510 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management
Yogi Berra, the former player and manager for the New York Yankees, once said, “If
you don’t know where you’re going, you probably won’t get there.” That’s certainly
true for a company—it needs a plan, one that starts with the! rm’s general goals and
details the steps that will be taken to get there. When you! nish this chapter, you
should be able to:- Discuss the importance of strategic planning and the central role that! nancial
forecasting plays in the overall planning process. - Explain how! rms forecast sales.
- Use the Additional Funds Needed (or AFN) equation and discuss the relationship
between asset growth and the need for funds. - Explain how spreadsheets are used in the forecasting process, starting with his-
torical statements, ending with projected statements, and including a set of! nan-
cial ratios based on those projected statements. - Discuss how planning is an iterative process.
Financial planners begin with a set of assumptions, see what is likely to happen
based on those assumptions, and then see if modi! cations can help the! rm achieve
better results. GE’s critics suggest that the company should make forecasts based on
its current structure and on an “if broken up” basis, then go forward with the breakup
if that indicates the higher shareholder value.^1
Although we focus on forecasting from the corporation’s standpoint, top security
analysts go through the same process. Analysts with hedge and private equity funds
are especially active as forecasters, and they are particularly interested in the itera-
tive process of forecasting.
GE was founded to commercialize Thomas Edison’s
inventions in lightbulb and power plant technologies, but
today its divisions extend far beyond its base. A number of
analysts have questioned GE’s diversification strategy and
have argued that the company should spin off unrelated
units and return to its roots. They point out that GE’s stock
price in 2008 is about 30% below its 2001 level; and they ask
why, if the company has such a good strategic plan, its stock
price has not done better. Here’s the comment of one analyst,
Citigroup’s Jeff Sprague: “We believe the evidence is mount-
ing that GE is too big and complex to manage effectively.”Sprague and others believe that stockholders would be
better served if GE were split into several smaller, more
focused companies. Then each company’s CEO would pre-
sumably understand his or her particular business and
could focus exclusively on running it. Businesses that are
related could be kept together, but unrelated ones would
be spun off. If that were done, perhaps forecasting would
be easier, Immelt would end up less chagrined, and GE’s
stockholders would be wealthier.Source: “GE Shocks Market with Profit Drop, Shares Tumble,” April 11, 2008, http://moneycentral.msn.com.P U T T I N G T H I N G S I N P E R S P E C T I V E
(^1) GE’s executives have undoubtedly done these analyses. However, since executive compensation is a function of
the size of the corporation, there is a bias against voluntary divestitures. Hedge funds and buyout funds have no
such bias, so the majority of breakups are led by activist investors.