CASE ANALYSIS ON CHAMPION

FINANCIAL CATTLE FARM, INC

FORECASTING

SUBMITTED BY GROUP 7

DR. JOMER MENDEGUARIN

DR. APOLLO MONDELO
DR. CELESTE SANTIAGO
FINANCIAL FORECASTING

Estimates of the overall Provide a comprehensive

impact of the picture of a company’s Guide managerial decision
management strategy and future financial status and making
program of action performance

Enables lower
Improve the quality of management to
Clarity in communicating
planning at all levels of the determine the level of
targets to stockholders
organization efforts it should exert to
attain the forecast results

USEFULNESS OF FINANCIAL
FORECASTING
•Support short-term and long-term
managerial plan
•Provide a comprehensive view of the
intended results of the investment and
financing decisions of management
•Improve the planning process
throughout the organization
LIMITATIONS OF FINANCIAL FORECASTING

• Inherent uncertainty of future events and the judgmental

nature of forecasts
• Time consuming and costly

FINANCIAL FORECASTING TECHNIQUE

• Uses the forecaster’s experience and opinion about

the future business conditions and capability of the
company
ØAdvantages:
• assimilates his awareness of operating conditions into
the forecast
• More committed to achieving the objectives of plans
that are based on his own forecasts
Subjective or • Subjective forecasts only require an expert
ØDisadvantage:
judgmental • When managers realize that top management uses
approach forecasts as standards of performance, managers
might not reveal the actual operating conditions to
the top management (may set a sales target that is
too low and easily achievable with minimal effort)
 2. TREND ANALYSIS OR TIME SERIES
• Prediction methods that derive patterns from past data
FINANCIAL a) Prior year as indicator: assumes that the immediately preceding
period’s figure is the best predictor of the next period’s figure.
FORECASTING b) Simple or compound growth rate forecast: uses simple or compound
past growth rates to forecast the future
TECHNIQUE c) Time series regression: method of drawing an average line using
data from past experience, assumes a linear relationship between
historical data and time.
3. CORRELATION OR CASUAL RELATIONSHIP ANALYSIS
• overcomes the limitations of trend analysis
a) The ratio technique
• assumes that the forecast variable is perfectly determined by the
independent variable
• Ratio need not correspond to past experience
• When applied to the forecast of entire financial statements, the ratio
method is called the percentage of sales forecast
b) Regression Analysis
• Establishes the relationship between actual levels of inventory and
sales
• estimates of individual accounts are
integrated into the financial statement
forecasts:
Ø Cash flow forecast: future cash requirement
& negotiate necessary financing in FINANCIAL
advance
Ø Income statement forecast: intended FORECASTING
future financial position
Ø Forecast balance sheet: intended future
financial performance
 In January 1988, Mr. Albert Lim constructed the Champion
Cattle Farm Inc., in the Southern part Batangas Province
(Calatagan)

Choice of location:

•Access to port for easy transport

•Availability of feed supply
CASE •characteristics of workers qualified to tend the feed lot

BACKGROUND
An inheritance amounting to Php 8.5 million was initially
used to finance the investment

