Decision Making
 Communication Tool
 Motivation
 Risk Reduction
 Control
Benefits of Financial Planning

5.  Following are the benefits of finical planning
 Clear Company Goals
 Systematic Decision Making
 Sensible Cash Flow Management
 Smart Budget Allocation
 Necessary Cost Reductions
 Risk Mitigation
 Crisis Management
 A Growth Roadmap
 Motivation
 Control
Other Benefits of Financial Planning
https://blog.spendesk.com/en/business-financial-planning

6. Developing the Financial Plan
•1. Compile Beginning Financial Data
•Collecting historical financial data with little explanation
•Data depend on type of financial Performa requirement and type of forecasting
model
For Example
•if we want to develop income statement ,balance sheet for this past financial
statement data of income statement and balance sheet required .
•Some technique required most recent data or some need past five year
data(historical data )

7. A careful analysis of these influences involves:
1. Determining which external factors and
variables are important to the firm.
2. Developing specific assumptions about these
elements.
3. Assigning probabilities to the different
scenarios.
Developing the Financial Plan
2. Develop Assumptions about the External Variables and Factors

8. (i). Identify Important external variables
Not difficult to identify key external factor but with changing
environment, but issue faced in projection the influence which
constantly changing
Financial Planning
2. Develop Assumptions about the External
Variables and Factors
1. The General Economy
firstly Indentify economic indicator like Consumer demand, consumer income, interest
rate, inflation rate and unemployment rate
the basic issues may be classified into three categories:
2. Industry trends

9. Identify the industrial trends regarding
sale
competition
Financial Planning
2. Develop Assumptions about the External
Variables and Factors
2. Industry trends
For example
industry sales of industry (increase of decline)
What is impact of technology on industry
New product entrance position(easy of difficult )
new competitor entrance in market (easy of difficult )

10. Identify demographic pattern relevant to the firm’s
trade area.
 distribution of population in different are group
Impact of groups(short run ,long run )
Financial Planning
2. Develop Assumptions about the External
Variables and Factors
3- Demographic patterns

11. Ample published and computer accessible data bases are available .
General Economy
• Survey of current Business, the Federal Reserve Bulletin and
Economic Indicators.
Industry Assumptions
• Rely on published information
• tread association frequently publish industry statistics on yearly
basis and keep updating date
• Financial service organizations such as; Moody’s, Standard & Poor’s,
and Value Line.
Demographics
Primary sources include Statistical Abstract of the United States,
Historical Statistics of United States, County and City Date Book and
Current Population Reports.
2. Develop Assumptions about the External
Variables and Factors
(ii) Predict the external environment

12. (iii) Assign probabilities.
It is absolutely essential to incorporate the possible
out variance of outcomes .
Identify most favorable scenarios
Identify most unfavorable scenarios
 difficult to predict appropriate chances of and event
happening/outcome.
Management practice and experience will make
reasonable able probability analysis .
Financial Planning
Developing the Financial Plan
2. Develop Assumptions about the External Variables and Factors

13.  Based on external factors.
 The process for developing internal assumptions is
similar in nature to the procedure in building
external assumptions.
Developing the Financial Plan
3. Develop Assumptions about Internal Variables and Policies
The steps are given as follows:
Translate the external assumptions into internal assumptions.
Estimate which internal influences have a significant impact
upon the firm’s operations.
 develop goals and strategies for the planning horizon based
upon external and internal assumptions and management
polices

14. (i) Translate from macro to micro
 Readily available external variables at macro level .
 it management responsibility to interpret the implication of
this information at firm or micro level .(External to internal)
 This translation serves as the basis for developing internal
assumptions.
Financial Planning
Developing the Financial Plan
3. Develop Assumptions about Internal Variables and Policies
Example
if we assume that consumer income will increase 6% in
next year.
Now management task is to identify how it create impact
on organization .

15. (ii) Identify Internal Cause and Effect Relationships.
External factor create direct impact on sale
For identifying cause and effect relation we are concern with these statement
•Income Statement Analysis,
Sale is most important factor in income statement and other operating expenses hinge on
the level of sales
 internal relationship can learn by examining past data
 then create link between sale and other variable like
adverting budget
Size of sale staff geography
 seasonality price and volume relationship
Financial Planning
Developing the Financial Plan
3. Develop Assumptions about Internal Variables and Policies

16. (ii) Identify Internal Cause and Effect Relationships.
•Balance Sheet Analysis;
Assets and liabilities are key driving forces .
 Certain assets and liabilities are highly sensitive to changes in sales
For example
Account receivable are directly related to credit sales
But also the amount of receivable are depend upon firm collection policies and
procedures .
Past collection pattern and some improved polices firms are able to predict future
assets and liabilities level
Financial Planning
Developing the Financial Plan
3. Develop Assumptions about Internal Variables and Policies

17. 4. Develop Goals and Strategies
After detail examine of internal and external factor now
management is in position to develop goals and
strategies
o Capital Expansion and Contraction
o Company Acquisition and Divestitures
o Current Product Line
o Financing
o Marketing Strategies
o Production
o Personnel
Developing the Financial Plan

18. 5. Select Financial Forecasting Models And Technique
 The next step is to translate the internal assumptions and
plans into specific financial results.
 Forecast important financial variables which are key driver to
achieve specific financial goals
 Financial forecasting variable are
 Profit planning ( sales and expenses)
 Cash budget (cash balance )
 Balance sheet (assets financial requirement )
 Thus identify the model which helps to develop financial
statement .
Developing the Financial Plan

19. 6. Perform Sensitivity Analysis
in last step be prepare your self to answer (what if ) question
After generation of statement now interpret the out put
Compare the out put with the forecast result
Identify variation
Modify the assumption and polices
Apply assumption and polices to get desire result
Developing the Financial Plan

20. 6. Perform Sensitivity Analysis
• However in general the spreadsheet applications provide the
following capabilities:
– Enable the user to access external data bases.
– Enable the manager to sort, search and rearrange data.
– Based on historical relationships enable the forecaster to make
changes in a variable and have these changes reflected throughout the
forecasted statements.
– Based on modeling techniques, such as regression and a moving
average, enable the manager to perceive relationships of the past as
basis for looking at the future.
– Allow the user to arrange forecasted data in a different format.
– Provide graphic presentations, such as bar graph, pie charts, and other
types of visual displays to help interpret the forecasted results.
Developing the Financial Plan

21. Financial Planning
Determine Financial
Position
Financial Statement
Generator
Forecasting Model
Internal Company
Assumptions/ Goals &
Policies
Assumptions of
External Environment
Interpretation of
Output
Modify
Assumptions &
Policies
Pro forma
Income Statement
Cash Budget
Balance Sheet
Sources and Uses
etc.
Yes No End