FINANCIAL STRATEGY AND RISK MANAGEMENT

Financial Strategy and Risk Management

Financial Strategy and Risk Management

(A) Forecasted Annual Cash Flow Statements for Adara Hotel Co

 

1

2

3

4

5

Year

2012

2013

2014

2015

2016

RECEIPTS

$ m

$ m

$ m

$ m

$ m

Sales Receipts

20.4

26.5

34.5

44.8

58.3

 

Total Receipts

20.4

26.5

34.5

44.8

58.3

PAYMENTS

$ m

$ m

$ m

$ m

$ m

Administration

6.4

6.5

6.5

6.7

6.7

Marketing and advertising

1.1

1.1

1.1

1.1

1.1

Interest Paid

0.2

0.2

0.2

0.2

0.2

 

Total Payments

7.7

7.8

7.8

8.0

8.0

 

Cash Flow

12.8

18.8

26.7

36.9

50.3

 

Opening Bank

1.4

14.2

32.9

59.7

96.6

 

Closing Bank

14.2

32.9

59.7

96.6

146.9

(B) Forecasted Revenue and Profit Performance of Adara Hotel Co

1

2

3

4

5

Year

2012

2013

2014

2015

2016

$ m

$ m

$ m

$ m

$ m

Revenue

20.4

26.5

34.5

44.8

58.3

Total Sales

20.4

26.5

34.5

44.8

58.3

Less : Cost of Sales

Total Cost of Sales

6.4

6.5

6.5

6.6

6.7

Gross Profit

14.0

20.0

28.0

38.2

51.6

Less : Operating Expense

Administration

6.4

6.5

6.5

6.7

6.7

Marketing and advertising

1.1

1.1

1.1

1.1

1.1

Operating Profit

6.5

12.4

20.4

30.4

43.8

Less : Interest Expense

Interest Paid

0.2

0.2

0.2

0.2

0.2

Profit Before Tax

6.4

12.3

20.2

30.3

43.6

Less : Tax (20 %)

1.3

2.5

4.0

6.1

8.7

Profit for the year

5.1

9.8

16.2

24.2

34.9

From the perspective of the board of directors of the Hamel Group Co, the revenue and profit performance of Adara Hotel Co over the five year period that is from 2012 to 2016 show positive trends. This increase in the revenue and profit will be beneficial for the Hamel Group Co to invest in the Adara Hotel Co. In addition to this, the revenue forecast shows that the sales of the Adara Hotel Co is increased by 30 %. The forecast of revenue potential to the target market is one of the processes leading to the establishment of the objective.

The choice between the different points of view will result in reaching a final forecast. This type of forecasting method is called the top down approach that is a forecast is made for the Adara Hotel Co and then must determine what their participation in the overall market, but this market segment analysis gives us only a general provision as a whole (Adams, 2006). The increase in the sales will increase the gross profit of the business which will affect the profitability structure of the business. Furthermore, the above table also shows that the cost of sales of Adara Hotel Co is increasing by one hundred thousand dollar per year which seems to be rational as the cost of the goods sold may be affected due to various factors in the economy such as inflation, rising cost of raw material etc. however, the tax rate of the business is assumed to be at 20 % each year. This tax rate may change each year as it depends on the government policy.

A revenue forecast is the estimate or forecast revenue of a product (good or service) during a specified future period. The demand market for a product is the total volume likely to be bought by a certain group of consumers in a particular geographic area, for a given period in a defined environment and marketing under a specific program of marketing.

Revenue forecasts are indicators of economic and business realities (basically the situation of the market and the company's participation in that market). The main objective of forecasting is then transformed to become the input for the rest of the operational plans.

Thus, the forecasting system is configured as a learning system. It aims to determine the errors in forecasts based on environmental changes that generated them, to thereby improve accuracy in the future for investment in Adara Hotel Co by the Hamel Group ...