Assignment Question
Guided Response: Review the posts from your classmates and respond to at least three. Compare and contrast the points you and your classmates made regarding the importance of preparing a sales projection in the financial forecasting process. Desara’s Post- Before developing a pro forma income statement, a company must prepare a sales projection for multiple reasons. I will admit, the activity we complete for this helped to make all of this make a little more sense. Forecasting the company spend for the future year can help the company get prepared for any financials that are coming their way. Block states, “Based on the projected statements, the firm is able to estimate its future level of receivables, inventory, payables, and other corporate accounts as well as its anticipated profits and borrowing requirements”(page 94). Knowing the spend that you project, helps to understand if the company will need outside funding, which in turns lets lenders and investors know their projected debt to income ratio. I really liked how our book provided the example with the Tesla car. When the Tesla projection showed that Tesla would sell less cars in the next year, people paid attention and the stock dropped 30%. While Tesla is a popular car, their initial projection was based on the fact that gas prices were rising, so they believed the electric car would have a better sales projection. When gas started to drop down, Tesla had to then find a different projection factor, even though the sales were still up, gas couldn’t be the main point of their projection. When looking at the other importance that a projection statement can give, BAASS (2020), says “the goal of business forecasting is to develop better strategies based on these informed predictions; helping to eliminate potential failure or losses before they happen”(para 2). A company that projects they are going to have more sales profit, must also prepare for the headcount they will need to hire to be able to produce these sales. The budget will let the company know where the headcount is needed and how much they can spend in that area, so that the new employees are given a salary within that budget. Looking at the actuals from the consolidated net sales and revenue at Deere & Company for 2022 Q4, on page 16, the assets increased from 84,114 to 90,030 , which is a 7% increase. Liabilities increased from 65,680 to 69,673, which is a 6% increase. With no significant changes happening, Deere & Company can plan for 2023 to stay in that range. If Deere& Company is opening another facility or looking to invest in more equipment, they would need to prepare for that dollar amount to be taken out of their income and if needing to have any type of loan for the equipment, they would be able to show their past financials and expected future financials to give a reliable projection so that a company can decide to invest in them. References Block, S. B., Hirt, G. A., & Danielson, B. R. (2022). Foundations of financial management (18th ed.). McGraw-Hill Education. Hall, R. (n.d.). Why Forecasting is Important for Business Success. https://www.baass.com/blog/why-forecasting-is-important-for-business-successLinks to an external site. John Deere – Investor Relations. (n.d.-b). https://investor.deere.com/home/ Richard’s Post- Before developing a pro forma income statement, one must first prepare a sales projection. Explain why this first step is so critical based on your reading. Part of the pro forma income statement will include how a firm is performing financially in regard to their debt and equity, but also show whether an increase of production is necessary. The sales projection, according to Block et al., talks about this step as forecasting profit, setting realistic goals, and tracking progress (2022, pg., 96). For example, if a company has taken out loans that are being paid back over time, a bank could look at these sales projections as part of the income statement as a guarantee they will be able to pay back their loans. It also shows a company whether or not their production costs are eating too far into their profits. In the text example, Goldman Corporation expects to see a profit of $37,290 over the next 6 months (Block et al., 2022, pg., 99). Will that projection cover their operational costs and remain financially stable, is what a bank might be asking. Review the Deere & Company quarterly report you downloaded for the Week 1 Making Sound Investment Decisions discussion. Describe how it addresses the sales results, and outline the sales projections issues this company may encounter. Being a parent company, Deere & Company, breaks down their sales results as consolidated and individual. In both the Annual Report (2021, pg., 16) and the Q4 News Release (2022, pg., 2-5), they do just that break down their market segment. At the bottom of each section is the SVA (Shareholder Value Added) and is communicated in terms of net profit. On page 8 of the Annual Report, you’ll find a consolidated breakdown of net sales and operating profit based on Deere & Company as a parent company. In total, Deere & Company reports, based on 2022 Q4, a net sales and revenue of $15,536 Billion. Noted in the 2022 Q4 financial statement is that Large Ag in the U.S, and Canada is trending down, as is agriculture and turf overall in Asia (Hartmann, 2022, pg., 5). Continuing, the 2022 Q4 Financial statement points out that while there was still growth, equipment operations only increased 0.1% from October 2021, small ag & turf decreased by 2.6% from October 2021, and production and precision ag also decreased by 0.3% from October 2021 (Hartmann, 2022, pg., 18). Considering the year over year factors, especially a year of growth from the pandemic, these business segments might need to release of potential negative equity or diversify how they’re approaching sales. References: Block, S. B., Hirt, G. A., & Danielson, B. R. (2022). Foundations of financial management (18th ed.). McGraw-Hill Education. Hartmann, J. (2022). Deere Reports Net Income of $2.246 Billion for Fourth Quarter, $7.131 Billion for Fiscal Year. Deere & Company. https://s22.q4cdn.com/253594569/files/doc_financials/2022/q4/DE-4Q22-News-Release-and-Financials.pdfLinks to an external site. John Deere. (n.d.). Investor relations. https://investor.deere.comLinks to an external site. Delaney’s Post- Importance of Developing a Sales Projection The first step to creating a pro forma income statement is to establish a sales projection (Block et al., 2022). The sales projection tells how much of a particular product a company expects to sell and at what price point the product will be sold. Based on that number, the company will know about how much product they should have on hand to be able to meet the expected demand. The company will then consider the amount of product already on hand, subtract that from the sales projection, and will end up with the amount of product that will need to be produced over the determined time frame (Block et al., 2022). An inaccurate sales projection can have expensive consequences for a company. This could include having an excessive amount of product made and stored or inversely a loss of profit for an underpredicted projection. An incorrect sales projection will also have affects to the projections on accounts receivable/payable and to expected profits and cash flow (Block et al., 2022). Different considerations are made when a company establishes a sales projection. It can be based on prior years’ sales, how other companies in the same market are performing, the economy in general, changes in legislation, and changes in market trends. One product that I think can be really relevant in this, based on just my personal viewpoint, is reusable water bottles. This is especially true as a nurse because we (should) keep well hydrated through our long shifts. I have seen that water bottle trends come and go, and based on TikToks nurses are usually the ones spearheading these trends. Personally, I have seen the transition from Nalgene to Hydroflasks to Starbucks cups, to Stanleys and now on to Owala brand. These are things I have observed on a consumer side, and things that companies would also have to consider. In particular, branding and social media has a massive impact on what is popular and selling well. Deere & Company Report Review Deere & Company’s annual report covering statements of consolidated income outlines the company’s net sales and revenues and its costs and expenses. Net sales and revenues is broken down into net sales, finance and interest income, and other income. Costs and expenses includes cost of sales; research and development; selling, administrative, and general expenses; interest expense; and other operating expenses (Deere, 2022). The problem that I see with this report is that the actual net sales section is not broken down at all, so there is really no way to extrapolate from the values given what actual product sales looked like. To make an educated guess regarding sales projections there should be some kind of data showing what product sales of prior years looked like. That being said, it would likely be possible to use the “percent-of-sales method” (Block et al., 2022, p. 107) to calculate potential financial needs. This is a different way to look at accounting/cash flows that could be utilized. References Block, S. B., Hirt, G. A., & Danielson, B. R. (2022). Foundations of financial management (18th ed.). McGraw-Hill Education. Deere & Company. (2022). Form 10-K. https://s22.q4cdn.com/253594569/files/doc_downloads/2022/12/DE-2022-10-K.pdf
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