What is Strategic Planning?
This is
basically a planning done by top officials of an organization for giving
direction to team for achieving common goal as specified in Mission &
Vision statement. It’s a continuous process and is guided by small action plans
which is further being monitored to achieve sole goal of the organization i.e.
wealth maximization of stakeholders.
Strategic Planning Steps
1. Perform situation analysis to understand your position
It answers “Where are we”?
Compare past performances with present one
Find the deviations
Do the SWOT analysis i.e. Strengths, Weakness, Opportunities & Threats which are prevalent in your business.
2. Determine desired state
It answers “Where we want to go?”
Define period for the plan. (Short term, Medium term & Long term)
Define Mission & Vision Statement
3. Determine organization goals & objectives
Organization goals and objectives are defined
Key improvement areas are identified
4. Assessment of strategies
Check for all strategies which can be implemented for reaching at desired goal.
Choose the best strategy for all action plans
5. Implementation of strategy
Handover the detailed plan i.e. Complete Road-map to the concerned team members who will execute the plan
Details such as who will do what, with how much budget, within what time frame should be specified clearly and informed accordingly.
6. Evaluation & monitoring
All strategies are analyzed in order to find out the deviations
Corrective actions are taken on as and when required basis
Further improvement areas are identified at the end of completion of plan period
Calculating Support & Resistance
Steps in Calculation of Support & Resistance
Step 1 Find out 52 Week High & Low for the stock
Let's suppose,
52 Week High = 1000
52 Week Low = 500
Step 2 Calculate difference between 52 Week High & Low
We have,
Difference = 500
Step 3 Divide the difference by 8
We have,
Result = 63
Step 4 Keep on adding "Step 3" figure (result) in 52 Week Low price till you reach 52 Week High to find out support & resistance for any stock
Here we go,
52 Week Low 500
563
625
688
750
813
875
938
52 Week High 1000
Step 5 Find out 8 Brackets which states Support & Resistance.
Bracket 1: 500 to 563,
Bracket 2: 563 to 625,
Bracket 3: 625 to 688,
Bracket 4: 688 to 750,
Bracket 5: 750 to 813,
Bracket 6: 813 to 875,
Bracket 7: 875 to 938,
Bracket 8: 938 to 1000
Step 6 Check Support & Resistance of Stock
Let's suppose,
CMP (Market Price) for Stock is 700
Try to find out the bracket in which CMP lies. It is evident that it is between 688 & 750. So the support for this stock would be 688 (lowest figure in bracket) which means that you should become cautious or should sell off your stock if it breaches 688 otherwise your stock may slip further. Resistance for this stock is at 750 (highest figure in the bracket) which mean that if CMP has crossed then there is probability that this stock will go up or gain upward momentum.
@ CMP (stock price)of 700
Support is 688 and
Resistance is 750
 |
| Graph Showing Support & Resistance |
Payback Period Method
Relevant Facts
a. The Payback period doesn’t have decision rule like NPV (Net Present Value) & IRR (internal Rate of Return). This is just a liquidity measure.
b. Acceptance or rejection of the proposal totally depends on the specified timeframe in which company / individual wants their money back.
c. Payback period should not be used alone. It should be used alongside any one of the DCF (Discounted cash flow) techniques i.e. NPV (Net Present Value) or IRR (Internal Rate of Return).
How to calculate Payback Period?
Suppose, Initial cash outflow is $90,000 for two projects i.e. A & B
Cash inflows for subsequent years are mentioned below.
Calculate the cumulative cash inflow in a separate column & calculate it till the last inflow. Mark a year in which you find your initial investment is recovered.
Hence, it is clear from the table that
a. Payback period for Project A is 7 Years, Total cash inflow is $1,35,000
b. Payback period for Project B is 4 Years, Total cash inflow is $1,00,000
Now the question arises, which project to choose? Most of the people who prefer Payback Period method would suggest Project B but Project A can’t be ignored due to surplus cash inflow of $35,000 ($1, 35,000 - $1, 00,000). Hence it is suggested that one should use Payback Period method in combination of DCF methods and base their judgement by evaluating all aspects.
Advantages of Payback period method
1. It’s easy & simple to calculate.
2. It measures the liquidity aspect of the proposal. The project with Payback period of 3 years can be considered more liquid as compared to project with Payback period of 5 years.
Disadvantages of Payback period method
1. It ignores many cash inflows which happen after payback period. Hence, the projects which tend to generate larger cash inflow at later years get discriminated.
2. It ignores the salvage value & total economic life of the project.
3. Most importantly, it ignores the time value of money.
4. It doesn't account for the profitability figure out of a project. Long term profitability should not be ignored during selection of project.
Mission Statement
Mission statements are clear & concise one or two line statement which explains the purpose of existence for the organization. A well drafted Mission statement can define company’s business, goals, customers and its market in a very lucid manner.
Cash Flow Calculation - Capital Budgeting
Basic principles which should be kept in mind while calculating cash flows are mentioned below.
1. Incremental approach
While calculating cash flows, only those cash flows are considered which can be associated and attributed to adoption of a particular project. Finance manager should check for nature of expenses very wisely while evaluating proposals. Only incremental cash flows are considered for capital budgeting.
2. Financial cash flows
As cost of debt or equity is already considered in WACC (weighted average cost of capital) which is used for discounting cash flows, financial cash flows are ignored in order to avoid error of double counting,
3. Cash flows are considered on after tax basis. Tax savings is considered as an inflow.
4. Depreciation is added back to PAT as they are of non-cash nature and provides a tax shield i.e. reduction in tax liability. All non-cash items should be added back to PAT to arrive at cash inflows.
5. Sunk cost is ignored as these are not incremental.
Sunk costs are that cost which has already been incurred in past, prior to evaluation of proposals and is thus ignored as this doesn't have effect on present or future decisions. Example, if a company has piece of land acquired in past and is considering to set up a plant on that land, then this cost land acquisition in past is considered as sunk cost.
If a new land has to be acquired for this new project then the cash outflows should be considered in capital budgeting.
6. Opportunity costs are considered as they are sacrificed. Opportunity costs of a resource is its value in its best alternative usage.
7. Unless given otherwise, it is assumed that cash outflows are considered to have occurred in the beginning of the year and inflows to be occurred at the end of the year.
8. While evaluating replacement decision, savings in costs are always considered as inflows and that to on after tax basis.
Calculation
Cash inflows
PAT (Profit after tax) + Depreciation +Financial charge (1-tax rate) – Capital expenditure (if any) – Repairs (if any)
Where,
PAT is calculated as
Net sales revenue – Cost of goods sold – Selling, general & administration expenses – Depreciation – Interest – Taxes
Where,
Cost of goods sold is calculated as
Opening inventory + Purchases – Closing Inventory
Cash outflows
Cost of new plant + Installation expenses + Other capital expenditure + Additional working capital – Tax benefit on account of capital loss on sale of old plant (if any) – Salvage value of old plant + Tax liability on account of capital gain on sale of plant (if any)
Fig: Showing items which are excluded / included in the calculation of cash flows.
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