Using The Excel Financial Forecast Worksheet From Assignment

Using The Excel Financial Forecast Worksheet From Assignment One Dete

Using the Excel Financial Forecast worksheet from Assignment one, determine the ‘sensitivity’ of the model by adjusting the values of growth rate in sales and cost of goods sold/net sales. Increase and decreases the % values for 2016 and observe and record the results. Create an Excel chart for each (growth rate in sales and cost of goods sold/net sales) and the resulting impact on external funding required. For example: Change growth in sales from 70% to 95% by 5% increments, recording and charting the resulting change in external funding required. Chart this data. In a two page executive summary explain your finding. Include the two charts (properly labeled) in your summary.

Paper For Above instruction

The purpose of this analysis is to assess the sensitivity of the financial forecast model developed in the initial assignment by systematically varying key growth assumptions and observing their impact on external funding requirements. Sensitivity analysis is essential in financial modeling as it helps identify how different variables influence financial outcomes, enabling more informed decision-making and risk assessment. In this context, the two primary variables under examination are the growth rate in sales and the cost of goods sold (COGS) as a percentage of net sales. This paper presents the methodology, findings, and implications of varying these parameters within the Excel financial forecast worksheet.

Methodology

Utilizing the Excel financial forecast worksheet from the previous assignment, the analysis focuses on adjusting the growth rate in sales and the COGS percentage for 2016. The base scenario assumed a certain growth rate (e.g., 70%) and specific COGS percentage. To evaluate sensitivity, the growth rate in sales was increased incrementally from 70% to 95% in 5% steps, and for each increment, the model recalculated the external funding required. Similarly, the COGS percentage was varied within a plausible range, observing the impact on funding needs. The results were recorded and visually illustrated using charts generated in Excel, providing a clear comparison of how each variable influences the funding gap.

Findings

Impact of Growth Rate in Sales

The analysis revealed a direct correlation between sales growth and external funding requirements. As the growth rate increased from 70% to 95%, the external funding required also rose significantly. This is attributable to higher sales growth necessitating expanded inventory, receivables, and possibly increased capital expenditures. The most notable finding was that moving from 70% to 80% growth resulted in a modest increase in funding needs, but further increases up to 95% caused exponential growth in external funding. The chart (Figure 1) depicts this relationship vividly, illustrating how variability in sales growth dramatically influences funding requirements.

Impact of Cost of Goods Sold (COGS) Percentage

Adjusting the COGS percentage from a lower to a higher value showed a different sensitivity profile. An increase in COGS percentage by 5% increments resulted in a steady but less dramatic rise in external funding needs compared to sales growth changes. This is because higher COGS ratios erode profit margins and increase working capital needs, yet the effect on external funding was more moderate than overseeing sales growth variations. The second chart (Figure 2) demonstrates this relationship, emphasizing that higher COGS percentages tighten profit margins and increase funding demands but to a lesser extent than aggressive sales growth.

Implications

The sensitivity analysis underscores the importance of accurate assumptions in financial modeling. Elevated sales growth assumptions can lead to significantly higher external funding requirements, highlighting potential liquidity risks if growth materializes faster than anticipated. Conversely, variations in COGS percentage influence profitability and working capital needs, but these effects are comparatively subdued. These findings suggest that financial managers should rigorously monitor sales trajectories and cost controls, as misestimations can substantially alter funding strategies.

Additionally, the charts generated serve as valuable visual tools for decision-makers to assess risk scenarios under different growth and cost circumstances. They facilitate strategic planning by illustrating potential funding gaps and emphasize the need for flexible financing arrangements that can accommodate rapid growth or cost fluctuations.

Conclusion

In conclusion, the sensitivity analysis of the financial forecast model reveals that sales growth has a more pronounced impact on external funding requirements than changes in COGS percentage. The exponential increase in funding needs with higher sales growth underscores the importance of conservative projections and contingency planning. By understanding these sensitivities, organizations can better prepare for varying economic and operational conditions, ensuring sufficient capital availability to support growth initiatives or manage costs effectively.

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