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2. Introduction
CASE OVERVIEW
SureCut Shears
household scissors
and shears
manufacturer
• Constant profits & growth since 1958
• Modernization of production plant with
estimated cost reduction of $900.000 per year
• Severe industry competition & retail recession
BACKGROUND
• ST loans usually just for seasonal sales peaks
• But: ST loan for modernization needed
• HN Bank extends outstanding & new loans
CURRENT
FINANCIAL
NEEDS
• Keep accepting outstanding short-term loans
and payment delays?
• Will current inability to pay change in future?
QUESTIONS
HN BANK
3. Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
Timeline
SureCut Shears, Inc. and HN Bank, years 1995 & 1996
1995
AssumptionsActions
$1.2m add.
fund needModernization completed
Add. ST borrowing need
Funds needed until adjusted to
requirements
Can’t repay $1.25m ST loan
$3.5m 1st credit line & forecast
1st credit line paid off by Dec ‘95
to cover fall requirements
Add. $500k
1996
4. What is a Seasonal Loan?
AIM
Credit arrangement that helps SureCut Shears
pay overhead costs in seasonal peaks
WHEN
SureCut Shears needs extra working capital
during its peak sales season in Oct - Nov
EFFECT
Allows SureCut Shears to operate smoothly
throughout the year
PAYBACK
Payback scheduled throughout Dec – Jul
{{
OFFERED TO FIRMS
THAT EXPERIENCE
SEASONAL SWINGS
IN CASH FLOWS
5. Assumptions
Seasonality in Sales Past Experience
Sales will be in line with previous year Sales & Profit
Growth, Recession
COGS will be consistent with previous year Modernization
S&A expenses remain stable throughout year Business Model
A/R estimated higher during Sep - Dec Peak Season
A/P assumed 30 days payment period Stable Forecasting
Raw material, WIP, and finished goods stable Stable Production
In IS, missing interest expense and depreciation Tax Reduction
Net plant predicted to increase in Aug by $3m Modernization Completed
✓
✘
✘
✓
✓
✓
✓
✓
✓
6. 04.
03.
02.
01. What funds are needed and for what are they used?
Are decreasing sales due to failure
of company or market recession?
Why is SureCut not able to repay loans?
Will completion of production plant modernization
effectively reduce costs?
What should
HN Bank consider?
Has SureCut’s financial condition worsened
enough to cause
HN Bank great concerns?
7. CF Analysis
The Uses & Source of Funds
Category Uses of funds: Var June95-Mar96 % of total uses
Asset Var. Acc/Receivables 783 16,3%
Asset Capex 3.248 67,6%
Liability Var. Acc/Payable 347 7,2%
Liability Var. Taxes Payable 127 2,6%
Liability Reduction Mortgage 299 6,2%
Net Cash Flow 4.804 100%
Category Sources of funds: Var July95-Mar96 % total Sources
Asset Var. Treasury 1.433 29,8%
Asset Var. Inventories 732 15,2%
Liability Var. Bank Borrowing 1.256 26,1%
Liability Retained Earnings 1.395 29,0%
Total Finance 4.816 100%
8. CF Analysis
Uses of Funds
1
2
3
4
ACCOUNTS PAYABLE & TAXES PAYABLE
A/P decreased, T/P negative (tax grant)
CAPEX
Increased due to investment in plant modernization
ACCOUNTS RECEIVABLE
Increased & A/R collection period increased substantially
MORTGAGE
Paid down slightly
Category Uses of funds: Var June95-Mar96 % of total uses
Asset Var. Acc/Receivables 783 16,3%
Asset Capex 3.248 67,6%
Liability Var. Acc/Payable 347 7,2%
Liability Var. Taxes Payable 127 2,6%
Liability Reduction Mortgage 299 6,2%
Net Cash Flow 4.804 100%
Category Sources of funds: Var July95-Mar96 % total Sources
Asset Var. Treasury 1.433 29,8%
Asset Var. Inventories 732 15,2%
Liability Var. Bank Borrowing 1.256 26,1%
Liability Retained Earnings 1.395 29,0%
Total Finance 4.816 100%
9. CF Analysis
Source of Funds
BANK BORROWING
Increased, but varied throughout the period
INVENTORIES
Decreased due to sale of products throughout the sales period
