Extra Credit Assignment - Case Study: Forecasting Financial Statements & Ratios

Case Overview

Ben Francis has decided to start an Internet business selling quality workout gear in the upcoming year. He believes that his products are innovative and tending well and is seeking a business loan. Therefore, Ben is in the process of putting together a business plan. As part of the business plan process, Ben must include forecasted financial statements for the first 5 years. The forecasted financial statements to be included are: Income Statement, Balance Sheet, and Statement of Cash Flows.

Forecasting Assumptions

? First year sales are projected to be $100,000 and grow/decline at the following rates:

Year 1 - Year 2

+ 2%

Year 2 - Year 3

-4%

Year 3 - Year 4

+10%

Year 4 - Year 5

+ 5%

? Cost of sales are projected based on percentage of revenue as follows:

Year 1 - Year 2

45%

Year 2 - Year 3

56%

Year 3 - Year 4

42%

Year 4 - Year 5

42%

? Advertising expenses are projected to be 3% of each year's projected revenue.

? Ben will outsource the creation and maintenance of his proprietary website with an outsourcing contract starting at $5,000 in year one and a 3% escalation clause each year.

? A part-time assistant will be hired stating on day one/year one for $20,000 per year.

? Office rent is estimated to be a flat rate of $1,500 per month under a five-year lease agreement with no escalation clause for the duration of the lease.

? Utilities for the rented office space are estimated to be $250 per month.

? The office space be to rented is unfurnished. The company will purchase $8,000 worth of furniture and fixtures at the beginning of Year 1. The furniture and fixtures will have a useful life of 15 years. The company will also purchase some computers and other office equipment for $10,000 also at the beginning of Year 1. The office equipment will have a useful life of 5 years. Both the furniture and fixtures as well as the equipment will be depreciated on a straight-line basis (Assume zero salvage value for calculations).

? A 5-year bank loan will be negotiated for $75,000. The estimated interest on the loan is 2% (assume simple interest). It will be paid back in $15,000 installments starting in Year 2. Interest is due at the end of each year and paid in January of the following year.

? The tax rate is 25%. Taxes for the year just ended are payed in the first quarter of the following year.

? Ben will invest $10,000 of her own money and from family and friends to start the business. This $10,000 investment of capital is also the beginning bank balance of Year 1.

? Accounts Receivable at year end is equal to 30 days of sales.

? Accounts Payable at year end is equal to 45 days of purchases (cost of sales)

? At the end of Year 2, the company will purchase an insurance policy to help cover the business. The policy has a term of 3 years and coverage starts at the beginning of Year 3. The policy costs $5,000.

Additional Instructions

You must use the given Excel template attached to this assignment.

The three financial statements are interconnected. Where applicable, reference the appropriate cells from other tabs. Also, use formulas within the cells where applicable. (Instructors may deduct points for not using cell references and formulas.)

Some cells have additional notes (cells marked with a red triangle in the upper right-hand corner; hover over the triangle to see the note).

The shaded areas are for data input. (NOTE: You will need to enter formulas to calculate subtotals on the 'Cash Flow Statement' tab for each major category)

On each tab there is an area to keep track of the various assumptions. The column labeled 'Assumptions' is to make note of any numbers, percentages, etc. relevant to that line item. The column labeled 'Assumption Explanations' is to help keep track of the 'Forecasting Assumptions' from above. (You can copy and paste the assumptions onto the relevant line item). On the 'Ratios' tab there is an area to layout the formulas and show your work.

There is a grading area on each tab that is being calculated as you input information. Please use this area to see where any mistakes are being made.

