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Compass Box Whisky Company In 2007, the fine Scotch whisky industry was booming wo rld wide. Scotch whisky exports, 90% of the industry's volume, h it record values in 2006, reaching nearly 2.5 b illion in value. Co mpass Bo x Whisky Co mpany was a small private co mpany located in London that made high -end whiskies fro m co mponent pieces purchased from separate distilleries. John Glaser, Co mpass Box's founder and whiskymaker, faced a serious challenge in this dramat ically changing market. After seven years in business, growing at 30% per year in an environment that should have been ideal for his young business, Glaser was suddenly confronted with a potentially fatal shortage of the component wh iskies he needed to make h is products . In order to ensure future supply, Co mpass Bo x would almost certain ly have to start purchasing component whiskies further in advance, and maintaining its own inventory of aging Scotch. However, purchasing and aging wh iskies was an entirely new business for Co mpass Bo x. The co mpany would have to abandon its business -model based on a cycle time o f less than one year fro m input purchase to output sale. Rather, it would have to become an inventory -intensive company with over 15 years between the purchase of input and the sale of output. Glaser had no idea what such a transition would mean for the company. One of his concerns was: how do I account for the aging wh isky inventory? Industry Background To be called Scotch whisky, a whisky had to be both distilled in Scotland and aged in cask in Scotland for at least three years (see Exhi bit 1 for whisky terminology). Two types of whisky existed: higher-grade malt whisky and grain wh isky. By value, roughly 80% o f Scotch whisky sold to consumers was \"blen ded wh isky,\" which contained both malt and grain whiskies. The next larg est category (about 19% by value) was \"single malt wh isky\"; this premiu m p roduct contained 100% malt whisky fro m a single distillery. Other premiu m categories such as \"vatted malts,\" which were made fro m malt wh iskies of mo re than one distillery and had no grain wh isky co mponentmade up less than 1% by value. The whisky production process began with d istilling the grain. Malt wh isky was d istilled fro m malted barley through a batch process in pot stills; grain whisky was distilled fro m corn, wheat, and/or barley in a less expensive, continuous process that used column stills. Upon distillation, new whisky was aged in oak casks that previously had contained either sherry or bourbon. The whisky ________________________________________________________________________________________________________________ P rofessors Romana L. Autrey and Devin Shanthikumar prepared this case. HBS cases are developed solely as the basis for class discu ssion. Some financial figures have been disguised. Cases are not intended to serve as endorsements, sources of pri mary data, o r ill ustrations of e ffective or ineffective manage ment. Compass Box Whisky Company 1 was aged for a min imu m o f three years, but often for ten years, twelve years, or even longer. While aging in cask, evaporation known as the \"angels' share\" reduced the contents by approximately 2% per year. After the whisky spent the desired time in cask, wh isky makers diluted the remaining mature whisky to the desired alcohol level (typically 40%-43%), bottled it, and sold it to consumers. Although the whisky production process was standard across the industry, each distillery' s product was distinct. Variations among the whiskies arose fro m several factors: the characteristics of the stills us ed (e.g., size and shape differences), the specific grain used (e.g., the variety of barley and the malt ing specifications), and the aging process (e.g., the type of casks used and aging duration). Compass Box John Glaser founded Co mpass Bo x in 2000, fine-tuning the compositions of his first whiskies in h is kitchen. His philosophy was firmly rooted in creat ing innovative new Scotch whiskie s to energize people about whisky. About his approach to whiskymaking, Glaser stated: \"My goal is to push the envelope of what whisky can be and to help open the eyes of people to the joy of wh isky. I question, explore, apply, and learn, with the ultimate goal to build delicious flavors into what we make.