Financial Management II (PADM-GP 2142)
Final Project
1. Select a government, not-for-profit, or for-profit organization that you are interested in and that is relevant to your career goals. You must be able to collect at least three years of historical financial statement data for the organization.
2. Research the financial environment for the entity. This might include:
a. Industry/region-specific economic conditions and outlook
b. Fund-raising environment (nonprofit)
c. Environment for raising capital (for-profit)
d. Public appetite for increased taxes and/or increased spending (gov)
3. Forecast a 3-year pro forma Income Statement, Cash Flow Statement, and Balance Sheet for the entity (spreadsheets with supporting assumptions). Your forecasts will require at least 3 years of historical data, which you should include in your spreadsheets. Depending on the size and complexity of the organization you study, it may be appropriate to combine certain line items so as to simplify the statements, especially on the cash flow statement.
4. Calculate 3-5 relevant financial ratios for the entity (current and forecast years). The ratios you calculate will depend on the nature of the organization. Explain how the ratios you have chosen are relevant to understanding the financial condition of the organization. If you are uncertain about what ratios to choose, I would suggest using at least one liquidity ratio (current ratio, quick ratio), one solvency ratio (leverage ratio), and one profitability ratio.
5. Identify one possible opportunity for upside (investment opportunity, fortuitous change in political or macroeconomic conditions) and evaluate its impact. You should evaluate the impact by altering some of the assumptions behind your projections and considering their effect. The upside scenario must represent a specific change from the status quo (eg. a sudden increase in the salience of an issue that enables a nonprofit to increase fundraising, a decrease in interest rates); it should not be a continuation of past policies. With the opportunity (and the risk calculations below), I am looking for you to demonstrate how the organization’s financial trajectory changes under different sets of assumptions.
6. Identify one major risk (or threat) that the organization faces and assess its implications for the organization’s financial performance using your pro forma financial statements. Thus, in addition to your baseline pro formas, you will also produce two sets of alternative pro formas: one that reflects the opportunity for upside, and another that reflects potential downside risk. As with the investment, the risk should be specific (eg. an increase in fuel prices, a reduction in government funding) and have clear impacts on the organization’s financial statements.
Write up your findings in a paper of no more than 10 pages, double-spaced. Along with the paper, you should include an Excel file that includes your assumptions, the pro forma statements, the financial ratios, and the alternative statements under the a) opportunity, and b) risk scenarios.
Forecast Assumptions
To prepare your baseline forecasts, a good place to start is to examine growth rates in the historical data, particularly as it pertains to sales and/or revenue. For example, if revenue was growing by 3 percent per year, then it may be reasonable to conclude that it will continue to grow by 3 percent. To the extent that linear growth trends are not appropriate, you should describe the assumptions you are using. If you have access to additional information that bears on the organization’s performance (eg. data on leading indicators and relevant economic forecasts), then I encourage you to use that as well. There is no right way to forecast. I will evaluate you on the clarity of your thinking rather than the exact numbers that you come up with.
As noted in point 3 above, for larger companies with complicated financial statements, it may be appropriate to simplify the statements by collapsing and condensing some of the line items. You should use your judgement; if you have any questions, please reach out to me. If you find that it is necessary to combine large numbers of line items, then you may want to consider choosing a different organization.
To model the effect of the opportunity and risk, you will need to alter your baseline assumptions. Where possible, try to make reference to other opportunities or risks that the organization or its peer organizations have faced in the past. But if no such information exists, then just describe your reasoning and state the change in your assumptions clearly. Once again, I am less interested in the exact numbers you use; I am simply looking for you to demonstrate that you understand how to use a financial model to evaluate and compare the financial path of an organization under different sets of assumptions.
Choosing an Organization
I suggest that you choose an organization in a sector that you are interested in potentially working for or learning more about. Ideally you will be able to use the research that you do for this assignment as a way of advancing your career.
· International Organizations: It is ok to choose an international organization, so long as their financial statements are available in English and they use international financial reporting standards.
· For-Profits: I recommend avoiding very large for-profit corporations; these organizations often have complicated financial statements that are difficult to forecast and include line items that are beyond the scope of this course. However, if you have a strong interest in a particular large corporation, then you should be aware that you will most likely wish to collapse and condense some of the line items on the financial statements.
· Governments: Governments do not produce cash flow statements, so you do not need to produce cash flow forecasts. However, keep in mind that government accounting differs from non-profit/for-profit accounting. You should forecast the government-wide statements, not the fund statements, unless you are deliberately focusing on a particular fund.
· Nonprofits: When forecasting a nonprofit’s balance sheet, you should forecast both net assets with and without donor restrictions. You do not need to forecast with/without restrictions separately on the activity statement. Note that it is not enough to find an organization’s Form. 990; you need to find three years of audited financial statements.
Structure of Paper
Your paper should proceed in the following fashion.
1. First, you should provide an introduction and/or background section in which you describe the organization and provide relevant background. You should also elaborate on the financial environment the organization faces and its strategy.
2. Next, you should concisely summarize the organization’s financial condition based on the previous three years. What trends can you deduce from the organization’s recent financial performance.
3. Next, you should discuss the pro-forma financial statements. What were the most important assumptions that you relied on to make your forecasts? (You do not need to discuss all of your assumptions, but they should be evident in your spreadsheets.) You should also concisely summarize your baseline forecasts. What are the important take-aways? What do the pro forma statements reveal about the organization’s financial condition over the next few years?
4. As part of your discussion of the pro forma financial statements, you should also discuss what financial ratios you have selected, why they are particularly relevant for assessing this organization, and what conclusions you have drawn from the calculations.
5. Next, you should discuss your analysis of the favorable scenario (opportunity). Does this opportunity reflect a realistic prospect for the organization? You should label the changes that result to the financial statements clearly. What does your analysis reveal?
6. The analysis of the risk scenario should also be presented on a separate tab on your spreadsheet and labeled appropriately. How large is the downside risk from this particular scenario?
7. In your conclusion, you should briefly re-state the financial condition of the organization and summarize the conclusions from your analyses.
Your paper should focus on how to interpret the information in the financial statements, i.e. it should focus primarily on what the numbers mean, not just where they come from. Try to avoid just re-stating numbers from the spreadsheets. The best papers will make it easy for the reader to draw conclusions about the future path of the organization as well as the risk/reward that it faces under alternative scenarios. This paper is not intended to be a research assignment, however to the extent that it is helpful, it is ok to draw on outside research, so long as you properly cite all of the sources you consult.
Intermediate Products
Before submitting your final paper, you will turn in two intermediate products:
1) At the beginning of Class 10 you will turn in a project proposal that describes the organization you have chosen and briefly details the financial environment. The proposal is ungraded and serves only as an opportunity for you to receive feedback. I would recommend that you also submit the three years of historical financial statements. If you wish, you might also outline the investment and the possible risk that you will consider. The proposal should be no more than two double-spaced pages.
2) For Class 12, you will turn in your pro forma financial statements (baseline forecasts only) along with the assumptions you used to make the forecasts. You do not need to provide any accompanying text, however it should be possible to deduce your assumptions from the spreadsheet. To this end, you should use cell references wherever possible.
The final paper is due May 8th at 4:55 pm. Good luck!