 Every financial manager needs to do some financial planning for the period to come. For that purpose, financial manager needs certain assumptions in order to prepare certain performance statements and particularly those performance statements are income statement, a balance sheet and a cash flow statement. Before going into a simple example of financial planning, there are certain assumptions. Let us assume that there is a direct relationship between all variables and the sales. This means that every variable will be moving in accordance with the movement in sales and there would be no need to acquire external financing. Let us assume that we have a simple income statement with sales of $1000 and cost of $800 and net income of $200. On the balance sheet, we have debt and equity each by $250 and assets in total of $500. Now, with the assumed increase in sales by 20%, we have sales grown by $1200, cost grown by $960 and resulting net income grown by $240. So, we see that there is a 20% increase in net income and that in absolute value is equal to $40. Now, we move every variable by 20%. Let us see on the screen that assets grow from $500 to $600. So, there is an overall increase of $100 in the asset side. Equal increase would be in the liabilities side. If we say that an increase by 20% in debt, so debt would be equal to $300 in order to equalize the liabilities side with the assets side, we would be requiring a $300 in the equity. But we have seen that earlier the equity was $250 and there is an increase of $240 in net income. So, the equity would be $490 but this taking into account would not equalize the balance sheet. This means that keeping the debt equal to 20% increase, we would be required to pay extra amount as dividend to our shareholders so that our equity would be reporting at $300. This means that there would be a payment of $140 as cash dividend to the shareholders. In this way, our liabilities side would be equal to the assets side. In this particular case, we have used dividend as a plug in order to equalize both sides of the balance sheet. But we have another option. If we don't want to pay cash dividend rather we want to retain it for the future expansion. So, our equity would be reporting at $490. Now, what would be the solution? The solution is that we have to pay a certain amount of debt in order to remain the liabilities in agreement with the assets side. So, the amount of $140 would be paid out of the debt in order to keep the debt at $110. In this way, we have used the debt as plug in order to equalize the liabilities side with the balance sheet. So, this was the simple example of financial planning in which we develop a constant relationship of all variables in the balance sheet and income statement with the sales that we know that in order to support the increased sale, there is a huge amount of investment to be made in fixed assets and networking capital. Increasing firms net assets means increasing assets and liabilities and equity as well. Now, increase in equity and liabilities is subject to the firms financial and dividend policy and this financial and dividend policy is required in order to support the growth in finance. Now, how this sport would be done in order to support the finance? This is typically managerial decision.