Long Range Financial Planning

1. Long Range Financial Planning Justin Byrd and John Hanna

2. Presentation Topics • Planning and the Strategic Plan • Trend of revenue and profits • Capital investments • Cash flows and financing requirements • Key statistics • Risk Analysis • Breakdown by business unit, product line, and geography • Financial position

3. Planning and the Strategic Plan • Overview of planning process • Strategic plan • Outlines in general terms the characteristics and objectives of the firm • Development plan • Includes new products, services, and markets in which company plans to engage • Operations plan • Focuses on existing products and markets

4. Planning and the Strategic Plan • Strategic plan begins with present and extends as far into future as useful for planning purposes • Usually three to five years • Focus on needs, threats, and opportunities facing company • Plan should contain: • Statement of Purpose • Actions to take • Resources to use • Goals to meet • Time schedules to follow • Assumptions made

5. Planning and the Strategic Plan • Important factors for plan decision makers • Economic consensus • Planning assumptions • Growth strategy • Prior year comparison • SWOT analysis • Business goals • Profit plans • Financial summaries

6. Trends of Revenues and Profits • Business plan should provide target sales level or average growth rate to be achieved • Growth projections • Adjustments should be made annually, tying revenue to: • Changes in demand and new products on market • Creation of new business units • New geographical areas reached • Profit projections • Margin and profit projections should be linked to anticipated costs of: • Creating new products • Capital expenditures • Marketing campaigns • Other growth-related costs

7. Capital Investments • Long-range plan should indicate key capital investments required to attain revenue and profit projections • Important to consider alternative project management styles

8. Capital Investments • Investment amount should include working capital requirements • Cash invested in receivables+inventories-accounts payables • Should account for events changing investment revenues and expenses each period • Current market trend • Shrinking working capital through reduction of inventories and receivables • Handout and Case Study

9. Capital Investments • Case study • Reduced inventory allowed for significant decrease in depreciation expense • JIT benefits • Lowered holding costs • Smaller, more frequent orders • Reduced lead time • Ordered when needed • Safety stock reduction

10. Capital Investments • Capital requirements • Should be listed by product, business unit, or geographical areas

11. Cash Flows and Financing Requirements • Crucial aspect due to management’s needing to know about risk of future indebtedness • May need to issue stocks or bonds to finance operations • Issues associated with debt and equity financing • If future indebtedness is more or less than management finds optimal, then management should perform and an analysis of potential courses of action • Ernst and Young survey

12. Cash Flows and Financing Requirements

13. Cash Flows and Financing Requirements • Product profitability • Assumptions are key component of projected cash flows • Analyses should be carried out on both individual projects and the company as a whole • Should contain both: • assumptions regarding expected competition and other factors that may reduce margins • assumptions including cost reductions and boosts in revenue that may augment margins

14. Risk Analysis • The long-range financial plan should contain a thorough investigation of the risks that could occur as a result of the business plan composed by the company. Here are some of the risks… • Competitive Response • Competitors will respond to any new product in a geographical area • Response could be price cuts, lawsuits, stricter regulations

15. Risk Analysis • Capital Cost Overruns • Construction projects that exceed their budgets • Yankee Stadium, Oklahoma State renovations (T Boone Pickens) • Funding requirements • Nationalization of Facilities • Management may want to relocate its facilities if the host country has a tendency of nationalizing certain industries with little or no compensation to the owners

16. Risk Analysis • Examples: Nationalization of Industry • 1968- Cuban Nationalization of all privately owned business • 1972-Chilean nationalization of copper mining industry • 2007- Venezuela seized operational control of Orinico Belt crude projects from many of the world’s largest oil companies • 2009- Many consider US government’s bailout of banking industry of over $600 billion a nationalization of large banks

17. Risk Analysis • Ecological Costs • Chemical waste from manufacturing could result in fines or lawsuits which would destroy any potential profits • Certain industries spurn lawsuits due to products being unsafe • Tobacco, asbestos, alcohol, etc.

18. Risk Analysis • Sales Fluctuations • Sometimes inaccurate, be aware of best and worst-case scenarios • Significant losses, or expanding facilities • Seasonal Fluctuations

19. Risk Analysis • Raw Material Scarcity • Some raw materials are in short supply or tightly controlled • Oil, computer chips, energy, etc. • Sales may fall short since supply may not equal demand • Deterioration of Margins • Competing products may advance into the market causing margins to lessen • The company should look at these issues and determine national and international competitors who may threaten in the market

20. Risk Analysis • Technological Advances • Obsolete Products • Trade literature can show news of experimental technology since technological advances may be hard to predict • Forecast a decline • Netflix vs. Blockbuster

21. Breakdown by Business • The long-range financial plan should contain aspects such as revenue, margin, profit, and capital expenditure breakdowns • Detailed breakdowns include • Business Unit • Product Line • Geography

22. Business Unit • Broken down by the individual product • Can highlight forecasted problems in a specific business sector that management can correct

23. Product Line • This type of business plan is based on the output of a new product line within a company • Marketing, advertising, R&D, capital costs, etc should be included in a summary of the new product • Attached commentary should explain maximum/minimal sales levels, capital cost overruns, competitive responses to the new product line

24. Geography • May include expansion into various geographical areas • The costs associated with advertising and marketing should be itemized • If the facilities are built in foreign countries then the capital costs should be itemized as well as the working capital cost of the expansion • The breakdown should include these numbers as well as risk assessments concerning the foreign entity, maximum vs. minimum sales forecasts, and capital cost overrun • Examples: Manufacturing industries (Autos, Furniture, etc.)