\" In 2000, Co mpass Bo x introduced its first product, Hedonism, a unique vatted grain wh isky (a blend of 100% grain wh iskies). More innovative products followed, includ ing Eleuthera (a vatted malt), Orangerie (a whisky infused with fresh orange peels and spices), Spice Tree (a vatted malt with a secondary maturation in casks containing barrel inserts of French oak), and several others. Eventually, the company divided its product lines into core products and limited releases, and it assured availability only for the core products. In 2007, the main product line consisted of Asyla (a blended wh isky), Oak Cross (a vatted malt fin ished in Co mpass Bo x proprietary oak casks), and Peat Monster (a vatted malt). The typical whisky making process at Compass Box (pictured at Exhi bit 2) began when Glaser tasted samples fro m 30- 40 d ifferent casks of aged whisky and selected the best casks to purchase. The company then sent the actual casks from their respective warehouses in Scotland to a bottling hall facility in Leven, north of Ed inburgh. At the Leven bottling hall, the casks were empt ied into a large tank according to Co mpass Bo x's recipe, d iluted fro m the cask strength of approximately 60% alcohol to 48% alcohol, an d returned to the original 2 casks to age an additional 6 months or so. Finally, the whisky was bottled in Bro xburn, just west of Ed inburgh, and the empty casks were sold to a local cooper for a minimal salvage value. By 2007, Co mpass Box's artisanal methods led to over sixty awards for quality and innovation. Among its honors, it was the only co mpany to ever win Whisky Magazine's \"Innovator of the Year\" four t imes. At this time, the entrepreneurial start-up had four employees and an estimated value of 3.5 million (appro ximately US$7 million). 1 2 Most distilleries offered more than one maturity of whisky for sale. For example, Ardbeg (a distillery located on the island of Islay) sold 10-y ear, 17-year, and 21-year bottlings. The procedure of returning the whisky to the casks to age further was known as \" marrying\" the whisky. Most companies didn't m arry the whisky because of the hassle and expense of the additional operations, but Glaser believed that the marrying process improved the whisky's taste and created sweeter flavors in the resulting whisky. 2 Compass Box Whisky Company Whisky Sourcing Co mpass Bo x was founded during a period o f decreasing prices for Scotch whisky that was aging in casks, referred to collectively as whisky stocks. Supply of such stocks was plentiful. Historically, the industry experienced alternating cycles of supply glut and crunch due to the inherent challenges of estimating demand and costs over the 10-12 year ag ing period. (See Exhi bi t 3a for price fluctuations of whisky stocks over time .) Over the years, however, growth in the demand for Scotch whisky outstripped the industry's capacity. The growth of the middle class in Ch ina caused demand for Scotch wh isky to surge in that country during the 3 preceding decade, rising fro m 700,000 liters to 5.7 million liters. India was by far the world 's largest market for whisky by volu me, consuming some 600 million liters a year. In 2007, the repeal of India's tariff, wh ich 4 had been up to 550% on foreign liquor, opened the Indian market for imports. To co mpound matters, growing world wide barley shortages lowered the available raw materials that were required to distill new whisky. 5 By 2007, the shortage began to affect standard industry practices for sales of whisky stocks. According to one distiller: \"The way the Scotch whisky industry works is that companies constantly buy and sell whisky to top up their blends to meet demand. Suddenly all that has stopped. The big firms will just not sell any more.\" 6 In this environment, prices for wh isky stocks increased sharply some whiskies were essentially unavailable and the older the stock, the more the price increase. A small co mpany like Co mpass Bo x that used primarily 7 10+ year o ld whiskies simp ly could not ensure its ability to purchase mature stocks. When asked the most pressing problem facing Co mpass Bo x, Robbie M illar, Managing Director, responded: \"No supply, no business.\" To figure out its best course of action, the co mpany analy zed several s cenarios for Peat Monster, a representative core product made fro m 10- 11 year o ld Cao l Ila and 12-17 year o ld Ard more. A ll scenarios required Co mpass Bo x to estimate wh isky prices and consumer demand into the future, a highly uncertain 8 venture. However, the company could use historical prices and demand to calculate expected average rates of growth for the future. The first scenario was to continue purchasing mature stock. To successfully pursue this scenario, Co mpass Bo x believed it would need an industry partnerwho m it would have to co mpensate with guaranteed access to its component whisky stocks. Alternatively, Co mpass Bo x could modify its product offerings based on the whisky stocks to which it had access. Such a shift in practice, ho wever, would require consumers to accept those hypothetical new products, a significant risk. The present 3 4 William Lyons, \" Scotch rocks!\" Scotland on Sunday, February 18, 2007. Deborah Ball and Eric Bellman, \" Spirited Attack: Western Liquor Makers Eye Rich Indian Market,\" W all Street Journal, June 8, 2007. 