Computer Usages in Financial Corporate Planning
Authors: Osborne Homer C. 
Published: December 2007

A financial model is described that has been designed to predict short-term and intermediate-term probable cash flow of a company, to predict the influence of possible variations of non-controllable economic environmental variables, and to permit evaluation of the influence of variations of some controllable financial factors. The output of the model for any one set of predicted conditions, including predicted future balance sheets and profit or loss statements for almost any type of company organization and any mixture of business ventures, is to be compared with the results of several other runs under altered conditions in order to determine the influence of these variations.

Introduction

The post-war years have been a time of increasing technology in the petroleum industry as well as in all other fields. Much of this new technology has been concerned with the extension of computational powers through the use of digital computers, and since these machines and their systems are still undergoing rapid development, there is no suggestion of any immediate levelling-off of this trend. Each new extension in computing capabilities has produced, and will no doubt continue to produce, corresponding extensions in the nature or range of the problems that can be solved practically and economically.

During these years the petroleum industry has developed and improved upon many types of mathematical models in order to simulate on a computer the behavior of some particular segment of the industry. A list of some of these models would include:

Models m predict future performance of gas or petroleum reservoirs; Models to predict performance of gasoline plants, refineries and other processing plants; Network models to predict performance of pipeline systems for gathering, distributing or transporting gas, petroleum or products; Market analysis models that project future demand for various products. Some companies have been developing models that are, or will be, capable of simulating the economic behavior of a company or some particular segment thereof. Since there are many different companies with individual variations, combinations, aspirations, needs and desires, there are without question many approaches to the development of such a model. One such approach is presented here.

CONCEPT OF A FINANCIAL MODEL

In the conceptual stage of almost any sizable project it is normally desirable to formulate objectives at an early point, and such is the case with a financial model. The model to be discussed in this paper was conceived to achieve three principal objectives:

to predict short-term and intermediate-term probable cash flow performance of a total company or a major portion of a company; to permit evaluation of the influence of possible variations of non-controllable variables such as, but not limited to, market demand factors, some product prices, availability of and terms for financing, tax rates, and the timing of any such variations; and to permit evaluation of the influence of controllable variables such as amount to invest, when to invest, where to invest, use of financing, dividend payments, new capitalization and how much to spread risks of various types.

If a model of this type is to fulfill these objectives, it must be used generously. Definition of many case-runs would be required to investigate the effect that various combinations of possible future situations might have on the economics of a company, had it been following any particular plan. Many interesting aspects of a company's position, risk and opportunities could be analyzed with a model with these capabilities without any attempt to formulate probabilities until a later stage of analysis is reached.

In operating, the model must be able to provide as a minimum, the basic financial statements of any proof-making organization, the balance sheet, and the profit or loss statement for each future accounting period for which income and expense data are provided. It must readily allow the user, the management or manager of a company or some important part of a company, to introduce new values of some financial variables and changes in financing or capitalization at any time point.

P. 71^