Page 1 Karen and Elizabeth Whatley are twins and the owners of Topeka Adhesives, company they started seven years ago. The technical experiise of the firm is unsur pissed, and Topeka has developed a number of adhesives Like tapes and glues that are popular with industrial users as well as home supply and hardware stores. About twelve months ago the partners concluded that Topeka's products were "underappreciated" and that "sakes could-and should be substantially higher." They fired an unproductive salesperson and, more importanthe made a key marketing decision. They decided to reduce advertising in trade journals and increase the funds spent on attending trade shows. The marketing change worked. The firm's exhibits were impressive, and the Whatleys made impor tant contacts with some major industrial users and even one large retailer, Spears, The sisters are in the process of negotiating a number of large contradis for the coming year (1996) and product inquiries are markedly higher. As a result of all this, Topeka's sales are expected to increase sharply in the ngat three yours, more than doubling by the end of 1998. The partners estimate sales of 51,933,100 in 1996, $2,609700 in 1997, and 53,131,600 in 1998. On one hand the twins are extremely pleased with the forecast because it is evidence of what they have long believed: The company manufactures quality products at a reasonable price. The downside is that such large growth will undoubtedly require external financing and could cause managerial difficulties. FORECASTING CONSIDERATIONS The partners have met with Fred Larri, Topeka's accountant, and Karl Shatner, the fimy's general manager, in order to compile a forecast for 1996-199 and to discuss the financing options. The table below shows the 1996 pro forma balance shoot resulting from the meetings, and Indicates that $326,100 needs to be Tophat 1926 Pro Forma Balance Sheet to009 Myskin& ammar Epdin raised The partners need to develop forecasts for 1997 and 1998, though they are confident that 19% will be the year of the "barged neal" for edenul funks The Whatleys do not intend to declare any dividends and expect the nat profit margin (N/sailor) to equal 35 percent, The net profit margin estimate is a bit creative since it aniders the possibility that new funds may be borrowed, which would increase interest expense. They also believe that there will be little if any economics of scale in working capital mypinment, and consequently it is messorable to assume that current assets will increase proper tionately with sale in 1997 and 1995,as will accruals and accounts payable that in, "spontaneous ligbilitics" Not thed acts are expected to Inanace by $146000 In 1207 and $50,000 In 197% Topeka has one ban outstanding and the amount due eachyour is song FINANCING DIFFERENCES It is no surprise, since the What boys are twins that they are rimilir in mary ways. For example, both are gifted at math and science they enjoy hiking and horseback riding in their spare time, and they randy dissave about even the most important business decisions Yet it is clear that they have very different views about how the expected growth should be financed. Keen What key wants to borrow all the necessary funds for a number of mea- sore, First, she argues that "we have voy limited capital of our own" This Implies that any orjuicy beyond retained earnings will have to be rabed from new Investors She is loathe to do this because she has been told that during the port twelve months privately held companies with sales under ten million have sold at four to six times FIDIT cumings before depredation, infeast, and bush During the five previous years the multiple was seven to ten, In sheet, Karen is convinced that any now shares of stock would be sold at relatively low prices In addition, the really believes that "profits are going to explode" and the doesn't like the idea of "hazing them with outsiders" Further Karen wants to borrow as much short ham debt as possible in part because of its relatively kow interest rate. And she realizes that much of the external financing will be used to expand receivables and inventory. She considers these to be short-form anote and believes that it is appropriate to finance them using a short-term debt The possibility of borrowing makes Elizabeth a bit uneasy. Frankly she does- n't believe that her sevier thinks enough about the consequences of a "downside disaster." Elizabeth doesn't want to worry about "cash crunches," that is, the possibiliya that in bad times the fim may have to scramble to raise the funds nowcantry to most ddie payments Beabah agree with Karen that this is not a good time to sell new equity Still, she is not convinced that new equity could not be raised at an acceptable price. True, it appears that it is a buyer's market for small firms Yd Topeka las an edremely strong customer and product bares and unusual growth prospects Then, Flixiboth morons, an equity interest in Topeka might well be sold at A "voy attagive pric." She dow admit, though. that borrowing at least some of the necessary funds is a good idea. Still, she is not willing to concede that she and her sister will be unable to supply additional capital For cumple the Whalleys own hand that could be sold to raise needed finds After further input from Land and Shatner, the twins decide on two things. First, the forwent needs to be complied to see "what the numbers bok lie." Soand the forcerot should consider "prudent liquidity and debt mtion," And the dodeion about what constitutes a "peuday" ratio was made for than Topia's bank. Kansas City Federal, said it would "strongly coxseder" a loan request but that any loan agreement would Bely contain the following provisions Topeka's current ratio must earned 2 and it's debt to-equity ratio, that is, total debe divided by equity (at look values), can't fall below 1. These are numbers fat Elizabeth is comfortable with, so the forecast will be made incorporating these constraints. MANAGERIAL CONTROL The partners are convinced that one reason Topeka has been and is successful is lecase they've loan involved in all phases of the bushewe production naranch, marketing, finance, and soon, The sisters believe they ain "keep on top of the business through 1296. They are omarred, though, that "large growth" beyond that time may curse them to lose managerial effectiveness, and think it may be a good idea to limit sikes growth beyond 1956 'Twonder," muses Kann, "whether we should cup our growth after 1956 at the amount we can intemally finance?"