A long term financial plan represents a blueprint of what a firm proposes to do in the future. Typically it covers a period of three to ten years most commonly it spans a period of five years. Naturally planning over such an extended time horizon tends to be in fairly aggregative terms. While there is considerable variation in the scope, degree of formality and level of sophistication in financial planning across firms, most corporate financial plans have certain common elements. These are.
1. Economic assumptions
The financial plan is based on certain assumptions about the economic environment.
2. Sales forecast
The sale forecast is typically the starting point of the financial forecasting exercise. Most financial variables are related to the sales figure.
3. Pro forma statements.
The heart of a financial plan are the pro forma profit and loss account and balance sheet.
4. Asset requirements
Firms need to invest in plant and equipment and working capital. The financial plan spells out the projected capital investment and working capital requirements over time.
5. Financing plan
Suitable sources of financing have to be thought of for supporting the investment in capital expenditure and working capital. The financing plan delineates the proposed means of financing.
6. Cash budget
The cash budget shows the cash inflows and outflows expected in the budget period.
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