The principal driver in creating a budgeted income statement sometimes referred to as a pro forma statement, is the sales forecast as discussed above. A projected increase in sales will require additional assets. Those assets (i.e., increase in accounts on the left-hand side of the balance sheet) must be paid for with corresponding increases in liabilities and equity (i.e., increases in accounts on the right-hand side of the balance sheet). The percent of sales method is most often used to forecast future asset, liability accounts, and equity (this assumes that the growth of all accounting elements follows the same trend line). For this process, the direct financing accounts on the right-hand side of the balance sheet (in particular, notes payable, long-term debt, preferred stock, and common equity are kept constant). The resulting difference between projected total assets and projected total liabilities and equity is the company’s future need for external funding. The growth rate in sales that results in the future need being zero is called the organizations’ sustainable growth rate.
For this assignment, you are the head of the budget committee for the chosen company from your previous assignments. Create a chart to convey the information in a chart or graphic format for each of the three stated assumptions below. The assumptions below will become part/support for the company strategic plan being developed. Incorporate each of your charts into a narrated PowerPoint presentation for the full strategic development committee.
This mid-term assignment has three related parts:
Create pro forma statements for your chosen company for next year.
Estimate the sustainable growth rate for your company.
Perform a SWOT analysis on your company, using lessons you learned in Weeks 1 through 4 concerning microeconomics, macroeconomic, financial analysis, and financial forecasting.
Be sure your presentation includes the following details:
Estimate the sales growth rate for the company for the next annual accounting period. Explain each step of your estimation process.
Create proforma income statements and proforma balance sheets for your company for the next annual accounting period using the percent of sales method. Assume that all income accounts increase as a percent of sales, all asset accounts increase as a percent of sales, spontaneous liabilities increase as a percent of sales, and all financing accounts remain constant. The statements you create will be the initial round in order to determine the amount of working capital (cash, accounts receivable and inventory are the main categories of working capital) needed. Clearly identify what your statements indicate is the need for external short-term liabilities funds for the next annual accounting period (assume that current and quick ratios remain the same as prior years).
Estimate the sustainable growth rate for your organization. Assume that all income accounts increase as a percent of sales, all asset accounts increase as a percent of sales, spontaneous liabilities increase as a percent of sales, and all financing accounts remain constant. Also, assume that the company will pay the exact same dollar amount in dividends in the next annual accounting period that it paid during the most recent period. Be sure to describe all steps in the process and clearly indicate the growth rate (as a percentage) that you find.
Compare the sustainable growth rate you determined to the average annual growth rate in sales the company has had over the past 2 years. Is the average annual growth rate greater than or less than the sustainable growth rate? Assess this relationship.
Conduct a SWOT analysis of your company (much information about each of the SWOT elements will be found in the text description at the beginning to annual report). Use one of the many templates (tables) for SWOT that you can find online. Your SWOT analysis should include at least three entries for each element in the table. The entries should be some combination of microeconomic (related to demand for the product, cost functions, competition, etc.), macroeconomic (related to projected growth in the overall economy, inflation, unemployment, etc.), financial past (based on your analysis in week three), and projected financial future (based on your analysis in Week 4).
Write a one-paragraph description of each element in your SWOT table. Specifically indicate why you believe the chosen element is a Strength, Weakness, Opportunity or Threat.
Length: 12-15 slides with notes, including title and reference slides
Notes: 200-350 words per slide