Jiffy case notes
Immediate Cash Needs
- In 1984 Jiffy Lube (JL) will have $750K due in notes payable. Combined with the new interest payments it will take on from financing 25% of its new franchise news, JL will be operating at a loss of $727K. With case on hand of only $139K, it will have to come up with at least $750K to pay off the notes due that year.
- The company also has $1.4M in on-demand debt which can be called at any time. In reality, $1.2M of that debt is to Jiffy Lube itself and Hindman. So of concern is the remaining $146K from to other sources.
Growth Strategy
- The strategy of offering financing to new franchisee’s really only works if they’re making money on the difference between the cost of obtaining the credit line and the rent they charge the franchisee. The case gives a range of 3K – 4K per month. $3K per month x 12 months = $36K per year. The cost to finance is 12% of $300K = $38.05 when compounded monthly. So JL is actually LOSING money. JL needs to keep its rent at the higher range of $4K / per month. And that’s assuming their rate is 12%. If their rate is higher than 12% this it should raise its rent accordingly.
There are two main issues that stick out in this case.
1. Collection of Franchise Rental Income
a. Actual income from franchise rentals was $276,000.
b. According to the numbers given in the case, the income from franchise rentals should be $864 in 1983.
c. $864 was calculated as follows:
i. Number of units where Jiffy Lube owned the real-estate and rented to the franchisee: 24 (from Exhibit E) ii. Jiffy Lube charged its franchisees a monthly rental fee of $3K (from Exhibit E) which equals $36K per year. iii. $36K x 24 rented properties = $864K.
d. That’s a shortage of $588,000K
e. Accounts Receivable that year was $962,000. So it’s conceivable that the rental income just hadn’t been paid yet. Either way, this seems high and will become a concern for cash flow because of….
2. Cash on hand
a. JL is
- In 1984 Jiffy Lube (JL) will have $750K due in notes payable. Combined with the new interest payments it will take on from financing 25% of its new franchise news, JL will be operating at a loss of $727K. With case on hand of only $139K, it will have to come up with at least $750K to pay off the notes due that year.
- The company also has $1.4M in on-demand debt which can be called at any time. In reality, $1.2M of that debt is to Jiffy Lube itself and Hindman. So of concern is the remaining $146K from to other sources.
Growth Strategy
- The strategy of offering financing to new franchisee’s really only works if they’re making money on the difference between the cost of obtaining the credit line and the rent they charge the franchisee. The case gives a range of 3K – 4K per month. $3K per month x 12 months = $36K per year. The cost to finance is 12% of $300K = $38.05 when compounded monthly. So JL is actually LOSING money. JL needs to keep its rent at the higher range of $4K / per month. And that’s assuming their rate is 12%. If their rate is higher than 12% this it should raise its rent accordingly.
There are two main issues that stick out in this case.
1. Collection of Franchise Rental Income
a. Actual income from franchise rentals was $276,000.
b. According to the numbers given in the case, the income from franchise rentals should be $864 in 1983.
c. $864 was calculated as follows:
i. Number of units where Jiffy Lube owned the real-estate and rented to the franchisee: 24 (from Exhibit E) ii. Jiffy Lube charged its franchisees a monthly rental fee of $3K (from Exhibit E) which equals $36K per year. iii. $36K x 24 rented properties = $864K.
d. That’s a shortage of $588,000K
e. Accounts Receivable that year was $962,000. So it’s conceivable that the rental income just hadn’t been paid yet. Either way, this seems high and will become a concern for cash flow because of….
2. Cash on hand
a. JL is