Dreams M.I.A. Consulting
Financial Analysis and Forecasting of Sweet Dreams Inc.
Sweet Dream Incorporated (SDI) is a manufacturing company focused on mattress and box spring production for large retailers and hotel chains. With two facilities at their disposal, SDI manufactures over 20 different styles of bedding for their consumers. SDI’s founder and president, Douglas May, has contacted our consulting firm with regards to current financial problems between himself and SDI’s bank, First International Bank. Due to the spike in bank failures in the early 1990’s First National has become extremely sensitive to problem loans (loans which show ratio performances below the industry standard). Unfortunately, SDI has had poor liquidity and debt ratios for the past three years which has caught the banks attention. After a phone call from the bank Doug has realized that SDI is in even worse trouble than the bank thinks. He has just signed a 9.5 million dollar contract to expand the business which was allegedly being loaned from the bank. Seeing as how the bank is debating closing Doug down it doesn’t look likely that they would want to front him another 9.5 million. Following a brief meeting with his senior managers, Doug and his team decided that this 9.5 million dollar loan from the bank is the only way to keep their business alive. They have decided to reverse their current policy of aggressive price drops and easy credit, reduce their administrative, selling and miscellaneous expenses, not acquire any new fixed assets or sell common stock, decrease accounts payable, stop paying dividends, and freeze executive salaries. All this is an attempt to prove to the bank that Sweet Dreams Inc. is taking their financial situation very seriously and that the bank should strongly consider giving SDI the 9.5 million dollar loan. Doug has asked us to verify the bank’s evaluation of his company, predict the expected performance of Sweet Dreams Inc. for 1996 and 1997, and prepare a list of SDI’s strengths and weaknesses. All of these requests will be used to influence the bank to grant a 9.5 million dollar short-term loan to SDI as well as not forcing the bank to demand immediate re-payment of their loans. Sweet Dreams Incorporated (SDI) is struggling currently. With a current ratio of 1.9, SDI looks good up front. However the company’s inventory occupies close to 60 percent of its current assets. The quick ratio better shows SDI’s performance. With a ratio of .77, SDI cannot pay their short-term liabilities as they come due. This shows the first problem of Sweet Dreams Inc; Inventory Management. Also in Doug’s efforts to spin his recent losses he has decided to change his traditional dividend payout from 25% to 0. This symptom cuts to the core problem that SDI’s bottom line has suffered in the past years, partly because of economic downturns and partly because of management’s response to the economic downturn. Finally SDI’s Z score poses a problem with the banks’ standards. An Altman’s Z score is calculated by combining five different ratios of a company. First National claims that a Z score below the industry standard shows weakness in a firm and increases the likelihood of default. SDI’s Altman score is 3.07 which is not enough to worry the bank, but enough to put increased pressure on Sweet Dreams Inc. Therefore the problem here lies at minimizing costs and increasing revenues. To solve these problems SDI would need to focus their efforts on inventory management, company decisions, and effectiveness and efficiency. Regarding inventory SDI can lower the current level of mattress production to let inventory deplete to an acceptable percentage of current assets. As for company decisions when the economy is hurting companies should focus on cutting wages or hours to minimize costs, not reducing prices to increase sales. Finally the company needs to work on improving their ratios. Strong ratios come from more selling and less...
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