NAME

ADMISSION NO.

DEPARTMENT

COURSE TITLE: INTRODUCTION TO FINANCE

COURSE CODE: ACT 205

DECMEBER, 2023
QUESTION 1

Financial forecasting utilizes historical data and analytical techniques to predict future financial
performance. It's akin to peering into a crystal ball, helping businesses anticipate challenges,
capitalize on opportunities, and make informed decisions for long-term sustainability.

Why is it Important for Going Concern Assessment

The "going concern" assumption underpins financial reporting. It implies that a corporation
will continue operating for the foreseeable future, allowing its financial statements to be
presented on a "going concern" basis. Financial forecasting plays a vital role in this assessment
by providing insights into:

• Future profitability and cash flow: Can the corporation generate sufficient revenue
and cash to meet its obligations in the coming years?

• Debt repayment ability: Will the corporation be able to manage its debt burden and
avoid defaulting on loans?

• Liquidity and solvency: Does the corporation have enough readily available assets to
cover its short-term liabilities?

Methodologies for Forecasting Going Concern Status:

There are various methodologies available, each with its strengths and limitations. Choosing
the right method depends on the specific circumstances of the corporation and the desired level
of detail. Here are some common techniques:

• Trend Analysis: Extrapolating past trends into the future, assuming they will continue.
Simple but effective for stable businesses.

• Ratio Analysis: Evaluating key financial ratios like profitability, liquidity, and
solvency to assess future performance.

• Discounted Cash Flow (DCF) Analysis: Estimating the present value of future cash
flows to determine the corporation's intrinsic value. More complex but insightful for
long-term assessment.

• Scenario Planning: Exploring different potential future scenarios based on various

assumptions, such as economic changes or market disruptions. Helps prepare for
uncertainties.
Each of these techniques has its own strengths and weaknesses, and the choice of methodology
will depend on the specific needs of the business.

QUESTION 2

Zee Fabrics Limited: Financial Forecasting for Growth

1. Business Overview:

Zee Fabrics Limited is a small business based in Lagos, Nigeria, specializing in the production
of high-quality, locally-sourced fabrics. Founded in 2019, Zee Fabrics has garnered a loyal
customer base by offering unique designs, competitive prices, and excellent customer service.

Current financial status (2023):

• Revenue: ₦4.5 million

• Net Profit: ₦1.2 million

• Growth Aspiration: Double revenue to ₦9 million by year-end 2024.

2. Sales Forecast:

Method: Trend Analysis with Seasonal Adjustment

Based on historical sales data (2021-2023), Zee Fabrics has experienced a consistent annual
growth rate of 25%. Considering seasonal fluctuations (increased demand during festive
periods), we project the following sales revenue for 2024:

Quarter Projected Sales (₦)

Q1 ₦2.3 million

Q2 ₦2.5 million

Q3 ₦3.0 million
 Q4 ₦3.2 million

Rationale:

• 25% growth trend applied to each quarter's baseline (previous year's sales + seasonal
adjustment).

• Increased marketing efforts during Q4 (festive season) to capitalize on higher demand.

The rationale is to create a realistic estimate that reflects both the business's current trajectory
and its growth initiatives.

3. Expense Projection:

We account for any anticipated changes in costs due to expansion plans or market conditions.
The goal is to create a comprehensive projection that allows the business to allocate resources
efficiently while accounting for potential fluctuations in expenses.

Fixed Costs:

• Rent: ₦150,000 per month

• Salaries: ₦400,000 per month

• Utilities: ₦50,000 per month

• Insurance: ₦25,000 per month

Variable Costs:

• Raw materials: 50% of sales revenue

• Labor: 20% of sales revenue

• Transportation: 5% of sales revenue

4. Cash Flow Forecast:

A simple cash flow forecast for next year (4 quarters) is prepared below, focusing on the timing
of cash inflows and outflows. This forecast highlights potential periods of surplus or deficit,
enabling Zee Fabrics to manage its liquidity effectively. By aligning cash flow with business
activities, the company can make informed decisions about investments, working capital, and
financing needs.
 Q1 Q2 Q3 Q4

Beginning Cash ₦200,000 ₦150,000 ₦200,000

Sales Revenue ₦2.3 million ₦2.5 million ₦3.0 million

Total Inflows ₦2.5 million ₦2.65 million ₦3.2 million

Fixed Costs ₦625,000 ₦625,000 ₦625,000

Variable Costs ₦1.15 million ₦1.25 million ₦1.5 million

Total Outflows ₦1.775 million ₦1.875 million ₦2.125 million

Ending Cash ₦725,000 ₦775,000 ₦1.075 million

Potential Surplus: Q3, Q4. Potential Deficit: Q1, Q2.

5. Financial Risks:

Risk 1: Raw material price fluctuations

Rationale: Global economic factors and supply chain disruptions can lead to unpredictable
increases in raw material costs, impacting profit margins.

Mitigation Strategy:

• Diversify suppliers to reduce dependence on single sources.

• Negotiate long-term contracts with reliable suppliers.

• Adjust pricing models to incorporate potential cost fluctuations.

Risk 2: Increased competition from larger players

Rationale: Entry of larger businesses offering similar products might attract customers and pose
a threat to Zee Fabrics' market share.

Mitigation Strategy:

• Emphasize unique selling propositions (locally sourced, customized designs).

• Invest in brand building and targeted marketing to differentiate Zee Fabrics.

• Explore niche markets underserved by larger competitors.

6. Recommendations:

1. Secure additional funding: To overcome potential cash flow deficits in Q1 and Q2,
consider seeking bank loans or small business grants.

2. Implement inventory management system: Optimize raw material ordering to

minimize holding costs and reduce risks associated with price fluctuations.

3. Expand online presence: Establish a strong online store and leverage social media
marketing to reach a wider customer base and boost sales.

By implementing these recommendations and closely monitoring financial forecasts, Zee

Fabrics can navigate potential risks and achieve its ambitious growth goals for 2024.