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Financial Planning: Data Gathering, Analysis, and Decision Making

Learn the steps and importance of financial planning, including data gathering, forecasting, and utilizing financial data for business decisions. Understand the impact of economic conditions on financial planning.

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Financial Planning: Data Gathering, Analysis, and Decision Making

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  1. chapter7 Approaches to Financial Planning Lonni Steven Wilson, Medaille College

  2. Key Chapter Objectives • Define financial planning. • Describe how to acquire financial data from internal and external sources. • Understand how to utilize financial data to make business decisions. • Distinguish between long-term and short-term financial planning.

  3. Financial Planning Steps • Gathering information • Forecasting sales • Projecting profits and losses • Comparing with industry norms • Determining capital needs

  4. Financial Planning Case Study: Alex Rodriguez • In December 2000, Alex Rodriguez signed with the Texas Rangers for $252 million over 10 years. • Shortly after, the Rangers announced a ticket price increase; now only the Yankees and Red Sox had higher ticket prices. • Why did they raise prices? • Was the team just savvy in thinking people would pay to see the best ballplayer in baseball? (continued)

  5. Financial Planning Case Study: Alex Rodriguez (continued) Average Attendance at Ameriquest Field • As the table shows, signing Rodriguez led to no measurable difference in attendance. • However, the Rangers signed a 10-year $250 million contract with Fox to broadcast games that same year. • Their broadcast fees essentially covered the Rodriguez contract. (Data from baseball-almanac.com. Available: http://www.baseballalmanac.com/teams/rangatte.shtml )

  6. Data Data gathering • Companies cannot plan without appropriate data. • Planning data should be compared with internal and external projections. • Internal data: Often referred to as primary data since these are data generated by the business itself. • External data: Data obtained from other sources, usually already developed and published; often referred to as secondary data.

  7. Sources of Internal Data • Personal observation or conversations • Fan surveys • Past balance sheets and income statements • Audited financial records • Annual reports • Research and development reports • Countless other documents generated by employees or consultants

  8. Sources of External Data • Monitoring international terrorist activities to determine if an event needs to be canceled • Analyzing industry trends to develop appropriate pricing for concession items • Tracking culinary advances to determine the most effective means of packaging and selling food items • Reading current articles in trade publications to stay abreast of industry changes • Attending conferences to hear what other executives are saying about the industry • Reviewing government census reports to understand demographic changes in the possible fan base

  9. Benchmarking Allows one business to compare itself to others and see if it is paying more for similar work or results • Regardless of the type of external data, the reader of such reports needs to compare apples with apples, not apples with oranges. • Comparing data that have been obtained using different equations will lead to inaccuracies.

  10. Benchmarking with Revenues • Thus, we might compare NCAA Division I athletic programs using expenses and revenues. • This table shows the revenue streams for a typical Division 1-A program. • Data from "Fiscally friendly football," 1996, Sidelines: 2

  11. Benchmarking with Expenses • Looking at expenses, we could benchmark where one institution is spending money compared with others. • This table shows the expenses for a typical Division 1-A program. Data from "Fiscally friendly football," 1996, Sidelines: 2.

  12. Benchmarking Revenue by Sport We might also compare the revenues various sports in the athletic program are generating. • Data from "Fiscally friendly football," 1996, Sidelines: 2.

  13. Benchmarking Expenses by Sport Or we might compare the expenses various sports in the athletic program have. • Data from "Fiscally friendly football," 1996, Sidelines: 2.

  14. The Financial Planning Process • There are two major activities: • Forecasting potential revenues • Budgeting for future expenses, commonly called budgeting • The most common managerial decisions have to do with maximizing revenue sources and minimizing expenses. • Financial planning is often based on behavior learned from previous bad habits or mistakes.

  15. Economic Conditions Affecting Financial Planning Inflation • Inflation represents an increase in the price level of products that could be due to increased demand. • The increased demand for products can force prices to increase, which leads to a chain reaction of increasing wages and material costs. • Inflationand prosperity typically cause a sharp need for corporate capital so that the company can continue to produce more. Interest rates: Affect a business’ interest in borrowing money and its ability to do so.

  16. Short-Term Planning • Time frame usually less than two years • Based on specific research • Requires individuals to meet specific goals • Requires close scrutiny of internal variables (e.g., cash flow and debt-related issues) • Some key aspects: How to effectively understand and make decisions based on working capital, net working capital, current ratio, acid test ratio, and the cash budget

  17. Long-Term Planning • More oriented toward the future • Allows executives to be creative because of uncertainties • Long-term goals less clear (future uncertainty) • Greater emphasis on external variables (e.g., industry trends and technological advancements) • Backbone for developing the proper documentation needed to secure capital support

  18. Key Terms budget—First and foremost a financial plan for the future. For example, if you want to buy a car, you might examine your financial position and discover that you can afford only $100 a month for a car. pro forma budget—A future budget based on past financial results and expected future financial results.It contains a financial plan for the business, and the two are often combined to help complete the business plan.

  19. Questions for In-Class Discussion • Discuss a rough budget for your finances. What hurdles might you face in preparing the budget and following the budget? • Discuss a short-term plan for a perennially losing team, and identify specific steps that could be taken to increase income or generate victories. • Discuss a long-term plan for a perennially losing team, and identify specific steps that could be taken to increase income or generate victories.

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