•Farmland
•yearlings
•Facilities for feed-lot operations
•equipment: feeding and cleaning
•supply of feeds
•salary of people needed for the operation
 Start of operations
Ø 1st batch of yearlings purchased on January 1998 in cash
Ø purchase of 12-18 months old cattle from Masbate
Province
Ø Mr. Lim wanted to spread feed-lot operation into monthly
batches of 200-300 cattle
Ø An inventory of 1200-1800 head of cattle desired
projection by June 1998
Ø Farm equipped to handle 1800 head of fully-grown cattle
CASE Ø 6 months intensive farm-feeding to cattle until the weight
of of 100-120 kg was reached
BACKGROUND Ø Cattle sold to traders/buyers who in turn sold them to
meat dealers in Manila
Ø Cash basis: terms of purchase and sale
Ø Only obtain credit for a minor portion of its feeds and
veterinary supply
Ø Feeds purchased in cash except from a dealer in Manila
which sold on 21-day credit-term but credit was limited to
Php 150,000
 CASE BACKGROUND
CATTLE FEED LOT OPERATIONS
• Yearlings= Php 3,000/head (average price) Ave wt: 40 kg
• “on-the hoof” selling price Php 80/kg, fully grown cattle on the
average= 100 kg, sold to nearby cattle market
• Expenses related to farm management only: salary of farm manager,
Insurance, office supplies, etc, estimated at Php 10,000/monthly
DIFFICULTY ENCOUNTERED
• Insufficient cash to purchase stocks in six monthly batches by the end
of February
• Immediate need of funds for continuous operation
• Bank Manager of DBB asking for detailed estimate of the amount and
timing of Mr. Lim’s financing requirement and latest financial
statement
 TIME CONTEXT
April of 1998
This was the time that
the cash purchase stocks
was insufficient to
sustain the six-monthly
batches of cattle.

VIEWPOINT
Mr. Albert Lim, owner-
manager of Champion
Cattle Farms, Inc

This Photo by Unknown Author is licensed under CC BY-NC

STATEMENT OF THE
PROBLEM
There is an urgent
need of additional fund
amounting to Php 8
million by Mr. Albert to
sustain the operation of
Champion Cattle Farm,
Inc.
MUST OBJECTIVES ( SHORT TERM)
1. To determine the possible sources of
funds suitable for the financial needs
and condition of Champion Cattle
Farms Inc.
2. To acquire the funds needed by
Champion Cattle farm Inc, for
continuous operation of handling 1200-
1800 head of cattle in six weight
category by June.
 WANT OBJECTIVES
(LONG TERM)

1. To establish a
reputable and self-
sustaining cattle farm
industry
2. To maintain the
maximum capacity
of the farm
3. To make profitable
income
 AREAS OF CONSIDERATION
STRENGTH
• Ideal location of farm (access to port for
transport of supplies and cattle)
• Existing farm set-up (feeding & cleaning
equipment, can accommodate 1800
fully grown cattle )
• Established market (buyers & traders)
• Cash basis: terms of payment
OPPORTUNITIES
• Government programs/grants
• Presence of other trade credits
• Banks and other lenders
• Commercial finance companies
WEAKNESS
• Slow return of investment (waiting period
of 6 mos. before batch of cattle can be
sold)
• Insufficient financial resources to
maintain inventory
• Limited credit line for feeds and
veterinary supplies
• Cash basis for the purchase of yearlings
THREATS
• Natural calamities (typhoon)
• Plagues/diseases
• Presence of other cattle farms with new
product or technology
• Failures in foaling/ lean months of supply
 ALTERNATIVE COURSES OF
ACTION

1. To get a credit line from DBB amounting

to Php 8 million and draw at Php 2
million per month
Advantage/s: very flexible can be
used for cash flow
problems
less expensive(for
business with low
margins)
Disadvantages: hard to get (need assets
and trading history)
hard to get an increase
when credit limit is
reached
ALTERNATIVE COURSES OF ACTION

2. To convince DBB to grant a one-time lump sum loan

amounting to 8 million
Advantage/s: provides capital for operation
better interest rates
accounting and tax advantages
ownership remains with borrower
Disadvantage/s: partial funding requirement
strict repayment schedule
processing fee
interest rate risks/cost of funds
 ALTERNATIVE
COURSES OF ACTION

3. Government grants/assistance
Advantage/s: not required to
provide shares
receive fund
without losing
control of business
venture can be
publicly endorsed
Disadvantage/s: eligibility
required
limited amount
provided
competition from rival
businesses also asking
for grants
ALTERNATIVE COURSES OF ACTION

