The document discusses Topeka's financial challenges, focusing on financing methods to support projected growth and improving accounts receivable management. It includes detailed financial forecasts, comparisons of cash flow projections, and analysis of potential scenarios regarding inventory management. The recommendations emphasize utilizing debt financing, optimizing payment terms with suppliers, and considering alternative accounts receivable terms for better cash flow management.

1. The Topeka Adhesives
Nino Burnadze
Ekaterine Khaburzania
Nino Bazhunaishvili
07.12.2013

2. The issues that Topeka faces:
•Financing methods for the upcoming 3-4 years: what method
to use in order to cover upcoming forecasted growth
•Improving the companies accounts receivable;
•Make forecasts and see if the short-term growth of the
company is sustainable

3. Assumptions
Gross Margin
Increase by 20%
1995 Depr + 1/6 new
Remains constant
40% of pretax profits
Sales
Cost of Goods Sold
SG&A (% sales)
Depreciation
Interest Expense
Tax Rate
Dividend Payout
Rate
31%
20%
17%
0%
40%
0%
3% of sales
Asume 40.4 days for AR
Inventory Turns at 7.7x
0.6% of sales
3% of sales
Prev AccDep + Depr
Cash & Securities
Accounts Receivable
Inventory
Other Current Assets
Gross Fixed Assets
Accumulated Depr.
3%
40,40
7,70
0,60%
175
New Debt
23.33 days
2.2% of sales
Subtract debt due from previous
No change in CS
Debt Due
Accounts Payable
Accruals
Long Term Debt
Common Stock
Retained Earnings
23,33
2,2%
(20)
-

4. Pro Forma Income Statement
1993
Sales
Cost of Goods Sold
1994
1995
1 347,0 1 448,0 1 546,5
956,4 1 010,7 1 076,4
1996
1997
1998
1 933,1 2609,7 3131,6
1 333,8 1 800,7 2 160,8
Gross Profit
Selling, General & Admin.
Depreciation
390,6
323,3
29,6
437,3
350,4
31,9
470,1
368,1
34,0
599,3
441,7
63,2
809,0
530,1
63,2
971,0
636,1
63,2
EBIT
Interest Expense (Income)
37,7
14,0
55,0
12,0
68,0
10,0
94,4
8,0
215,8
6,0
271,8
4,0
Earnings before Taxes
Taxes
23,7
9,5
43,0
17,2
58,0
23,2
86,4
34,5
209,8
83,9
267,8
107,1
Net Income
14,2
25,8
34,8
51,8
125,9
160,7

7. Average Collection Periods
Percentage
%
Days
%
Weighte
Days
d
0,2
40
32,0
0,1
55
46,0
0,4
ACP30
0,8
30
0,6
ACP45
0,9
45
40,4
40% ACP30 = .80 (30) + .20 (40) = 32 days
60% ACP45 = .90 (45) + .10 (55) = 46 days
The "overall ACP" equals .40(32) + .60(46) = 40.4 days .
Level of A/R = 216.9
Level of A/P= 86.4

8. Cash Vs Retained Earnings
Retained Earnings do not represent surplus of cash
or cash left over after the dividends payments.
Retained Earnings demonstrate what company did
with its profits; they are the amount of profit the
company has reinvested in business since its
inception.

9. Bad Inventory Management
The worst case would be for the inventory level to decrease by
the value of the funds so that the balance of passive and active
will remain. In this case the funds will tend to 0. In the best
case, the inventory levels will be the same as those predicted
earlier, meaning that the needed funds will stay the same.

10. Cash
Account Receivable
Inventory
Other Current Asset
Current Assets
Gross Fixed Assets
Accumulated Depreciation
Net Fixed Assets
1996
58
216,9
173,2
11,6
460
441
-188,7
252,3
Total Assets
712
Liabilities& Equity
Account Payable
Debt due
Accruals
Current Liabilities
Long term debt
Common Stock
Retained Earning
87
20
42,5
149,5
60
235,6
216,7
Total Liabilities and equity
661,8
TA-TL= 50.2

11. Funds Needed Vs Percentage Sales Method
Comparing two results the 97 value generate by the percentage of sales
method is higher that the initial value for funds of 50.22. The difference
comes from the fact that the percentage of sales method brings in the sales
figures for the current year as being in relation with the previous year’s
sales figure. Also the percentage of sales method is a method of estimating
cash requirements by expressing revenues and expenses as percentages of
sales, and using these percentages to construct a pro forma income
statement.

12. Cash Flow
1996
EBIT
less Taxes on EBIT
add Depreciation
Working Capital:
Receivables
Inventory
less Accounts Payable
less Accurals
Adjusted Working Capital
less Change in AWC
less Capital Spending
Free Cash Flow
Dividends
less: Dividends
less: Interest (1-tax rate)
add: New Equity
add: Net Debt
Total Cash Generated
1997
1998
94
(38)
63
216
(86)
63
272
(109)
63
217
173
(86)
(43)
261
261
(175)
293
234
(117)
(57)
353
91
351
281
(140)
(69)
423
71
(316)
101
156
(20)
(20)
(20)
(336)
81
136
If free cash flow is
negative, it could be a sign
that a company is making
large investments. If these
investments earn a high
return, the strategy has the
potential to pay off in the
long run.

13. Recommendations:
•Debt financing
•Although company officials think that the net 30 term is better,
which is actually true from an economic point of view, the net 45 is
better if it justifies not losing the sale
•To take discounts from suppliers, which is the additional saving of
money for the company