Pro-Forma Bank Loan Case

(1) There were many compounding factors that caused SureCut Shears to be unable to pay its bank loan by March 31, 1996. When looking at the pro forma income statement as compared to the actual income statement we see the following inconsistencies, which are contributing to SureCut’s financial problems: Anticipated Actual Dollar Loss Contributed
Sales 25,800 22,987 2,813
COGS (% to Sls) 70.5% 73.8% 768
Gross Profit (% to Sls) 29.5% 26.2%
SG&A Expenses (% to Sls) 9.4% 10.6% 269
Total dollar loss contributed by increase in expenses 1,037
Total dollar loss contributed by decrease in sales 2,813

As expenses increase, profits are squeezed and SureCut continues to pay dividends at the same rate and amount, further squeezing the
Without making changes to financial policy, SureCut Shears continues to increase liabilities while sales decline, inventory grows, and cash dwindles down to only 8.74 days sales in cash in March 1996. If Mr. Stewart were paying close attention to these ratios compared he would be concerned that SureCut hasn’t changed its financial policy to accommodate, other than requesting to borrow more money. In short, Mr. Stewart should not lend additional dollars to SureCut given the financial
As a result of the cash flow problems, the owner of the company in each of the cases requested a loan from the bank in order to support the continued operations of his business. However, the reasoning behind the requested funding and the risks and returns associated with its fulfillment varied in each of the cases examined. For Wilson Lumber, the company was experiencing rapid growth and the nature of the business (long cash cycles and low profit margins) necessitated that Mr. Wilson secure outside funding to finance its growth. Wilson Lumber is an established business with 10 years of profitable returns in a non-seasonal industry that has little volatility in sales and is relatively unaffected by swings in the economic state of the nation. These characteristics differentiate Wilson Lumber from the other cases discussed and impact the options available to Mr. Wilson in terms of outside funding. Mr. Wilson had previously been relying on extended trade credits as a means of financing. However, by extending the life of the trade credits, Mr. Wilson was not only increasing his cash cycle but also running the risk of financing his payables at a much higher rate than obtaining a bank loan. Mr. Wilson was therefore left to decide how to finance his growing company, something his narrow profit margins left him unable