Long-Term Planning

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The long-term or strategic plan focuses on Pro Forma Statements of Income

prepared for annual periods three to five years into the future. You may be

asking yourself, “How can I possibly predict what will affect my business

that far into the future?” Granted, it’s hard to imagine all the variables

that will affect your business in the next year, let alone the next three

to five years. The key, however, is control–control of your business’s

future course of expansion through the use of the financial tools explained

in the preceding chapters.

First determine a rate of growth that is desirable and reasonably

attainable. Then employ Pro Formas and Cash Flow Budgets to calculate the

capital required to finance the inventory, plant, equipment, and personnel

needs necessary to attain that growth in sales volume. The business

owner/manager must anticipate capital needs in time to make satisfactory

arrangements for outside funds if internally generated funds from retained

earnings are insufficient.

Growth can be funded in only two ways: with profits or by borrowing. If

expansion outstrips the capital available to support higher levels of

accounts receivable, inventory, fixed assets, and operating expenses, a

business’s development will be slowed or stopped entirely by its failure to

meet debts as they become payable. Such insolvency will result in the

business’s assets being liquidated to meet the demands of the creditors.

The only way to avoid this “outstripping of capital” is by planning to

control growth. Growth must be understood to be controlled. This

understanding requires knowledge of past financial performance and of the

future requirements of the business.

These needs must be forecast in writing–using the Pro Forma Income

Statement in particular–for three to five years in the future. After

projecting reasonable sales volumes and profitability, use the Cash Flow

Budget to determine (on a quarterly basis for the next three to five years)

how these projected sales volumes translate into the flow of cash in and

out of the business during normal operations. Where additional inventory,

equipment, or other physical assets are necessary to support the sales

forecast you must determine whether or not the business will generate

enough profit to sustain the growth forecast.

Often, businesses simply grow too rapidly for internally generated cash to

sufficiently support the growth. If profits are inadequate to carry the

growth forecast, the owner/manager must either make arrangements for

working growth capital to borrowed, or slow growth to allow internal cash

to “catch up” and keep pace with the expansion. Because arranging financing

and obtaining additional equity capital takes time, this need must be

anticipated well in advance to avoid business interruption.

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