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pros and cons of financial planning models

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The First part: What is the financial planning model and what is involved in it?

--Second the percentage of sales approach to financial planning.

--Third Growth rates and financial planning

--Lastly what are the pros and cons of financial planning models.

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https://brainmass.com/economics/finance/pros-and-cons-of-financial-planning-models-163223

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The First part:
What is the financial planning model and what is involved in it?
Financial plan, budgeting and forecasting is one of the important components of the business plan and success of the business. This consists of details of raising and allocation of financial resources in an efficient and effective manner. The major features are:
? Will help maximize efficiency and minimize waste.
? To facilitate management and control.
? Effectiveness and efficiency of operations include the use of the entity's resources.

? Help in strategy implementation

Financial planning model include task of preparing a set of projections is the construction of a mathematical model to reflect the finances and activities of a business. Sales minus Costs equals Profits (i.e. S - C = P expressed as a formula) is an example of a very simple model for deriving projected profits from assumptions about future sales and costs.
http://www.planware.org/financialprojections.htm as retrieved on 27 Jan 2008 04:13:31 GMT.

They can be much more complex as they must accommodate multiple time periods (months, quarters and years) and handle hundreds of variables relating to sales, costs etc. Components of the process:
1. Information capture Financial analysts need to collect information, whether it's from internal sources (such as sales data) or external sources (such as data from distribution partners).
2. Information aggregation You need to aggregate the captured information to support the forecast.
3. Analysis Using different analytical techniques, you ...

Solution Summary

The pros and cons of financial planning models are specified.

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A. Produce a set of financial statements for 2007. Assume that net working capital will equal 50 percent of fixed assets.
b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2007. What is the projected debt ratio for 2007?

16. Building Financial Models. The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (that is, assets net of depreciation) by $200,000 per year for the next 5 years and forecasts that the ratio of revenues to total assets will remain at 1.50. Annual depreciation is 10 percent of net fixed assets at the end of the year. Fixed costs are expected to remain at $56,000 and variable costs at 80 percent of revenue. The company's policy is to pay out two-thirds of net income as dividends and to maintain a book debt ratio of 25 percent of total capital.

INCOME STATEMENT, 2006
(figures in thousands of dollars)

Revenue $1,800
Fixed costs 56
Variable costs (80% of revenue) 1,440
Depreciation 80
Interest (8% of beginning-of-year debt) 24
Taxable income 200
Taxes (at 40%) 80
Net income $120
Dividends $80
Retained earnings $40

BALANCE SHEET,YEAR-END
(figures in thousands of dollars)
2006
Assets
Net working capital $400
Fixed assets 800
Total assets $1,200
Liabilities and shareholders' equity
Debt $300
Equity 900
Total liabilities and
shareholders' equity $1,200

a. Produce a set of financial statements for 2007. Assume that net working capital will equal 50 percent of fixed assets.
b. Now assume that the balancing item is debt and that no equity is to be issued. Prepare a completed pro forma balance sheet for 2007. What is the projected debt ratio for 2007?

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