I need help with this Investment Game workroon for nmy Financial Mangament 11

 Investment Game Workroom. 

 Discussion posts and trading activities for the class will take place in the Investment Game Workroom. Your required activity is outlined below:

• By Sunday, midnight of Week 5 (2% of Course Grade)

  Post a brief commentary on your portfolio explaining:

  How you are doing relative to your benchmark.
  What changes you have made, if any, and why you made them.

  Post at least one current news item from The Wall Street Journal, or other reputable news source, about one of your stocks, and explain how and why that impacted the stock price.

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JWI 531 (1202) Page 1 of 9

JWI 531: Financial Management II

Week Five Lecture Notes

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JWI 531 (1202) Page 2 of 9

FORECASTING AND PLANNING

What It Means

Forecasting is the financial lens through which the business plans of an organization are analyzed. While
forecasting is both an art and a science, there are proven tools and practices financial analysts use to
build predictive models incorporating past trends, current risks, and opportunities. Based on these
forecasts, budgeting tools are then applied to develop a plan needed to fund strategic initiatives.

Why It Matters

• Every strategic initiative an organization considers will be based on forecasts. The more accurate
the forecast is, the more successful the plan will be.

• Financial leaders are key members of the strategy team, and will be relied upon to develop

accurate forecasts based on economic conditions and market dynamics.

• The strategic planning process of building models for future cash flows requires that you identify
all of the assumptions being made about an opportunity. This comprehensive process enables
the team to be more thorough in their decision-making.

“Budgeting is about opportunity. The only
two measurements that count are how did I
do against the prior year and how did I do

against the competition: that’s what creates
shareholder value.”

Jack Welch

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JWI 531 (1202) Page 3 of 9

THE CHALLENGE AND OPPORTUNITY FOR MANAGERS

It’s impossible to imagine any organization making important strategic decisions without thorough
analysis. For plans that require a significant commitment of capital, you can be certain that proven
forecasting techniques will be used to analyze opportunities and risks, and to develop a budget for the
strategy.

Unfortunately, budgeting may be the most cringe-worthy word in business vocabulary. But why is that?
And, more importantly, what can we do to change this?

Instead of being a positive process that encourages people to think big and plan how to put the
organization’s strategy into action, too often, the budgeting process becomes a time-consuming game.
But if you can end the “budget game” and focus on more useful information, you can empower managers
with better tools to run their businesses.

If you want a seat at the table where strategic opportunities are discussed and planning decisions are
made, you need to understand the principles upon which these decisions rest. Forecasting is always a
part of this process. If you can’t contribute to this analysis or understand the terms being used, your ability
to impact these decisions will be severely limited and your business’s strategy may never get off the
ground.

The challenge with forecasting, of course, is that it’s basically a prediction. Predictions take events,
trends, patterns, and behaviors that have happened in the past, and extrapolate to develop probabilities
about what will happen in the future. If the forecasts turn out to be correct, and if the business has a
viable plan to capitalize on them, it can make money. Forecasting and planning require the identification
of a range of possible outcomes that could occur, narrowing that range to the most likely best- and worst-
case scenarios, and developing a financial strategy that maximizes upside potential and minimizes
downside impact within the forecasted range.

Still, it’s not unusual to have a group of seasoned and successful business leaders working together to
develop a business plan, and to have each of them come to the table with a very different set of
assumptions and forecasts. Understanding and leveraging the tools of budgeting is critical to testing
various scenarios and developing a financially defensible business strategy.

The materials we cover this week will help you strengthen these skills and deepen your understanding of
these critical processes. Your great ideas deserve nothing less!

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JWI 531 (1202) Page 4 of 9

YOUR STARTING POINT

1. Are you as involved with strategic decisions in your organization as you would like to be? If
not, why not? If so, do you feel comfortable with participating in all aspects of this process?

2. What are the most difficult metrics to accurately forecast in your business? Why is that?
Which ones are the easiest to accurately forecast? How can you leverage additional data
sources or team members to help you improve the accuracy of your forecasts?

