Question

George’s Tech, Inc. (GTI) is a new company the start of which has been internally funded. GTI’s owners are projecting significant Sales growth over the next two years, and realize that external funds will be necessary to support that expansion, but they are not sure how much funding will be required. The owners believe that the Additional Funding Needed (AFN) formula and methodology can be adapted to their business model to help them predict asset and funding requirements. Last year’s Sales were $750,000 (the last year which was funded internally). Last year’s ACTUAL Balance Sheet is shown below.

Balance Sheet (in THOUSANDS)

Current Assets and IP                800                 Operating Current Liabilities                    400

                                                                        Short Term Bank Loan                               50

                                                                                    Total Current Liabilities               450

                                                                        Personal Loans                                        350

Equipment                                200                 Net Equity Contributions                           200

Total Assets                              1,000                 Total Liab & Equity                               1,000

Information extracted from GTI Business Plan:

GTI’s has revised its business plan based on an analysis of requirements used to support past Sales; economies of scale and improved efficiencies, market analysis, customer feedback, potential investor inquiries and review of industry standards. GTI’s business is current and intangible asset intensive. To grow Sales and create value, GTI will have to expand staff, invest heavily in marketing and R & D, increase technology capabilities, and finalize an Intellectual Property (IP) development and protection program. The Net Equity Contributions on the Balance Sheet include operating losses to date.

Operational and Asset Projections:

GTI expects Sales to increase to $1,125,000 next year and to double to $2,225,000 in Year 2. Founders expect that GTI will only have to buy $50,000 in Equipment to support the projected increased Sales; but they predict that the firm’s investment in Current Assets will increase by $.70 for every $1.00 in Sales growth. The company expects a NET LOSS next year of 20% of Sales Next Year and a NET PROFIT of 10% in Year 2. Due to increase purchases and payroll, GTI predicts that Operating Liabilities will grow by $.15 for each $1.00 in New Sales.

1) By how much will Operating Current Liabilities increase over the two year forecasting period? (1)                       

2) What is the AGGREGATE Profit or Loss for the 2 year period? (1)

3) If the owners will make an additional $100,000 in Personal Loans during the 2 year period, what is the Total Amount of ADDITIONAL (external) FUNDING NEEDED (AFN) to support the company’s projected Sales growth over the next two years? (5)

Assets/Sales *(∆ Sales)—CL/Sales *(∆ Sales)—(NP/Sales)(Total Sales)

Extra Credit (1 point)

Prepare a Pro forma Balance Sheet at the end of the 2 year period: (Must be complete for any additional credit)

Answer 1

A B 1 Operating Current Liabilities increase over the two year forecasting period 2 Sales last year (given) $750,000 3 Sales next year (given) $1,125,000 4 Sales 2nd year (given) $2,225,000 5 Increase in sales next year $375,000 6 Increase in sales 2nd year over 1st year $1,100,000 7 Net loss (given) 20% 8 Net profit(given) 10% 9 Net loss $225,000 10 Net profit $222,500 11 Cost of equipment to be bought (given) $50,000 12 Current asset increase ($0.70 for every $1 increase) 70% 13 Current asset increase $262,500 14 Current asset increase 2nd year $770,000 15 Operating liabilities increase ($0.15 for every $1 increase) 15% 16 Operating liabilities increase $56,250 17 Operating liabilities increase 2nd year $165,000

1. Increase in operating liabilities over 2 year forecast period

20 Operating Current Liabilities increase next year 21 Operating Current Liabilities increase 2nd year 22 Increase in Operating liabilities over 2 year forcast period $56,250 $165,000 $221,250

2. Aggregate profit or loss for the 2 year period

25 Net loss 26 Net profit 27 Aggregate loss for the 2 year period -$225,000 $222,500 -$2,500

3. Additional funding needed over two years

Less:

30 Cost of equipment to be bought 31 Increase in current assets over 2 year forecast period 32 Total increase in assets $50,000 $1,032,500 $1,082,500

34 Increase in Operating liabilities over 2 year forcast period 35 Increase in personal loan (given) 36 Aggregate loss for the 2 year period 37 Additional funding needed over two years $221,250 $100,000 -$2,500 $763,750

41 42 Current assets and IP 43 Equipment 44 Balance Sheet (Last year) $800,000 Operating current liabilities $200,000 Short-term bank loan Total current liabilities Personal loans Net equity contributions $1,000,000 Total liability and equity $400,000 $50,000 $450,000 $350,000 $200,000 $1,000,000 45 46 47 Total assets 48 49 50 53 Balance Sheet (End of 2nd year) 51 Current assets and IP $1,832,500 Operating current liabilities 52 Equipment $250,000 Short-term bank loan Total current liabilities Personal loans Net equity contributions 56 Total assets $2,082,500 Total liability and equity Excess of total assets over total liability and equity = Additional fund needed $621,250 50000 671250 $450,000 $197,500 $1,318,750 54 55 57 $763,750 58

Excel Formulas Used:

A B 1 Operating Current Liabilities increase over the two year forecasting period 2 Sales last year (given) $750,000 3 Sales next year (given) $1,125,000 4 Sales 2nd year (given) $2,225,000 5 Increase in sales next year =B3-B2 6 Increase in sales 2nd year over 1st year =B4-B3 7 Net loss (given) 20% 8 Net profit(given) 10% 9 Net loss =B3*B7 10 Net profit =B4*B8 11 Cost of equipment to be bought (given) $50,000 12 Current asset increase ($0.70 for every $1 increase) =0.7/1 13 Current asset increase =B5*B12 14 Current asset increase 2nd year =B6*B12 15 Operating liabilities increase ($0.15 for every $1 increase) -0.15/1 16 Operating liabilities increase =B5*B15 17 Operating liabilities increase 2nd year =B6*B15 18 19 20 Operating Current Liabilities increase next year 21 Operating Current Liabilities increase 2nd year 22 Increase in Operating liabilities over 2 year forcast period =B16 =B17 =SUM(B20:B21) 23 24 25 Net loss 26 Net profit 27 Aggregate loss for the 2 year period --B9 =B10 =SUM(B25:B26)

=B11 =B13+B14 =SUM(B30:B31) 30 Cost of equipment to be bought 31 Increase in current assets over 2 year forecast period 32 Total increase in assets 33 Less: 34 Increase in Operating liabilities over 2 year forcast period 35 Increase in personal loan (given) 36 Aggregate loss for the 2 year period 37 Additional funding needed over two years =B22 $100,000 =B27 =B32-B34-B35-B36

41 42 Current assets and IP 43 Equipment 44 Balance Sheet (Last year) $800,000 Operating current liabilities $200,000 Short-term bank loan Total current liabilities Personal loans Net equity contributions $1,000,000 Total liability and equity $400,000 $50,000 $450,000 $350,000 $200,000 $1,000,000 45 46 47 Total assets 48 49 50 53 Balance Sheet (End of 2nd year) 51 Current assets and IP =B42+B31 Operating current liabilities 52 Equipment =B43+B30 Short-term bank loan Total current liabilities Personal loans Net equity contributions 56 Total assets =SUM(B51:B52) Total liability and equity Excess of total assets over total liability and equity = Additional fund needed =D42+B34 =D43 =SUM(D51:052) =D45+B35 =D46+B36 = SUM(D54:D55)+D53 54 55 57 =B56-156 58

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