NCB is a manufacturer and distributer of a wide range of office products. In Canada, NCB uses several distributers in different regions. One of the major distributers is Harrison Stationary and Office Supply LTD. Harrison had distributed NCB’S products for over 50 years and NCB was the largest supplier of Harrison. In January 2003 Harrison was acquired by the president of the company and four senior officers. Most of the acquisition cost was financed by bank loans. Since the acquisition, Harrison had difficulties to pay NCB for the goods and the account receivable reached to unacceptable level. In September 2005 the Harrison account was 156 days old and amounted to $ 4.4 million. In addition, NCB’s credit management tried to receive financial information from Harrison’s management without great success. After 14 months of avoiding the requests of NCB’s credit department, Harrison’s management released the financial statements. The financial statements of Harrison revealed a very risky financial situation. The company had substantial losses and had an equity deficit position. Tutlte, NCB’s credit manager recommended to stop shipments to Harrison immediately and let them get bankrupt. However, Pam Bookman, vice-president sales had a different opinion. She was afraid to lose market share because the company didn’t have a contingency plan for another distributer. Now, NCB’s management is facing a big dilemma concerning this issue and must decide how to handle this situation. MNC’s decision will have a great impact on both companies. 1: stop doing business with Harrison by cutting off all credit This action may cause serious consequences on both companies. Harrison will face bankruptcy and we need to estimate how it will impact NCB. The debt of Harrison to NCB is currently amounted to $ 4.4 million and we need to estimate how much debt can be recovered. In order to estimate the amount we can recover, we applied the liquidation process based on 3 assumptions: 1. 75% of Harrison’s account receivable will be saved.
2. 50% of Harrison’s inventory will be saved.
3. 75% of Harrison’s property.
Harrison’s account receivable: 6832,000 * 0.75 (+) Harrison’s inventory: 9632,000 * 0.5 (+) Property, plant and equipment + land: 3,295,000 * 0.75 Liquidation value: $ 12,276,000 (-) Harrison’s bank loan (operating): $ 5,199,000 Harrison’s bank loan (term): $ 4,550,000 The amount left for paying the account payable: $ 2,528,000 2,528,000 / 9,462,000(AP) = 0.27 (27 Cent per 1 $).
4,400,000 * 0.27 = $ 1,188,000 (AR amount that can be recovered after liquidation process). A. Finding A New Distributor
In addition to the losses on the Harrison’s account receivable, MNC’s management may face more losses because they didn’t have a contingency plan for a new distributor. In 2004 the amount of sales to Harrison amounted to $10,000,000. Based on our estimation, if MNC will switch to another distributor they may lose 15% of their market share ($1,500,000). $ 10,000,000 - $ 1,500,000 = $ 8,500,000 (estimated sales amount for the next year). Due to that, profit margins will probably decline. In 2004 the average trading profit margin to Harrison was 22.3% (based on sales level of $ 10,000,000). $ 10,000,000 * 0.223 = $ 2,230,000 (2004)
$ 8,500,000 * 0.223 = $ 1,895,500 (2005)
$ 2,230,000 - $ 1,895,500 = $ 334,500.
In conclusion, if Harrison will get bankrupt, MNC will lose at least: 1. $ 4,400,000 - $ 1,188,000 = $ 3,212,000 (AR – liquidation value). 2. $ 334,500 (decline in profits).