The Place of Financial Planning in the Overall Planning Task
To better put the financial planning process into perspective, it is necessary to briefly describe the organizational chain related to the overall planning task and goal-setting (i.e., the firm's overall strategic plan). This description is verbal in nature.
The corporate mission statement:The corporate mission statement directs the firm's strategic plan and explains the directives of its strategic plan. It will state what management must do to align the company's resources so as to achieve its long-run objectives as outlined by its mission statement. For U.S. corporations the predominant goal is typically related to the long-run maximization of stockholder wealth. This means the typical mission statement is centered around what managers can do to make their firm's more valuable in the future. Recent socio/political, governmental and environmental influences have caused the wording of this objective to be tempered a bit so as to recognize the negative externalities that follow from production. This means that the trend in mission statements today is one that addresses the firm's social costs that result from operations. Abatement or minimizing the social costs of production are reflected in less profits for the company's stockholders. How much of the firm's resources are actually expended to reduce social costs are a contentious and debateable topic. Today it is safe to say that while corporations are devoting some resources to controlling their negative externalities, the execution of corporate mission statements still centers around maximizing value for the stockholders.
More on the firm's strategic long-run plan: The firm's long-run strategic plan stems from its mission statement. It states how resources are to be obtained and directed to achieve the company's mission and how the various parts of the organizational chain will operate so as to achieve its stated goals. Often the strategic plan will outline the firm's strengths and address its shortcomings. It will usually describe the firm's scope of business operations—what are the firm's lines of business, its intended market(s) and customer base, and the breadth and depth of its geographic operations. Some strategic plans identify divisional aspects of the business and assign accountability for the delivery of divisional results in a defined period of time. This provides a general way to measure performance.
The firm's operating plans: While the firm's mission statement and long-run strategic plan provide an overall philosophy of the company and a general way to achieve its mission, they are quite broad-based and as such are not operational. The firm's formal statement of its operating plans provides management with specific operational objectives.
Operating plans can be qualitative in nature. In this case they are difficult to measure. As a result good operating plans must quantify what is expected from management (and/or the firm's divisions) and places a time frame on expected results. For example, an operating plan that sets forth specific quantitative goals might state that "within the next five years the firm is to achieve X% market share; is to achieve an ROE of Y%; is to have a growth rate of earnings of Z%." A time frame will also be included in these quantitative guidelines.
Operating plans in a changing operating environment: Operating plans, to be actionable, must consider any changes that are on-going and that can impact the firm's future operating environment. These changes are exogenous constraints since they are imposed from outside the firm's decision-making area. Some examples of exogenous constraints would be on-going structural changes in the life cycle of the industry; structural changes in the firm's customer base as related to age, income, and geographic demographic alterations; on-going changes in the firm's competitive environment and market; changes related to technological innovation; changes related to future input supply and prices; possible governmental and environmental regulations. Many other exogenous constraints could be cited. Since the firm cannot control these factors, the operating plans should consider them in a pre-emptive defensive manner.
