512 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management
addressing environmental issues, it is investing heavily in infrastructure tech-
nologies to purify air and water. Immelt expects to “do good by doing good.”- Operating Plan. Each of GE’s units must develop a detailed operating plan that
is consistent with the corporate strategy to help it achieve the! rm’s objectives.
Operating plans can be developed for any time horizon, but most companies
use a 5-year horizon. The plan explains in considerable detail those people
responsible for each particular function, deadlines for speci! c tasks, sales and
pro! t targets, and the like. - Financial Plan. Financial planning is a multi-step process. Allied’s! nancial
plan involves four steps. First, assumptions are made about the future levels
of sales, costs, interest rates, and so forth, for use in the forecast. Second, a set
of projected! nancial statements is developed. Third, projected ratios such as
those we discussed in Chapter 4 are calculated and analyzed. Fourth, the entire
plan is reexamined, the assumptions are reviewed, and the management team
considers how additional changes in operations might improve results. This
last step requires reconsideration of all the earlier parts of the overall plan,
from the mission statement to the operating plan. Thus, the! nancial plan ties
the entire planning process together.
Financial planning as described previously is often called “value-based
management,” meaning that the effects of various decisions on the! rm’s
! nancial position and value are studied by simulating their effects within the
! rm’s! nancial model. For example, if GE was considering a shift in appliance
manufacturing from Kentucky to Mexico, it would simulate the effects through
its! nancial model and then make the move if it appeared that pro! ts and thus
shareholder wealth would be increased.^4
Operating Plan
Provides management
with detailed
implementation guidance
based on the corporate
strategy to help meet the
corporate objectives.Operating Plan
Provides management
with detailed
implementation guidance
based on the corporate
strategy to help meet the
corporate objectives.
Financial Plan
The document that
includes assumptions,
projected financial
statements, and projected
ratios and ties the entire
planning process together.Financial Plan
The document that
includes assumptions,
projected financial
statements, and projected
ratios and ties the entire
planning process together.(^4) Note, though, that there would surely be political rami! cations to such a move. These e" ects would be studied
by use of the model, and the computer-generated results would be an input in the decision. However, the ulti-
mate decision would be made by GE’s top executives and board, not, in essence, by a computer.
(^5) Note that you need 5 years of data to! nd the 4-year growth rate from 2004 to 2008.
SEL
F^ TEST What are the key elements of a corporation’s strategic plan?
How is the! nancial plan related to the other parts of a! rm’s overall strategic
plan?
How can the! nancial plan be used to help management provide guidance
to security analysts?
16-2 THE SALES FORECAST
Financial plans generally begin with a sales forecast, which starts with a review of sales
during the past 5 years, shown as a graph such as the one in Figure 16-1 for Allied
Foods. These numbers are based on Allied’s! nancial statements, which were! rst
presented in Chapter 3. The data below the graph show 5 years of historical sales.
Allied had its ups and downs from 2004 to 2008. In 2006, poor weather in
California’s fruit-producing regions resulted in below-average crops, which caused
2006 sales to fall below the 2005 level. Then a bumper crop in 2007 pushed sales up
by 15%, an unusually high growth rate for a mature food processor. As shown in
the chapter’s Excel model, the compound annual growth rate over the 4-year
period was 9.88%.^5 Due to planned new products, planned increased production,