Introduction to Corporate Finance

16: Financial Planning

16 -1a SUCCESSFUL LONG-TERM PLANNING

Long-term planning requires more than paying close attention to a company’s existing markets. Even

more important is the ability to identify and prioritise new market opportunities. Successful long-term

planning means asking and answering questions such as the following:

■ In what emerging markets might we have a sustainable competitive advantage?

■ How can we leverage our competitive strengths across existing markets in which we currently do not

compete?

■ What threats to our current business exist, and how can we meet those threats?

■ Where in the world should we produce? Where should we sell?

■ Can we deploy resources more efficiently by exiting certain markets and using those resources

elsewhere?

As the company’s senior managers develop answers to these questions, they construct a strategic plan, a

multi-year action plan for the major investments and competitive initiatives that they believe will drive

the future success of the enterprise.

16 -1b THE ROLE OF FINANCE IN LONG-TERM PLANNING

Finance plays several roles in long-term planning. First, financial managers draw on a broad set of

skills to assess the likelihood that a given strategic objective can be achieved. With respect to a major new

investment proposal, their first questions should be, ‘Does this investment make sense?’ and ‘Is there

good reason to expect this proposal to generate wealth for our shareholders?’

strategic plan

A multi-year action plan for

the major investments and

competitive initiatives that a

company’s senior managers

believe will drive the future

success of the enterprise

US, EUROPEAN AND ASIAN PRO FORMA PLANS FOR 2009

Source: Figures from Murillo Campello, John R. Graham, and Campbell R. Harvey, ‘The Real Effects of Financial Constraints: Evidence from the Financial Crisis,’

Journal of Financial Economics, Vol. 97 (2010), pp. 470–87.

–11.4

–2.3

–8.3

–4.3–5.3–4.6

–10.8

–4.0

–10.6

–3.3

–7.7

–3.8 –5.0–4.1

–9.1

0.4

–1.6–1.9

–20

–10

0

10

% Change in policy variable

United States EuropeAsia

Tech spending Capital expenditures Marketing expenditures

Number of employees Cash holdings Dividend payments