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 Carsons 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 Carsons 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 Carsons current Bank is unable to come to an acceptable solution.

1- Sourcing from Fabrics R Us

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- Selling to Top Brands

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- Smith Carson

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 Carsons 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.

Case Requirements

In groups of two or three please complete the following tasks.

Task One 5 Marks

As the Banker and a trusted advisor to Smith Carson, identify any risks in the above transactions and offer any mitigation technical or products you would recommend or require

Task Two 10Marks

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 Three 5 Marks

Construct a timeline for the transaction. Starting at contract signing, continuing for the period covering Smith Carsons 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?

Task Four 10Marks

In a memo to the executives (no more than one page) please introduce Smith Carson and their transaction. Make a recommendation as to how your bank will support Smith Carson and justify why they should approve your deal with Smith Carson.

Credit Memo should mimic layout we used in elevator pitch.

Summarize transaction and Smith Carson

Identify Financing need with collateral, pricing, conditions

Detail key risks and detail risk management strategies

Overall recommendation, why should your bank take on Smith Carson and this transaction

Options / thinking points

- New or increased Line of Credit, what would be terms and conditions and proposed risks what can you do to mitigate any of these?

- What type of LC are you willing to approve? Any conditions?

- What are the risks of this transaction for the Bank? What conditions would you put in place to protect both Smith Carson and your Bank?