5 Some of this shortage was caused by poor weather. For example, 2002 and 2006 had disastrous weather, causing the smallest bar ley harvests since 1937. However, some German brewing industry lobbyists also attributed the shortage to the subsidies for biofue l crops such as corn for ethanol. Spiegel Online, April 23, 2007 (www.speigel.de/international/business/ 0,1518,478901,00.html, accessed August 22, 2007). 6 William Lyons, \" Scotch rocks!\" Scotland on Sunday, February 18, 2007. 7 Another changing industry practice that affected Compass Box was the pricing of whisky casks, which historically was based on ly on the quantity of alcohol and the age of the cask. For example, the cost per liter for whisky stocks aging in sherry casks was higher than whisky in bourbon casks. Currently, Compass Box paid no premium for selecting the best quality individual casks, but Glaser speculated that this situation might change in the future. 8 This analysis was based on 15-year-old Ardmore and Compass Box's sales forecasts for consumer demand, and it assumed a 3% price increase per year for whisky stocks. 3 Compass Box Whisky Company value of buying mature stocks for the next 10 years' production equaled 2.84 million (see analysis at Exhi bit 4). Second, Co mpass Bo x could purchase \"new fill\" casks and age them. (See Exhi bits 3a and 3b for costs to purchase and age whisky, respectively). This scenario would add nu merous inventory -related business processes and costs to the existing business model. As with mature stock, Co mpass Bo x would continue to purchase both the casks and their contents. Now, however, instead of automatically purchasing whatever cask the desired mature whisky happened to be in, Co mpass Bo x would be able to purchase casks of its own selection. Those chosen casks would be filled at various distilleries with considerably less expensive new whisky. Although this system would lower acquisition costs, Co mpass Bo x wo uld incur several new costs to age the newly-filled casks fo r 10 o r mo re years. Aging costs included cash outlays for renting warehouse space to store the casks, insuring the casks, and paying interest to finance the inventory. Moreover, there was the non - cash cost of evaporation known as \"the angels' share.\" Because whisky casks were not topped off, their contents steadily decreased over time . For examp le, a newly filled cask that began with 123 liters wou ld only contain about 100 liters after 10 years and about 95 liters after 12 years. The \"new fill\" scenario had two primary drawbacks: (1) it required a substantial cash investment in whisky stocks, with a ten-to-fifteen year p ipeline of inventory aging in casks at any given time, and (2) it involved project ing consumer demand a decade or more into the future, a task that had proven problemat ic for the industry in the past. On the other hand, new fill casks offered co mp lete control over the whisky during its aging period, enabling more quality control and further opportunity for innovation. Glaser speculated that improv ing the oak quality might produce sellable whisky in 6 or 8 years instead of 10 to 12 years (a lthough he would always want to age some of the stock to 10 or 12 years, o r even older). To proceed with this scenario, Co mpass Bo x wou ld need a financing partner to fund the inventory acquisition. Not only did the co mpany need to understand the imp licat ions of this switch for itself, but it would also need to explain it to any potential financiers. Due to the time lag for aging, the co mpany analy zed the in it ial outlay for the pipeline of wh isky stocks, plus annual maturation costs. The transition to purc hasing new fill stocks and aging those casks for the next 10 years' production would cost 2.85 million (see analysis at Exhi bit 5). In addition to purchasing stocks for the next 10 years' production, Co mpass Box would also incur ongoing annual costs to purchase new fill casks for production in years 11 and after. Estima ted costs for 2007 were 235,000 for wh isky stocks and 200,000 for maturation costs, with about a 10% increase per year thereafter as sales volume increased. Finally, the company considered several hybrid options, but ruled these out quickly. They posed all o f the challenges that the first two options created, but did not provide the benefits. The quantitative comparison of the two most extreme scenarios revealed that, on average, the cost over a ten-year period would be roughly the same. (That is, the financing cost roughly equaled the holding gains as the whisky stocks matured.) For quality, control, and access to supply, Glaser sensed that, in the long -term, the switch to new fill casks was inevitable . However, the holding of inventory raised several potential issues that Co mpass Bo x had never had to consider before. It was vital that the co mpany understand exact ly what holding inventory would mean for the business. How would op erations be affected? What additional costs would the company incur? How would it even know if the business was profitable when input costs were so unclear and so distantly connected to output? 