38. Reliant Umbrellas has been approached by Plumpton Variety Stores of Nevada. Plumpton has expressed interest in an initial purchase of 5,000 umbrellas at $10 each on Reliant’s standard terms of 2/30, net 60. Plumpton estimates that if the umbrellas prove popular with customers, its purchases could be in the region of 30,000 umbrellas a year. After deductions for variable costs, this account would add $47,000 per year to Reliant’s profits.

Reliant has been anxious for some time to break into the lucrative Nevada market, but its credit manager has some doubts about Plumpton. In the past five years, Plumpton had embarked on an aggressive program of store openings. In 2007, however, it went into reverse. The recession, combined with aggressive price competition, caused a cash shortage.

Plumpton laid off employees, closed one store, and deferred store openings. The company’s Dun and Bradstreet rating is only fair, and a check with Plumpton’s other suppliers reveals that, although Plumpton traditionally took cash discounts, it has recently been paying 30 days slow. A check through Reliant’s bank indicates that Plumpton has unused 2009 2010 2009 Cash $ 1.0 $ 1.2 Payables $ 2.3 $ 2.5 Receivables 1.5 1.6 Short-term loans 3.9 1.9 Inventory 10.9 11.6 Long-term debt 1.8 2.6 Fixed assets 5.1 4.3 Equity 10.5 11.7 Total assets $18.5 $18.7 Total liabilities $18.5 $18.7 2010 2009 Sales $55.0 $59.0 Cost of goods sold 32.6 35.9 Selling, general, and administrative expenses 20.8 20.2 Interest .5 .3 Tax .5 1.3 Net income $ .6 $ 1.3 credit lines of $350,000 but has entered into discussions with the banks for a renewal of a $1,500,000 term loan due at the end of the year. Table 30.5 summarizes Plumpton’s latest financial statements.
As credit manager of Reliant, how do you feel about extending credit to Plumpton?