Case 12 - financial forecasting - the Topeka Adhesives case

Executive Summary

I. The Study Case story

After having worked several years for a large chemical company and after having attended several evening courses in the field of business, the two twins Karen and Elizabeth Whatley finally completed their long term goal of having their own company. After conducting several contracts with some local business store, the company really took off although they feared that their products were really undervalued. The twins decided to change their marketing approach and make their products available to the public in a new light. As a result of this, the company successfully contracted new business partners, leading the twins in believing that the predicted sales growth was manageable. Unfortunately, the problem that came along with this rapid growth was that it had to be financed in the short-run. Before this measure could be taken, the company must evaluate their internal performance in order to help them make a clear forecast for the upcoming 3-4 years.

The issues that Topeka is facing address:

a) Financing methods for the upcoming 3-4 years: the issue here is figuring out which method of financing to approach in order to cover the upcoming forecasted growth;

b) The issue of improving the companies accounts receivable;

c) Forecasting the company’s short-term evolution in terms of realizing company financial statements and see if the short-term growth of the company is sustainable and feasible;

II. The Solutions to the Case Study

1. When Jim Davidson, a company foreman, heard that Topeka may need external funds he was quite puzzled.”I’ve seen the most recent balance sheet. And we seem to be rolling in dough, judging from the impressive amount of retained earnings. ” Respond to Davidson’s comment.

We consider that Jim Davidson’s opinion is completely justified since the evolution of financial performance over the last 3 years has shown a constant increase. Compiled with this information, one should remember that the owners of the company decided that no new major external funds shall be drawn. However, the foreman can be also mistaken since a balance sheet shows merely a static image of the company’s performance over a period of time and one should have analyzed the income statements over the last 3 years or more in order to figure out a pattern. On the other hand, he might think that since he’s a first level manager, some significant funding will be aimed probably at improving the production process and this would be redundant in the face of already occurring success.

2. Develop a pro forma income statement for 1996. You may assume that depreciation equals the 1995 amount plus one-sixth of 1996 capital spending. The relevant tax rate is 40%.