Why Was Sure Cut Unable to Repay Its Bank Loan by March 31, 1996, as Originally Forecast?
Why was Sure Cut unable to repay its bank loan by march 31, 1996, as originally forecast?
Sales started to decrease since September 1995, finishing by March 1996 a 10.3% under the budget (Exhibit 1). The gross profit margin was also decreasing. This decreased in the gross profit comes mainly because sales decrease and there are some fix cost within the COGS that didnt decrease in line with sales.
From another hand, Sure Cut didnt decreased the production of shears when their sales were decreasing (Exhibit 2), therefore they started building inventory, decreasing their cash flow from operations, increasing their working capital. Also, the accounts receivables didnt decreased in line with sales, in the contrary in December and January they were bigger than forecasted (Exhibit 3). Again, this increased Sure Cuts working capital. Finally, in September Sure Cuts asked for $500,000 in September, mainly due to non-forecasted higher expenditures for the plant modernization.
In summary, Sure Cut was unable to repay its bank loan due to the decreased in sales (and gross profit) and the increase in working capital (due to high A/R and inventory)
Has Sure Cuts financial condition worsened sufficiently to cause Mr. Stewart any great concern?
Even though sales have been decreasing, Sure Cuts has enough assets (the collaterals exceeds by far the bank loan) to pay the loan in case of a default; therefore the bank shouldnt have a big fear of not being paid.
If we see the biggest picture, we see a company that has had profits for 40 years, and it is projecting to have profits this year as well (Exhibit 4). It is true that Sure Cuts financial condition are worst than expected, but they are not as bad to have any great concern.
Nevertheless, it is important to improve the cash management. This