1. 1. What is the inherent flaw in CPI?s business model that creates a cash flow management challenge?

1. 2. Calculate the financial statement impact to CPI if the project team is able to improve the billing process and achieve its goal of issuing invoices within one day of shipment? You need to determine the sources of savings and quantify the amounts. You also need to determine if the savings are one-time events or annual recurring savings. (HINT: Keep separate the balance sheet savings from the savings affecting only the income statement).

1. 3. Goldman Sachs stated that printing companies normally sell for a multiple of 15x earnings. CPI plans to issue 10 million shares. If the billing project realizes the savings you estimate, what will be the offering price when the CPI completes its IPO. (Note: the corporate tax rate is 35%).

Key Performance Measure Case Exercise Commercial Printing Inc. (\"CPI\") had been a division of a much larger company. It was sold to a private equity firm in 2012 due to poor operating (business) performance. With prodding from the private equity firm, management has eliminated some non-essential costs, and the business operations turned a profit in 2015. CPI's current revenues are $200 million and net income is projected to reach $15 million this year. The private equity firm is relieved with the improvement but wants the business to increase profitability. The private equity firm wants to \"cash out\" their investment in 2016 by offering the business to the public through an IPO ('initial public offering\"). The Company's core service is catalog printing for major retailers. The Company's customers include recognizable names such as L.L. Bean, Talbots, Cabelas, and Restoration Hardware. In anticipation of the public offering, the private equity firm has engaged Goldman Sachs as the lead underwriter. Prior to accepting CPI as a client, Goldman performed a standard review of the business, the management team and the financial statements. From their business review (aka. Due diligence), Goldman had three observations: 1. CPI has too much debt on the balance sheet and the related interest expense reduces profitability. Currently, the debt/equity ratio exceeds 100%. Long and short term debt approximates $35 million. The debt has an average interest rate of 8%. 2. CPI has a negative reputation among many customers due to back office inefficiency and quality issues. This reputation results from a high frequency of customer billing errors and disputes over customer payments. Goldman Sachs concluded customer disputes delay payments and hurt cash flow and negatively impact the financial statements. 3. The management team members have deep industry experience. CPI has a competent bookkeeper, but Goldman concluded that the business needs a seasoned CFO with experience with an IPO (Initial Public Offering) and subsequent public company operating experience. You were hired as the CFO to address all three issues. During the first month, you met with various members of the organization who had responsibilities for the various business functions. Through your meetings you learn about the customer disputes and delays in customer payments. Customer feedback includes complaints about invoice data accuracy, pricing errors, confusion over chargeable vs. nonchargeable services. Furthermore, processing delays in the billing department at CPI often result in customers receiving the invoice after the \"payment due\" date (normal payment terms are net 30 days). Since sales representatives do not receive their commission check until the customer payment is received, they are demanding you resolve the problem as soon as possible (ASAP). You check the DSO collection statistics for the past 3 years and learn that the customers take approximately 55 days to pay an invoice once the customer receives it. The lowest ratio was 47 days and the highest was 62 days. You then check with the accounts payable manager who tells you that all vendors are paid within 20 days. Discounts are taken if offered; however, most vendor terms are n/20. The light bulb in your head illuminates as to the cause driving the high debt level. Poor operating cash flow procedures. You then assemble an internal Six Sigma project team consisting of sales reps, customer service reps, catalog project coordinators and billing (invoicing) specialists to solve the issues related to the billing process. After approximately 3 weeks of process analysis, the team presents you with a series of process and organizational issues that they believe can fix the customer billing issues and cash flow delays. Some of the Six Sigma findings and recommendations are as follows: The project team analyzed the time required to issue an invoice after the product is shipped. They determined the average time is 25 days after shipping date. The recommendations to reduce the long duration are as follows: The job order cost file should be sent to billing same day the product is shipped. Designate one clerk to review and approve the job cost sheets. Follow up questions are assigned to an expediter. Once approved, another clerk prepares the bill from a pre-printed invoice template. This would save approximately 3 days in processing time. Eliminate the invoice review by sales. This will reduce the processing time by approximately five days. Remove general ledger duties from the billing clerks and eliminate conflicting duties at month end. Previously, no invoices were issued during the first seven (7) days of each month. This would potentially save seven days. Customer disputes over billable charges delay payment by at least 6 days. Nearly all invoice disputes are resolved in favor of the customer, even though the customer may be incorrect. This philosophy is in place in order to maintain good relationships. In 2015, customer disputes amounted to 1.5% of all billings. Gross margins approximate 40%. Utilize electronic invoicing to reduce time lost through regular mail. Currently, all invoices are mailed to customers. Mail time approximates 4 business days. CPI's customer payment terms are n/30. With appropriate leadership and cross functional cooperation, the above recommendations are intended to reduce the time to issue an invoice, reduce the frequency of customer disputes and improve cash flow. If the recommendations work, the Six Sigma project team is extremely confident all invoices could be issued within one day of the shipping date with a significant improvement in invoice quality. You ask the team about the timeframe to implement their recommendations and additional costs. They are confident the changes can be implemented within a three month period, and no outside costs are necessary. The team also informs you there are no additional systems changes/enhancements required to improve the billing process. You compliment the team for their fine work, but then realize there is more work to be done before this can be discussed with the CEO. The two work steps are described below for you to complete: 1. What is the inherent flaw in CPI's business model that creates a cash flow management challenge? 2. Calculate the financial statement impact to CPI if the project team is able to improve the billing process and achieve its goal of issuing invoices within one day of shipment? You need to determine the sources of savings and quantify the amounts. You also need to determine if the savings are one-time events or annual recurring savings. (HINT: Keep separate the balance sheet savings from the savings affecting only the income statement). 3. Goldman Sachs stated that printing companies normally sell for a multiple of 15x earnings. CPI plans to issue 10 million shares. If the billing project realizes the savings you estimate, what will be the offering price when the CPI completes its IPO. (Note: the corporate tax rate is 35%)