Ms. Suzanne Montague had just delivered on unsettling news to Mr. Jason Wu, president and owner of the Sea & Snow Sports, Inc. (S&SS). Ms. Montague, the company's accountant reported that the firm's cash balance had fallen to approximately $1,250.1 Ms. Montague, a local CPA, went on to explain her estimate for the coming 60 days showed that the collection of accounts receivable during this period would be insufficient to pay certain 'trade obligations on which speedy payment was essential. These projections, in fact, showed that the company's planned level of purchases and sales to June 1 would result in substantially greater accounts payable on that date than at present.

S&SS had been criticized by trade suppliers for its failure to make payment within stated terms of sale. These complaints had increased sharply in recent months. Two important suppliers had suggested that they would have to put future shipments on a C.O.D. basis unless rapid improvement in payment was made. Connection with several of these suppliers included valuable franchises and distributorships. As a consequence, Mr. Wu was eager to maintain good relations.

After examining Ms. Montague's forecasts with great care, Mr. Wu concluded that the only solution to his problem was in obtaining, as soon as possible, an increased loan from his bank of account, the First Sailor's National Bank (FSNB). S&SS was currently borrowing $10,000 from the bank on sixmonth, unsecured, renewable notes. Mr.Wu disliked largescale borrowing as a matter of principle and had hoped to be able to avoid asking for an increase, but he was confident that the growing size of his business, together with its record of increasing profits, would prevail upon the bank to increase the loan to $100,000 for a few months until matters were squared away. He thought that this amount would enable him to "clean up his balance sheet" and thus make it unnecessary to spend time constantly worrying about daytoday financial problems such as trade payments and payrolls. He was also aware that the business was losing a growing number of prompt payment discounts. Additionally, he thought the company should target a minimum cash balance of $25,000 in the long run. With these ideas in mind, Mr.Wu thought that it would be advantageous to borrow funds for this purpose. Accordingly, he visited Mr. Steiner, vicepresident of FSNB, and made his request.

Mr. Steiner initially expressed some surprise at the size of the proposed loan increase, but after skimming the company's financial statements (Exhibits 1 and 2), he remarked that he was clearly not up to date on the company's status and had not realized the extent of the progress which Mr. Wu had made in his sales volumes. Periodic renewal of the modest current note, he said, had been made in a routine fashion. Before granting such a substantial increase as had been requested, he would have to study the entire situation thoroughly. He promised to let Mr. Wu know of his decision shortly.

S&SS was located in Stoney Shore, Connecticut, a northshore suburb of New Haven. Mr. Wu had established the business in 1988 after a successful career in the travel business. He had lived in the New Haven area all his life and the formation of his own company was a goal he had been striving toward since graduating from a major state university. In his youth, he had won numerous regional sailing prizes and, as the years passed, had established a reputation as a yachtsman of some renown. In 1988, he had sold his interest in the travel agency and with the proceeds, together with $50,000 of savings and family funds, established S&SS (initially the company was named Sea Side Sports). He succeeded in finding a satisfactory building and storage area on Stoney Shore harbor which he secured on a tenyear lease and, largely through his reputation, quickly obtained two important wholesale distributorship franchises for marine products.

The business had been profitable in each year since its founding. Sales volume had continued to grow, and Mr. Wu had, from time to time, added new product lines which he felt had attractive growth possibilities. The company's employee staff was small, consisting mainly of clerical help and semiskilled warehouse labor. Mr. Wu believed the company could handle substantial increases in sales volume with its present facilities and personnel. In 1998, S&SS sold, as wholesale distributor, a variety of small sail and power boats made, of wood and fiberglass, as well as outboard motors, water skis, skindiving equipment, surfboards, and marine hardware and accessories.

In 1995, in an effort to smooth the seasonal character of sales, Mr. Wu diversified into winter sporting goods. Currently, sizable revenues from winter recreational items are now being realized. These items included skis, snowmobiles, sleds, skates, and hockey equipment.

