Custom Snowboards is a company that uses financials to their benefit, they would naturally prepare a yearly budget and most likely a five-year budget with expected sales and costs, as well as the direction of the company and a growth plan. Custom Snowboards should clean up their financials before pursuing an expansion. A clean-up should begin well in advance to requesting funding for growth or expansion. One way to make the financials look better might be to care less inventory on-hand by using Just-It-Time (JIT) models. Custom Snowboards does not appear to carry a lot of excess inventory, but every little bit helps the cash flow.
Year 12 year-end inventory was $36,900
Year 13 year-end inventory was $37,080
Year 14 year-end inventory was $35,820
Inventory is bound to fluctuate with sales and projected sales, but working with their vendors to use the JIT model to their benefit.
Another way in help increase their cash flow would be to collect more receivables. In year 14 the ending Accounts Receivable balance is only about 3% of Sales. This does not seem very high, but external factors could help to make this look better or worse depending upon the circumstances. For example, if the industry average for account receivable is 5%, then Custom Snowboards’ would appear to be in a better situation than the average snowboard manufacturer. Reviewing Custom Snowboards Horizontal Analysis, it appears they have already begun reducing the accounts receivable, as well as reducing Notes Payable, Mortgage payable, and short and long term investments.
A third option deals with accounts payable. Custom Snowboards might be able to negotiate longer terms with their vendors. With longer payment terms they could stretch their cash flow a little. If the extended terms are not needed the company could make payments within normal terms, usually 30 days. On time and early payments to vendors shows an ability and want to pay their bills.
After cleaning up their financials, the first thing to do to begin this report is to think like a banker or an investor. Their primary goal is to make money. Custom Snowboards needs to convince the bank’s vice president that extending a loan to them would be a good investment. To get a good approximation of Custom Snowboards financial health the vice president of the bank would look at assets, financial reserves, liquidity, profitability, solvency, collateral, and ability to pay the loan back, and too many others to name. From the Income Statement the banker can see the company’s revenue and the expenses incurred to make that income over a period of time, such as a month, quarter, or year. It is best to exhibit multiple periods for trending.
A big concern might be the ability for Custom Snowboards to repay the loan. This question may bring the company’s historical Net Income under scrutiny.
Year 12 has Net Income of $140,250
Year 13 has Net Income of $96,900
Year 14 has Net Income of $16,725
Their historical data for Net Income, as shown on the Horizontal Analysis, shows a positive Net Income, but the Net Income is drastically dropping from year 12 to year 13 and year 13 to year 14. From year 12 to year 13 the Net Income drops by approximately 30% and between year 13 and year 14 the Net Income drops more than 80%. This data alone does not evoke the best financial picture for Custom Snowboards, but the positive side is they do have income. To help ease the bank’s vice president’s mind, Custom Snowboards should more historical data to show trending in sales.
Net Sales, Cost of Goods Sold, and Gross Profit relatively stable. Even though the Net Sales are down in year 14 and only slightly up in year 12, the consistency in the percentage of the changes shown in the Horizontal Analysis demonstrates that Custom Snowboards are dependable and honest in their budgeting and planning.
Unlike the Income Statement, the Balance Sheet show a snapshot for a particular...
References: Kantrovich, A. (2011). Financial Ratios Part 12 of 21: Capital Debt Repayment Capacity. Michigan State University Extension. Retrieved from http://msue.anr.msu.edu/news/financial_ratios_part_12_of_21_capital_debt_repayment_capacity
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