My company name was Arete Sytems. Arete is an ancient Greek term meaning “excellence of any kind”. The choice of name was intended to represent the quality, high-end systems that we would produce.
B1. Using Budgets and Pro-Forma Statements to Plan Production Capacity
One of my key lessons from this simulation was the importance of working in teams and openly discussing decisions that need to be made before making them. I approached the simulation as the only team member because the simulation didn’t include other participants. In retrospect, I would have assigned other members, at least in my mind, to gain additional team insights. I was not careful enough in setting pricing for my two products correctly in the second quarter when we actually began sales. I priced my high end Mercedes line accidentally at the price I had planned for my mainstream Workhorse line and vice-versa. I did not look closely enough at my pro forma cash flow or income statements to recognize the forecasted loss and as a result did not dig deep enough to see the reasons and to make the adjustments in pricing. I was overly focused on cash at that point to fund production capacity. I discovered the error when evaluating second quarter actuals. Going into third quarter planning, I looked at the pro forma cash flow and income statements to determine that my cash balances would not require any emergency borrowing while allowing me to expand production levels to meet or exceed my forecasted sales. I decided to be somewhat conservative in setting production capacity to try to avoid excessive inventory holding costs. As it turned out I significantly underestimated demand in Q3 and Q4 so that I sold out my
