Assignment 2 Case Study: Forecasting Financial Statements Ra

Assignment 2 Case Study Forecasting Financial Statements Ratiosdu

Students will construct a set of forecasted financial statements and calculate a set of financial ratios for a start-up business. You will need to create forecasted income statements, balance sheets, and cash flow statements for five years based on provided assumptions and an Excel template. Additionally, you must calculate financial ratios, analyze the projected financial health of the business, and answer related short-answer questions.

Sample Paper For Above instruction

Forecasting financial statements is an essential process for start-up businesses and involves projecting future financial performance based on a mix of historical data, assumptions, and market analysis. For Janelle Higgins' new event planning business, JH Events, an accurate and comprehensive forecast can dramatically impact her ability to secure funding and strategically plan for growth.

Building the forecast starts with understanding her initial assumptions, which serve as the foundation for the projections. The assumptions provided indicate that Janelle expects her first-year sales to be $150,000, with varying growth rates over the subsequent years—3% for years 2 and 3, and 5% for years 4 and 5. These growth rates are realistic given market conditions and her business strategy. The cost of sales, set at 45% of revenue initially and growing concurrently, mirrors typical gross margin expectations, and advertising expenses at 4% of revenue align with standard marketing investments for a new business.

From a financing perspective, Janelle plans to secure a 3-year bank loan of $60,000 at 3% interest, with repayments starting in Year 2. She also invests her own initial capital of $30,000, augmented by an additional $10,000 in Year 3. The assumptions about equipment, furniture, and fixtures depreciation using straight-line methods further shape the asset side of the forecast, influencing profitability and cash flow calculations.

Constructing the forecasted financial statements involves developing detailed income statements, balance sheets, and cash flow statements. The income statement begins with revenue, subtracts cost of goods sold and operating expenses such as advertising, wages, rent, utilities, and depreciation, culminating in net income. The balance sheet incorporates assets like receivables, equipment, and furniture minus accumulated depreciation, alongside liabilities such as loans and accounts payable, and equity components including capital and retained earnings. The cash flow statement tracks cash inflows and outflows across operating, investing, and financing activities, essential for understanding liquidity positions over time.

In addition to preparing these financial statements, calculating key financial ratios like gross margin, net profit margin, current ratio, debt-to-equity ratio, and return on assets offers insights into the company's operational efficiency, liquidity, leverage, and profitability. For example, a high gross margin indicates healthy pricing power, while a healthy current ratio suggests sufficient liquidity to meet short-term obligations. Fixing these ratios over the forecast years allows for tracking the company's financial health and identifying areas requiring management attention.

Beyond numerical analysis, understanding the interconnectedness of financial statements is crucial. For instance, net income flows into retained earnings on the balance sheet, affecting overall equity. Depreciation reduces asset value but does not impact cash flow directly, yet it influences taxable income and thus taxes paid, which concerns the cash flow statement.

After constructing and analyzing the forecasted statements, an overall assessment must be made. This involves examining projected profitability, liquidity, and leverage measures to determine the business’s projected financial health and viability. For example, if the ratios display deteriorating liquidity or excessive debt, Janelle might need to reassess her assumptions or seek additional funding sources.

In conclusion, building a comprehensive five-year financial forecast for JH Events involves careful application of assumptions, detailed financial statement construction, ratio calculations, and critical analysis. Such a forecast is invaluable in making informed strategic decisions and securing necessary financing to grow the business. Future iterations might incorporate qualitative factors such as market trends and competitor analysis to refine the projections further, but the numerical framework provides a solid base for business planning and evaluation.

References

• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Gibson, C. H. (2018). Financial Reporting and Analysis. Cengage Learning.
• Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2019). Financial Statement Analysis. McGraw-Hill Education.
• Ohler, D., Oehler, B., & Gappa, J. (2017). Small Business Financial Management. Wiley.
• Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
• Bragg, S. M. (2016). Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and Make Better Decisions. John Wiley & Sons.
• Investopedia. (2023). Forecasting Financial Statements. https://www.investopedia.com/terms/f/forecastingfinancialstatements.asp
• Small Business Administration. (2022). Financial Management Tools. https://www.sba.gov/
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