Growing Pains "We are growing too fast," said Geoff. "I know I shouldnt complain, but we better have the capacity to fill the orders or we'll be hurting ourselves." Dawn and Geoff DeTolve started their oatmeal snacks company in 2008, upon the suggestion of their close friends who simply loved the way their oatmeal tasted. Geoff, 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, Healthy Grains Inc., was established in 2008 and reached sales of over $4 million by 2015 . Given the current trend of eating healthy snacks and keeping fit, Geoff was confident that sales would increase significantly over the next few years. The industry growth forecast had been estimated at 30% per year, and Geoff was confident that his firm would be able to at least match if not beat that rate of sales growth. "We must plan for the future," said Dawn. "I think we've been playing it by ear for too long." Geoff immediately called their treasurer, Matt Evans. "Matt, I need to know how much additional funding we are going to need for the next year," said Geoff. "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." Matt knew that his fishing plans for the weekend had better be put aside - 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 2 Healthy Grains Inc. Balance Sheet For the Year Ended Dec. 31st 2015 \begin{tabular}{|lrrr|} \hline & 2015 & 2014 & 2013 \\ Assets & & & \\ Cash and Cash Equivalents & & & \\ Accounts Receivable & 60,000 & 97,376 & 48,000 \\ Inventory & 250,416 & 175,000 & 150,000 \\ Total Current Assets & 511,500 & 390,000 & 335,000 \\ Plant \& Equipment & 821,916 & 662,376 & 533,000 \\ Accumulated Depreciation & 560,000 & 560,000 & 560,000 \\ Net Plant \& Equipment & 175,000 & 150,000 & 125,000 \\ Total Assets & 385,000 & 410,000 & 435,000 \\ & 1,206,916 & 1,072,376 & 968,000 \\ Liabilities and Owner's Equity & & & \\ Accounts Payable & & & \\ Notes Payable & 135,000 & 151,352 & 128,000 \\ Other Current Liabilities & 275,000 & 275,000 & 250,000 \\ Total Current Liabilities & 43,952 & 50,000 & 46,000 \\ Long-Term Debt & 453,952 & 476,352 & 424,000 \\ Total Liabilities & 275,000 & 250,000 & 300,000 \\ Owner's Capital & 728,952 & 726,352 & 724,000 \\ Retained Earnings & 155,560 & 155,560 & 155,560 \\ Total Liabilities and Owner's Equity & 322,404 & 190,464 & 88,440 \\ & 1,206,916 & 1,072,376 & 968,000 \\ \hline \hline \end{tabular} 1. This is the first time Matt and Geoff will be conducting a financial forecast for Healthy Grains Inc. 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 Healthy Grains Inc. is operating its fixed assets at full capacity, what growth rate can it support without the need for any additional external financing? 3. Healthy Grains Inc. has a flexible credit line with the Uptown Bank. If Geoff 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 Healthy Grains Inc.? Explain. 4. Initially, Matt 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, Matt realizes that Healthy Grains Inc. 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 actions can Geoff 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 Healthy Grains Inc.? Is Dawn justified in being concerned about the need for financial planning? Explain why. 8. Given that Geoff prefers not to deviate from the firm's 2015 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 2016 (ignoring feedback effects)