SureCut Shears Essay Essay Example

SureCut Shears Essay Essay There were many intensifying factors that caused SureCut Shears to be unable to pay its bank loan by March 31. 1996. When looking at the pro forma income statement as compared to the existent income statement we see the undermentioned incompatibilities. which are lending to SureCut’s fiscal jobs: AnticipatedActualDollar Loss Contributed Sales25. 80022. 9872. 813COGS ( % to Sls ) 70. 5 % 73. 8 % 768Gross Profit ( % to Sls ) 29. 5 % 26. 2 %SG A ; A Expenses ( % to Sls ) 9. 4 % 10. 6 % 269Entire dollar loss contributed by addition in disbursals 1. 037 Entire dollar loss contributed by lessening in gross revenues 2. 813 As disbursals addition. net incomes are squeezed and SureCut continues to pay dividends at the same rate and sum. further squashing the maintained net incomes. and therefore net income of the company. In entire over the nine months. the per centum addition in COGS and SG A ; A disbursals contributed to over a $ 1 million loss based on the existent gross revenues during that clip. We will write a custom essay sample on SureCut Shears Essay specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on SureCut Shears Essay specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on SureCut Shears Essay specifically for you FOR ONLY $16.38 $13.9/page Hire Writer In add-on the instance refers to a works modernisation plan. which is claimed to be the ground for an addition in needful financess. However. when examined more closely. the works modernisation undertaking was supposed to make efficiencies that would salvage $ 900K in fabrication costs ( to demo up in COGS ) . If we look at the overall addition in existent COGS through March vs. the awaited sum. we find that this nest eggs of 3 % is non realized and the procedure has really reduced in efficiency. By looking at the pro forma balance sheet compared to actuals through March we see this drama out – existent hard currency on manus in March is $ 1. 68 million lower than anticipated. Since SureCut did non do fiscal accommodations to their payables or receivables period to increase hard currency flow. this loss straight contributed to their inability to pay the $ 1. 25 million loan at the terminal of March. To measure the fiscal state of affairs of SureCut Shears we examined a fewfiscal ratios. Based on our appraisal. SureCut Shears’ fiscal state of affairs has decidedly declined and Mr. Stewart should be concerned. Before discoursing ratios. we looked at the tendency over clip of gross revenues and stock list. as seen in Exhibit 1. As you can see. gross revenues drop off of prognosis in September/October. but it doesn’t look that SureCut dynamically changes their production and stock list scheme. Alternatively of the difference of existent vs. awaited stock list dropping with gross revenues. it increases. As a consequence. stock list continues to construct and gross revenues soften. doing hard currency to be tied up. and forestalling SureCut from paying off their seasonal loans. This is seen in the fiscal ratios listed in the chart below every bit good. RatioAnticipatedActualCalculationNet income Margin29. 5 % 26. 2 %ROE9. 2 % 5. 5 % ( Common Stock + Earned Surplus ) /Net IncomeAsset Turnover24. 3 % 23. 4 % Average Sales/Current AssetsInventory Turnover30. 7 % 25. 6 % Average COGS/Ending Inventory Current Ratio 7. 89 5. 75 Current Assets/Current Liabilities Acid Test 3. 49 1. 87 ( Current Assets – Inventory ) /Current Liabilities Days Gross saless in Cash 28. 85 8. 74 Cash in March/ ( Annual Sales/365 ) Together these ratios reinforce the issues discussed supra. Without doing alterations to fiscal policy. SureCut Shears continues to increase liabilities while gross revenues decline. stock list grows. and hard currency dwindles down to merely 8. 74 yearss gross revenues in hard currency in March 1996. If Mr. Stewart were paying close attending to these ratios compared he would be concerned that SureCut hasn’t changed its fiscal policy to suit. other than bespeaking to borrow more money. In short. Mr. Stewart should non impart extra dollars to SureCut given the fiscal state of affairs. All three instances. SureCut. Play Time Toys. and Wilson Lumber had hard currency flow jobs that contributed to the fiscal problem our supporters found themselves in. As a consequence of the hard currency flow jobs. the proprietor of the company in each of the instances requested a loan from the bank in order to back up the continued operations of his concern. However. the concluding behind the requested support and the hazards and returns associated with its fulfilment varied in each of the instances examined. For Wilson