Ashley Palmer Clothing, Inc.

Its January 2014. And were trying to predict what next year will look like financially. Will we need more money from investors? If so, who might supply it, and on what terms?

We produce dresses for women. Our firm was launched in June 2009 by two graduates of Boston College. Ashley Palmer designs apparel for the modern womans shape rather than using the traditional standard sizing.

In 1939, the National Bureau of Home Economics of the U.S. Department of Agriculture was charged with standardizing sizing for womens clothing. Over a two-year period, some 15,000 women were given full-body measurements. This system created the sizing system that is still in use today.

Studies have found that the average body proportions of American women when the sizing charts were created are different from the body proportions of todays women. Specifically, American women in 1939 were markedly more slender and shorter. The result is that it is difficult for some women to find clothing that fits well. In the September 2009 issue of Fashionista Magazine, one of us, who stands six feet tall, said,

[W]e were tired of not finding the clothes that were the right fit so we decided it would be a good venture to create products for todays women based on bust measurement, cup size and torso length.

This problem represented an opportunity for us. After considerable research, we decided to start a business that produced fitted clothing for todays young women. We recruited a young up-and-coming fashion designer, Joy Lee, who had experience in apparel design for several major womens clothing brands. Seven months after starting the business, we offered our first dresses for sale online.

Then, in early 2010, the firm began supplying clothes to two well-known high-end retailers. Within a year after becoming a supplier to these exclusive retail outlets, the companys production orders had more than doubled. In order to keep up, the firm added five more team members in October 2010.

Sales continued to increase over the next three years, reaching $4.7 million in 2013. During this same time, the number of employees grew from 7 to 16. The company also moved into a 4,000-square-foot facility and added additional sewing equipment and presses.

In August 2013, Ashley Palmer ventured into creating professional attire for young women. The products received rave reviews. Within three months, the retail outlets had sold over 90% of their inventories, quickly placing orders for more products.

While excited about the prospect of sales growth, we are starting to worry a little. Based on our estimates, the company could enjoy a 50% growth rate if we move aggressively, compared to the usual 25% we had experienced over the past two years. To support this growth, we would need to have a special one-time $200k increase in the marketing campaign this year, and would need to buy some new equipment next year. If we do this, our sales in the following year would jump by 50% and then grow at 35% per year thereafter. We know that if we are to avoid cash flow problems from the anticipated growth, we need to anticipate the asset requirements and additional financing that would be required to sustain their business.

We believe we would need to purchase state-of-the-art industrial sewing machines, cutting tables, and pressing machines at a cost of $980,000. The new equipment would be depreciated over 14 years, using straight-line depreciation. We think the following assumptions are appropriate (but if you need to know more, just ask us):

The short-term notes must be fully repaid this year. But no repayments of the existing long-term loan are expected in the next five years at least.

Accounts receivable, accounts payable, inventory, and other current liabilities would follow their same relationships to sales as in the past year; that is, each asset would maintain the average asset-to-sales percentage experienced in 2013.

Both cost of goods sold and marketing expenses (other than the special one-time campaign) are variable and would approximate the same percentage of sales as in 2013.

General and administrative costs are mostly fixed in nature but should increase to $130,000 this year, and then grow at 8% per year thereafter.

The interest rates on the already outstanding debt would be renegotiated, which would reduce the interest on this debt to $45,000 per year.

The firms tax rate will stay about 40%.

To meet the firms financing needs, we have negotiated a line of credit (short-term debt) with Amway Bank for up to $100,000. The bank has also agreed to loan the firm $150,000 towards the purchase of the new equipment; this is to be repaid over five years. The principal on the latter loan is to be repaid in $30,000 annual payments, with interest payments being made on the remaining balance of the note. Both notes will carry a 5% interest rate. Accounts payable and other current liabilities should increase proportionally with sales increases.

Finally, after many years of living on tiny payouts from this business, we think we can start to take out $100k per year as dividends starting this year.

Here are our past financial statements our accountant prepared for us:

Ashley Palmer Clothing, Inc. Income Statements or the Years Endina December 31. 2011. 2012. and 2013 Ashley Palmer Clothing, Inc. Balance Sheets for the Years Ending December 31, 2011, 2012, and 2013 2012 2013 Assets Cash Accounts receivable Inventory Total current assets Plant \& equipment Accumulated depreciation Net plant \& equipment TOTAL ASSETS Debt (Liabilities) and Equity Accounts payable Short-term notes payable Other current liabilities Total current liabilities Long-term debt Total debt Owner's capital Retained earnings Total equity TOTAL DEBT AND EQUITY