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FIN 360 Chapter 11: FIN360 Module 11 Notes

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sapphiregnat826
4 Dec 2016
School
Quinnipiac University
Department
Finance
Course
FIN 360
Professor
Thomas Coe

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Document Summary

The forecasting process begins with a retrospective analysis. That is, we analyze current a(cid:374)d prior (cid:455)ears" state(cid:373)e(cid:374)ts to (cid:271)e sure that the(cid:455) a(cid:272)(cid:272)uratel(cid:455) refle(cid:272)t the (cid:272)o(cid:373)pa(cid:374)(cid:455)"s financial condition and performance. All forecasts are based on a set of forecasting assumptions. For example, to forecast the income statement, we must make assumptions about revenue growth and other assumptions about how expenses will change in relation to changes in revenues. Then, to forecast the balance sheet, we make assumptions about the relation between balance sheet accounts and changes in revenues. Co(cid:373)puti(cid:374)g fore(cid:272)asts out to the (cid:862)(cid:374)th de(cid:272)i(cid:373)al pla(cid:272)e(cid:863) is eas(cid:455) usi(cid:374)g spreadsheets. This increased precision makes the resulting forecasts appear more (cid:862)professio(cid:374)al,(cid:863) (cid:271)ut (cid:374)ot necessarily more accurate. If the forecasted cash balance on the balance sheet agrees with that on the statement of cash flows, it is likely that our income statement and balance sheet articu-late properly. We also must ensure that our forecast assumptions are internally consistent.

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Related Questions

Read the Background Information about FirstRate Company, below. Then, explain what the company’s treasurer should do about the draft versions of the projected financial statements and short-term cash flow forecast (prepared by him) in response to comments made by the company’s chief financial officer (CFO) in their meeting. Do not recommend specific treasury management steps, such as selling investment securities, factoring accounts receivable, reducing operating costs, or seeking alternative financing arrangements. (The background information is not sufficient to formulate such steps, nor is there enough time to implement such steps before the CFO meets with FirstRate’s banks to discuss the financial projections and cash flow forecast). It is most important that you clearly provide the reasons for your recommendations. Background Information about FirstRate Company For nearly two decades, FirstRate has been the second largest firm in its industry, maintaining market share approaching 25 percent and generating stable, if modest, sales and net income growth. Beginning in 20X1, FirstRate began to experience intensified competition from several recent entrants into its industry, including a well-capitalized firm that expanded into FirstRate’s industry by exploiting a distribution channel it developed over many years in its original line of business. FirstRate responded to this increased crowding by "competing on price." In contrast, under its historical strategy, the company positioned itself based on brand recognition, product leadership, and personalized customer service. Along with its revised pricing strategy, FirstRate liberalized its customer credit and product return policies. In response to the effects of its revised pricing strategy on the company’s operating performance, management immediately scaled back the company’s product development plans, but was initially slow to critically re-examine its cost structure. FirstRate eventually reduced staff and closed some facilities as it outsourced certain production and fulfillment activities. However, the transitional costs of implementing these changes were significant. In addition, to support its revised pricing strategy, the company expanded its advertising and promotion. While FirstRate’s new strategy yielded greater-than-historical sales growth for the company, its reported net income suffered, along with its stock price. In response to the effects of these changes on FirstRate’s financial performance and condition, its lending banks increased the collateral requirements and interest rates on their loans to the company. The CFO of FirstRate Company is preparing for a meeting at one of the banks where the company been a long-time borrower. The company’s $40 million working capital line of credit (LOC) will expire shortly. The company currently has $33.5 million in borrowings outstanding under the LOC and this balance will become due and payable in 30 days, unless the bank renews the LOC. The company’s treasurer has just completed projected financial statements and a short-term cash flow forecast for the company. In anticipation of her bank meeting, the CFO met with the treasurer to discuss the financial projection and forecast. The CFO expressed her concern that "these will fail to make a favorable impression" on the bank. She continued, "Our recent results have already brought pressure from all of our banks. It’s important that we have the banks in our corner while we implement our revised strategy." The treasurer responded, "I’ve prepared these [projections and forecasts] using our "best case" assumptions and estimates." The CFO replied cryptically, "Well, ‘sharpen your pencil’ because these are probably not going to get the job done." As the treasurer left her office, the CFO reminded him that, "We have more than a thousand employees, even more stockholders, not to mention dozens of suppliers, and our customers to take care of."

Read the Background Information about FirstRate Company, below. Then, explain what the company’s treasurer should do about the draft versions of the projected financial statements and short-term cash flow forecast (prepared by him) in response to comments made by the company’s chief financial officer (CFO) in their meeting. Do not recommend specific treasury management steps, such as selling investment securities, factoring accounts receivable, reducing operating costs, or seeking alternative financing arrangements. (The background information is not sufficient to formulate such steps, nor is there enough time to implement such steps before the CFO meets with FirstRate’s banks to discuss the financial projections and cash flow forecast). It is most important that you clearly provide the reasons for your recommendations. Background Information about FirstRate Company For nearly two decades, FirstRate has been the second largest firm in its industry, maintaining market share approaching 25 percent and generating stable, if modest, sales and net income growth. Beginning in 20X1, FirstRate began to experience intensified competition from several recent entrants into its industry, including a well-capitalized firm that expanded into FirstRate’s industry by exploiting a distribution channel it developed over many years in its original line of business. FirstRate responded to this increased crowding by "competing on price." In contrast, under its historical strategy, the company positioned itself based on brand recognition, product leadership, and personalized customer service. Along with its revised pricing strategy, FirstRate liberalized its customer credit and product return policies. In response to the effects of its revised pricing strategy on the company’s operating performance, management immediately scaled back the company’s product development plans, but was initially slow to critically re-examine its cost structure. FirstRate eventually reduced staff and closed some facilities as it outsourced certain production and fulfillment activities. However, the transitional costs of implementing these changes were significant. In addition, to support its revised pricing strategy, the company expanded its advertising and promotion. While FirstRate’s new strategy yielded greater-than-historical sales growth for the company, its reported net income suffered, along with its stock price. In response to the effects of these changes on FirstRate’s financial performance and condition, its lending banks increased the collateral requirements and interest rates on their loans to the company. The CFO of FirstRate Company is preparing for a meeting at one of the banks where the company been a long-time borrower. The company’s $40 million working capital line of credit (LOC) will expire shortly. The company currently has $33.5 million in borrowings outstanding under the LOC and this balance will become due and payable in 30 days, unless the bank renews the LOC. The company’s treasurer has just completed projected financial statements and a short-term cash flow forecast for the company. In anticipation of her bank meeting, the CFO met with the treasurer to discuss the financial projection and forecast. The CFO expressed her concern that "these will fail to make a favorable impression" on the bank. She continued, "Our recent results have already brought pressure from all of our banks. It’s important that we have the banks in our corner while we implement our revised strategy." The treasurer responded, "I’ve prepared these [projections and forecasts] using our "best case" assumptions and estimates." The CFO replied cryptically, "Well, ‘sharpen your pencil’ because these are probably not going to get the job done." As the treasurer left her office, the CFO reminded him that, "We have more than a thousand employees, even more stockholders, not to mention dozens of suppliers, and our customers to take care of."