DIFFERENCE BETWEEN STRATEGIC AND OPERATING FINANCIAL PLANS BASIC INFORMATION AND TUTORIALS

LONG-TERM (STRATEGIC) FINANCIAL PLANS
Long-term (strategic) financial plans lay out a company’s planned financial actions and the anticipated impact of those actions over periods ranging from 2 to 10 years.

Five-year strategic plans, which are revised as significant new information becomes available, are common.

Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both, tend to use shorter planning horizons.Long-term financial plans are part of an integrated strategy that, along with production and marketing plans, guides the firm toward strategic goals.

Those long term plans consider proposed outlays for fixed assets, research and development activities, marketing and product development actions, capital structure, and major sources of financing.

Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement of outstanding debts; and any planned acquisitions.

Such plans tend to be supported by a series of annual budgets. The Focus on Ethics box shows how one CEO dramatically reshaped his company’s operating structure, although it later cost him his job.

SHORT-TERM (OPERATING) FINANCIAL PLANS
Short-term (operating) financial plans specify short-term financial actions and the anticipated impact of those actions. These plans most often cover a 1- to 2-year period.

Key inputs include the sales forecast and various forms of operating and financial data. Key outputs include a number of operating budgets, the cash budget, and pro forma financial statements.

Here we focus solely on cash and profit planning from the financial manager’s perspective. Short-term financial planning begins with the sales forecast. From it, companies develop production plans 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 operating expenses.

Once these estimates have been made, the firm can prepare a pro forma income statement and cash budget. With these basic inputs, the firm can finally develop a pro forma balance sheet.