4. Commercial Finance Companies

Advantage/s: less conservative than traditional
banking
willing to make riskier loans
short-term and long-term loans offered
a good source to investigate for asset-
backed loans
Disadvantage/s: higher interest rates than banks
assets ((collateral) must be readily
accessible and marketable
prepayment penalties to defer
borrower from refinancing with a
conventional bank
 ALTERNATIVE COURSES OF
ACTION
5. To diversify the business in cattle industry by Including the purchase
of dairy (milk-producing) cows and engage in dairy production and
distribution for additional income to sustain inventory needs while
waiting for the cattle to be sold
Advantage/s: other source of income
self-sustaining
Disadvantage/s: additional machineries
training for dairy production
additional man-power
6. Accelerate the cattle fattening procedure by utilizing complete food
designed for fattening cattle over 90 days
Advantage/s: can sell cattle every 3 months instead of 6
Disadvantage/s: high cost of feeds
ALTERNATIVE COURSES OF ACTION
ACA MONEY MAN- TIME
POWER
1 / / /
2 / /
3 / /
4 / /
5 / /
6 / /

RECOMMENDATION
Our final recommendation is ACA 1: To get a credit line from DBB amounting to Php 8
million and draw at Php 2 million by providing an estimate of the amount and timing of
financial requirement to sustain the continuous operation of Champion Cattle Farms,
Inc. to cover the needs for:
Ø purchasing next batches of cattle
Ø supply of feeds
Ø veterinary care: vaccinations and vitamin supplements
Ø management expenditures
 ´ The funding source best suited to the
financial need and condition of
Champion Cattle Farm Inc., is to get a
CONCLUSION credit line from DBB amounting to Php
8 million and draw at Php 2 million per
month
DETAILED ACTION PLAN
• Estimated costs over a 6-month feeding period for each head of cattle:

FEEDING OPERATION : Cost /head of Cattle

ITEM COST IN PhP

• Purchased Feeds 3,740
• Wages of farm labor 320
• Veterinary supplies 105
• Farm overhead costs 35

TOTAL 4,200

Average cost of feeding per month per cattle: P 4,200/6 months = P 700/
month
per
cattle
 CHAMPION CATTLE FARMS, INC
Balance sheet as of February 28, 1998
(in thousand pesos)

ASSETS
• Cash 456
• Feeds inventory 134
• Cattle stock inventory (315 heads) 2,950
• Equipment 460
• Land and building 4,550

TOTAL ASSETS 8,550

LIABILITIES AND STOCKHOLDER’S EQUITY

• Accounts payable 150

• Common stock 8,400

TOTAL LIABILITY AND STOCKHOLDER’S 8,550

EQUITY
CASH BUDGET : CHAMPION CATTLE FARMS, INC

MARCH APRIL MAY JUNE JULY AUG

BEGINNING
BALANCE
Cash P 456,000 P 1,115,500 P 1,565,000 P 1,804,500 P 1,834,000 P 1,713,500

Cash Receipts:

1. proceeds from 2,000,000 2,000,0000 2,000,000 2,000,000

loan
2. Sales 1,920,000 1,104,000

TOTAL CASH P 2,456,000 P 3,115,500 P 3,565,000 P 3,804,500 P 3,754,000 P 2,817,500

RECEIPTS
CASH
DISBURSEMENTS:
1. purchase of P. 900,000 P 900,000 P 900,000 P 900,000 P 900,000 P 900,000
yearling
2. Feed operation 430,500 640,500 850,500 1,060,500 1,130,500 1,260,000

3. Payment to
suppliers
4. Overhead cost 10,000 10,000 10,000 10,000 10,000 10,000

TOTAL P 1,340,500 P 1,550,500 P 1,760,500 P 1,970,500 P 2,040,500 P 2,170,000

DISBURSEMENT
CAH ENDING P. 1,115,500 P 1,565,000 P 1,804,500 P 1,834,000 P 1,713,500 P 647,500
CASH BUDGET : CHAMPION CATTLE FARMS, INC

