Miller Building Supplies Case Study Submit Assignment Submitting a text entry box or a file upload Due Dec 3 by 11am Points 100 See "Working Capital Management" by Sagner pp. 229-233 Answer questions on pp. 231-233. Question 1: Omit Question 2: (20 points) Are there specific working capital management suggestions that you can make to the company? (Hint: Use Miller's balance sheet and income statement (Exhibits C3.2 and C3.3) to calculate ratios and compare to industry ratios (Exhibits C3.4). Provide suggestions based on this analysis Question 3: (15 points) If a line of credit is requested from the Bank, should it be offered? At what interest rate? (Hint: refer back to LOC section in CH4) Question 4: (65 points) Would a monthly cash budget improve forecasting and provide support for a line of credit? If so, provide a cash budget (to the best of your ability based on the data in the case) Use format similar to Exhibit 4.2 (see Excel spreadsheet below). For sales, use the information in Exhibit C3.1 and divide each quarter by 3 to get monthly numbers. Since we don't know the minimum cash requirement, you can le stop at ending cash Exhibit 4.2 Cash Budget.xlsx fx Exhibit 4.2 Cash Budget ($000) A1 K L G F C B A 1 Exhibit 4.2 Cash Budget ($000) September July August June 2 from forecast 60,000 $ 50,000 40,000 $ 50,000 $ 3 Sales 4 Collections 8,000 12,000 10,000 20% 10,000 5 same month 30,000 30,000 36,000 1 month after 60% 24,000 6 2 months after 8 Total cash in 9 Payments 10,000 12,000 20% 6,000 8,000 7 50,000 50,000 56,000 40,000 from forecast 35,000 43,000 52,000 43,000 10 Expenses from forecast 4,000 4,000 es 11 39,000 12 Total cash out 13 Net cash in/out 14 Beginning Cash 15 Ending Cash 16 Minimum Cash Required 17 Surplus/deficit 18 Bank borrowing 19 Cummulative bank borrowing 20 Short-term investing 56,000 43,000 43,000 (6,000) (3,000) 13,000 11,000 (3,000) 10,000 6,000 3,000 (3,000) 5,000 (8,000) 10,000 21,000 3,000 5,000 5,000 5,000 (2,000) 5,000 16,000 2,000 8,000 10,000 5,000 11,000 21 22 23 Miller Building Supplies A NNE ARUNDEL COUNTY IS LOCATED south of Baltimore, MD and is the home of Annapolis, MD, the location of the U.S. Naval Acad- emy. Annapolis and the surrounding area has become a popular recreational and retirement community due to its access to the Chesapeake Bay, historic areas, and decent medical care. Furthermore, a major airport (BWI Thurgood Marshall Airport) is less than one hour away, and Washington, DC, is approximately the same distance. The potential growth of the county has attracted numerous businesses, with more expected to follow. The economy is diverse. Roughly 75 percent of employment is in service, education, and government; retail: financial: and the hospitality industry. Many Maryland state offices are in the area of Annapolis, and the county has such institutions of higher learning as St. John's College and Anne Arundel Community College, in addition to the Naval Academy. 229 JOSEPH MILLER STARTS MBS Joseph Miller founded his building supply company after returning from the Korean War. He saw the migration of economic activity in the county from agri- culture to a diversified mix of businesses, and located Miller Building Supplies (MBS) in the town of Glen Burnie in 1953. His choice of Glen Burnie was moti- vated by access to the major highways in that part of the state and the recent opening of the Chesapeake Bay Bridge to access the Eastern Shore of Maryland. The firm began as a wholesale distributor of various building supplies like paint, lumber, flooring, drywall, fencing, and cleaning supplies. As Miller devel- oped his customer base, he came to realize that construction companies needed a full range of electrical. plumbing, and heating/air conditioning supplies and equipment in addition to basic building materials. MBS has been run by Joseph Miller's children and now his grandchil- dren. As of 2010. Joseph III is the president, although