3. Do you feel the budgeting process in your organization is as effective as it could be? If not,
why not? Does the budgeting process at your organization feel like a chore, or a strategic
planning process? How can you make it more like the latter?

4. When building forecasts of future cash flows, does your team use flexible models that provide
a range of possible results to analyze?

5. How frequently do you compare actual results with planned results? Do you think you do it
often enough? Why?

6. Do you have a great idea for a new strategic initiative? Draw out an investment timeline and

forecast the cash flows you’d expect. Change a few assumptions and recalculate the results in
order to get a sense of how changes in assumptions impact the viability of the idea.

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JWI 531 (1202) Page 5 of 9

FORECASTING AND PLANNING

Looking into the Crystal Ball

Forecasting and planning are about modeling what the future might look like if you follow a specific
strategic opportunity. While it’s impossible to know the future, you will be better prepared to make
decisions and execute if you have put the work into planning. This means:

1. Identifying all of the assumptions you have to make about the future (e.g., costs, revenues,
market share, market size, competitive environment). You can count on having these
assumptions challenged and that’s okay – you’ll be prepared if you’ve done your homework.

2. Putting cash flows against those assumptions. Cash flows, not revenues and expenses, are the
building blocks of forecasting. You must build models that allow you to test the sensitivity of the
financial results to changes in your assumptions.

Modeling…Bad Behavior?

Bragg begins his chapter on budgeting and forecasting with an acknowledgement of the challenges
financial leaders face in most planning processes.

“The corporate budget is one of the principal documents used by a CFO to gain an
understanding of where a company is supposed to go, and how to get there. However,
the budget has also fallen into some disrepute, since it can lead to a variety of negative
outcomes, and can diverge so wildly from actual results that it is essentially ignored.”

The CFO Guidebook, p. 131

To illustrate the pros and cons of forecasting and planning, Bragg presents a summary outlining the
advantages of having a formal process, including orientation for stakeholders, scenario modeling,
assumption reviews, predicting cash flows and costs, and even investor communications. He then
outlines an even longer list of the downsides, including inaccuracy, rigid decision making, and gaming the
system (pp. 131-134). He summarizes these challenges as follows:

“The single most fundamental problem underlying the entire concept of a budget is that it
is designed to control a company from the top. The basic underpinning of the system is
that senior management forces managers throughout the company to agree to a specific
outcome (that portion of the budget for which they are responsible), which senior
management then monitors to control the activities of the managers. This agreement is
usually a formal agreement under which each manager commits to achieve a fixed target
in exchange for receiving a bonus.”

The CFO Guidebook, p. 135

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JWI 531 (1202) Page 6 of 9

It is this last point, the risk of negative behaviors driven by rigid bonus models, which underlies much of
Bragg’s critique of the self-reinforcing systems and bureaucracy needed to control budgets.

Planning and Control

Budgeting is about two elements: planning and control. Organizations set goals and identify the
resources necessary to meet those goals: time, people, materials, and money (planning). They must then
monitor financial data as they unfold and manage adjustments in operational activities (control) to ensure
that actual outcomes are as close as possible to what was budgeted.

• When you hear the word budget, you should be thinking of it as a plan to operationalize the
organization’s strategy, describing the results you expect in the near term and the resources
you’ll need to achieve those results.

• A flexible budget is one that uses the same estimates for costs as the original budget, but is set
at the same volume or activity level as the actual results.

• When actual results start to come in, differences between the plan and these results can be
measured. These differences are what financial managers call “variances.”

• In the language of budgeting, all of the work to keep the actual results on track and achieve the
goals set out in the budget is called “control.”

During the period covered by the budget, variances provide feedback on where to direct attention and
corrective action to get the business back on track. If market conditions with customers and suppliers
change significantly after the budget is made, then variance analysis can provide inputs to update the
budget. When the actual level of revenue is greater than planned or some actual cost is lower than
planned, this variance is called “favorable.” When the opposite occurs, the variance is referred to as
“unfavorable.”

Finding a Better Way

Before managers and business leaders can consider changes to the financial planning process, they
must understand how the models are typically structured. Bragg provides an excellent summary of the
“system of budgets” (pp. 138-144). Read it carefully to help you better understand the organization and
dependencies of different budgets, as well as what levers can be pulled to improve the process.

