Chapter 30: Financial Planning & Forecasting

Financial Planning & Forecasting analyzes the cumulative capital requirement, illustrating how firms manage irregular growth in assets through various financing strategies, such as matching the maturities of assets and liabilities to minimize risk. A significant portion of the chapter is dedicated to the mechanics of constructing a cash budget, which involves forecasting sources of cash, primarily through the collection of accounts receivable, and contrasting them against uses of cash like payments to suppliers, labor expenses, and capital expenditures. The text details how financial managers identify cash surpluses or deficits and explores financing options to cover shortages, including bank loans and the costly practice of stretching payables, which often results in the loss of valuable trade discounts. Moving to long-term financial planning, the chapter explains how firms utilize planning models to ensure consistency between their growth goals and financing needs. It introduces the percentage of sales model, where forecasts for costs and assets are derived proportionally from projected sales growth to create pro forma income statements and balance sheets. These models are presented not just as forecasting tools, but as mechanisms for contingency planning and company valuation, helping managers assess the impact of different strategic scenarios on free cash flow and horizon value. Finally, the chapter establishes the critical mathematical relationships between corporate growth and financing requirements. It defines the internal growth rate as the maximum growth achievable using only retained earnings, and the sustainable growth rate as the maximum growth possible without issuing new equity while maintaining a constant debt-to-equity ratio. These concepts emphasize how the plowback ratio, return on equity, and financial leverage directly dictate a firm's ability to expand without raising external capital.