David Green is a 47-year-old financial manager at Mayor’s Jewelers, Inc. Mr. Green has worked at the retail store for twelve years, and he has gathered enough experience in the financial field to help the company make the best decisions on merchandise management. He is also an indispensable human asset in the accounting process of the company. His expertise in cash management in retail companies has influenced the vast growth of the company that has been witnessed over the past decade. Mr. Green agreed to take part in an interview aimed at establishing some of the dynamics of financial management. The answers provided for the structured interview by Mr. Green are highlighted in the sections below.
Benefits and purpose of developing pro forma statements and a cash budget
Pro forma statements are beneficial in the development of financial objectives for the company because they highlight the expected financial gains. Companies need pro forma statements to create reasonable cash budgets for a given business period. Cash budgets are beneficial for companies because they help in the allocation of cash to different business activities. The pro forma statements give a projection of the cash available for the budget. Projecting the expected returns on investments helps the corporation to limit its spending on different business activities.
Borrowing needs of the corporation
Borrowing needs of the corporation are determined by the collection and purchases schedule. A company needs to make purchases, and this means that cash flows out of the company. During certain periods, a corporation may not have adequate cash to make purchases; thus, it has to borrow. Borrowing fills the deficit in cash, and the corporation can refund the debts when its merchandise makes profits. The collection schedule determines when the corporation can borrow.
LIFO and FIFO methods
While using the LIFO inventory method, the most recent merchandise in the company’s inventory is sold first. This method has dire implications on perishable merchandise, but it can be used when the products have a long expiration date. The implication of this method is that some of the merchandise may remain in the stores for a very long time before being sold. FIFO inventory method means that the first products in the inventory are the first to be sold. This is a very efficient inventory method because it eliminates the risk of making losses because of the expiry dates set on the merchandise.
Effects of LIFO and FIFO on the cost of goods sold
With inflation, LIFO method decreases the net profit of the corporation because the cost of goods sold increases. Inflation increases the cost of the recently acquired inventory, and since the last product in the inventory is sold first, the unsold inventory is always lower in value. Inflation has a positive effect on the FIFO inventory method. Inflation increases the prices of goods; hence, the goods that were purchased first are sold at a higher price. This means that the profit margins are higher for the corporation using this method. With inflation, the most desirable inventory method is the FIFO method because it makes it easier to understand the balance sheet and to make high profits.
Relationship between inventory turnover and purchasing needs
The rate of inventory turnover should be matched by the rate of purchasing to replenish the merchandise. When the turnover rate of inventory is high, the demand for the associated products rises. Corporations must be ready to meet the purchase needs associated with high inventory turnover. Consumers do not keep loyalty to companies that do not have the goods when they demand the same. Keeping a loyal customer base requires a company to purchase new products immediately after the initial inventory sells out. The corporation does not need to make purchases if the turnover rate of the inventory is low.
Rapid corporate growth in sales and profits can cause financial problems
Rapid corporate growth in sales and profits translates into growth management problems. An increase in sales means that the demand for the merchandise increases; thus prompting the company to increase its capital to finance larger supplies and labor. This development makes it necessary for the company to start borrowing. The growth also attracts an imbalance in the cash flow if the borrowing attracts higher rates than the profits. Financing the required growth means that the creditors have to wait longer to have their cash refunded, and this increases the total interests that the company pays. Rapid growth also increases the operational tax required by the authorities, and the company may not have a cash flow system that supports the payment of the tax.
Making a percent-of-sales forecast almost accurate as pro forma financial statements and cash budget
Assumptions made in the percent-of-sales forecast must be as close as possible to the actual events in the future to make the forecast almost accurate. The forecast must also include all the assets owned by the corporation.
Mr.Green helped in the understanding of the need to understand the dynamics of merchandise planning. He also revealed some of the financial issues that are likely to emerge as corporations strive to attain fast growth.