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 2018, 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 2017. It was increased to $2.5 million in 2019 and $3.5 million in 2020. 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 2021-2023.
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 Ceramic's need for funds?
4. What would happen to Ceramic's need for funds if accounts receivable increased to 25% of sales?

CERAMIC STRUCTURES ENGINEERING, INC. BALANCE SHEETS AT DECEMBER 31, 2016 2018 2019 2020 Forecast ASSETS 2.363 1,178 899 470 250 4,779 8,467 9,946 11,507 3.450 9.020 Inventory 10.592 16,351 Current assets 5,193 6.551 8,235 10,354 Net fixed assets 15,785 18,584 24,586 27,812 31,131 Total assets LIABILITIES AND EQUITIES 1,669 2,139 4,004 4,226 Accounts payable 1,000 1,000 2.500 Notes payable 1,000 1,000 1.000 Current Portion LTD 243 299 425 566 818 Accruals 2,564 7.544 Current liabilitys 2,358 Long-term debt 4,106 11,928 12,902 Total Liabilities 3,000 3,000 3,000 Common stock 8,679 10,258 11,775 12,884 15,229 Retained earnings 11,679 13,258 15,884 18.229 Equities 15.785 18,584 24.696 27,812 31,131 Total capital Cumulative Need for Funds Annual Need for For Funds 2016 2017 2019 2020 2021 2022 26,470 33,856 42,709 56,196 70,245 Sales 20,087 25,386 32,199 55.560 Cast of Goods 6,383 8,47 10,510 11,071 14.685 Gross Profit 1.324 1,693 2,563 3,372 4.215 G and A expenses 1.642 2.010 1.064 1,666 1.910 289 772 Miscellaneous 4,318 6,531 Total operating expenses 2,065 3,979 3,176 5.566 EBIT 330 444 1,223 Interest 1,735 2,924 EBT 798 1,345 1,292 1.998 Taxes 937 1,517 1,109 Net income 100.00% 100.00% Sales 75.89% 74.98% 75.39% 80.30% 79.09% Cast of Goods 24.1 1% 24.61% 20.91% Gross Profit 5.00% 5.00% 6.00% 6.00% 6.00% G and A expenses 6.20% 5.10% 4.25% 3.40% 2.86% Fixed operating expenses 4.02% 3.96% 3.90% 3.40% 3.02% Depreciation 1.09% 1.01% 1.14% 1.25% 1,10% Miscellaneous 16.31% 15.07% 15.29% 14.05% 12.98% Total operating expenses 7.80% 9.32% 5.65% 7.92% EBIT 1.31% 2.74% 2.00% 1.74% Interest 6.55% 8.64% 6.58% 3.65% 6.18% EBT 46.00% 46.00% 46.00% 46.00% Taxes 3.54% 4.66% 3.55% 3.34% Net income ASSETS 8.93% 3.48% 2.10% 0.84% 0.36% 16.67% 19.83% 17.70% 16.38% Accounts receivable 13.03% 16.35% 14.36% 12.84% Inventory 40.01% 35.54% 32.90% 29.58% Current assets 19.62% 19.35% 19.28% 14.74% Net fixed assets 59.63% 54.89% 57.57% 49.49% 44.32% Total assets LIABILITIES AND EQUITIES 5.69% 4.93% 5.01% 7.13% 6.02% Accounts payable 2.95% 3.56% Notes payable 2.34% 1.78% 1.42% Current Portion LTD 0.92% 1.01% 1.16% Accruals 8.77% 10.74% Current liabilities 8.91% 6.96% 17.23% 11.31% 7.63% Long-term debt 15.51% 23.23% 21.23% 18.37% Total Liabilities 11.33% 7.02% 4.27% 32.79% 30.30% 27.57% 22.93% 21.68% Retained earnings 44.12% 39.16% 34.60% 28.27% 25.95% 59.63% 54.89% 57.83% 49.49% 44.32% Total capital