Ceramic Structures has experienced rapid growth over the past several years. Sales are expected to grow at 15% per year for the next three years. Sales growth has been fueled by aggressive pricing as well as increased use of ceramics in high performance engines.

Asset growth has been financed by internal funds as well as the increased use of debt. At the end of 2012, the debt was restructured with a new 10% seven-year loan with principal payments of $1 million per year. In addition a $1.5 million working capital line was negotiated in 2011. It was increased to $2.5 million in 2013 and $3.5 million in 2014. Interest is charged at prime + 1%. (For class, we will use 9%.)

Cash balances will be kept around $250,000 and the credit line will average $2 million.

1. Prepare pro-forma statements for Ceramic and determine their need for funds for the years 2015-2017.

2. Why is there a need for funds when Ceramic is generating a profit?

3. If expected sales growth fell to 8% per year, what would be Ceramics need for funds?

4. What would happen to Ceramics need for funds if accounts receivable increased to 25% of sales?