he has been considering retiring. Joseph III's cousins are the chief financial officer (CFO), the marketing vice president, and the chief purchasing officer. The family has been quite suc- cessful in managing the business, and MBS is continuously profitable despite the fact that sales are sensitive to the economy of Anne Arundel County, of southern Maryland, and the Eastern Shore counties. VARIATIONS IN WORKING CAPITAL REQUIREMENTS The company's sales are seasonal, and during the colder months building activ ities slows down. Ifthe winter is mild. some building projects continue, but large new projects are not usually started until the spring. The low point of the year is January, and from that time on, sales build. MBS has a small year-round labor force and employs seasonal workers during peak business periods. Management is quite aware ofthe seasonal variation in the working capital position of the company. Historically. MBS has maintained large cash positions, and when receivables and inventory have increased, it has primarily financed them by drawing down cash. However, the company is taking a critical look at this strategy. The CFO realizes that further expansion of MBS may be difficult using internally generated funds. The cash philosophy may be unnecessarily tying up capital, and it may be appropriate to use short-term financing for seasonal working capital needs. The president thinks that the CFO's suggestion is worth pursuing. particu- larly as it would free up long-term capital for expansion. The marketing vice president is not convinced and thinks that the company's financing methods continue to be appropriate. In addition, he is opposed to additional interest expense and having to deal with a bank. His cousin, the sales manager, is not opposed to using debt to finance working capital and argues that receivables and inventory should be supported with short-term debt. A BANKER'S ASSISTANCE The Bank of Maryland (the "Bank") has dealt with MBS for four decades. The company has never established much of a relationship with the Bank except for an occasional term loan, depository and disbursement services, and a few other services. As noted. long-term capital has generally been internally generated. The Bank has tried to develop a stronger relationship as it considers MBS to be astable, well-run company. When Sara Williams, the Bank's calling officer for MBS, received a phone call from Joseph Miller III, she was more than willing to meet him. The CFO asked for help in analyzing MBS's working capital needs to do the following: Estimate MBS's working capital needs. Determine if the Bank is willing to extend MBS a line of credit sufficient to finance the company's working capital. QUESTIONS 1. Using the data in Exhibit C3.1, estimate the amount of working capital that is required during each quarter of the year. Does MBS have excess working capital during these periods? If so, what do you suggest? 2. Are there specific working capital management suggestions that you can make to the company? 3. If a line of credit is requested from the Bank, should it be offered? At what interest rate? Specify terms that the Bank can reasonably require. You should refer to Exhibits C3.2 through C3.4 in your analysis. 4. Would a monthly cash budget improve forecasting and support for a line of credit? If so, provide a cash budget (to the best of your ability based on the data in the case). Assume that the contractors who purchase from MBS pay when they are paid by their residential and commercial customers which is one-half in the second month and one-half in the third month following sales. Assume also that MBS must pay one-half of its payables in the month the expense is incurred, and one-half in the following month Miller Building Supplies 232 Recent MBS Quarterly Financial Statement Results (in $000) EXHIBIT C3.1 1st Quarter: Sales, $11,191; Net income, ($83) 2nd Quarter: Sales, $25,309; Net