PART 5: SPECIAL TOPICS
build projections on an account-by-account basis, the apparent need for external funding predicted by
Equation 16.2 turns into a financial surplus, highlighting that Equation 16.2 is just an approximation.Some Concluding Remarks
This discussion has presented two important points. First, shorthand approaches – such as the sustainable
growth model or the equation for determining external funds required (EFR) – help managers predict
whether they should expect a scarcity or a surplus of financial resources, given the company’s growth
objectives. Second, companies can construct a more complete picture of their funding requirements by
building pro forma income statements and balance sheets. Managers can use any of these models to
reduce the risk of experiencing unpleasant financial surprises a year or two ahead.
Besides planning for growth that will occur over a period of years, companies also construct financial
plans with shorter time horizons. These plans generally focus on temporary cash surpluses or deficits due to
seasonal fluctuations in transactions volume. The next section examines this dimension of financial planning.3 Describe and evaluate the use of return on investment (ROI) and economic value added (EVA)
as growth targets in financial planning. Why do companies often use annual growth in sales or in
assets as a target growth rate?4 Explain the difference between a company’s sustainable growth rate and its optimal growth rate. In
what circumstances is a company’s optimal growth rate likely to exceed its sustainable growth rate?
Under what conditions would you expect the opposite to be true?5 Current asset accounts, especially cash and inventory, usually increase at a rate that is slightly less
than the growth rate in sales. Why? What is the implication of this fact for the sustainable growth
model?CONCEPT REVIEW QUESTIONS 16-2
16-3 PLANNING AND CONTROL
In the previous section we observed that most companies establish growth as one of their long-term
objectives. So it is not unusual to observe a distinct upward trend in any company’s historical sales
volume. However, in a single year, many companies experience sharp quarter-to-quarter sales changes
because of seasonal factors. Construction-related businesses, for instance, generate much higher volume
in the summer than they do in the winter; in contrast, toy companies experience peak volume in the
winter. As a result, short-term financing strategies are also important, and companies may employ
conservative, aggressive and matching financing strategies to fund the long-term trend and seasonal
fluctuations in their businesses.16-3a SHORT-TERM FINANCING STRATEGIES
Companies monitor these fluctuations very closely, with frequent internal management accounts.
However, they try to keep this detailed information confidential, as it can have an impact on their
competitive position. Instead, they tend only to publish financial reporting data when they are requiredLO 16.5