Complete Ramsey Walker’s profit plan Essay

Work assumption: 1. Assume that the sales will increase by 10% for each new title, as indicated the Backlist sales increase. 2. Assume that the total number of new titles remain unchanged; since Ramsey is trying to publish fewer segments and focus more resources on trying to publish fewer segments and focus more resources on differentiation those books in the marketplace, there is no reason for him increase the new titles. 3. Assume that they plan to increase their gross margin by 2% and decrease the expenses of sales by 1%, for each of the six formats, as given for Backlist. 4. Assume that AR as the percentage of sales remains 20%, as indicated by Backlist. 5. Assume that inventory as the percentage of sales decrease by 15%, as indicated by Backlist. 6. Assume that AP as the percentage of sales will stretch to 20%, as the last year percentage for the first five formats is 18%. The 10% increase in sales, 2% increase in GM and 1% decrease in expenses should be critical since it will increase the profit dramatically. And the decrease in inventory is also critical because it will decrease the lower part of the ROA formula. Since the overall goal of the profit plan is to achieve the 10% increase in ROA, so the above assumptions will directly affect the end results. Problem 2: Review the list of financial performance measure presented above. What measures or calculations should Ramsey use to manage the business? How should those measures be calculated? 1. Annual sales growth rate should be used to measure their performance  because this rate helps management to evaluate the quality of their decisions and also helps to make the new strategy for the future development. It is calculated by suing the difference between current year sales and previous years divided by the previous year sales. 2. Profit % is the most critical measurement of a business performance. Without profit or potential to earn profit in the future there is no meaning for a business to continue. It is simply calculated by using profit divided by the sales. 3. Average unit sales help the company to find the right format which is more profitable and more popular, and affect the company’s future strategies. Using the total units sold for one format divided by the total titles in this format. 4. Operating expenses can help them to manage their cost control system, OP can be calculated simply sum up all the expenses in the income statement. 5. POA and ROI are hard to control and too complex to analyze. But these measurements can be calculated by dividing the profit by total asset or total investment respectively, different results can be achieved by suing different assumptions. Picture Photo B & W Nonfiction Fiction Backlist Income Statement Number of New Titles 5 3 1 7 7 0 Sales 426,933.10 122,314.00 50,589.73 218,156.40 256,171.30 1,200,000.00 COGS 127,672.00 39,591.50 19,644.67 63,200.00 71,302.00 384,000.00 Royalties 58,218.00 16,679.00 6,898.67 29,749.00 34,933.50 180,000.00 Gross Margin % 56% 54% 48% 57% 59% 53% Expenses % of the sales 53% 54% 54% 54% 54% 47% Expenses 226,584.30 66,049.53 27,318.39 117,804.10 138,333.20 564,000.00 New Income 14,458.83 -6.083 -3,271.99 7,403.34 11,602.61 72,000.00 Balance sheet – May 31, 1998 Current Assets Inventory 39,892.20 40,119.15 10,933.55 36,187.90 65,747.50 500,000.00 A/R as % of Sales (projected) 20% 20% 20% 20% 20% 20% A/R $ 85,386.62 24,462.79 10,117.95 43,631.28 51,234.26 240,000.00 Total current Assets 125,278.80 64,581.94 21,051.50 79,819.18 116,981.76 740,000.00 Current Liabilities A/P as % of Sales 20% 20% 20% 20% 20% 0 A/P $ 85,386.62 24,462.79 10,117.95 43,631.28 51,234.26 0 Royalties Payable 0 0 0 0 0 0 Total current Liabilities 85,386.62 24,462.79 10,117.95 43,631.28 51,234.26 Free Cash Flow (= Net Income +/- Change in Net Working Capital) Net Income 14,458.83 -6.08 -3,271.99 7,403.34 11,602.61 72,000.00 Change in Net Working Capital 39,892.20 40,119.15 10,933.55 36,187.90 65,747.50 Free Cash Flow 54,351.03 -40,125.23 7,661.56 43,591.24 77,350.11 72,000.00