Introduction to Financial Models for Management and Planning

757 Pages·2009·20.769 MB·English

by  Daley, John P., Morris, James R

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CRC Press
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To my family: JAM, RSM, and KDM
Thanks for your love and support.
—Jim
I dedicate this book to my wife and
partner for life, Cynthia. Her untiring support
made my contribution possible.
—John Daley
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Contents
Preface xxi
Authors xxix
CHAPTER 1 An Overview of Financial Planning
and Modeling 1
1.1 WHAT IS PLANNING? 2
1.2 WHAT IS FINANCIAL PLANNING? 4
1.3 THE INPUT TO FINANCIAL PLANNING 5
1.3.1 Th e Goals of Financial Decisions 7
1.3.2 Th e Decision Alternatives 7
1.3.3 Th e Links between Decisions and Goals 8
1.3.4 Resources and Constraints 9
1.3.4.1 Company-Specifi c Resources and Constraints 10
1.3.4.2 Industry-Specifi c Constraints 11
1.3.4.3 Constraints Imposed by the Economy 12
vii
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viii (cid:31) Contents
1.3.4.4 Constraints Imposed by the Legal
and Political Environment 13
1.3.5 Th e Planning Horizon and the Amount of Detail 13
1.3.5.1 Th e Length of the Planning Horizon 13
1.3.5.2 Th e Amount of Detail 14
1.4 INGREDIENTS OF A FINANCIAL MODEL 16
1.4.1 What Is a Model? 16
1.4.2 What Does a Model Do? 20
1.5 HOW TO DEVELOP THE MODEL? 21
1.5.1 Th e Decision Problem 21
1.5.1.1 What Is the Problem? 21
1.5.1.2 What Questions Must Be Answered? 21
1.5.1.3 What Is the Time Horizon of the Problem? 22
1.5.1.4 How Important Is the Problem? 22
1.5.2 Th e Output 22
1.5.2.1 What Kind of Information Is Needed? 22
1.5.2.2 How Will the Information Be Evaluated? 23
1.5.2.3 What Kind of Detail Is Necessary? 23
1.5.2.4 Who Will Use the Information? 23
1.5.3 Th e Structural Input 24
1.5.3.1 What Is the Goal? 24
1.5.3.2 What Are the Decision Alternatives? 25
1.5.3.3 What Are the Linkages between
the Decisions and the Goal? 25
1.5.3.4 What Are the Constraints? 25
1.5.3.5 What Is the Planning Horizon? 27
1.5.4 Th e Data Input 28
1.5.4.1 Th e Current State of the System 28
1.5.4.2 Relations between Variables 29
1.5.4.3 Forecasts of Future Conditions 29
1.6 TYPES OF MODELS 30
1.6.1 Simulation 30
1.6.2 Optimization 32
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Contents (cid:31) ix
1.7 WHAT DO WE GET OUT OF THE MODELING PROCESS? 33
1.7.1 Explicit Benefi ts 34
1.7.2 Implicit Benefi ts 34
1.8 SUMMARY 35
PART I Tools for Financial Planning and Modeling:
Financial Analysis 37
CHAPTER 2 Tools for Financial Planning I:
Financial Analysis 39
2.1 INTRODUCTION 39
2.2 FINANCIAL RATIO ANALYSIS 40
2.2.1 Example: Th e Odd & Rich Corporation 41
2.2.2 DuPont Analysis 52
2.2.2.1 Asset Utilization 54
2.2.2.2 Operating Cycle 55
2.2.2.3 Th e Equity Multiplier and Financial Leverage 56
2.3 BREAK-EVEN ANALYSIS 60
2.3.1 Fixed and Variable Costs 60
2.4 ANALYSIS OF OPERATING AND FINANCIAL
LEVERAGE 64
2.4.1 Degree of Operating Leverage 65
2.4.2 Degree of Financial Leverage 66
2.4.3 Degree of Combined Leverage 67
2.5 CONCLUSION 68
APPENDIX A: USING NAMES IN THE EXCEL SPREADSHEET 72
APPENDIX B: CONSTRUCTING A DATA TABLE 75
CHAPTER 3 The Tools for Financial Planning II: Growth
and Cash Flows 79
3.1 PROJECTING PRO FORMA FINANCIAL STATEMENTS 80
3.2 GROWTH AND THE NEED FOR FINANCING 88
3.2.1 Required External Financing 89
3.2.2 Sustainable Growth 92
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