Financial Planning & Policy for Large Corporations
Financial planning and policy is essential for large corporations to manage financial decisions and to report accurate results internally and externally. Financial planning and policy is conducted by a firm's financial leaders often led by the CFO (chief financial officer). The financial arm of a corporation understands reporting requirements and establishes plans and policies to guide financial decisions regarding dividends, financing, investment and capital management.
Keywords Budgeting and Control; Capital Investment; Corporate Finance; Corporate Financial Management; Corporate Financial Planning; Financial Planning; Financial Policy; Fiscal Policy; Return on Capital; Working Capital Management
Finance: Financial Planning
Large corporations have a need to establish guidelines for financial planning and policy. The guidelines are needed because corporations are typically managing large amounts of money and have obligations to employees and stockholders to carefully manage the money that is generated within the company. These obligations require corporations to employ internal and external financial experts to develop and implement financial decisions such as financing, investment, dividends and maximizing the use of funds created. Experts have postulated a relationship between financial policy and the ability to create wealth for stockholders (Bah & Dumontier, 2001). There is a verified relationship between certain types of financial decisions such as research and development, debt financing, investment and dividends.
Proper Financial Planning for the Corporation
Financial managers are central to corporate governance, and in addition to expertise in financial areas, these individuals must also possess a high-level sense of ethics to ensure that the decisions they make will be honest and straightforward. Financial planning is necessary because without it companies may lose money and jeopardize the survival of the organization. Poor financial planning can cause companies to lose value, which has ramifications for stockholders, potential investors, customers and creditors.
Financial Analysis, Planning & Reporting (2002, p. 6 — 7) listed ten financial planning mistakes corporations should seek to avoid. These included:
- Having a vague business plan.
- Ambiguous financial reports.
- Unmanaged earnings expectations.
- Bad mergers and acquisitions.
- Overvalued stock repurchases.
- Misaligned executive pay levels.
- Faulty measurement systems.
- Too much detail.
- Playing it too close to the vest.
- Lack of automation.
Business plans are important to detail how a business is run and how it plans to make and use its finances. Financial Analysis, Planning & Reporting (2002) reminded investors that Enron was a company where investors did not understand how Enron was making its money and advised investors to be wary of things they don't understand in business plans. If the plan is too complex, lacks detail or seems impossible it may not be a good plan.
A comprehensive formal business plan should contain the following elements: cover page, table of contents and table of appendices, executive summary, body of the business plan (Niemand, 2013). The business plan in itself does not, and cannot, guarantee success, but "coupled with a rather large dose of discipline" can be valuable in enhancing the chances of success, Niemand writes.
Reports, like business plans, should be clear and easy to understand. Anything that is not standard should be called out in the financial reporting notes and explained. Many corporations may be anxious to report good news to prevent fluctuations in stock price. However, once it is discovered that reports are inflated, stock prices may still react. Similarly, corporations should be straightforward in earnings projections as well. However, many companies often underestimate earnings so that a number is reported that is known to be achievable. Investors will need to monitor these actions to determine if a company is a good investment or simply good at managing the reporting of its earnings achievements.
Mergers and acquisitions are dangerous for corporations because they usually involve the merging of different cultures and management/reporting practices. A merger or acquisition may be seen as a positive for a company and a way to make money and improve earnings. However, many mergers and acquisitions cost money in terms of figuring out how to merge cultures, staffing, equipment and real estate. As a result, the path to greater earnings and benefits may be longer than anticipated by management and stockholders. This area is another one requiring companies to manage and set expectations appropriately internally and externally. Corporations may often engage in stock buy-back programs but investors must be clear on the true value of a company's stock to avoid loss of value. Most corporate financials managers hold a belief that their corporation is worth more than stock price and analyst projections suggest.
Rehm, Uhlaner, and West looked at what kind of merger strategy is most apt to generate excess returns for shareholders (2012). The authors looked at more than 15,000 non-bank mergers that occurred over a 10-year period. Companies that made frequent acquisitions of smaller firms recorded higher returns than did those who focused on making "the occasional large deal." Among those pursuing the latter strategy, companies in "slow-growing, mature industries" were more likely to be successful than those in fast-growing segments such as high technology (Rehm, Uhlaner & West 2012).
Stock options are usually a way to provide incentives in the compensation of corporate executives. However, when stock prices fall, so does the value of the executive compensation package. In some cases, companies will make adjustments to alleviate the pain felt by executives. These adjustments may make the executives feel better but doesn't hold them to endure the same risk and reward structure as stockholders. It also seems unfair to allow top CEOs and other executives to prosper while stockholders feel pain.
Corporations must engage in strategic performance measurement to keep track of how the company is performing against its internal targets and against the industry. Corporations must ensure that they are measuring the right things, measuring these things accurately, and have in place accountabilities and early warning systems to indicate when the company is off-course.
If corporations reduce the amount of detail in planning processes they will be able to concentrate on the things that are most important, measure accurate performance and take steps to improve performance. Too much detail is confusing internally and externally and creates a planning infrastructure that is difficult to manage and that does not suit the purposes of the company.
When Financial Analysis, Planning & Reporting (2002, p. 7) discussed companies "playing it too close to the vest" in financial planning, it meant that involvement by all facets of the business is necessary to ensure that accurate, relevant information is used in the planning process.
Following the financial scandals of Worldcom, Tyco, and Enron in the very early 2000s, popular opinion pointed to a failure of corporate accountability. Karim and Taqi (2013) wrote that research does suggest that "a number of interdependent variables defining overall corporate performance are positively influenced by accountability effects, including performance, satisfaction, conformity, and goals and attentiveness." When planning is done by a few and others are not consulted, only a few are accountable and much of the needed information is not available. Greater involvement by various business units can also improve the performance of those units as they have greater understanding, involvement and accountability for company performance. Financial Analysis, Planning & Reporting (2002) also recommends the use of electronic software for financial planning. Software can reduce the amount of time spent collecting financial information and can improve the accuracy of reporting. Some systems also have the capability to allow financial managers to do high level analysis and modeling of complex 'what-if' scenarios.
Implications of Financial Policy
Corporate financial policy can have a variety of implications for firms, industries, investors and the economy in general. In the retail industry, companies have to be concerned about the fact that consumers don't have as much money available to spend on typical retail items. This shortage is due to consumers being saddled with heavy debt and small pay increases being given to workers. Retailers are also looking at the fact that the global consumer is becoming wealthier and has more disposable income to spend. So, companies may be looking more closely at global markets to increase opportunities. Technology has also allowed retailers to reach out to customers across the globe.
Home Textiles Today (2007) reported on Wal-Mart's explanation of its financial policy that encompasses a very long range view of 10 — 15 years in the future. This policy includes:
- Stock buybacks.
- Increasing dividends.
- Reducing domestic capital expenditures.
- International expansion.
Some of Wal-Mart's international expansion includes investment in a joint venture with a Japanese company. Wal-Mart may be easily able to increase the dividends it offers because of a high cash flow. Home Textiles Today (2007) reported that Wal-Mart paid $2.8 billion in dividends and $1.4 billion in repurchasing shares of stock. In fiscal year 2008, Wal-Mart is planning to offer $3.6 billion in dividends and has already made $5 billion in share buybacks. Wal-Mart has a vested interest in remaining atop the retail industry and financial policy...
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