4 Compass Box Whisky C ompany Measuring Profitability Co mpass Box's cost accounting in the existing business model was simp le: since bottling occurred in batches, the company accumulated all direct costs for each batch, divided by the number of cases in that batch, and the result was the cost of goods sold for each case. This co mputation excluded indirect labor costs (e.g., supervisory monitoring at the bottling hall) and other manufacturing overhead costs (e.g., warehousing during the marrying period). Instead, these indirect costs were expensed as period costs in Ad min istrative Expenses. However, since the product cycle was less than one year, bottom-line net inco me would be nearly the same even if manufacturing overhead were included with cost of goods sold. To illustrate Co mpass Bo x's accounting in the existing business model, we present the projected gross marg in co mputation for Peat M onster in Exhibit 6. Switching to new fill casks would dramat ically alter Co mpass Bo x's financial statements and several key ratios, such as return on assets, which both Compass Bo x and its potential investors tracked. The switch would also involve majo r operational changes to the business that would create several new challenges in costing its whisky. For examp le, the co mpany would have to determine whether the costs of storing and insu ring the casks should be considered part of the input cost. Moreover, it would have to decide whether to measure profitability relative to the actual costs incurred for the co mponent whisky, possibly purchased 10-15 years earlier, or the replacement costs today of either new or aged whisky. Accordingly , Co mpass Bo x would face several new challenges in costing its whisky. These costing choices might ultimately affect the product offerings that the company maintained, the distribution channels it pursued, and the price of its product. Not only would understanding profitability be vital for the ongoing business, but any potential financiers would demand forecasted financials with reasonable profit calculations, along with a sound plan for the new inventory operations. 5 Compass Box Whisky Company Exhi bit 1 Whisky Terminology The term \"wh isky\" orig inated fro m the Gaelic word usquebaugh (\"water of life\"). Legal Definition of Scotch Whisky Scotch whisky was first defined in Un ited Kingdom law in 1909 and was recognized by European Union legislat ion in 1989. For purposes of the Scotch Whisky Act of 1988, \"scotch whisky\" meant whisky: a) which was produced at a distillery in Scotland from water and malted barley (to wh ich only whole grains of cereals may be added)... which was distilled at an alcoholic strength of less than 94.8% so that the distillate had an aro ma and taste derived fro m the raw materials used in, and the method of, its production [emphasis added]; b) which was matured in an excise warehouse in Scotland in oak casks of a capacity not exceeding 700 litres, for no less t han t hree years [emphasis added]; c) which retained the colour, aro ma and taste derived fro m the raw materials used in, and the method of, its production and maturation; and d) to which no substance other than water and spirit caramel had been added. Malt whisky Malt whiskies were made by the Pot Still (batch) process from malted barley, yeast, and water. Grain whisky Grain whiskies were made by the Patent Still, so metimes called the colu mn still, (continuous distillation) process from malted barley together with unmalted barley and maize (c orn) or wheat, plus yeast and water. Single malt whisky (Single grain whisky) The word \"single\" indicated that the whisky was the product (100% malt or 100% grain whisky) of one distillery, although it could contain whiskies fro m d ifferent casks and vintages fro m that one distillery. Blended whisky A comb ination of single malt whiskies, often as many as 30, with single grain whiskies. The average mixture was approximately two -th irds grain and one-third malt, but there were many with d ifferent proportions. Vatted malt A blend of single malts fro m various distilleries. Maturation Whisky was typically matured in oak casks previously used to make bourbon or sherry. Aging duration varied by distillery, but several common ages were 10, 12, 15, or 18 years, or more . If more than one age of whisky was included in the bottling, the age s tatement indicated the youngest whisky in the bottle. Wood finishes The term \"wood finish\" implied that the whisky was removed fro m its initial cask and transferred to a new cask that had been previously used to make port, Madeira, wine, or another product, for the fin ishing touch. This fin ishing process often lasted six months to two years. So urces: Alan S. Gray, \"T he Scotch Whisky Review,\" ( Sutherlands Edinburgh, 2007) and Michael Jackson, Complete Guide to th Single Malt Scotch, 5 edition (Philadelphia: Running Press Book Publishers, 2004). 