Question

X_Woods, Inc.

In early 2014 John McDonald, president and majority owner of X_Woods, is concerned about the firm's short-term financing, as his accountant just brought the year-end 2013 financial statements to John. The statements show what John already knows, the $35,000 line of credit from First Bank is completely drawn down, and cash balances are well below the $10,000 minimum balance John feels is necessary.

X_Woods was started by John in 2001 with a personal loan of $160,000 and $80,000 of his savings as equity. During the 2000s, the lack of competition allowed him to maintain a high profit margin. Annual sales growth of 15% to 25% was financed entirely by profits and the start-up capital. Operating expenses had been kept low because John did all of the firm's marketing and purchasing himself. Besides John, the firm had 6 employees. These employees were primarily responsible for filling mail orders and customer billing.

In 2004 several competitors arrived. Each year, to continue to increase sales, he had to lower prices slightly, or not raise them despite having to pay his suppliers more. Between 2009 and 2012, his gross margin fell from 28.6% to 26.2% of sales. In the late 2012, he had been forced to forego the cash discounts his suppliers offered. By mid-2013, he was beginning to have trouble meeting their 30-day payment terms and was forced to arrange a line of credit for $10,000 with his bank. During 2001, the line of credit had to be increased to $35,000. In a recent conversation with his banker, John had been told that it would be difficult for the bank to grant further increases of the credit line. The banker was concerned about the amount of long-term debt outstanding and about John's inability to pay down any of the $35,000 loan. The banker did say the $35,000 would continue to be available through 2002 but that the bank could not increase the loan amount. John thought that there were three possible strategies for 2002, but he was not sure how to analyze them. John would like you to analyze the three plans described below. Financial statements from 1999 through 2001 are attached.

Plan 2002A:

Sales growth will be stimulated by offering low prices. John is uncertain if the $35,000 credit line will be sufficient to finance this plan.

Objectives: Sales growth of 25%. Gross margin 26% of sales.   Pay suppliers in 30 days.

Plan 2002B:

Limit sales to exotic, high profit margin types of wood. Lower sales growth, with higher return and lower inventories will reduce financing need.

Objectives: Sales growth of 10%. Gross margin 30% of sales.   Pay suppliers in 30 days.

Plan 2002C:

Follow plan B but take the cash discount offered by suppliers. This requires paying for inventory in 10 days, rather than 30, which may strain his available working capital.

Objectives: Sales growth of 10%. Gross margin 32% of sales.  

Pay suppliers in 10 days. The Gross Margin of 32% of sales includes the 2% supplier discount.

ASSIGNMENT:

- Prepare pro forma income statements and balance sheets for each of John plans. Base your pro form analysis of all three plans, on the following assumptions:

- All sales are credit sales.

- GA&S (including interest) 20% of Sales.

- All after tax profits are retained in the firm.

- A/R and Inventory days of 45 and 90, respectively.

- Net Fixed Assets will be unchanged at $90,000.

- Make the $8,000 long-term debt payment.

- Other Current Liabilities will remain 2% of sales.

- Cash balance minimum of $10,000.

- The tax rate is 40%.

X_WOODS, INC.					X_WOODS, INC.
INCOME STATEMENT (ACTUAL)					INCOME STATEMENT (Pans: A, B, C)
all numbers in thousands (000s)
	1999	2000	2001			Plan A	Plan B	Plan C
Sales	$700	$860	$1,070		Sales
COGS	$500	$620	$790		COGS
Gross Margin	$200	$240	$280		Gross Margin
GA & S Expense	$150	$180	$210		GA & S Expense
Profit b/taxes	$50	$60	$70		Earnings Before Taxes
Tax (40%)	$20	$24	$28		Tax (40%)
Net Income	$30	$36	$42		Net Income
X_WOODS, INC.					X_WOODS, INC.
BALANCE SHEETS (ACTUAL)					BALANCE SHEETS
as of December 31st					as of December 31st
	1999	2000	2001			1999	2000	2001
Assets:					Assets:
Cash	$22	$7	$8		Cash
A/R	$88	$108	$134		A/Receivable
Inventory	$125	$155	$198		Inventory
Total Current	$235	$270	$340		Total Current
Net Fixed	$65	$80	$90		Net Fixed
Total Assets	$300	$350	$430		Total Assets
Liabilities:					Liabilities:
NP (Bank)	$0	$9	$35		N/P (Bank)
A/Payable	$42	$52	$68		A/Payable
Other Current	$14	$17	$21		Other Current
Current LTD	$8	$8	$8		Current LTD
Total Current	$64	$86	$132		Total Current
Long Term Debt	$56	$48	$40		Long Term Debt
Common Stock	$80	$80	$80		Common Stock
Retained Earnings	$100	$136	$178		Retained Earnings
Total Liabilitities & Equity	$300	$350	$430		Total Liabilitities & Equity

