Unit 03 · Case
Adom's Year 4 Plan
Forecasting the Financing Gap · Ghana · GH₵
This is the student brief. The instructor guide is distributed separately.
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The credit committee renewed Adom's facility, with conditions. One of them is that the company must deliver a credible Year 4 plan within thirty days, showing how it intends either to grow into its current working-capital structure or to bring that structure into line with its industry.
The bank wants both scenarios modelled. Ama and Kwesi have asked Mountain River to build them.
Scenario A — status quo. Growth continues at twenty-five percent. Working-capital practices are unchanged: sixty days to collect, fifty days of inventory, forty days to pay suppliers. Capital expenditure of GH₵4.3 million.
Scenario B — tightened. Growth slows to fifteen percent. Collections come back to forty days, inventory to thirty-five days, and payables stretch to fifty days. Capital expenditure of GH₵2.1 million.
Scenario A has been built for you. Your job is Scenario B.
Exhibit 1 · Shared assumptions
| Item | Basis | Value |
|---|---|---|
| Year 3 revenue | Actual | GH₵80.0m |
| Cost of goods sold | % of revenue | 85% |
| Operating overhead (SG&A) | % of revenue | 8.1% |
| Operating cash | % of revenue | 1.0% |
| Interest | 7% × Year 3 closing debt of 16.5 | 1.16 |
| Tax rate | On pretax income | 25% |
| Dividends | — | none |
| Item | Value |
|---|---|
| Net property and equipment | 11.0 |
| Short-term debt (held flat in Year 4) | 5.0 |
| Long-term debt (the plug) | 11.5 |
| Owners' equity | 10.0 |
Exhibit 2 · Scenario A, completed
| Line | Amount |
|---|---|
| INCOME STATEMENT | |
| Revenue | 100.00 |
| Cost of goods sold (85%) | (85.00) |
| Gross profit | 15.00 |
| SG&A (8.1%) | (8.10) |
| Depreciation | (1.80) |
| Operating income | 5.10 |
| Interest | (1.16) |
| Pretax income | 3.95 |
| Tax at 25% | (0.99) |
| Net income | 2.96 |
| ASSETS | |
| Cash (1.0% of sales) | 1.00 |
| Receivables (60 days) | 16.44 |
| Inventory (50 days of COGS) | 11.64 |
| Net PP&E (11.00 + 4.30 − 1.80) | 13.50 |
| TOTAL ASSETS | 42.58 |
| CLAIMS | |
| Payables (40 days of COGS) | 9.32 |
| Short-term debt | 5.00 |
| Equity (10.00 + 2.96) | 12.96 |
| Subtotal | 27.28 |
| LONG-TERM DEBT (the plug) | 15.30 |
| THE ANSWER | |
| FINANCING GAP = 15.30 − 11.50 | +3.81 |
Exhibit 3 · Scenario B — six blanks to complete
| Line | Amount |
|---|---|
| INCOME STATEMENT | |
| Revenue (80.00 × 1.15) | 92.00 |
| Cost of goods sold (85%) | (78.20) |
| Gross profit | 13.80 |
| SG&A (8.1%) | (7.45) |
| Depreciation | (1.60) |
| Operating income | 4.75 |
| Interest | (1.16) |
| Pretax income | 3.59 |
| Tax at 25% | (0.90) |
| Net income | 2.69 |
| ASSETS | |
| Cash (1.0% of sales) | 0.92 |
| Receivables (40 days) | _______ (1) |
| Inventory (35 days of COGS) | _______ (2) |
| Net PP&E (11.00 + 2.10 − 1.60) | _______ (3) |
| TOTAL ASSETS | _______ (4) |
| CLAIMS | |
| Payables (50 days of COGS) | _______ (5) |
| Short-term debt | 5.00 |
| Equity (10.00 + 2.69) | 12.69 |
| Subtotal | _______ |
| LONG-TERM DEBT (the plug) | _______ (6) |
| THE ANSWER | |
| FINANCING GAP = (6) − 11.50 | ? |
Question 1 · 15 minutes
Complete the six blanks and compute Scenario B's financing gap.
A negative gap is not an error. Think about what it means before you assume you have made a mistake.
Question 2 · 13 minutes
Compare the two scenarios line by line. Where does the difference come from?
Then quantify the trade: how many cedis of financing does each cedi of forgone profit buy?
Question 3 · 9 minutes
What do you recommend Ama and Kwesi commit to?
Name one real cost of your recommendation that does not appear anywhere in this model, and one thing you would want to know before locking it in.