6 Compass Box Whisky Company Exhi bit 2 The Whisky-Making Process and Resulting Product So urce: Company photos. 7 Compass Box Whisky Company Exhi bit 3a Estimated Acquisition Costs for Scotch Whisky AVERAGE MARKET VALUE OF MALT S COTCH WHIS KY IN CAS K (in pence per liter of alcohol) S tart Year New (0 Years) 3 Years AVERAG E PRICE OF NEW FILL CASKS AFTER : 4 Years 6 Years 8 Years 12 Years a E nd Year 1987 15 1 485 400 325 330 660 19 99 1988 15 9 400 310 255 363 580 20 00 1989 15 9 290 275 255 400 520 20 01 1990 18 2 258 230 270 400 415 20 02 1991 18 9 223 225 280 355 405 20 03 1992 18 9 218 233 313 340 395 20 04 1993 18 9 223 273 293 330 425 20 05 1994 19 0 253 295 288 305 435 20 06 1995 19 0 285 280 273 300 550 20 07 1996 19 0 260 265 255 290 1997 18 5 248 238 250 290 1998 18 5 228 223 240 295 1999 18 5 213 223 240 335 2000 18 5 210 223 245 2001 18 5 210 223 335 2002 17 5 210 228 2003 17 5 215 300 2004 17 5 290 2005 17 5 2006 18 0 2007 19 5 So urce: Alan S. Gray, \"T he Scotch Whisky Review\" ( Sutherlands E dinburgh, 2007): Appendix II \"Estimated Broking Values of Scotch Whisky in Bond.\" a The source table presents a spread of market values for each year and age, which typically ranged from 30 to 40 pence per lit er (e.g., 1987 new fill was 136-165), though some exceeded this range considerably. Market values shown in this table are the midpoint of this range. 8 Compass Box Whisky Company Exhi bit 3 b Estimated Aging Costs for Scotch Whisky Year ES TIMATED ANNUAL COS T OF AGING WHIS KY (in pence per liter of alcohol) Warehousing Financing Evaporation Total 1992 6. 07 15.71 3.83 25.61 1993 6. 24 16.35 4.00 26.59 1994 6. 41 15.27 3.83 25.52 1995 6. 59 16.27 4.00 26.86 1996 6. 76 17.27 4.17 28.20 1997 6. 93 15.95 4.00 26.89 1998 7. 11 14.61 3.67 25.39 1999 7. 28 14.89 3.83 26.01 2000 7. 45 14.53 3.67 25.65 2001 7. 63 15.18 3.83 26.64 2002 7. 80 15.46 4.00 27.26 2003 7. 97 15.72 4.00 27.69 2004 8. 15 15.74 4.00 27.88 2005 8. 32 15.86 3.83 28.01 2006 8. 49 17.02 4.33 29.85 2007 8. 67 19.50 4.83 33.00 So urce: Alan S. Gray, \"T he Scotch Whisky Review\" ( Sutherlands Edinburgh, 2007). 9 Exhi bit 4 Analysis of Inventory Options: Buying All Stocks When Mature Forecasted Sales (liters) 2007 2008 2009 2010 14,490 18,630 24,840 33,120 6.17 Total estimated outla y 89,474 6.36 6.55 6.75 2013 2014 2015 54,648 60,113 66,124 72,736 a NET PRESENT VALUE , 2007-2016 So urce: 80,010 7.16 7.37 7.59 7.82 8.06 6.95 391,190 118,489 2016 49,680 Average cost per liter 2012 2011 162,725 223,475 345,269 2008 2009 2010 2011 443,219 502,167 568,948 644,622 2,843,977 Company documents. Exhi bit 5 Analysis of Inventory Options: Transition to New Fill Casks 2007 Forecasted Sales (liters) 14,490 18,630 24,840 33,120 49,680 To get to end volume requirement, need to start in 2007 with: Total liters, pre-evaporation 18,870 24,261 32,349 43,131 64,697 Initial outlay required (one-time) Warehousing Financing Estimated maturation cost Estimated maturation costs per liter Ne t pre se nt v al ue of ma tura ti on c os ts So urce: a Company documents. Discount rate of 3%. 2013 2014 2015 2016 54,648 60,113 66,124 72,736 80,010 71,167 78,284 86,112 94,722 104,195 57,050 46,100 33,137 17,879 0 61,371 118, 421 49,592 95,692 35,648 68,785 19,233 37,111 0 0 295 282 246 0 0 1,869,851 (average cost per liter = 303p) Estimated pipeline maturation costs NET PRESENT VALUE , 2007-2016 2012 a 81,125 87,270 80,174 86,247 77,931 83,833 73,884 79,481 66,238 71,255 168,395 277 166,421 284 161,764 290 153,365 294 137,493 297 982,984 a 2,852,835 Compass Box Whisky Company 108-032 Exhi bit 6 2007 Gross Margin Co mputation for Peat Monster and Industry Average Peat Monster, 10+ year vatted malt Selling Price to importer, per case of 12 (75cl bottles) Spirit Costs (4.14 liters alcohol) Dry Goods bottle, corks, labels, etc. Direct Labor bottling charge Total cost of goods sold, per case 104 Gross margin, per case of 12 So urce: 29 15 8 52 56% 29 15 100% 52 50% Company documents. Industry Average, Six-Year Blend Selling Price (to importer), per cases of 12 40 Spirit Costs Dry Goods bottle, corks, labels, etc. Direct Labor bottling charge Overhead, freight in 7 4 2 1 50% 29 14 7 Total cost of goods sold, per case 14 100% Gross margin, per case of 12 Ad vertising and selling 26 15 65% 38% Net profit after advertising, per case of 12 11 28% So urce: 9 Alan S. Gray, \"T he Scotch Whisky Review\" ( Sutherlands Edinburgh, 2007). 9 For clarity, only Industry Average data is drawn from \"The Scotch Whisky Review.