Purchases of the various products are generally on terms of 2% ten days, net 30 days, from the manufacturers. S&SS has, however, seldom taken advantage of the discounts offered and has, in fact, been meeting the 30day deadline less and less often as volume growth has strained the firm's capitalization.

In the fall of 1997, Mr. Wu had competed for and won a valuable franchise, on a oneyear trial basis, for the distribution of a line of highend yachts made by a South American manufacturer. Purchase terms from this producer were for net amounts 30days after purchase. Since shipment time from South America sometimes exceeded 30 days, it was necessary on those occasions to make payment prior to the receipt of the shipment. In April 1998, S&SS had completed an extensive publicity campaign relative to this new line. Dealers were just beginning to place orders, and Mr. Wu thought that in another three months the boats would "really be moving."

S&SS's geographic area of distribution varied with different product lines. Some of the franchises were only for the New Haven area or for the state of Connecticut. Others extended throughout the New England region. Although there remained a pronounced seasonal pattern of sales for individual products, the addition of the winter sport items to the firm's operations had resulted in a smoothing out of volume for the company as a whole. In recent years there has, in consequence, been no appreciable monthly variation in sales within the steady growth experienced.

The financial condition of S&SS's customers is a major problem. Most are small retail businesses that are usually undercapitalized. Although S&SS allows a 5% discount for tenday payment, few customers pay within this period. While the firm is thus forced to carry many dealers for weeks or even months, the manufacturers of the various product lines insist that dealers' orders be promptly filled by S&SS. There is heavy and growing competition in the industry at all levels and there is a constant problem of losing dealers to another distributor of a competing product solely on the basis of credit extension and speed of shipment. On the other hand, distributorships from important manufacturers are much sought after and, therefore, S&SS is not in a position, as are its customers, of dealing at will with whatever supplier provides the most liberal credit accommodation.

In 1998, Mr. Wu withdrew only a modest salary to support his family, preferring to reinvest as much as possible of the company's profits in the business. He is convinced that the growing popularity of boating, skiing and snowmobiling will continue for years, and that it will be of major importance to be prepared in every way to participate in the growth. Current indications are that S&SS's sales volume will reach about $1,800,000 for 1998 and that further increases of at least $300,000 per year can reasonably be expected.

Mr. Wu has paid dividends from the business to provide funds for outside investments of unusual promise. He has purchased, in this way, a part interest in the local franchise of a large national motel chain; an option on a parcel of waterfront real estate; and some stock in one of his suppliers' companies. Though these investments are not directly related to his business, Mr. Wu believes that he owes it to his family to diversify his estate as it grew in size. Furthermore, he believed in 1998 that the value of these holdings had at least doubled over the total initially invested in them. Mr. Wu expected to continue paying $25,000 per year in dividends as he had in the past.

Mr. Steiner, the banker, contacted several other marine and sporting goods wholesalers in the New Haven area and found that Mr. Wu is highly regarded by all. He is characterized by these sources as a "real competitor," an "imaginative salesman," and as "one who knows this business backward and forward a man whose basic objective is and always will be growth."

1 The numbers in the case may appear "too small" to be realistic or worth worrying about. If so, just add three 0's to all numbers. The concepts employed will be the same regardless of the dollars involved.

QUESTION

Construct a long-term financial plan. Specifically, produce pro forma income statements for the full year 1998, 1999, and 2000 and year-end balance sheets for 1998, 1999 and 2000. (We will need to make additional assumptions to construct these pro formas. The assumptions from #6 above will serve as the starting point and let's accept Mr. Wu's sales projections. We also must recognize that most items will grow with sales including cost of goods sold and operating expenses. To calculate receivables and inventory, let's use historical DSO (or ACP) and historical Days of Inventory. But, for simplicity, let equipment, deferred charges and accrued expenses remain constant)