Financial Forecasting and Decision Making

Chapter 3MANAGEMENT USES OF THE FORECASTING TECHNIQUE: A CASE ANALYSIS ON WORKING CAPITAL PLANNING

LEARNING OBJECTIVE

In this chapter, a case will be presented. The purpose of this chapter is to highlight working capital management issues. After completing this chapter, you should be able to do the following:

•    Identify how a firm can generate additional funds required through working capital management.

The Davidson Toy Company

The Davidson Toy Company manufactures high-quality wooden toys and sells its products to department stores, toy stores, and through a small mail order business. The firm has nine manufacturing plants, located in Texas, Ohio, Oklahoma, and Alabama. The Company was founded in 1906 by W.N. Davidson and has been managed by the Davidson family ever since that time. W.N. Davidson III is currently chairman and president of the company. The treasurer and controller of the company is Ron Ison, who was hired away from a competitor six years ago. Mr. Davidson owns 51 percent of the company's outstanding common stock. The remaining 49 percent trades over the counter.

Financial data relating to the most recent year, 200B, has been included in the table titled “Davidson Toy Company Balance Sheet.” The firm's overall return on assets and equity has been very close to the industry average for the past few years. Because the company is currently operating at a practical capacity level and has significant back orders, Davidson is contemplating building a new ...