SureCut Shears, Inc. is a manufacturer of household scissors and industrial shears. Because of a policy of level production and a seasonal sales pattern, the company has to borrow funds under a line of credit to cover its seasonal buildup in inventory and receivables. During 1995-96, sales began to fall from projected levels due to a retailing downturn. However, the company may have been slow to react resulting in an accumulation of excess inventory and related inability to repay its bank loan prior to the next seasonal increase in demand. We were given both forecasted and actual financial data. A diagnosis of why the company cannot repay its bank loan should be made to decide whether to renew the outstanding loan.
The following is the course of loan requests from SureCut during 1995-96: 1. June 1995 - $3.5 million ? Until December 1995
2. Another $1.2 million by June 1996 (For Plant modernization - finish est. August 1995) 3. September 1995 ? Additional $0.5 million until December 1995 (Total $1.25 million) 4. January 1996 ? Extending loan funds until April 1996 (retailing downturn ? sales down) 5. April 1996 ? Extending until June 1996 (again, retailing recession) The plant modernization program is, in essence, a long term investment, and is expected to return $900,000 per year ($75,000 per month) in manufacturing costs.
Pro Forma Assumptions
It is obvious that Mr. Fischer made wrong assumptions when constructing the pro forma financial reports. He assumed that sales would continue to be steady, while actual sales were about 86% of the forecast -------------------------------------------------
Mr. Fischer forecasted NOF of $4,492,000 but actually ended up being $3,465,000 due to a retailing downturn. Higher-than-expected inventory was being carried through the peak season as well. This was their peak sales period and it was hoped that proceeds from this season would pay off the seasonal loan for the capital expenditure. SureCut...
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