He also presents a consideration of alternatives to even having a budget. While this may seem ridiculous
at first, it may not be as radical as it sounds. He introduces the idea of a rolling forecast as follows:

“A good replacement for a budget is the rolling forecast. This is a simple forecast that
contains information only at an aggregate level, such as:

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JWI 531 (1202) Page 7 of 9

• Revenues by product line
• Expenses aggregated into a few line items
• Customer order backlog
• Cash flow

The intent is to create a system that is easily updated, and which gives the organization a
reasonable view of what the future looks like for at least the next few months. A key reason
for having a rolling forecast is to bring up issues as soon as possible, so that a company
can initiate corrective actions to deal with them. Thus, the goal of a rolling forecast is not to
attain a specific target, but rather to provide early notice of problems and opportunities.”

The CFO Guidebook, p. 147

From this jumping off point, he addresses several connected topics, including goal setting without a
budget, strategy without a budget, reduction of bureaucracy, and even building compensation models
without a budget. These will definitely give you some ideas for reconsidering the status quo.

In Summary

The future will never look exactly as you planned. One way to deal with those inevitable changes is to
make sure that the models you’re using to make decisions are flexible enough to adapt to changing or
unanticipated conditions.

It’s not that businesses shouldn’t make plans based on forecasts. Of course they should. It’s about getting
every brain in the game and working with financial leaders to develop processes that drive the behaviors
needed to win – not just to beat the budget. The forecasting and planning process must be one in which
information is shared more broadly, in which a culture is created that ends the gaming of the system, and
in which team members are united around common values and metrics.

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be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University.

JWI 531 (1202) Page 8 of 9

SUCCEEDING BEYOND THE COURSE

As you read the materials and participate in class activities, stay focused on the key learning outcomes
for the week and how they can be applied to your job.

• Explore the challenges of forecasting in developing a sound financial plan

Take your “best big idea” and put it through your own forecasting and budgeting process. The
best way to become familiar with the language and techniques of planning is to practice. What
forecasts about cash flow will you have to consider to determine if the idea makes financial
sense? Don’t worry initially about the accuracy of your forecasts. Just start by identifying what
forecasts you will need to consider to develop a well-researched plan. Visit the finance
department and get their guidance on what criteria should be used to analyze your ideas.

• Assess the reliability and application of key predictive indicators
You have identified the forecasts you will have to consider in building your financial plan. This
may have been quite simple or complex, depending on the scope of your big idea and whether it
is an evolution of your company’s current core business or an untested venture. Now, you must
assess the reliability of the predictive indicators that inform your forecast. Generally speaking,
forecasts are most reliable when they are: (a) focused on near-term events, and (b) where the
historical trends have been consistent and connectable to clear drivers. It’s okay if you have to
make some assumptions – all business planning requires assumptions. The key is to be clear on
what sources you are leveraging, what parameters represent reasonable best- and worst-case
scenarios, and what risk events could undermine the forecast. This is a great time to review your
course materials from Week 2.

• Evaluate options for goal setting and compensation relative to forecasts

Whether you are a manager setting performance goals for your team, or you are working with
your boss to set your own performance goals, it’s important to have honest conversations about
how the business forecasts were arrived at, and what it will take to get there. Jack is a strong
advocate for candor in this area. The forecasting techniques we’ve looked at in this course are
popular across a variety of organizations, but every business is different, and the reliability of a
forecast for a company that has decades of data behind it is going to be different than those of a
startup or a new product offering. The bottom line is that you want to set your team up to win.
Creating goals that are excessive or have little data to support them can lead to disappointment.
The best principle is to set performance goals so that if the team knocks it out of the park, the
people who generated the results get rewarded.

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be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University.

JWI 531 (1202) Page 9 of 9

ACTION PLAN

To apply what I have learned this week in my course to my job, I will…

Action Item(s)

Resources and Tools Needed (from this course and in my workplace)

Timeline and Milestones

Success Metrics