Case Study

Financial Forecasting and Planning-Personality

Associates

Group L
Section 2
PGP 14
AGENDA

Case Background

Issue in case

Case Analysis

Solutions
Company

 Company: Personality Associates

 Founded: 1992
 Founder: Carl Myers
 Location: North Carolina
 Aim: Complete Psychological Counselling for the Family
Case Background

 Personality Associates offered family counselling with a well-qualified professional staff in a modern relaxed setting
 Tree-lined, pleasant street assisted in services offered
 Word-of mouth endorsement by faculty and other members of the University were he initially taught
 Revenue for 2005 was $1.6 million
 Staff: 8 full-time and part-time licensed psychologist and counsellors
 Business was incorporated in 1995 by Myers and two other partners with a total capitalization of $200,000
 Original contribution to the partnership was maintained until the date of incorporation
 The building that housed Personality Associates was owned by the corporation, free and clear
 The substantial profit after-tax (retained earnings) earned since the company’s inception had been used to completely amortize the
mortgage
 The company essentially debt free and solely owned by Myers and two of his associates – the original investors
 Public was willing to accept the “for-profit” medical care facility
 Personality Associates was poised to expand
 Revenue for the company was expected to increase by a compound annual rate of 15 percent over the next five years or so
Income statement and Balance sheet

Revenue $1,600,000
Total Expenses (1,120,000)
Profit before tax 480,000
Taxes (35%) (168,000)
Profit after tax $312,000

Current assets $290,000

Fixed assets, net 1,250,000)
Total assets $1,540,000
Current liabilities $10,000
Long-term debt 30,000
Owner’s equity 200,000
Surplus 1,300,000)
Total liabilities and equity 1,540,000
Issues in the case

 Revenue was expected to grow at the rate of 15% per year and myer was thinking of opening another facility
with out diluting the service offered at his center
 They were going for the renovation of existing facility and were thinking How should the projected need for
approximately $150,000 be acquired?
 Another was how they should plan for the funds for the new facility they are trying to acquire at the cost of
$850000 ?
 They wanted to expand the company and was ready for further borrowings but didn’t want to dilute their
holding on the company
 Conflict between “for profit” vs Control over the company
Case Analysis

 $150,000 to refurbish the interior of the present facility be acquired

 The land and the necessary building in the suburban area would cost approximately $850,000
 Projections indicated $400,000 in revenue for the first year of operation for the new facility
 In the past the annual profit after-tax had been set aside to service the mortgage loan
 The plans called for the expansion to be completed by the end of 2009
 Total costs will increase by $100,000 when the new facility becomes operational
 The profit after tax for the next three year is available for investment on a short-term basis at 8-percent
interest
What will be the amount of external financing needed by the firm at
the end of 2008 if the need projected at present is $1,000,000?

Particulars 2005 2006 2007 2008 2009 2010

Revenue 1600000 1840000 2116000 2433400 2798410 3618172
Total Expense -1120000 -1288000 -1481200 -1703380 -1958887 -2632720
PBT 480000 552000 634800 730020 839523 985451.5
Tax (35%) 168000 193200 222180 255507 293833.1 344908
PAT 312000 358800 412620 474513 545690 640543.4
             
             
Current Assets 290000 333500 383525 441053.8 507211.8 655793.6
Fixed Assets 1250000 1500000 1750000 2000000 2250000 2250000
Total Assets 1540000 1833500 2133525 2441054 2757212 2905794
             
Current Liabilities 10000 11500 13225 15208.75 17490.06 22613.57
Long-term debt 30000 0 0 0 0 0
Owner’s equity 200000 200000 200000 200000 200000 200000
Surplus 1300000 1378800 1541420 1765933 2061623 2702166
Debt Plug 0 243200 378880 459912 478098.8 -18986.4
Total liabilities and equity 1540000 1833500 2133525 2441054 2757212 2905794
             
Ratios            
Current Ratios 29 29 29 29 29 29
ROA 0.202597 0.195691 0.193398 0.194389 0.197914 0.220437
ROE 0.208 0.227261 0.236945 0.241368 0.241282 0.220712
Retention Rate 1 1 1 1 1 1
IGR 0.254072 0.243304 0.239769 0.241293 0.246749 0.282769
SGR 0.262626 0.294098 0.310521 0.318162 0.318014 0.283223
Profit Margin 0.195 0.195 0.195 0.195 0.195 0.177035
EFN -133800 -139320 -156468 -181813 -294585 
 Financial position in the year before the expansion is complete and
the year after the completed expansion

2005 2006 2007 2008

PAT 312000 358800 412620 474513

Amount available after 2008 393030.1 418504.3 445629.6 474513

Interest Earned 81030.14 59704.32 33009.6

Projected Need 1000000

Total Interest Earned 173744.1

EFN 168876.8

Since interest earned is more than EFN, no external amount is needed

The company’s owners wish to retain majority control in the
business, now and in the future

 Yes, the projected financing allows us to retain majority control in the business as profit after tax and the
available surplus is more than enough to finance the future investment. External fund requirement (EFN) is
also coming negative which supports our calculations.
 Is expansion feasible for the company? Are there likely any ethical
issues related to operating a chain of therapy centers?

 Yes the expansion is feasible as the company is financially strong enough to meet the future investment and
requirement.
 Yes there are ethical issues related to operating a chain of therapy centres. The dilemma which Myers had
might be true i.e. the quality will not be maintained in the chain. Myers wanted to make sure that the internal
mechanisms traditionally used in the business to assure quality would be maintained. In addition to certain
state licensing requirements, many such operations used peer monitoring and evaluation to ensure
conformity to accepted rules of conduct and the providing of high-quality service.
How should the owner/managers deal with the question of growth
versus maintaining control of the business?

 The question of growth is solved by the internal growth and profit after tax. Only the question of maintaining
control of business should be considered deeply. This could be achieved by recruiting knowledgeable and
skilful persons.
What managerial/financial problems will likely occur with
expansion?

 Financially the percentage PAT will also increase and the management issues will increase. Hence proper
managerial actions to be taken.
Generally, what are some reasonable sources of expansion funds for
the type of expansion planned by Personality Associates?

Reasonable sources of expansion funds for the type of expansion planned are as follows :-
 Fund it internal revenue i.e. surplus and profit after tax.
 Take loan from the bank or creditors
 Issue IPO. But this will reduce the control over the company.