income, $1,247 3rd Quarter: Sales, $27,877; Net income, $1,554 4th Quarter: Sales, $15,439; Net income, ($21) 1st Quarter: Beginning cash, $12,102; Total current assets (TCA), $38,708; Current liabilities (CL), $7,579 2nd Quarter: Beginning cash: $6,768; TCA, $43,454; CL, $11,101 3rd Quarter: Beginning cash, $1,484; TCA, $40,773; CL, $6,809 4th Quarter: Beginning cash, $8,392; TCA, $39,456; CL, $5,121 EXHIBIT C3.2 Selected Industry Ratios Current ratio: 1.8 times Quick ratio: 0.9 times Total debt ratio: 55.4% Average collection period: 45 days Asset turnover: 2.5 times EXHIBIT C3.3 MBS Income Statements, 2008-2010 (year ending January 31) (in $000) 2009 2008 2010 $57,496.3 $69,619.2 $79,816.1 Sales Cost of goods sold Gross profit 40,990.5 51,352.6 58,505.7 16,505.8 18,266.6 21,310.4 Sales and administrative costs 12,164.7 13,397.2 14,810.2 Depreciation Earnings before interest and taxes Interest expense Earnings before taxes 1,265.0 1,532.8 1,756.3 3,336.6 4,743.9 3,076.1 159.6 104.9 171.0 2,916.5 3,231.7 4,572.9 es 1,168.6 1,293.1 1,826.9 $1,747.9 $1,938.6 2,746.0 Net income Questions 233 EXHIBIT C3.4 MBS Balance Sheets, 2008-2010 (year ending January 31) (in $000) 2009 2008 2010 Assets Cash $9,262.1 $10,651.6 $12,568.9 Accounts receivable 10,821.3 12,838.9 13,388.6 Inventory 11,499.4 12,563.4 13,021.2 Other current 344.6 418.9 479.0 Current assets 31,927.4 36,472.8 39,457.7 Gross fixed assets 19,312.7 19,734.5 20,853.8 Accumulated depreciation Net fixed assets -10,948.2 -12,480.1 -14,236.5 8,364.5 7,254.4 6,617.3 Total assets $40,291.9 $43,727.2 $46,075.0 Liabilities and Owners' Equity $2,568.6 $3,063.7 $3,044.7 Accounts payable Accruals 917.3 1,247.8 1,577.6 Current portion of debt due 500.0 500.0 500.0 5,122.3 Current liabilities 3,985.9 4,811.5 Long-term debt 1,542.4 2,221.5 1,510.3 Common stock 10,000.0 10,000.0 10,000.0 Retained earnings Total liabilities and owners' equity 24,763.6 $40,291.9 26,704.2 29,442.4 $43,737.2 $46,075.0 Miller Building Supplies Case Study Submit Assignment Submitting a text entry box or a file upload Due Dec 3 by 11am Points 100 See "Working Capital Management" by Sagner pp. 229-233 Answer questions on pp. 231-233. Question 1: Omit Question 2: (20 points) Are there specific working capital management suggestions that you can make to the company? (Hint: Use Miller's balance sheet and income statement (Exhibits C3.2 and C3.3) to calculate ratios and compare to industry ratios (Exhibits C3.4). Provide suggestions based on this analysis Question 3: (15 points) If a line of credit is requested from the Bank, should it be offered? At what interest rate? (Hint: refer back to LOC section in CH4) Question 4: (65 points) Would a monthly cash budget improve forecasting and provide support for a line of credit? If so, provide a cash budget (to the best of your ability based on the data in the case) Use format similar to Exhibit 4.2 (see Excel spreadsheet below). For sales, use the information in Exhibit C3.1 and divide each quarter by 3 to get monthly numbers. Since we don't know the minimum cash requirement, you can le stop at ending cash Exhibit 4.2 Cash Budget.xlsx fx Exhibit 4.2 Cash Budget ($000) A1 K L G F C B A 1 Exhibit 4.2 Cash Budget ($000) September July August June 2 from forecast 60,000 $ 50,000 40,000 $ 50,000 $ 3 Sales 4 Collections 8,000 12,000 10,000 20% 10,000 5 same month 30,000 30,000 36,000 1 month after 60% 24,000 6 2 months after 8 Total cash in 9 Payments 10,000 12,000 20% 6,000 8,000 7 50,000 50,000 56,000 40,000 from forecast 35,000 43,000 52,000 43,000 10 Expenses from forecast 4,000 4,000 es 11 39,000 12 Total cash out 13 Net cash in/out 14 Beginning Cash 15 Ending Cash 16 Minimum Cash Required 17 Surplus/deficit 18 Bank borrowing 19 Cummulative bank borrowing 20 Short-term investing 56,000 43,000 43,000 (6,000) (3,000) 13,000 11,000 (3,000) 10,000 6,000 3,000 (3,000) 5,000 (8,000) 10,000 21,000 3,000 5,000 5,000 5,000 (2,000) 