Financial Planning

We have seen how the main objectives of the firm are expressed in financial form. Detailed financial analysis is necessary to support these financial targets. Since this type of analysis is dealt with throughout this book, this webpage is not detailed in this respect. Indeed, the purpose of this webpage is to emphasize the necessity of setting long-run objectives and of relating short-term decisions to these objectives.

In the field of long-range planning, the accountant's role is to contribute to the management team. The importance of this role should be apparent from our discussions earlier of the way profit targets are set.

The accountant's role in this regard has been defined as embracing the following activities:

(1) Providing background information which serves as a prelude to planning. A valuable contribution which the accountant may make in this respect is the preparation of preliminary studies in the form of reviews of past performance, product-mix studies, surveys of physical facilities, and estimates of capital expenditure requirements. Moreover, he has special skills in the analyses of cost-volume profit relationships, profit margins by product lines, cash flows and so on.

(2) Assisting in the evaluation of alternative courses of action which are being considered, and assessing the financial feasibility of the proposed course of action. This requires the accountant to decide what data is relevant, prior to its analysis and expression in financial terms, so that the data base of the long-range plan shall be reliable.

(3) Assembling, integrating and co-ordinating detailed plans into a corporate master plan. In this respect, the accountant has a traditional skill in aggregating data which is particularly relevant.

(4) Translating plans into overall schedules of costs, profit and financial conditions. These schedules may subsequently be used to prepare detailed operating budgets.

(5) Presenting the anticipated results of future operations in financial terms.

(6) Assisting in the critical appraisal and, where necessary, the revision of long-range plans to ensure that they do constitute a realistic basis for directing and controlling future operations.

(7) Establishing and administering the network of operational controls that are necessary to the attainment of the planned objectives. This vital phase of the planning process requires the integration of long- and short-run profit plans, the monitoring of current performance against that planned for the long-term and reporting to management on the realization of the long-term plan.

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Read on: Planning and the Shareholder

Before we can calculate a target return on capital employed we must first estimate the returns which shareholders are likely to expect over the planning period. The following factors will affect these returns:

(1) The rate of return which shareholders have had in recent years.

(2) The rate of return which they could earn elsewhere. If a better rate of return is obtainable from similar companies, there will be pressure from management to increase the profit target.

(3) The impact of inflation on the rate of return. The rate of return may have to be increased to compensate... see: Planning and the Shareholder