Financial Planning and Analysis, Statistics Problem Example


Year 2015
Accounts Receivable 427,500
Inventory 855000
Total Current Assets 1297500
Fixed Assets 442500
Miscellaneous Assets 7500
Total Assets 1747500
Notes Payable 135000
Accounts Payable 772500
Total Current Liabilities 975000
Long Term Debt 337500
Total Liabilities 1312500
Net Worth 435000
Total L+E 1747500


Year 2015
Net Sales 5130000
Cost of Sales 3420000
Gross Profit 1710000
Operating Expenses 1435375
Operating Profit 275625
Interest 37125
Earnings Before Taxes 237500
Taxes 95000
Earnings After Taxes 142500





Year 2015
Return on Sales 2.78%
Return on Equity 32.8
Average Collection Period 30.0
Inventory Turnover 4.00
Current Ratio 1.33
Quick Ratio 0.45
Debt to Equity 3.02
Fixed Asset Earned $12
Times Interest Earned 7.40



The numbers were projected by analyzing the trends present in the previous four years of projections. As the cash had remained constant throughout, the 2015 balance sheet did not reflect any increase in the projected cash totals. However, the inventory totals had been steadily increasing each year, so those were projected to grow for 2015. Similar systems were used to project out each of the balance sheet and income statement numbers. In some cases, the numbers were revised downwards somewhat to ensure conservatism.

These projections seem to show that the company is headed in the direction of being in a good position. The return on equity is constantly increasing and can be expected to fully quadruple by the end of the period these projections are for. Other metrics and ratios are projected to move in similar directions. For example, the company’s liquidity will increase as the years pass, signified by current and quick ratios that continue to drop, a good sign for the financial health of the company. However, their debt to equity ratio and also their debt to asset ratios are increasing, showing that the growth in the company is largely being fueled by increasing debt.

The increase in debt comes from an exploding number in the accounts payable projections, which show an increase of over four-hundred percent in a period of less than five years. Combined with a smaller increase in notes payable and long term debt, the company is expected to be increasing its debt load greatly within the next few years. Ultimately, this undoes a great deal of the optimism that can be seen on other areas of the balance sheet and income statement projections.

The company is in a period where they can expect increasing sales, but also increasing costs that are ultimately going to be financed through increased debt. While this ultimately is not a significant problem as long as profits keep growing, giving them a healthy amount of capital with which to service this debt, they are running a risk. If there is a lowered demand through their product due to overall market fluctuations or perhaps a competitor gaining their market share from them, suddenly the projected debt levels could become very difficult for them to manage.

For this reason, I feel that the company should slow down the growth in operations it is undertaking in the near future. They are funding it entirely through debt, while slower growth would allow them to use retained earnings from their strong profits levels. This would make the growth more sustainable and put the company into a stronger position financially. Ultimately, this is a tough decision to make as it will undoubtedly be followed with lower short term profits than these projections show. However, these projections are not factoring in risk strongly enough as they assume large deals of revenue and sales growth in the coming years. Therefore, it is in the company’s best long term interests to shield themselves from the vulnerability these projections create.