The purpose of this study is to develop a long range financial planning model and to demonstrate its applicability for corporations. The model is aimed at reflecting the changes of the internal and external financial events of firms including new developments in strategies and environments.
The main framework of model is a system of simultaneous equations incorporating the possible interrelationships among various financial decision variables, which was originally suggested by Francis and Rowell.
The model consists of 10 sectors :
(1) Industry Sales Forecast Sector
(2) Production-Marketing Sector
(3) Asset Estimation Sector
(4) Production Cost Estimation Sector
(5) Operating Income Estimation Sector
(6) Financing Sector
(7) Risk Sector
(8) Cost of Capital Sector
(9) Sensitivity Analysis-Indifference Curve Analysis Sector
(10) Financial Ratio Analysis Sector
The actual application of the model in two Korean firms has revealed that the forecasting error depends highly on the estimate of Sales and Earnings before Interest-Taxes.
Therefore, the model has confirmed its applicability, predictability and the explanatory power of financial systems, provided that one can obtain the accurate estimate of those two financial factors.
At the same time, it is noteworthy taht the usefulness of model is not totally dependent on the accuracy of forecast in Sales and Earnings Before Interests- Taxes. That is, regardless of their accuracy, the "What-if" type of sensitivity analysis may provide decision-makers with each possible financial outcomes by varying the level of exogenous variables of the model, including corporate sales and other relevant financial informations as well.