SEPT OCT NOV DEC

BEGINNING
BALANCE
Cash P 647,500 P 1,357,500 P 2,067,500 P 2,777,500

Cash Receipts:

1. proceeds from
loan
2. Sales 2,880,000 2,880,000 2,880,000 2,880,000

TOTAL CASH P 3,527,500 P 4,237,500 P 4,947,500 P 5,657,500

RECEIPTS
CASH
DISBURSEMENTS:
1. purchase of 900,000 900,000 900,000 900,000
yearling
2. Feed operation 1,260,000 1,260,000 1,260,000 1,260,000

3. Payment to
suppliers
4. Overhead cost 10,000 10,000 10,000 10,000

TOTAL P 2,170,000 P 2,170,000 P 2,170,000 P 2,170,000

DISBURSEMENT
CAH ENDING P 1,357,500 P 2,067,500 P 2,777,500 P 3,487,500
 PURCHASE OF YEARLINGS
(IN THOUSAND PESOS)
MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC

PROJECTED 300 300 300 300 300 300 300 300 300 300
PURCHASE OF
YEARLINGS 315
SALES 200 115 300 300 300 300

ENDING BALANCE 615 915 1,215 1,515 1,615 1,800 1,800 1,800 1,800 1,800
315

AVERAGE COST OF
FEED OPERATION
/MONTH

4200/6= 700

TOTAL FEED COST 430.5 640.5 850.5 1,060.5 1,130.5 1,260 1,260 1,260 1,260 1,260
 Mar-june July Aug Sept Oct Nov Dec Total

Sales

Quantity 200 115 300 300 300 300 1,515

Average kg 120 120 120 120 120 120 120

Champion Price/ kg P 80 80 80 80 80 80 80

Cattle farm Total kg 24,000 13,800 36,000 36,000 36.000 36,000 181,800

Projected TOTAL SALES P 1,920,000 P 1,104,000 P 2,880,000 P 2,880,000 2,888,000 2,880,000 14,544,000

Income
Statement Cost of Sales
For the period
ending yearling P 3,000 600,000 P 345,000 P 900,000 P 900,000 P 900,000 P 900,000 4,545,000

December 1998
Feed/head 700 x 840,000 483,000 1,260,000 1,260,000 1,260,000 1,260,000 6,363,000
6 mos

TOTAL COST P 1,440,000 P 828,000 P 2,160,000 P 2,160,000 2,160,000 2,160,000 10,908,000

GROSS PROFIT P 480,000 P 276,000 P 720,000 P 720,000 P 720,000 P 720,000 3,636,000

Less P 40,000 10,000 10,000 P 10,000 P 10,000 P 10,000 P 10,000 P 60,000

operating
expense
NET INCOME P (40,000) P 470,000 P 266,000 P 710,000 P 710,000 P 710,000 P 710,000 P3,576,000
 CHAMPION CATTLE FARM INC, PROJECTED BALANCE SHEET
(IN THOUSAND PESOS)
As of Feb 1998 As of July 1998 As of Dec 1998
ASSETS

CASH 456.00 1,713.50 3,487.50

FEEDS INVENTORY 134.00 3,264.00 3,534.00
CATTLE STOCK 2,950.00 7,032.50 8,094.50
INVENTORY
EQUIPMENT 460.00 460.00 460.00
LAND BUILDING 4,550.00 4,550.00 4,550.00
TOTAL ASSETS P 8,550.00 P 17,020.00 P 20,126.00
LIABILITIES &
STOCKHOLDERS EQUITY
ACCOUNTS PAYABLE 150.00 150.00 150.00
BANK LOAN 8,000.00 8,000.00
COMMON STOCK 8,400.00 8,400.00 8,400.00
CURRENT EARNINGS 470.00 3,576.00
TOTAL LIABILITIES & P 8,550.00 P 17,020.00 P 20,126.00
STOCK HOLDERS EQUITY
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