\" Peat Monster data is based on company docum ents. 11 Case writing You should think of case writing as (1) an evaluation of a finance problem and (2) a style of management. For the moment, let's consider the style of management and think of how you will make a contribution to the firm where you work. First of all, you want to clearly and accurately convey information to the people that you work for. You will want to setup the problem, the facts that are important, the options, and your rationale for a specific path of action. Make sure everything is well thought out and carefully argued. It is important to make transparent what you think about the problem, why you think the way you do, and how would you approach this problem. This type of thinking will make your management style more predictable and you will find it easier to work on projects with people and they will find it enjoyable to work with you. I know that case writing is labor intensive, but the payoff is huge. If there is any single issue that you could learn in the business school program, it is how to make careful decisions and how to communicate those decisions to others. The structure of writing cases that I suggest is also similar to a legal opinion. And there are many other applications as well. The framework that I propose here is quite generic and has a wide range of uses for you. Some financial tools that you might consider When you look at the financial statements, make some diagnostic tests on what is going on at the firm. What you want to ask is whether the financials tell a different story than the text of the case. Here are some ratios that I use. They are really bare bones, but they will cover the ground for you. 1. Liquidity ratios Current ratio= Current Assets/Current liabilities Cash ratio= Cash/Current liabilities 2. Profitability ratios Profit margin on sales=Net income/Sales Basic earning power= EBIT/Total assets Return on assets=Net income/Total assets 3. Asset management Days sales outstanding (DSO)= 365/(Sales/AR) Inventory turnover= Cost of Goods Sold/Inventory 4. Debt management Debt to assets=Debt/Assets} Times interest earned (TIE)= EBIT/Interest How should you want to organize your thoughts, once the ratios are done? You should think first of the firm's customer, the product for the firm, and then the profitability of the product. Thus, think out the firm problem in terms of marketing, production, and finance - in that order. Try to organize firms in that way. Try to keep the basic framework quite simple. As a general rule, think of case writing with the following set of questions. First, who is the customer of the firm? Second, what is the product and how does the product fit the customer's needs? Third, what is the profit margin and return on the project? Now ask if all three questions are clearly understood by the management. Many people see the finance problem first. This is incorrect. The customer comes first. Ask who the elite are in the firm. This is the group that tends to dominate decision making. Is it the engineer, the scientist, the physician? Figuring out who is the decision maker may be one of the central issues of the case. There are typically three functional areas: (1) marketing (setting prices and managing the customer base, (2) production (producing the product efficiently), and (3) accounting/finance (keeping score of whether we are making money and whether we are maximizing the firm value). When you look at firms think about scoring them along these lines. Some firms are good at one and weak at the other two areas. Outline for your case There are four sections for your case. I want to describe an outline case writing with an analogy. Consider that you are a doctor, who is evaluating a patient and organizing the report in the medical record. Tongue in cheek, Fact pattern XYZ corp is a 25year old male who came to the emergency room at 11:00 P.M. on June 24 with complaints of appendicitis... (The your fact pattern should be a about a paragraph or two, but no more. It should describe the facts that are especially important. They are the distilled facts.) Diagnostics I ran the following tests, and the results are ... (This should be diagnostics of what is unusual. This is much more of an art than a science. You might consider: the credibility of the financial projections, the liquidity of the company, and the growth opportunities of the business, for example. This is the heart of the case and shows that you can apply the tools of the finance to the problem. Here is where the ratios belong and other tests that you make.) Options There are the following options that were considered: Hospital rest, surgery, or home. (You always want to setup a problem with a number of options and discuss each. There are usually multiple ways of solving a problem and we want to find the best.) Recommendations I operated, removing his appendix. (This is what you recommend and why.)