2. C. The calculations is done based on many assumptions given in the case instruction. The analysis begins with the development of labor cost. In the case information, it is said that Mary will be the instructor, and she will be hiring her friend as a part-time receptionist. The salary of Mary is $900 per month, and it is increased in next year i.e. 2016. Similarly, her friend Jamie earns $90 ($10/hr.) in a month, and she gets pay rise in next 6 months by $10 per week. Accordingly, with her increasing experience and expertise in the related job as well as her increasing seniority in the job will lead to periodic increase in the salary.
The monthly and annual cash flow is prepared according to the case instructions. The variable cost is only considered half in the month of December and January because the company remains closed from 15 December to 15 January. The financial analysis of the business is to be done based on the cash flows in and out of the business on monthly as well as annual basis. The monthly cash flow of the company shows mixed signs. There have been adequate researches and theories depicting the importance of a positive cash flow over a period for a business (Moneycrashers.com). The indications of a positive cash flow can be:
- The business is performing well on the collection part of receivables.
- There is adequate amount of working capital for the functioning of day to day activities.
- The balance in the bans is positive due to the periodic and timely inflow of cash into the business.
The profit of the Company is reflected in the profits that the Profit and Loss statement carries. There can be two ways to assess the P&L statements; one being monthly and the other annual. The monthly profit of the company seems to be positive in the earlier months while the company suffers loss in the later period because of her increasing expenses.
I do not see the positive hopes for the business because its expenses are increasing in a greater rate while its income is almost constant. In this case, the business is bound to suffer heavy loss. She has a limited capacity to accommodate her students so she is earning only limited revenue. But, her expenses have no limit and with the increasing age of her organization, her expenses are increasing. So, to avoid this bankruptcy situation, she must hire other instructors and increase the capacity of her institute to accommodate more students so that she can earn more to cover her increasing expenses. At present, the company is not doing well.
3. Discuss the reliability of forecasting using methods, such as regression analysis. What other factors should be included in a forecast analysis? What specific factors would be relevant to Mary’s business?
Regression analysis has been used extensively as a tool for forecasting and predicting. Regression analysis is crucial method for finding out the relationship between independent and dependent variables and the interdependence of the factors. Sometimes, when the circumstances are restricted, the relationship conferred in between the independent and dependent variables may be just casual and not a detailed one. This may lead to creating illusions in cases where there needs assessments of relationships. Caution is advised in such situations (Innovation).
These cautions may be in the form of the various techniques that have been developed for conducting this kind of analysis. There are familiar as well as non familiar techniques, where methods like linear regression and ordinary least squares regression is used. The results of the analysis primarily depend on the form of data generation process and its relation to the approach of regression analysis method being used.
A large amount of data is generally preferred for the testing of the assumptions underlying regression analysis. The assumptions may sometimes be somewhat violated in order to get the optimally realistic performance. Regression methods may give misleading results when in some applications where there are small chances of casualty and their minimal effects.
In order to make an effective evaluation and forecasting, the four prescribed methods are to be followed: Testing of assumptions, testing of the available data and usable methods, Output replication and output assessment. The forecasting method can be improved by ensuring that the principles used for the test of forecasting methods are based on common methodological procedures. The examples of the same could be prescription of specific criteria or a large sample size to reduce errors. The problem arises in the form of violation by forecasters as well as businesses. In order to be consistent in performance, a timely and accurate forecast system is a must, which also provided assistance in decision making processes and strategic formulation (Regression Analysis and Forecasting Models).
The flexibility of the forecasting method should also be increased to assess the actual effectiveness of the system. A correct forecast can assist in resulting streamlined processes, change responses, improvement of work processes and business drivers’ evaluation. Process automation based on reliable and accurate data is the factor providing the competitive edge.
Innovation,. (2012). Methods for Improving Forecast Accuracy. Retrieved 6 November 2014, from http://blogs.sap.com/innovation/analytics/methods-for-improving-forecast-accuracy-020085
Moneycrashers.com,. (2014). Positive Cash Flow Statement Analysis - How to Avoid Personal Budgeting Problems. Retrieved 6 November 2014, from http://www.moneycrashers.com/positive-cash-flow-statement-analysis-personal-budgeting-problems/
Regression Analysis and Forecasting Models. (2014) (1st ed.).