The purpose of this analysis is to show how proforma planning is needed to make capital budgeting decisions. The proforma income statement will show a projected growth of net sales for Adidas of 15%. In conclusion, Adidas is continually maximizing its growth as a sports apparel industry.
Adidas is one of many successful sporting goods apparel stores in the industry. With sales increasing from 2,708 million in 1998 to 2,718 million in 1999, they are definitely making sound capital budgeting decisions. A proforma income statement will be created to show future planning and growth.
The first step in financial planning is to determine a sales forecast. The projected sales for the year 2000 will be an increase in sales of 15%. Second, a proforma statement for Adidas will support the projected sales increase to 3,125 million for 2001. Proforma means “as a matter of form,” which are financial statements that summarize the different events projected for the future. (Ross, Westerfield & Jordan,1998)
Income StatementProforma Income Statement
First Quarter ended Mar.31,2000
Cost of sales1,558
Taxable Income 1,134 Taxes 1,303
Net Income 1,060
Third, an asset requirement describes projected capital spending which effects capital budgeting. So, Adidas will also be increasing capital spending by 15%. Fourth, are the financial requirements that deal with Adidas financing arrangements. Adidas has two shareholders so they will use assets instead of borrowing. The fifth part of the financial planning is the plug, which is an external equity. This company has enough retained earning and has continuous income coming in. Finally, the plan will also include economic assumptions. Adidas will try not to exceed tax rates over 39%.
Adidas sporting apparel has a high profit margin of 40%, which is good. They increased sales prices, which prevents the margin from shrinking. The profit margin will show the investor’s growth from trading activities of the enterprise and the profit or loss becomes the measure of return on capital employed. (Jones, 1972)
Adidas is generating sales from three categories which are footwear, apparel, and hardware. By creating a proforma statement, Adidas can manage their investment and make good decisions. Therefore, if Adidas can reach the projected income for the year 2001, they can achieve their maximum growth potential without external financing.
Jones, Ernest. (1972) Finance for the Non-Financial Manager., New York. Pitman Publishing Co.
Ross, Stephen; Westerfield, Randolph; Jordan, Bradford. (1998) Fundamentals of Corporate Finance. (4th Ed.) Massachusetts: McGraw-Hill Co.,Inc.
www.Adidas.com:Quarterly Annual reports.