Financial Planning & Analysis

Proper financial forecasting relies on methods and tools that bring rigor to the forecasting process. Oversimplifying the forecasting process can create forecasts that ignore business cycles and lead to missed investor expectations, excess inventory buildup, and overstaffing. Financial analysts need processes and tools that help them provide management with forecasts in which management can have confidence.  

Financial analysts can create stronger forecasts by building thorough forecasts from the ground up. Analysts often face similar problems when developing forecasts. Learning to avoid these pitfalls can help you strengthen your forecasts. Forecasting can play a key role in the budgeting process. Companies can benefit by creating flexible budgets that they can adapt to changing business conditions.

 Financial analysis is an important part of the process of developing a business plan, and then for monitoring the success of that plan. Typical elements of financial analysis include:

1. Budgeting - creating a budget setting out planned cash flows in and out of the business. By monitoring a cash flow budget it is possible to identify any potential crisis points where liquidity will be poor. Budgets can also be set out for income and expenditure by the business, as well as a capital budget showing major capital spending e.g. on premises, equipment etc.

2. Profit and loss analysis - this involves the creation of a profit and loss budget setting out expected future profits/losses for the business. This is important in assessing the return on the business.

3. Balance sheet – developing a balance sheet is a financial "snapshot" of your business at a given date in time. It includes your assets and liabilities and your business' net worth over the forecast horizon.

4. Cash flow statement – Summarizes the company's cash receipts and cash disbursements over a period of time; Lists cash to and cash from operating, investing, and financing activities, along with the net increase or decrease in cash for the period.

5. Solvency analysis - involves calculating the net current assets of a business as shown in the balance sheet (i.e. current assets - current liabilities).

6. Return on capital employed (ROCE) - this is a measure of the return made on all of the capital employed in the business in a given period of time.

7. Where a business has shareholders it is useful to analyze returns to these shareholders in terms of returns for each dollar invested in share capital.

Financial analysis is very important in planning because ultimately business success is measured in terms of money.

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Other Financial Models

The workbook below contains the following models in separate spreadsheet tabs:

Breakeven analysis -  a tool used to determine when a business will be able to cover all its expenses and begin to make a profit. To calculate your breakeven point you will need to identify your fixed and variable costs. Fixed costs are expenses that do not vary with sales volume, such as rent or administrative salaries. These costs have to be paid regardless of sales and are often referred to as overhead costs. Variable costs vary directly with the sales volume, such as the costs of purchasing inventory, shipping, or manufacturing a product.

Loan Amortization - The schedule of payments to be made in repaying a debt. With level-payment amortization, the payment amount is constant throughout the repayment period. With constant-principal payment amortization, the amount of principal repaid in each payment is constant but the interest amount and the total payment amount decline as the principal balance of the loan is reduced.

Capital Budgeting - The process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return.

Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below.

• Leverage Ratios which show the extent that debt is used in a company's capital structure.
• Liquidity Ratios which give a picture of a company's short term financial situation or solvency.
• Operational Ratios which use turnover measures to show how efficient a company is in its operations and use of assets.
• Profitability Ratios which use margin analysis and show the return on sales and capital employed.
• Solvency Ratios which give a picture of a company's ability to generate cashflow and pay its financial obligations.

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