Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 109

FIGURE 3.2 Short-Term Financial Planning

The short-term (operating) financial planning process

Pro Forma

Income

Statement

Pro Forma

Balance Sheet

Current-

Period

Balance

Sheet

Cash

Budget

Production

Plans

Sales

Forecast

Long-Term

Financing

Plan

Fixed Asset

Outlay

Plan

Information Needed

Output for Analysis

Hint Electronic
spreadsheets such as Excel and
Lotus 1–2–3 are widely used to
streamline the process of
preparing and evaluating these
short-term financial planning
statements.

get, and pro forma financial statements. The entire short-term financial planning

process is outlined in Figure 3.2.

Short-term financial planning begins with the sales forecast. From it, produc-

tion plans are developed that take into account lead (preparation) times and

include estimates of the required raw materials. Using the production plans, the

firm can estimate direct labor requirements, factory overhead outlays, and oper-

ating expenses. Once these estimates have been made, the firm’s pro forma

income statement and cash budget can be prepared. With the basic inputs (pro

forma income statement, cash budget, fixed asset outlay plan, long-term financ-

ing plan, and current-period balance sheet), the pro forma balance sheet can

finally be developed.

Throughout the remainder of this chapter, we will concentrate on the key

outputs of the short-term financial planning process: the cash budget, the pro

forma income statement, and the pro forma balance sheet.

Review Questions

3–7 What is the financial planning process?Contrast long-term (strategic)

financial plans and short-term (operating) financial plans.

3–8 Which three statements result as part of the short-term (operating) finan-

cial planning process?