25. Financial Position • The overall financial position of the company obviously will not be 100% accurate for the long-range plan • The long-range plan serves as a guide to forecast profits for investors, potential investors, and lenders

26. Financial Position • The long-range plan should include • Balance Sheet • P&L Statement • Should extend the statements by similar amounts or percentages • The company may also chose to include a statement of financial highlights which usually includes sales, earnings, ROE, select important expenses, and projected backlogs

27. Financial Position • Lastly, the main aspect of the financial highlights would be the projected earnings per share and projected net earnings

28. Elvis Products International Balance Sheet As of Dec. 31, 2008 Assets 2009* 2008% 2008 2007% 2007 Cash and Equivalents 52.00 1.35% 52.00 1.68% 57.60 Accounts Receivable 444.51 10.44% 402.00 10.23% 351.20 Inventory 914.90 21.71% 836.00 20.84% 715.20 Total Current Assets 1411.40 33.51% 1290.00 32.75% 1124.00 Plant & Equipment 527.00 13.69% 527.00 14.31% 491.00 Accumulated Depreciation 186.20 4.32% 166.20 4.26% 146.20 340.80 360.80 344.80 Net Fixed Assets 9.37% 10.05% Total Assets 1752.20 42.88% 1650.80 42.80% 1468.80 Liabilities and Owner's Equity Accounts Payable 189.05 4.55% 175.20 4.24% 145.60 Short-term Notes Payable 225.00 5.84% 225.00 5.83% 200.00 Other Current Liabilities 163.38 3.64% 140.00 3.96% 136.00 Total Current Liabilities 577.43 14.03% 540.20 14.03% 481.60 Long-term Debt 424.61 11.03% 424.61 9.42% 323.43 Total Liabilities 1002.04 25.06% 964.81 23.46% 805.03 Common Stock 460.00 11.95% 460.00 13.40% 460.00 Retained Earnings 300.04 5.87% 225.99 5.94% 203.77 Total Shareholder's Equity 760.04 17.82% 685.99 19.34% 663.77 Total Liabilities and Owner's Equity 1762.08 42.88% 1650.80 42.80% 1468.80 * Forecasted Other Information Forecast Actual Actual Sales 4300.00 3850.00 3432.00 Dividend 22.00 Sample Pro Forma B/S

29. ACME Corporation Pro-forma Income Statement For the Year Ended Dec. 31, 2008 ($ 000's) 2009%* 2009* 2008% 2008 2007% 2007 Sales 100.00% 4,300.00 100.00% 3,850.00 100.00% 3,432.00 Cost of Goods Sold 83.93% 3,609.11 84.42% 3,250.00 83.45% 2,864.00 Gross Profit 690.89 600.00 568.00 15.58% 16.55% Selling and G&A Expenses 7.79% 334.80 8.58% 330.30 6.99% 240.00 Fixed Expenses 100.00 2.60% 100.00 2.91% 100.00 Depreciation Expense 20.00 0.52% 20.00 0.55% 18.90 EBIT 236.09 149.70 209.10 3.89% 6.09% Interest Expense 76.00 1.97% 76.00 1.82% 62.50 Earnings Before Taxes 160.09 73.70 146.60 1.91% 4.27% Taxes @ 40% 64.04 0.77% 29.48 1.71% 58.64 Net Income 96.05 44.22 87.96 1.15% 2.56% *Forecasted Sample Pro Forma P&L

30. Long-Range Financial Plan Questions?

31. Works Cited • Atkinson, Charles. "Dell: A Case Study in Low Inventory". Inventory Management Review. November 23, 2009 <http://www.inventorymanagementreview.org/2005/09/dell_computers_.html>. • Atkinson, Charles. "McDonalds: A Guide to the Benefits of JIT". Inventory Management Review. November 23, 2009 <http://www.inventorymanagementreview.org/2005/09/dell_computers_.html>. • Dunn, Roger. "ROI Model: Agile efficiency boosts ROI with constant return". IBM. November 23, 2009 <http://www.ibm.com/developerworks/rational/library/edge/08/may08/dunn/fig1.jpg>. • Fabrikant, Geraldine. "Harvard Endowment Loses 22%". New York Times. <http://www.nytimes.com/2008/12/04/business/04harvard.html?_r=2>. • "Netflix vs. Blockbuster: Rent DVDs Phenomenon Competition". Keep Net Business Profiles. November 22, 2009 <http://www.keepnetflixprofiles.org/business-ideas/netflix-vs-blockbuster-rent-dvds-phenomenon-competition/index.html>. • "Optimize Capital Availability and Deployment". Ernst and Young. November 20, 2009 <http://www.ey.com/Media/vwLUExtFile/LFC_Sector_charts/$FILE/sgf-chart05.jpg>. • Roehl-Anderson, Janice. The Controller's Function. Hoboken: Wiley, 2005. • Victor, Antonio. "Blockbuster v. NetFlix: Innovation and Competition". TheLogicofSuccess.com. November 22, 2009 <http://www.thelogicofsuccess.com/blockbuster-netflix-innovation-competition.htm>.