MINICASE Garnett Jackson, the founder and CEO of Tech Tune-Ups, stared Mr. Jackson thumbs through past financial statements and esti- out the window as he finished his customary peanut butter and jelly mates that each of the firm's computers, costing $10,000, can sup- sandwich, contemplating the dilemma currently facing his firm. port revenues of $80,000 per year but that the salary and benefits Tech Tune-Ups is a start-up firm, offering a wide range of com- paid to each consultant using one of the computers is $70,000. puter services to its clients, including online technical assistance, Sales revenue in 2018 was $1.2 million, and sales are expected to remote maintenance and backup of client computers through the grow at a 20% annual rate in the next few years. The firm pays Internet, and virus prevention and recovery. The firm has been taxes at a rate of 21%. Its customers pay their bills with an average highly successful in the 2 years since it was founded; its reputation delay of 3 months, so accounts receivable at any time are usually for fair pricing and good service is spreading, and Mr. Jackson around 25% of that year's sales. believes the firm is in a good position to expand its customer base Mr. Jackson and his co-owners receive minimal formal salary from rapidly. But he is not sure that the firm has the financing in place to the firm, instead taking 70% of profits as a "dividend," which accounts support that rapid growth. for a substantial portion of their personal incomes. The remainder of Tech Tune-Ups' main capital investments are its own powerful the profits are reinvested in the firm. If reinvested profits are not suffi- computers, and its major operating expense is salary for its consul- cient to support new purchases of computers, the firm borrows the tants. To a reasonably good approximation, both of these factors required additional funds using its line of credit with the bank. grow in proportion to the number of clients the firm serves. Mr. Jackson doesn't think Tech Tune-Ups can raise venture Currently, the firm is a privately held corporation. Mr. Jackson funding until after 2020. He decides to develop a financial plan to and his partners, two classmates from his undergraduate days, have determine whether the firm can sustain its growth plans using its contributed $250,000 in equity capital, largely raised from their line of credit and reinvested earnings until then. If not, he and his parents and other family members. The firm has a line of credit partners will have to consider scaling back their hoped-for rate of with a bank that allows it to borrow up to $400,000 at an interest growth, negotiate with their bankers to increase the line of credit, rate of 8%. So far, the firm has used $200,000 of its credit line. If or consider taking a smaller share of profits out of the firm until and when the firm reaches its borrowing limit, it will need to raise further financing can be arranged. equity capital and will probably seek funding from a venture capi- Mr. Jackson wiped the last piece of jelly from the keyboard and tal firm. The firm is growing rapidly, requiring continual invest- settled down to work. ment in additional computers, and Mr. Jackson is concerned that it Can you help Mr. Jackson develop a financial plan? Do you is approaching its borrowing limit faster than anticipated. think his growth plan is feasible