Bigger isn t always better

Andre Pires opened his automobile parts store, Quickfix Auto Parts, five years ago, in a midsize city located in the Midwestern region of the United States. Having worked for an automobile dealership, first as a technician, and later as the parts department manager, for over 15 years, Andre had learned the many nuances of the fiercely competitive automobile servicing business. He had developed many contacts with dealers and service technicians, which came in really handy when establishing his own retail store. Business had pick up significantly well over the years, and as a result, Andre had more than doubled his store size by the third year of operations. The industry and local forecasts for the next few years were very good, and Andre was confident that his sales would keep growing at or above recent levels. However, Andre had used up most of his available funds in expanding the business and was well aware that future growth would have to be funded with external sources of funds. What was worrying Andre was the fact that over the past two years, the stores net income figures had been negative, and his cash flow situation had gotten pretty weak (See Tables 1 and 2). He figured that he had better take a good look at his firms financial situation and improve it, if possible, before his suppliers found out. He knew fully well that being shut out by suppliers would be disastrous! Andres knowledge of finance and accounting, not unlike many small businessmens, was very limited. He had often entertained the thought of taking some financial management courses, but could never find the time. One day, at his weekly bridge sessions, he happened to mention his problem to Tom Andrews, his longtime friend and bridge partner. Tom had often given him good advice in the past and Andre was desperate for a solution. Im no finance expert, Andre, said Tom, But you might want to contact the finance department at our local universitys business school and see if you can hire an MBA student as an intern. These students can often very insightful, you know. Thats exactly what Andre did. Within a week he was able to recruit Juan Plexo, a second semester MBA student, who had an undergraduate degree in Accountancy and was interested in concentrating in Finance. When Juan started his internship, Andre explained exactly what his concerns were. Im going to have to raise funds for future growth, and given my recent profit situation, the prospects look very bleak. I cant seem to put my finger on the exact cause. The banks commercial loan committee is going to want some pretty convincing arguments as to why they should grant me the loan. I need to put some concrete remedial measures in place, and was hoping that you can help sort things out, Juan, said Andre. I think I may have bitten off more than I can currently chew.

Questions Q1. Using a spread sheet Construct the Cash Flow Statement for the most recent years. Q2. Juan knows that he should compare Quickfixs condition with an appropriate benchmark. How should he go about obtaining the necessary comparison data? Q3. What recommendations should Juan make for improvement, if any?

Quickfix Autoparts
Balance Sheet
ASSEETS	2014	2015	2016	2017	2018
Cash and marketable securities	155,000	309,099	75,948	28,826	18,425
Accounts receivable	10,000	12,000	20,000	77,653	90,078
Inventory	250,000	270,000	500,000	520,000	560,000
Current Assets	$415,000	$591,099	$595,948	$626,479	$668,503
Land, building and equipment	250,000	250,000	500,000	500,000	500,000
Accumulated depreciation	-25,000	-50,000	-100,000	-150,000	-200,000
Net fixed assets	$225,000	$200,000	$400,000	$350,000	$300,000
Total assets	$640,000	$791,099	$995,948	$976,479	$968,503
LIABILITIES AND EQUITIES	2014	2015	2016	2017	2018
Short-term bank loans	50,000	145,000	140,000	148,000	148,000
Accounls payable	10,000	10,506	19,998	15,995	16,795
Accruals	5,000	5,100	7331	9,301	11,626
Current liabilities	$65,000	$160,606	$167,329	$173,296	$176,421
Long-term loans	63,366	98,000	196,000	190,000	183,000
Mortgage	175,000	173,000	271,000	268,000	264,000
Long-term debt	238,366	271,000	467,000	458,000	447,000
Total liabilities	$303,366	$431,606	$634,329	$631,296	$623,421
Common stock (100,000 shares)	320,000	320,000	320,000	320,000	320,000
Retained earnings	16,634	39493	41,619	25,184	25082
Total equity	$336,634	$359,493	$361,619	$345,184	$345,082
Total liabilities and Equity	$640,000	$791,099	$995,948	$976,480	$968,503
Quickfix Autoparts
Income Statement
	2014	2015	2016	2017	2018
Net sales	600,000.00	655,000.00	780,000.00	873,600.00	1,013,376.00
Cost of good sold	480,000.00	537,100.00	655,200.00	742,560.00	861,370.00
Gross profit	$120,000.00	$117,900.00	$124,800.00	$131,040.00	$152,006.00
Administrative and selling expenses	30,000.00	15,345.00	16,881.00	43,680.00	40,535.00
Depreciation	25,000.00	25,000.00	50,000.00	50,000.00	50,000.00
Miscellaneous expenses	2,027.00	3,557.00	5,725.00	17,472.00	15,201.00
Total operating expenses	$57,027.00	$43,902.00	$72,606.00	$111,152.00	$105,736.00
EBIT	62,973.00	73,998.00	52,194.00	19,888.00	46,270.00
Interest on short-term loans	15,000.00	15,950.00	14,000.00	13,320.00	13,320.00
Interest on long-term loans	8,000.00	7,840.00	15,680.00	15,200.00	14,640.00
Interest on mortgage	12,250.00	12,110.00	18,970.00	18,760.00	18,480.00
Total interest	$35,250.00	$35,900.00	$48,650.00	$47,280.00	$46,440.00
Before tax earnings	27,723.00	38,098.00	3,544.00	-27,392.00	-170.00
Taxes (40%)	11,089.20	15,239.20	1,417.60	-10,956.80	-68.00
Net Income	$16,633.80	$22,858.80	$2,126.40	($16,435.20)	($102.00)
Dividends on stocks	$0.00	$0.00	$0.00	$0.00	$0.00
Addition to retained earnings	$16,634.00	$22,859.00	$2,126.00	($16,435.00)	($102.00)
EPS (100,000 shares)	$0.17	$0.23	$0.02	($0.16)	($0.00)