Financial forecasting: Expanding for a better and bigger future

The challenge

A family-owned food and beverage company producing a niche ingredient product faced a unique situation. Its largest customer wanted to increase the volume it purchased from the company, but required a second physical facility to reduce production risk —  or else they would source the ingredient elsewhere. The company needed to act quickly to determine how to best reply to its largest customer, and avoid the creation of  a new competitor.

The food and beverage company needed to fully understand all the risks and benefits to operating a second facility. A fully integrated financial forecast would be critical to weighing the pros and cons of the expansion.

Additional challenges for the company were:

• Locating and acquiring a facility suitable for use.
• Reaching an agreement with the customer for future purchases and proper economics to ensure the deal was mutually beneficial.
• Obtaining the financing to purchase the building and equipment.

The company had limited experience in sourcing a new facility and developing integrated financial models. Failure to act would have resulted in the loss of at least part of their largest customer’s volume — severely impacting the company’s financial results.

The solution

As an existing client, the company knew they could trust and rely on our expertise. Our experts worked hand in hand with the owners to understand their challenges and work with them each step of the way. The first step was to fully understand the needs and requirements from the client’s customer so that they could be addressed in their proposal. Once the customer needs were fully vetted, our team worked with Plante Moran Realpoint (PMR), formerly Plante Moran Cresa, to locate a long-term abandoned facility, purchase the facility, achieve tax credit incentives for the redevelopment of the property, and project manage the build out of the facility.

To understand the financial implications on the company and its lender, we developed an integrated financial model with income statement, balance sheet, cash flow forecast, borrowing base, and covenant calculation. For comparison, we also modeled their future financials without an expansion. Our financial forecast included:

•  Production ramp-up projection
•  Run rate forecast (up to five years at full capacity)
•  Sensitivity analysis, which detailed the variables that could affect their ROI and ability to pay off the loan

Using the results of the forecast, we worked with their lender to create the necessary financing package, and helped the company navigate their short-term bank covenants through the construction and startup periods.

The benefit

The company signed a mutually beneficial supply agreement with their largest customer and doubled their production capacity. They’re now well-positioned to grow their business and satisfy the volume requirements of all of their customers. Furthermore, the integrated financial model continues to be utilized for annual planning and analysis of financial performance.

Finally, due to the project’s success, the company’s thorough understanding of their operating economics, and their demonstrated ability to manage to their plan, the lending institution has confidence in the client’s ability to grow and meet their loan requirements.