Answer 1

Income Statement
Plan A 2002				Plan B 2002				Plan C 2002
Header	Values	Explaination if Any		Header	Values	Explaination if Any		Header	Values	Explaination if Any
Sales	1337.5	Sales growth of 25%: So 1070 will be increased by 25%		Sales	1177	Sales growth of 10: So 1070 will be increased by 10%		Sales	1177	Sales growth of 10: So 1070 will be increased by 10%
COGS	989.75			COGS	823.9			COGS	800.36
Gross Margin	347.75	It is 26% of Sales as per Objective for this scenario.		Gross Margin	353.1	30% of Sales as given in the objective for this scenario		Gross Margin	376.64	It is 32% of Sales in this scenario
GA &S Expenses	267.5	It is 20% of sales , as given in the bottom of the question		GA &S Expenses	235.4	It is 20% of sales , as given in the bottom of the question		GA &S Expenses	235.4
Earnings before Taxes	80.25			Earnings before Taxes	117.7			Earnings before Taxes	141.24
Tax(40%)	32.1			Tax(40%)	47.08			Tax(40%)	56.496
Net Income	48.15			Net Income	70.62			Net Income	84.744
Balance Sheet Performa
Balance sheet as for 2001 as per Plan A				Balance sheet as for 2001 as per Plan B				Balance Sheet as for 2001 as per Plan c
Header	Values	Explaination if Any		Header	Values	Explaination if Any		Header	Values	Explaination if Any
Assets:				Assets:				Assets:
Cash	-14.25	This will be the balancing figure to make the Assets and Liabilities equal.		Cash	52.7	This will be the balancing figure to make the Assets and Liabilities equal.		Cash	26.301	This will be the balancing figure to make the Assets and Liabilities equal.
A/R	167.1875	It is 45 days as given in the question. I am using 360 days as the calendar year		A/R	147.125	It is 45 days as given in the question. I am using 360 days as the calendar year		A/R	147.125	It is 45 days as given in the question. I am using 360 days as the calendar year
Inventory	247.4375	It is 90 days as given in the question. I am using 360 days as the calendar year. Cogs I sused for calculation		Inventory	205.975	It is 90 days as given in the question. I am using 360 days as the calendar year. Cogs I sused for calculation		Inventory	200.09	It is 90 days as given in the question. I am using 360 days as the calendar year. Cogs I sused for calculation
Total Current Assets	400.375			Total Current Assets	405.8			Total Current Assets	373.516
Net Fixed	90			Net Fixed	90			Net Fixed	90
Total Assets	490.375			Total Assets	495.8			Total Assets	463.516
Liabilities:				Liabilities				Liabilities
NP (Bank)	35			NP (Bank)	35			NP (Bank)	35
A/Payable	82.47917	It is 30 days of COGS		A/Payable	68.65833	It is 30 days of COGS		A/Payable	22.23222	It is 10 days of Cogs
Other Current	26.75	Remains 2% of Sales		Other Current	23.54	Remains 2% of Sales		Other Current	23.54	Remains 2% of Sales
Current LTD	8			Current LTD	8			Current LTD	8
Total Current	152.2292			Total Current	135.1983			Total Current	88.77222
Long Term Debt	32			Long Term Debt	32			Long Term Debt	32
Common Stock	80			Common Stock	80			Common Stock	80
Retained Earnings	226.15	Retained Earning of 178 is carried forward and current net income is added to it		Retained Earnings	248.62	178 will be carried forward		Retained Earnings	262.744	178 will be carried forward
Total Liabilitities & Equity	490.3792			Total Liab and Equity	495.8183			Total Liab and Equity	463.5162