Mini Case Financial Planning Essay

1311 words - 5 pages

IntroductionBusinesses develop budgets and business plans to ensure optimum financial performance. An important element of budgeting and planning is financial forecasting. Forecasting the finances of a business requires certain understanding of financial dynamics. This paper will examine the necessary steps for financial forecasting, important elements of projecting future growth, types, and methods of financing capital requirements, the impact of changes in interest rates and dividend payouts as well as alternatives to capital financing and its impact on debt ratio and equity.Planning and ForecastingGeorge Hedderwick needs to develop a financial plan and forecast for Executive Fruit. Financial planning is a method that will require George to consider the overall affect of financial investment decisions. In financial planning, balance sheets, income statements, and other sources of cash will need to be analyzed and projected. The financial plan will help Executive Fruit examine what could happen due to a change in economic conditions. Steps that can be taken in financial planning include both analyzing finance and investment decisions for Executive Fruit; setting both short-term and long-term goals and devising a plan on how these goals will be achieved.One method that can assist in this process involves setting up a forecasting model. The model includes data from the balance sheet including assets, liabilities, and owner's equity. Using an excel spreadsheet, the data will include growth, tax, interest rates, sales, and payout ratios. Once the formulas are entered, the data can be manipulated, enabling George to forecast the results of certain decisions and better aid in the planning phase.Projection of Future YearsGeorge is developing a financial plan by comparing the projected growth rate of 10 % against the growth rate of 15 %. The first step is to consider using a growth model to identify a realistic projection of total sales based on past performance as well as forecasting potential market changes that may affect sales. Determining the speed at which the company can recover outstanding debt affects their ability to pay bills on time. By using the projected sales data, it must be determined what it will cost the company to produce its inventory and bring it to market.Type of Financing and Amount RequiredFinally, it must be determined if the company will have excess cash or will need to borrow in order to maintain the company's minimum balance. With the CEO of Executive Fruit being against using equity financing, this option was not considered. In order to maintain the company's borrowing power, a forecasted debt ratio of 60 % or better needs to be maintained as well as healthy interest expense ratios. The projected figures for the three budgets where included on Exhibit 1, Executive Fruit Budget, in addition to keeping the debt ratio under 60 %. Reviewing the elements required to maintain a stable debt ratio involves a review of various...

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