Iterative process for financial and business plans.

[the_mighty_onion]

A very minor question regarding phrasing in the course notes (Chapter 6, page 28).

It states that "Clearly, an iterative process will be involved as the implications of the business plan are explored."

I don't undertand why we would have an iterative process here. If the business plan is used as input into the financial plan, then (a.) business plan is done first, and (b.) financial plan is done. There may be lots of complexity here, but we would still have this ordering.

The only way I can see an iterative process here is if the financial plan in turn influences the business plan. In this case should the relevant section in the course notes be "Clearly, an iterative process will be involved as the implications of the financial plan on the business plan are explored." (essentially, an "of" replaced with an "on")?

 

[didster]

My interpretation (which may not count for much) was that you need to go back to adjust the business plan if the financial plan cannot be arranged to mesh with the business plan, eg if finance is not available (eg breach of covenant on other finance or lenders cannot be found) or if cost of finance is too expensive(higher than expected).

Then you keep adjusting the business plan and finance plan until you get an overall plan that works.

So it's a bit of a chicken and egg scenario - need to know what you want to do (business plan) before you know what funding to look for BUT you can only carry out what you can afford (finance plan)

Of course lenders may not consider a loan without some sort of business plan, which is probably the reason for the ordering as is.

Perhaps this reasoning is completely wrong, so use it at your own risk.

I think that the wording is a matter of taste and could be construed to mean that implications of the business plan includes consequences of the finance plan, which depends on the business plan. These implications in turn should be considered for "tweaking" the business plan.

 

[Colin McKee]

iterative

This sounds like a good explanation to me. I suppose it comes down to the availability of finance, which, if unavailable, will lead to a change of business plan and perhaps cancelling a few projects. Also, if a debt issue has to be abandonned and replaced with a rights issue, then the WACC changes and several business plans may have to be canned. (similar reasoning with tax implications, ...
Not sure, but this all sounds right to me.

 

[the_mighty_onion]

Thanks very much guys - I feel a bit more solid on this now.