5,000 16,000 2,000 8,000 10,000 5,000 11,000 21 22 23 Miller Building Supplies A NNE ARUNDEL COUNTY IS LOCATED south of Baltimore, MD and is the home of Annapolis, MD, the location of the U.S. Naval Acad- emy. Annapolis and the surrounding area has become a popular recreational and retirement community due to its access to the Chesapeake Bay, historic areas, and decent medical care. Furthermore, a major airport (BWI Thurgood Marshall Airport) is less than one hour away, and Washington, DC, is approximately the same distance. The potential growth of the county has attracted numerous businesses, with more expected to follow. The economy is diverse. Roughly 75 percent of employment is in service, education, and government; retail: financial: and the hospitality industry. Many Maryland state offices are in the area of Annapolis, and the county has such institutions of higher learning as St. John's College and Anne Arundel Community College, in addition to the Naval Academy. 229 JOSEPH MILLER STARTS MBS Joseph Miller founded his building supply company after returning from the Korean War. He saw the migration of economic activity in the county from agri- culture to a diversified mix of businesses, and located Miller Building Supplies (MBS) in the town of Glen Burnie in 1953. His choice of Glen Burnie was moti- vated by access to the major highways in that part of the state and the recent opening of the Chesapeake Bay Bridge to access the Eastern Shore of Maryland. The firm began as a wholesale distributor of various building supplies like paint, lumber, flooring, drywall, fencing, and cleaning supplies. As Miller devel- oped his customer base, he came to realize that construction companies needed a full range of electrical. plumbing, and heating/air conditioning supplies and equipment in addition to basic building materials. MBS has been run by Joseph Miller's children and now his grandchil- dren. As of 2010. Joseph III is the president, although he has been considering retiring. Joseph III's cousins are the chief financial officer (CFO), the marketing vice president, and the chief purchasing officer. The family has been quite suc- cessful in managing the business, and MBS is continuously profitable despite the fact that sales are sensitive to the economy of Anne Arundel County, of southern Maryland, and the Eastern Shore counties. VARIATIONS IN WORKING CAPITAL REQUIREMENTS The company's sales are seasonal, and during the colder months building activ ities slows down. Ifthe winter is mild. some building projects continue, but large new projects are not usually started until the spring. The low point of the year is January, and from that time on, sales build. MBS has a small year-round labor force and employs seasonal workers during peak business periods. Management is quite aware ofthe seasonal variation in the working capital position of the company. Historically. MBS has maintained large cash positions, and when receivables and inventory have increased, it has primarily financed them by drawing down cash. However, the company is taking a critical look at this strategy. The CFO realizes that further expansion of MBS may be difficult using internally generated funds. The cash philosophy may be unnecessarily tying up capital, and it may be appropriate to use short-term financing for seasonal working capital needs. The president thinks that the CFO's suggestion is worth pursuing. particu- larly as it would free up long-term capital for expansion. The marketing vice president is not convinced and thinks that the company's financing methods continue to be appropriate. In addition, he is opposed to additional interest expense and having to deal with a bank. His cousin, the sales manager, is not opposed to using debt to finance working capital and argues that receivables and inventory should be supported with short-term debt. A BANKER'S ASSISTANCE The Bank of Maryland (the "Bank") has