TREASURY / CASH
Decreased due to multiple cash needs, with only limited inflow
RETAINED EARNINGS
Increased due to profits throughout the sales period
Asset Capex 3.248 67,6%
Liability Var. Acc/Payable 347 7,2%
Liability Var. Taxes Payable 127 2,6%
Liability Reduction Mortgage 299 6,2%
Net Cash Flow 4.804 100%
Category Sources of funds: Var July95-Mar96 % total Sources
Asset Var. Treasury 1.433 29,8%
Asset Var. Inventories 732 15,2%
Liability Var. Bank Borrowing 1.256 26,1%
Liability Retained Earnings 1.395 29,0%
Total Finance 4.816 100%
1
2
3
4
14. Ratio Analysis
Changes June ‘95 to March ‘96
1995
June
1995 July Aug Sept Oct Nov Dec Jan Feb Mar
Working Captial 11180 9767 8455 8298 8954 9462 9181 9318 9358 9028
OFN 4858 126 257 619 666 493 660 95 7 272
Accounts Receivable / Sales 0,069 1,371 1,399 1,427 1,390 1,638 1,991 2,251 1,823 1,914
Invetory / COGS 0,375 5,236 4,300 3,479 2,611 2,881 3,304 5,133 4,881 5,747
Accounts Payable / TOT Purchases 1,003 0,996 1,007 1,010 1,040 0,994 1,013 1,009 0,992
Accounts Receivable Days 25 41 42 43 42 49 60 68 55 57
Inventory Days 137 157 129 104 78 86 99 154 146 172
Accounts Payable Days 30 30 30 30 30 30 30 30 30 30
CCC 132 168 141 117 90 106 129 191 171 200
Current Ratio 10,89 5,06 3,08 2,74 2,96 3,63 3,60 4,45 5,55 5,75
1996
15. Ratio Analysis
Changes June ‘95 to March ‘96
0
20
40
60
80
100
120
140
160
180
200
June
1995
July Aug Sept Oct Nov Dec Jan Feb Mar
Ratios
Accounts Receivable Days Inventory Days Accounts Payable Days
16. Accounts Receivable
Forecast vs. Actual over Sales
$0,00
$500,00
$1.000,00
$1.500,00
$2.000,00
$2.500,00
$3.000,00
$3.500,00
$4.000,00
$4.500,00
20
25
30
35
40
45
50
55
60
65
70
June
1995
July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June
Comparison A/R Days
Accounts Receivable Days (forecasted) Accounts Receivable Days (actual) Sales (actual)
17. Inventory Days
Forecast vs. Actual over Sales
$0,00
$500,00
$1.000,00
$1.500,00
$2.000,00
$2.500,00
$3.000,00
$3.500,00
$4.000,00
$4.500,00
20
70
120
170
220
270
June
1995
July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June
Comparison Inventory Days
Inventory Days (forecasted) Inventory Days (actual) Sales (actual)
18. Cash Conversion Cycle
CCC vs. Sales
$0,00
$500,00
$1.000,00
$1.500,00
$2.000,00
$2.500,00
$3.000,00
$3.500,00
$4.000,00
$4.500,00
0
50
100
150
200
250
June 1995 July Aug Sept Oct Nov Dec Jan Feb Mar
CCC vs. Sales
Accounts Receivable Days (actual) Inventory Days (actual) Accounts Payable Days CCC Sales (actual)
19. Bank Loan Payable
Forecast vs. Actual
$0,00
$500,00
$1.000,00
$1.500,00
$2.000,00
$2.500,00
$3.000,00
$3.500,00
$4.000,00
June
1995
July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June
Bank Loan Payable
Bank Loans Payable (plug) (forecasted)
Bank Loans Payable (plug) (actual)
20. Conclusion
Has SureCut’s financial condition worsened enough to cause HN Bank any great concern?
Jan Feb Mar
Cash 1.133 1.076 688
Acc receivable 3.958 3.169 2.867
Inventories 6.925 7.170 7.374
Current Assets 12.016 11.415 10.929
Net Plant 27.843 27.810 27.812
Total assets 39.859 39.225 38.741
Bank Loans Payable (plug) 1.376 778 1.256
Acc Payable 699 658 514
Taxes Payable 357 361 127-
Misc. Other 266 260 258
Current Liabilities 2.698 2.057 1.901
Mortgage 8% 11.661 11.661 11.661
Common Stock 11.500 11.500 11.500
Earned Surplus 14.000 14.007 13.679
Total Liabilities, Net worth 39.859 39.225 38.741
1996 First Glance: CA outweigh CL
Tempting conclusion that CA are
sufficient to cover CL
But: Majority of CA (ca. 70%) locked
in inventory during economic
downturn
Peak selling season is over and
months with already low forecasts
still lie ahead
22. Conclusion
Has SureCut’s financial condition worsened enough to cause HN Bank any great concern?