Lumber. the company was sing rapid growing and the nature of the concern ( long hard currency rhythms and low net income borders ) necessitated that Mr. Wilson secure outside support to finance its growing. Wilson Lumber is an constituted concern with 10 old ages of profitable returns in a non-seasonal industry that has small volatility in gross revenues and is comparatively unaffected by swings in the economic province of the state. These features differentiate Wil son Lumber from the other instances discussed and impact the options available to Mr. Wilson in footings of outside support. Mr. Wilson had antecedently been trusting on extended trade credits as a agency of funding. However. by widening the life of the trade credits. Mr. Wilson was non merely increasing his hard currency rhythm but besides running the hazard of financing his payables at a much higher rate than obtaining a bank loan. Mr. Wilson was hence left to make up ones mind how to finance his turning company. something his narrow net income borders left him unable to make on his ain. The trade-off between the two beginnings. bank loans and drawn-out trade credits. finally depended on the rate of adoption and the impact this determination would hold on his concern and supplier/customer relationships. Both Play Time Toys and SureCut have seasonal gross revenues periods which greatly affect the hard currency flow rhythm of the concern. Mr. King from Play Time Toys is seeking to happen a manner to increase net income by keeping a degree production throughout the twelvemonth. For Play Time Toys. the seasonality of the fabrication and production procedure meant that equipment was left idle or underutilized during the off-seasons while labour disbursals and rewards spiked during peak seasons. In order to level production. Mr. King needs outside support because the blue gross revenues during the off-season are non plenty to finance flat production during this clip. In order to obtain this outside support from the bank. Mr. King needs to calculate future gross revenues and purchases to show sensible demand and recovery of the requested loan sum. However. prognosiss in a seasonal industry carry great hazard of volatile returns particularly when carrying stock list for goods mostly depende nt on the province of the economic system and consumer tendencies. Play Time Toys must see this hazard in footings of the company’s investing because in add-on to the bank loan the company will necessitate to partially finance the additions to stock list by utilizing its extra hard currency. Mr. King needs to see the tradeoff between the nest eggs ( increased net income ) from degree production and the involvement payments. decrease in marketable securities income and increase in storage costs ensuing from its execution. While the fiscal trade-off between these scenarios can be estimated given the forecasted gross revenues and disbursals the greater hazard lies in the forecasted Numberss themselves. SureCut Shears is an illustration of how the inability to run into forecasted sums can hold black effects on the long term profitableness and viability of the company as a whole good beyond any awaited nest eggs. The nature of the fiscal jobs SureCut Shears is confronting root from a failure to run into the gross revenues and net income prognosiss that it submitted to the bank and its ensuing inability to pay back the loan sums. Similar to Play Time Toys. SureCut Shears operates in a seasonal industry and its forecasted gross revenues fell abruptly of outlooks. However. in add-on to decreased gross SureCut Shears besides failed to keep its net income borders and control costs in the face of worsening gross revenues. The impact of the gross revenues forecast on SureCut Shears financials was extended because the company decided to keep a degree production throughout the twelvemonth. To finance this determination the company increased its liability by taking out bank loans to fund the production of stock list during months when grosss were low and future net incomes were unsure. The original pick to keep flat production. a hazardous move in itself for a company in a seasonal industry. was compou nded as SureCut increased adoption sums and stock list degrees ( above the â€Å"level limit† ) despite the perennial inability of the company to run into its gross revenues marks month after month. As a consequence. the company has been left with a reserve of stock list ( its largest current plus ) . diminishing net income borders and undependable prognosiss. SureCut Shears has been made riskier in the eyes of the loaning bank and is hence non expected to be able to keep its current adoption bounds.