dealt with MBS for four decades. The company has never established much of a relationship with the Bank except for an occasional term loan, depository and disbursement services, and a few other services. As noted. long-term capital has generally been internally generated. The Bank has tried to develop a stronger relationship as it considers MBS to be astable, well-run company. When Sara Williams, the Bank's calling officer for MBS, received a phone call from Joseph Miller III, she was more than willing to meet him. The CFO asked for help in analyzing MBS's working capital needs to do the following: Estimate MBS's working capital needs. Determine if the Bank is willing to extend MBS a line of credit sufficient to finance the company's working capital. QUESTIONS 1. Using the data in Exhibit C3.1, estimate the amount of working capital that is required during each quarter of the year. Does MBS have excess working capital during these periods? If so, what do you suggest? 2. Are there specific working capital management suggestions that you can make to the company? 3. If a line of credit is requested from the Bank, should it be offered? At what interest rate? Specify terms that the Bank can reasonably require. You should refer to Exhibits C3.2 through C3.4 in your analysis. 4. Would a monthly cash budget improve forecasting and support for a line of credit? If so, provide a cash budget (to the best of your ability based on the data in the case). Assume that the contractors who purchase from MBS pay when they are paid by their residential and commercial customers which is one-half in the second month and one-half in the third month following sales. Assume also that MBS must pay one-half of its payables in the month the expense is incurred, and one-half in the following month Miller Building Supplies 232 Recent MBS Quarterly Financial Statement Results (in $000) EXHIBIT C3.1 1st Quarter: Sales, $11,191; Net income, ($83) 2nd Quarter: Sales, $25,309; Net income, $1,247 3rd Quarter: Sales, $27,877; Net income, $1,554 4th Quarter: Sales, $15,439; Net income, ($21) 1st Quarter: Beginning cash, $12,102; Total current assets (TCA), $38,708; Current liabilities (CL), $7,579 2nd Quarter: Beginning cash: $6,768; TCA, $43,454; CL, $11,101 3rd Quarter: Beginning cash, $1,484; TCA, $40,773; CL, $6,809 4th Quarter: Beginning cash, $8,392; TCA, $39,456; CL, $5,121 EXHIBIT C3.2 Selected Industry Ratios Current ratio: 1.8 times Quick ratio: 0.9 times Total debt ratio: 55.4% Average collection period: 45 days Asset turnover: 2.5 times EXHIBIT C3.3 MBS Income Statements, 2008-2010 (year ending January 31) (in $000) 2009 2008 2010 $57,496.3 $69,619.2 $79,816.1 Sales Cost of goods sold Gross profit 40,990.5 51,352.6 58,505.7 16,505.8 18,266.6 21,310.4 Sales and administrative costs 12,164.7 13,397.2 14,810.2 Depreciation Earnings before interest and taxes Interest expense Earnings before taxes 1,265.0 1,532.8 1,756.3 3,336.6 4,743.9 3,076.1 159.6 104.9 171.0 2,916.5 3,231.7 4,572.9 es 1,168.6 1,293.1 1,826.9 $1,747.9 $1,938.6 2,746.0 Net income Questions 233 EXHIBIT C3.4 MBS Balance Sheets, 2008-2010 (year ending January 31) (in $000) 2009 2008 2010 Assets Cash $9,262.1 $10,651.6 $12,568.9 Accounts receivable 10,821.3 12,838.9 13,388.6 Inventory 11,499.4 12,563.4 13,021.2 Other current 344.6 418.9 479.0 Current assets 31,927.4 36,472.8 39,457.7 Gross fixed assets 19,312.7 19,734.5 20,853.8 Accumulated depreciation Net fixed assets -10,948.2 -12,480.1 -14,236.5 8,364.5 7,254.4 6,617.3 Total assets $40,291.9 $43,727.2 $46,075.0 Liabilities and Owners' Equity $2,568.6 $3,063.7 $3,044.7 Accounts payable Accruals 917.3 1,247.8 1,577.6 Current portion of debt due 500.0 500.0 500.0 5,122.3 Current liabilities 3,985.9 4,811.5 Long-term debt 1,542.4 2,221.5 1,510.3 Common stock 10,000.0 10,000.0 10,000.0 Retained earnings Total liabilities and owners' equity 24,763.6 $40,291.9 26,704.2 29,442.4 $43,737.2 $46,075.0