Jan Feb Mar
Cash 1.133 1.076 688
Acc receivable 3.958 3.169 2.867
Inventories 6.925 7.170 7.374
Current Assets 12.016 11.415 10.929
Net Plant 27.843 27.810 27.812
Total assets 39.859 39.225 38.741
Bank Loans Payable (plug) 1.376 778 1.256
Acc Payable 699 658 514
Taxes Payable 357 361 127-
Misc. Other 266 260 258
Current Liabilities 2.698 2.057 1.901
Mortgage 8% 11.661 11.661 11.661
Common Stock 11.500 11.500 11.500
Earned Surplus 14.000 14.007 13.679
Total Liabilities, Net worth 39.859 39.225 38.741
1996 First Glance: CA outweigh CL
Tempting conclusion that CA are
sufficient to cover CL
But: Majority of CA (ca. 70%) locked
in inventory during economic
downturn
Majority of sales on A/R plus
significant increase in inventory
days cause problem for CCC
Peak selling season is over and
months with already low forecasts
still lie ahead
24. Conclusion
Has SureCut’s financial condition worsened enough to cause HN Bank any great concern?
Jan Feb Mar
Cash 1.133 1.076 688
Acc receivable 3.958 3.169 2.867
Inventories 6.925 7.170 7.374
Current Assets 12.016 11.415 10.929
Net Plant 27.843 27.810 27.812
Total assets 39.859 39.225 38.741
Bank Loans Payable (plug) 1.376 778 1.256
Acc Payable 699 658 514
Taxes Payable 357 361 127-
Misc. Other 266 260 258
Current Liabilities 2.698 2.057 1.901
Mortgage 8% 11.661 11.661 11.661
Common Stock 11.500 11.500 11.500
Earned Surplus 14.000 14.007 13.679
Total Liabilities, Net worth 39.859 39.225 38.741
1996 First Glance: CA outweigh CL
Tempting conclusion that CA are
sufficient to cover CL
But: Majority of CA (ca. 70%) locked
in inventory during economic
downturn
Majority of sales on A/R , steady
A/P & significant increase in
inventory days cause CCC problems
Peak selling season is over and
months with already low forecasts
still lie ahead
25. Has SureCut’s financial condition worsened enough to cause HN Bank any great concern?
Conclusion
Outdating of Inventory
How long can inventory be sold
before it becomes outdated?
Economic Downturn
Foreseeable how long it will
last?
Efficiency Gains
$6m investment in plant
modernization
Bad Debt
Can total of $2.8m A/R be
collected or will some have to
be written off?
26. Conclusion
Has SureCut’s financial condition worsened enough to cause
HN Bank any great concern?
SureCut does still make sales company
needs to activate efficiencies it has invested in
Potential
Liquidity bound in high inventories
Seasonal sales, but stable production
Thus, high assets in need of funds & high CCC
Decreasing sales in economic recession
Issues
Issues cause sufficient amount of concern to
request more information on company
accounts & forecasts
Further Investigation
27. Proposed Solutions
DECREASE DAYS
RECEIVABLE
FIRE SALE
IMPLEMENT
“JIT”
PRODUCTION
STOP
DIVIDEND
PAYMENTS
REDUCTION
OF
WORKFORCE
A/P TERMS
• Extend paying period to
preserve cash
• Negotiate discounts for early
payments
PUSH & NEGOTIATE A/P TERMS
Should products
become outdated soon,
consider heavily
discounted sale of
inventory
FIRE SALE
Immediate halt of all quarterly
dividend payments to
shareholders
STOP DIVIDEND PAYMENTS
Strat collecting outstanding
A/R more aggressively
DECREASE DAYS RECEIVABLE
Continue with
reduction of workforce
to lower variable costs
REDUCTION OF
WORKFROCE
Start implementing Just In
Time manufacturing to reduce
inventory and start production
closer to sales peaks
IMPLEMENT JIT
