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Presentation/PPT
27/08/2022
Case Analysis Financial Forecasting: Growing Pains for Oats ‘R’ UsCase 4: Financial Forecasting: Growing Pains”We are growing too fast,” said Mason. “I know I shouldn’t complain, but we better have the capacity to fill the orders or we’ll be hurting ourselves.” Vicky and Mason Coleman started their oatmeal snacks company in 1998, upon the suggestions of their close friends who simply loved the way their oatmeal tasted. Mason, a former college gymnastics coach, insists that he never “intended to start a business,” but the thought of being able to support his college team played a significant role in motivating him to go for it.After considerable help from local retailers and a sponsorship by a major bread company their firm, Oats ‘R’ Us, was established in 1998 and reached sales of over $4 million by 2004. Given the current trend of eating healthy snacks and keeping fit, Mason was confident that sales would increase significantly over the next few years. The industry growth forecast had been estimated at 30% per year and Mason was confident that his firm would be able to at least achieve if not beat that rate of sales growth.”We must plan for the future,” said Vicky. “I think we’ve been playing it by ear for too long.” Mason immediately called the treasurer, Jim Moroney. “Jim, I need to know how much additional funding we are going to need for the next year,” said Mason. “The growth rate of revenues should be between 25% and 40%. I would really appreciate if you can have the forecast on my desk by early next week.”Jim knew that his fishing plans for the weekend had better be put aside since it was going to be a long and busy weekend for him. He immediately asked the accounting department to give him the last three years’ financial statements (see Tables 1 and 2) and got right to work!Table 1 Oats ‘R’ Us Income Statement For the Year Ended Dec. 31st 200420023,000,0002,400,000600,000215,00090,00025,000270,00066,000204,00081,600122,40073,440Table 2 Oats ‘R’ Us Balance Sheet For the Year Ended Dec. 31st 2004200248,000150,000335,000533,000560,000125,000435,000968,000Liabilities and Owner’s Equity128,000250,00046,000424,000300,000724,000155,56088,440968,000Questions:1. Since this is the first time Jim and Mason will be conducting a financial forecast for Oats ‘R’ Us, how do you think they should proceed? Which approaches or models can they use? What are the assumptions necessary for utilizing each model?2. If Oats ‘R’ Us is operating its fixed assets at full capacity, what growth rate can it support without the need for any additional external financing?3. Oats ‘R’ Us has a flexible credit line with the Midway Bank. If Mason decides to keep the debt-equity ratio constant, up to what rate of growth in revenue can the firm support? What assumptions are necessary when calculating this rate of growth? Are these assumptions realistic in the case of Oats ‘R’ Us? Please explain.4. Initially Jim assumes that the firm is operating at full capacity. How much additional financing will it need to support revenue growth rates ranging from 25% to 40% per year?5. After conducting an interview with the production manager, Jim realizes that Oats ‘R’ Us is operating its plant at 90% capacity, how much additional financing will it need to support growth rates ranging from 25% to 40%?6. What are some actions that Mason can take in order to alleviate some of the need for external financing? Analyze the feasibility and implications of each suggested action.7. How critical is the financial condition of Oats ‘R’ Us? Is Vicky justified in being concerned about the need for financial planning? Explain why.8. Given that Mason prefers not to deviate from the firm’s 2004 debt-equity ratio, what will the firm’s pro-forma income statement and balance sheet look like under the scenario of 40% growth in revenue for 2005 (ignore feedback effects).
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