Introduction to Corporate Finance

567

Special topics

16 Financial planning

17 International investment decisions

A big part of what financial managers do in

large corporations might be called ‘the control

function’. By this we mean that financial

managers are responsible for making sure that

the company has sufficient cash balances to

operate each day. This involves checking to

see that the company pays its bills on time (but

not too early) and following up on credit sales

to ensure that customers pay on time as well.

These are the issues that we address in Part 5.

Chapter 16 describes the financial planning

process. Financial planning methods vary

widely, but almost all companies’ financial plans

have certain characteristics in common. Most

companies plan over several horizons, with the

detail of the plan decreasing as the planning

horizon increases. That is, companies have very

detailed plans that they use to project inflows

and outflows of cash, as well as earnings, over

the next year or two. Most companies also

develop plans that look ahead two to five years

or more. Financial plans help companies focus

on goal achievement, identify problems before

they arise and arrange financing before cash

shortfalls become critical.

In the past three decades, countries around

the world began lowering trade barriers,

resulting in a tremendous increase in exports

and imports. Multinational corporations

expanded their operations into foreign

countries, which required them to face exposure

to a new set of risks. Fortunately, options and

other exotic securities provided just the tools

that these corporations needed to manage the

risks. Chapter 17 deals with the unique financial

issues that arise when companies do business in

multiple currencies.