Question

Be the Banker, Smith Carson Limited

Smith Carson Limited, located in Ottawa, ON, is a thriving t-shirt manufacturer that is also involved in screen printing. It has a strong balance sheet with moderate debt, reflecting the conservative nature of its management. Total revenues are CAD 25 million.

The company supplies two major Canadian retailers that make up about 60% of its annual turnover.  The remainder of its sales are spilt between the export market (25%) and smaller independent retailers/single outlets (15%).

Smith Carson’s CFO requested a meeting with your bank, which began with a discussion of the following 2 new business opportunities.

1.Smith Carson currently purchases a large volume of raw materials from the Hong Kong and Singapore. Smith Carson normally does its own manufacturing but it has now found a very reliable supplier in Singapore, Fabrics R Us Inc. Fabrics R Us has much cheaper labour costs and are able to produce a lower cost, high quality Tshirt. Smith Carson is interested in sourcing from Fabrics R Us on a trial basis.

2.Following a recent business trip to HK, Smith Carson identified a company called Top Brands Corp in Bristol, which indicated that they are prepared to buy high quality shorts from Smith Carson.

As a result of these 2 opportunities, it is now Smith Carson’s intention to sell Top Brands, the shirts manufactured by Fabrics R Us.

Smith Carson still plans to take delivery of the shirts so that they can screen print designs on them before shipping to Top Brands.

Sales contracts and purchase orders are close to being signed between Smith Carson and the two foreign companies.  The basic terms of sale are that Fabrics R Us will supply on a prices basis of $1 per shirt CIF Toronto Port and Top Brands will purchase the shirts for $7 FOB Toronto port.

The initial contract will be for 200 shirts, with many future contracts to follow if all goes well.

Smith Carson wants to take advantage of this opportunity given the huge profit margin and it hopes to develop these two relationships into ongoing sales. There are a number of issues closing, and Smith Carson’s current Bank is unable to come to an acceptable solution.

1-

As this is Fabrics R Us’ first transaction with Smith Carson, it prefers payment in advance, particularly as the good are being shipped by air. Its reasoning is that since Smith Carson is shown as consignee, once shipped the goods will no longer be under Fabric R Us’ control.

However to make this transaction more appealing, Fabrics R Us is prepared to ship the t-shirts so that they arrive 30 days after the signing of the contracts provided that at that time, they have an assurance of getting guaranteed immediate sight payment of 100% of CIF value ($200,000) before letting the goods leave their control. Fabrics R Us will ship the full 200,000 shirts in one shipment.

2-

Top Brands is an extremely credit worthy company that normally imports on open account. Its other suppliers are in the practice of giving them N45 credit terms. To help close this deal Smith Carson will have to do the same. In accordance with Top Brands expected credit terms, this 6 week credit period will be calculated from the time Smith Carson makes shipment of the goods.

3-

At your meeting you obtain the following information. Screen printing, packing and shipment of the t-shirts to Bristol will take a maximum of 50 days from receipt of the shirts from Fabrics R Us.

Smith Carson is mainly concerned with cash flow. Given the industry most of Smith Carson’s sales are sold on terms unfavorable to their cash flow. This causes financial stress on the mgmt of Smith Carson. While they generally have enough money to meet current contracts, this new foreign export contract will stretch their cash flow too far. Smith Carson is looking to you to help complete this very important transaction.

TASK 1: Using the table below, and for each commercial contract, identify which methods of payment could be used in the contract between Smith Carson& Fabrics R Us and between Smith Carson& Top Brands Corp. Once you have completed the charts, discuss what risk your bank could be exposed to and then decide what payment term you (as the bank manager) are comfortable authorizing for Smith Carson and why.

	Advanced Payment	LC - Sight	LC – Usance	Open Account
Fabrics R US
Smith Carson
Your Bank

	Advanced Payment	LC - Sight	LC – Usance	Open Account
Top Brands Corporation
Smith Carson
Your Bank

TASK 2: Construct a timeline for the transaction. Starting at contract signing, continuing for the period covering Smith Carson’s inventory and ending with Top Brands pays out. - How many days will this transaction take from production to payment? - If you were to issue a sight or usance LC, how many days will Smith Carson be waiting for payment?

Answer 1

Fabric R Us and Smith Carson should enter into a L/C at sight agreement, i.e once the documents of shipment are submitted by Fabric R Us, it gets immediate payment from bank, since these are the terms agreed between Fabric R Us and Smith Carson.

Top Brands Corporation and Smith Carson should enter into a L/c at usance agreement, i.e on predetermined future date and on presentation of required documents the payment will be released to Smith Carson from its Bank.

The Main risks from Bank side in a L/c transaction is the examination of the documents.Banks are no experts regarding goods and trade. They do not have enough knowledge to judge about goods and they cannot overview the terms and conditions between the applicant (importer) and the beneficiary (exporter).  The risk therefore exists that there are discrepancies on the credit when they found the obviously discrepancies. Those discrepancies may come from the result of fraudulent document, and cause big damage to the bank.

Since Smith Carson has a strong Balance sheet with moderate debt, bank will agree for L/c at sight and L/C usance agreements for Smith Carson.

Task 2: assuming The agreement is signed on 1st March 2018

1/03 2018: Date of signing the documents between Smith Carson and Fabric R Us.

30/03/2018: Expected date of receipt of T shirt at Ottawa

19/05//2018: Expected date of shipment of Tshirt from Ottawa to Bristol.

03/ 07/2018: Expected date of payment from Top Brands Corporation. (45 days from date of shipment of T- Shirts from Smith Carson).

Total number of days from production of shirts and receipt from Fabric R Us to shipment and collection of Payment from Top Brands Corporation is 125 Days.

shirt at Bristol