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Rondo Company Financial Plans Essay

808 words - 3 pages

IntroductionPreparing a six-year financial plan for the Rondo Company begins with an accurate sales forecast. After analyzing Rondo's recent sales history from 2003 though 2005, sales and net income had grown year over year between 8 and 10%. The relationship between sales and the various types of assets was important when calculating this six-year financial forecast.Key AssumptionsBased on Rondo's annual company growth of 5% to 10%, Rondo will continue to maintain their level of growth in sales over the next six-years, but will have to borrow capital to keep it up due to a decrease in a bank loan beginning in 2008 of $2,500,000. Rondo will continue to operate at full capacity over the next six-years as assets grow proportionally with sales. Payables and accruals will grow proportionally with sales. Sales are projected to increase from $50,000,000 in 2005, to almost $80,000,000 in 2011, an increase of 60%.AFN (Additional Funds Needed)Based on the six-year forecast, additional funds of $2,500,000 will be needed in 2008, and a 100% increase in 2009 of $5,000,000. AFN will continue to increase by 10% or $5,500,000 in 2010 and 18% or $6,500,000 in 2011. Since sales are projected to increase by a little over 7 % over the next six-years, the AFN changes dramatically because more assets would be required to finance additional sales. Reasons and factors for this include:-Excess capacity lowers AFN.-Economies of scale lead to less-than-proportional asset increases.-Lumpy assets lead to large periodic AFN requirements, recurring excess capacity.So as CFO of Rondo, I would pay off all debts, buy back some stock and buy short-term investments to increase cash flow. Due to Rondo's steady Current Ratio in the 1.9% - 3.0% range, the company should not have any problems covering its current liabilities.Rondo's sales will improve year-over-year but the decline in inventory turns may be the result of carrying more inventory in response to increased sales. Over the next six-years, Rondo is projecting to carry too much inventory and may have excess obsolete inventory. An analysis of the ratios show that the Total Assets Turnover rate is too low, and from the DuPont equation (included in excel analysis), this pulls the ROE down. The low turnover is caused by the high inventory/sales ratio, meaning too much inventory. Rondo must take steps to reduce its inventory and focus heavily on inventory management.Rondo's profit margin has shown some improvement since 2003 and will...

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