Abstract

The spectacular growth of the resource industry, and particularly the trend towards diversification into related business areas, makes the task of managing these operations increasingly complex and difficult. A computerized financia1 model capable of simulating the corporate organization can be a valuable management tool. A suitable model will provide better and highly flexible forecasting ability, allowing management to evaluate the effect on future financial performance of changes in business environment and business strategies. Flexibility is a critical factor in today's changing environment, where markets, product pricing, taxation and royalties are subject to shifting political pressures. Management must be able to quickly evaluate the significance of these changes, as well as possible corporate/industry responses. In response to these needs, Canadian Occidental's Corporate Planning Group built a computerized financial model, capable of stimulating the company's chemical, plastics and natural resource businesses, both in Canada and internationally. The model provides financial projections based on individual profit center operating parameters, such as production, sales, prices, operating costs, taxes, and capital requirements. Complete royalty and tax calculation routines are provided. Results can be summarized as required, and provide net income, cash flow, and balance sheet information on a year-by-year basis.

The paper describes the development of the model, the objectives it was designed to meet, and results obtained after two years of development and use. The discussion extends to considerations such as selection of the computer system, in-house proprietary programming versus packaged commercial models, required technical programming support, documentation, and proposed future developments.

Introduction

Corporate long-range planning is well established in today's business environment and requires little justification. It is based on the premise that business success is primarily a function of choosing the right direction at the right time that doing the right thing is more important than doing it well. Any sizeable venture today requires long lead time from conception to completion, whereas the business environment can change appreciably at very short notice. Business failure can result from a major capital investment based on incorrect premises about the future, or from failure to recognize major critical changed in markets or technology. Only Crown Corporations survive this type of disaster, and even governments are becoming sensitive to the economic damage caused by planning or simply on current political pressures.

Adequate strategic planning can counteract such threats in some extent. However the greatest payoff results from all improved ability to set the optimum direction for a business enterprise. It enables management to properties from a more caretaker" function, which minimizes risk but also results growth, to more a aggressive and innovative policies with promise of substantially greater rewards.

The distribution of a long-range plan, and the wealth by which management can evaluate alternative strategies prior to implementation, is the long-range financial forecast. This is a dollar projection extending five, ten, or more years into the future. The plan narrative sets the stage and the corresponding financial forecast quantities the effect of specific planning requires effective forecasting ability and the means of generating these forecast efficiently and accurately.

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