Financial Forecast

Financial Forecast
Your assignment is to structure a reasonable turnaround in years 1990 and 1991 so that you have improved the profitability and improved the cash flow.

Think through the changes you make in the operations, because you have to document them in the operating reports. This will include a change in strategy or tactics. Make the changes in the 1990 financial statement and 1991 financial statement. The numbers you change in the P&L with ‘what if’ will populate throughout the financial statement and into the control analysis section for the two years.

You have the historical data for 1986-1989. Do not change the historical data. The next step is to create a pro-forma statement for 1990 and 1991 which will show an improvement in the profits and the cash flow. So, we play “what if” with the financial statements. The ‘what if’ is the action you will take as a manager.

• What will be the result if I increase sales? An interesting question. Change the annual sales in 1990 (by changing the units sold) and see what change has been made in the GM and the various expense categories. Look at the ending cash flow.

• Since COGS is the category in which you have the largest expenses (65-75%), you may want to change the labor, material or overhead %, and see the result. Do the same with the Operating Expenses, and bring the P&L to profitability. Look at the cash flow. Make a note of what the cash flow is and then work with the balance sheet.

• Change a/r days. Look at the result.

• Change inventory turns. Look at the result.

• Change a/p days. Look at the result.

• You will note how the cash flow changes.

Since you are playing ‘what if’, you can implement whatever strategies you wish. Just explain them in the report and show the changes in the financial statement for the next year.

Following the format for the previous assignment, plus any suggestions that I made when I graded your paper, prepare an operating report for 1990-1989 and for 1991-1990. Prepare an Action Plan for 1990 for 1991 and for 1991 for 1992. In 1990 add a ‘’look back’ section that looks at the action plan for the previous year and discusses whether the plan was successful or not. Do the same for 1991. Do not forget to have an action plan in 1991 for 1992, even though you will not be preparing a pro-forma for that year.

Compare $ and/or % for each item. Discuss variance and give one example of the action plan that you will implement in the following year. Do not say, ‘I will cut expenses’—make a suggestion on how you will reduce the expense.

Remember that the %% change is much more descriptive than the $$ change.

Make comparisons on sales, COGS, GM, GM %, any significant operating expense, operating income, and any significant change in cash position, listing reason why.
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