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PLEKHANOV RUSSIAN ACADEMY OF ECONOMICS

INTERNATIONAL BUSINESS SCHOOL

COURSEWORK IN CORPORATE FINANCE

Financial Planning and Forecasting Financial Statements

Student: Luchkiv L. A.

Group: 5204

Supervisor: Prof. Fedunin A. S.

Moscow

2008

Contents

Page

Introduction 3

Chapter 1. The purpose and problems of intrafirm planning 4

Chapter 2. Kinds of intrafirm financial planning 5

1. Long-term (perspective) intrafirm planning. 6

2. Short-term (current) intrafirm financing. 7

3. Operative intrafirm financial planning 7

Chapter 3. The contents of the financial plan 8

1. Balance Sheet 9

2. Income Statement 11

3. Cash-flow Statement 12

Chapter 4. Forecasting Financial statements 13

Chapter 5. Financial statement analysis 14

1. Horizontal analysis 14

2. Vertical Analysis 16

3. Pro-Forma income statement 16

Chapter 6. Drawing up the financial plan 17

1. Methods of planning of the finance 18

2. Calculating the break-even point 20

Chapter 7. Financial planning in Russia 21

Conclusion 22

Bibliography 24

Appendices 25

Introduction

The important directions of work of the financial manager are financial planning and forecasting. The plan and the forecast — concepts not identical, each of them as the management tool carries out the role. In the broad sense of the word financial forecasting consists in studying of a possible financial position of the enterprise in the future, working out of the basic directions of strategy in the field of the finance for maintenance of necessary stability of the enterprise at financing of certain expenses. Such forecast matters first of all for the enterprise as constant problems at proceeding activity there is an attraction of the capital and the bankruptcy prevention. In the conditions of the civilised market the competition induces to increase a sales volume, to reduce costs, to provide quality of production, to diversify industrial activity that demands constant inflow of the capital and financial stability. Along with it the concept of the forecast is used with reference to the calculations necessary for drawing up of financial plans, for example, the forecast of volume of realisation of production, the forecast of size of expenses, etc. It gives to calculations certain flexibility, allows introducing corrective amendments depending on the changed circumstances. The forecast of prospects of a financial condition of the enterprise also matters for external users of the economic information. Their number includes banks which in the course of crediting provide with financial resources the enterprise-borrower, are interested in timely repayment of the credit, have access to the current financial reporting of clients and possibility for the analysis and forecasting. By experience of the western countries it is possible to tell that in banks considerable work on bankruptcy forecasting of enterprises. Applied methods of an estimation of probability of bankruptcy is spent are shined in the special literature, including with the domestic. As example of the financial forecast the estimation of a financial condition of the enterprise for criteria for definition of unsatisfactory structure of the balance, developed with a view of realisation of the legislation on an inconsistency (bankruptcy) of enterprises can also serve. According to results of an estimation of a financial condition the enterprise can be recognised by insolvent, conclusions can be drawn on real possibility at the enterprise-debtor to restore the solvency, about real possibility of the enterprise to lose solvency if in the near future it will not carry out obligations to creditors. Financial forecasting creates a basis for annual and perspective financial planning for that period as which it is possible to consider approaching for the authentic plan. In the western practice is usually 3-5 years.

Chapter 1. The purpose and problems of intrafirm planning

Financial planning is planning the acquisition of funds to finance planned activities.

In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan.

Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.

Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.

The Financial Planning activity involves the following tasks:

-Assess the business environment

-Confirm the business vision and objectives

-Identify the types of resources needed to achieve these objectives

-Quantify the amount of resource (labor, equipment, materials)

-Calculate the total cost of each type of resource

-Summarize the costs to create a budget

-Identify any risks and issues with the budget set

The purpose of financial planning is the definition of possible volumes of financial resources, the capital and reserves on the basis of forecasting of size of financial indexations.

Planning problems are: definition of planned volumes of necessary cash funds and directions of their expenditure; an establishment of financial relations with the budget, bank, the insurance organisations and other managing subjects; revealing of ways of the most rational investment of capital and its effective utilisation; profit mark-up at the expense of economical use of financial resources of the enterprise; control of use and a drawing on liquid assets and others.

Financial planning process includes some stages.

1. On the first financial indexations for the previous period are analyzed. For this purpose the basic financial documents of the enterprises are used— the balance sheet, reports on profits and losses, the cash flow statement.

2. The second stage provides drawing up of look-ahead documents, such as the forecast of balance, the report on profits and losses, movements of funds (cash movement) which concern perspective financial plans and join in structure of scientifically well-founded business plan of the enterprise.

3. At the third stage indicators of look-ahead financial documents by means of drawing up of current financial plans are specified and concretised.

4. At the fourth stage operative financial planning is carried out. Depending on the contents, appointment and problems it is possible to classify financial planning on perspective, flowing and operative.

A financial planning important point is its strategy. The content of strategy of financial planning is definition of its centres of incomes and the centres of costs. The income centres is its divisions which make the maximum profit. The centres of costs are the divisions which are remunerative or in general non-commercial, but playing important role in the general production.

Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set.

Chapter 2. Kinds of intrafirm financial planning

There are three kinds of financial intrafirm planning: long-term (perspective), short-term (flowing) and operative.

Long-term (perspective) intrafirm financial planning is a planning for some years (five-years period) with breakdown on years.

Short-term intrafirm financial planning is a planning for a year with breakdown on quarters, months.

Operative financial planning is a planning for a quarter with breakdown for shorter period: month, decade, week, day.