W N. FORECASTED BALANCE SHEET Assumptions Assumption Explanations Should agree to the Statement of Cash Flows YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Assets 5 Cash $70,328.77 $45,336.96 $35,051.99 $30,602.63 $28,003.83 6 Accounts Receivable $8,219.18 $9,383.56 $8,048.22 $8,853.04 $9,295.69 7 Prepaid Insurance 8 Current Assets 78,548 54,721 43,100 39,456 37,300 9 Furniture & Fixtures (net) $7,466.67 $6,933.34 $6,400.01 $5,866.68 $5,333.35 10 Equipment (net) $8,000 $6,000 $4,000 $2,000 50 11 Total Assets 94,015 67,654 53,500 47,322 42,633 12 13 Liabilities 14 Accounts payable $5,547.95 $7,042.19 $5,070.38 $5,577.42 $5,856.29 15 Interest payable $1,500 $1,200 $900 $600 $300 16 Taxes payable/(receivable ) $491.67 50 $1,029.54 $2,411.16 $3,185.70 17 Current Liabilities 7,540 8,242 7,000 8,589 9,342 18 Bank loan $75,000 $60,000 $45,000 $30,000 $15,000 19 Total Liabilities 82,540 68,242 52,000 38,589 24,342 20 21 Stockholder's Equity 22 Capital 23 Retained Earnings 24 Total Stockholder's Equity 25 Total Liabilities & Stockholder's Equity 82,540 68,242 52,000 38,589 24,342 26CASHFLOW STATEMENT Assumptions Assumption Explanations YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Enter all decreases Net Income $1,475 ($13,063.33) $3,088.63 $7.233.48 $$9557.10 as negative numbers Add back depreciation $2.533 $2,533 $2.533 $2,533 $2,533 7 Changes in working capital 8 Accounts Receivable Enter decreases as negative bombers 9 Prepaid Expenses 10 Accounts Payable 11 Interest payable $0 $ 12 Takes Payable 13 14 Cash flows from operating activi 4.008 (10.530) 5,622 9,767 2.533 15 16 17 Amount paid for equipment ($10,000) $0 $0 $0 $0 18 Amount paid for furniture & fixtures ($8,000.00) $0 $0 $0 $0 19 Cash flow from investing activiti, [18,000) 20 21 22 Proceeds from bank loan $75,000 $0 $0 $0 $0 23 Proceeds from issuing capital $0 $0 $0 $0 $0 24 Repayment of bank loan $0 ($15,000) ($15,000) ($15,000) ($15,000] 25 Cash flow from financing activiti 75,000 [15,000) [15,000) [15,000) (15,000) 26 27 Net increase (decrease) in cash 61,008 (25.530) (9.378) (5.233) (12.467) 28 Add: Beginning cash balance $10,000 $70,328.77 $45,336.36 $35,051.99 $30,602.63 29 Ending Cash balance 71,008 44,799 35,959 29,819 18,1364 Bank Loan $ 75,000 Term 5 yrs 7 rate 2% 8 installments $ 15,000 9 10 accrued interest S 1,500 11 12 13 Furniture & 14 Fitxtures 8000 15 life 15 yrs 16 Depreciation S 533 17 18 Computers 10000 19 life 5 yrs 20 Depreciation 2000 21RATIOS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 4 *ROUND TO TWO DECIMAL PLACES 5 CURRENT RATIO 6 TOTAL ASSET TURNOVER 7 DEBT RATIO 8 TIMES INTEREST EARNED 0.00 0.00 9 GROSS PROFIT MARGIN 10 NET PROFIT MARGIN (%) 11 RETURN ON EQUITY (%) 12 13 14 15 Comment on the projected health of the company (Years 1-5) in terms of liquidity, activity , and profitability. As a financial 16 analyst, what suggestions would you make to Janelle to improve certain ratios. If you were the bank would you give Janelle 17 the business loan? 18 19 20 21 22 23FORECASTED INCOME STATEMENT Assumptions Assumption Explanations YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 Revenue $100,000 $102,000 $97,920 $107,712 $113,097.60 5 Cost of Sales $45,000 $57,120 $41,126 $45,239 $47,500.99 6 Gross Margin 55,000 44,880 56,794 62,473 65,597 7 Operating Expenses 8 Advertising $3,000 $3,060 $2,937.60 $3,231.36 $3,392.93 Website/Content Creation $5,000 $5,150 $5,304.50 $5,463.64 $5,627.54 10 Wages $20,000 $20,000 $20,000 $20,000 $20,000 11 Office Rent $18,000 $18,000 $18,000 $18,000 $18,000 12 Utilities $3,000 $3,000 $3,000 $3,000 $3,000 13 Insurance Expense $0.00 SO SO $0 14 Depreciation $2,533.33 $2,533.33 $2,533.33 $2,533.33 $2,533.33 15 Operating Income 3,467 (6,863) 5,019 10,245 13,043 16 Interest Expense $1,500 $10,555 $900 $600 300 17 Income before taxes 1,967 (17,418) 4,118 9,645 12,743 18 Income taxes 492 (4,354 1,030 2,411 3,186 19 Net Income/(Loss) 1,475 (13,063) 3,089 7,233 9,557