FIN404 – Advanced Topics in Financial Management
February 28, 2008
Oats ‘R’ Us is a local oatmeal snacks company established in 1998 by Vicky and Mason Coleman. Due to the trend of healthy snacks and getting fit, sales reached $4 million in 2004, with the industry growth forecast at 30% per year. At this point, the owners realized the need to start planning for the future instead of just going along. The treasurer, Jim Moroney was selected for the task to figure out how much additional funding the company would require with revenue growth between 25% and 40%. Background
The key issue in this case is with the company’s growth, does it have the capacity to handle the additional sales? Jim’s task may seem trivial, but given the different planning models available, the problem is more complicated. He must determine the best mix of external financing and uses of net working capital in proportion to the forecast increase in sales. There are a number of planning models in existence, ranging from the simple percentage of sales model to more complex models using several factors. For example, Jim can determine if they should keep the debt-equity ratio constant, or how much sales can grow without the need for additional financing. These alternatives are detailed below. Alternatives
There are a few alternatives that Jim could use to forecast revenue for Oats ‘R’ Us. Forecasting can be simplified by using financial planning models, and there are several different types of models. Each model has common characteristics: inputs, the planning model, and the outputs (2007). The inputs consist of current financial statements and its forecasts as determined by management, and possibly the marketing team. The planning model calculates how managements’ decisions will affect costs, working capital, fixed assets and financing requirements. The output consists of pro forma financial statements, which are forecasts, based on the inputs into the planning...