ABSTRACT
Much of a firm’s forecasting work will be concerned with the outcome of its investment decisions. Major investment projects originate in most cases from the firm’s long-term strategy and plans.
Large corporations tend to review their plans from year to year, imposing a discipline throughout the major components of the company. Plans, however, are constructed to meet the firm’s objectives. Thus the starting point for planning and investment has to be a review of the firm’s performance and operating ratios and a set of decisions on where the board of directors wishes to take the business.
The strategic plan may lay down targets for the return of capital employed, the growth in earnings per share and dividends per share, as well as the prospective share price. It may also include targets for market share of its various products and services and make provision for product development and new products.
None of these decisions should be taken in a vacuum. If targets are to be realistic and attainable, allowance has to be made for changes in the operating environment outlined in previous chapters. If, for example, price inflation and interest rates have been high, the firm will probably have set a high target rate of return on capital employed. But if there is evidence of a change in trend towards low inflation and interest rates, then the target rate of return has to be lowered. If not, the business may suffer from underinvestment, since prospective investment projects will show a lower potential return than the targets laid down by the board.
