What is Financial Planning By Dan M Mervin Pdf
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Financial plans draw out the connections between the firm’s plans for growth and the financing requirements. For example, a forecast of 25 percent growth might require the firm to issue securities to pay for necessary capital expenditures, while a 5 percent growth rate might enable the firm to finance capital expenditures by using only reinvested profits. Financial plans should help to ensure that the firm’s goals are mutually consistent. For example, the chief executive might say that she is shooting for a profit margin of 10 percent and sales growth of 20 percent, but financial planners need to think whether the higher sales growth may require price cuts that will reduce profit margin.
Financial planners often use a financial planning model to help them explore the consequences of alternative financial strategies. These models range from simple models, such as the one presented later in this chapter, to models that incorporate hundreds of equations. Financial planning models support the financial planning process by making it easier and cheaper to construct forecast financial statements. The models automate an important part of planning that would otherwise be boring, time-consuming, and labor-intensive.
Long-term financial planning focuses on the firm’s long-term goals, the investment that will be needed to meet those goals, and the finance that must be raised. But you can’t think about these things without also tackling other important issues. For example, you need to consider possible dividend policies, for the more that is paid out to shareholders; the more the external financing that will be needed. You also need to think about what is an appropriate debt ratio for the firm. A conservative capital structure may mean greater reliance on new share issues. The financial plan is used to enforce consistency in the way that these questions are answered and to highlight the choices that the firm needs to make. Finally, by establishing a set of consistent goals, the plan enables subsequent evaluation of the firm’s performance in meeting those goals.