We are growing too fast," said Mason. "I know I shouldn't complain, but we better have the capacity to fill the orders or we'll be hurting ourselves." Vicky and Mason Coleman started their oatmeal snacks company in 1998, upon the suggestions of their close friends who simply loved the way their oatmeal tasted. Mason, a former college gymnastics coach, insists that he never "intended to start a business," but the thought of being able to support his college team played a significant role in motivating him to go for it.
After considerable help from local retailers and a sponsorship by major bread company their firm, Oats 'R' Us, was established in 1998 and reached sales of over $4 million by 2004. Given the current trend of eating healthy snacks and keeping fit, Mason was confident that sales would increase significantly over the next few years. The industry growth forecast had been estimated at 30% per year and Mason was confident that his firm would be able to at least achieve if not beat that rate of sales growth.
"We must plan for the future," said Vicky. "I think we've been playing it by ear for too long." Mason immediately called the treasurer, Jim Moroney. "Jim, I need to know how much additional funding we are going to need for the next year," said Mason. "The growth rate of revenues should be between 25% and 40%. I would really appreciate if you can have the forecast on my desk by early next week."
Jim knew that his fishing plans for the weekend had better be put aside since it was going to be a long and busy weekend for him. He immediately asked the accounting department to give him the last three years' financial statements (see Tables 1 and 2) and got right to work!
Table 1 Oats 'R' Us Income Statement For the Year Ended Dec. 31st 2004

Table 2 Oats 'R' Us Balance Sheet For the Year Ended Dec. 31st 2004

1. Since this is the first time Jim and Mason will be conducting a financial forecast for Oats 'R' Us, how do you think they should proceed? Which approaches or models can they use? What are the assumptions necessary for utilizing each model?
2. If Oats 'R' Us is operating its fixed assets at full capacity, what growth rate can it support without the need for any additional external financing?

2003 2004 2002 4,700,000 Sales 3,760,000 3,000,000 3,877,500 Cost of Goods Sold 3,045,600 2,400,000 Gross Profit 822,500 714,400 600,000 Selling and G&A Expenses 275,000 250,000 215,000 Fixed Expenses 90,000 90,000 90,000 Depreciation Expense 25,000 25,000 25,000 EBIT 432,500 349,400 270,000 Interest Expense 66,000 66,000 66,000 Eamings Before Taxes 204,000 366,500 283,400 146,600 Taxes @ 40% 113,360 81,600 219,900 122,400 Net Income 170,040 Retained Eamings 131,940 102,024 73,440 Assets 2004 2003 2002 Cash and Cash Equivalents 60,000 97,376 48,000 Accounts Receivable 250,416 175,000 150,000 Inventory 511,500 390,000 335,000 Total Current Assets 821,916 662,376 533,000 Plant & Equipment 560,000 560,000 560.000 Accumulated Depreciation 175,000 150,000 125,000 Net Plant & Equipment 385,000 410,000 435,000 Total Assets 1,206,916 1,072,376 968,000 Liabilities and Owner's Equity Accounts Payable 35,000 151,352 128,000 Notes Payable 275,000 275,000 250,000 Other Current Liabilities 43,952 50,000 46,000 Total Current Liabilities 453,952 476,352 424,000 Long-term Debt 275,000 250,000 300,000 Total Liabilities 728,952 726,352 724,000 Owner's Capital 155,560 155,560 155,560 Retained Eamings 322,404 190,464 88,440 Total Liabilities/Owner's Equity 1,206,916 1,072,376 968,000