1slideshar.working-capital-management.ppt

8/14/2019 1slideshar.working-capital-management.ppt

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WORKING CAPITAL

MANAGEMENT


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Factor vs Reverse Factor

Factor: Supplier sends invoices tofactor

RF: Buyerchooses invoices that he

wants to be aid ear!ier b" the factorand then, supplier chooses which

of invoices he needs to be aid

RF# strong$%"er and &an"smaller' or deendent' Suppliersinneed of financing

RF tar(eted at b%"ers who !i)e to (et!on er a &ent ter&s fro& their


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http://www.capgemini.com/sites/default/files/procurement-blog/files/2012/02/20120209-Figure-2.png


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http://www.capgemini.com/sites/default/files/procurement-blog/files/2012/02/20120209-Figure-2.png


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DiscountRF-Bank discounts suppliers receivables before theirpayment date and the Customer repays the liability to Banks account

on the receivables' payment date.

-Customer can get longer payment terms from his suppliersMaturity RF:Bankrepays the Customers liability to his supplier onthe payment date

-Customers repays the debt in the additional financing period, specified

in the agreement

Benefits for the suppliers:

Bank takes over risk of default on payment of receivables by the

Customer,

Financing ahead of payment date or on payment date at the latest,

Financing without the need to examine credit capacity of the supplier

and the need for him to establish additional collateral


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!

What is Wor)in( Caita! .

/%ant%& of cash a b%siness re0%iresfor r%nnin( da" to da" b%sinessoerations

Financin( conversion of Raw &ateria!into finished (oods 1 receivin(roceeds of sa!e thereof in case of&an%fact%rin( %nits

Stoc#ingof (oods 1 rea!i2ation ofsa!e roceeds in case ofTradin(

%nits


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3Re0%ire&ents


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Wor)in( Caita! Mar(in

Shareholder4sContrib%tion

Cash profitsearnedduringthe "ear

Cash reservesofprevious"ears

$on term loans


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"

%urrent Assets

Reresent those assets that wi!! be t%rned into cash within

fro& the ba!ance date in the nor&a! co%rse of $%siness*

Inventories

7toc) of Raw &ateria!

Wor) in Pro(ress

7toc) of Finished Goods


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#

%urrent $ia&ilities

Represent those o&ligations !hich arerepaya&le !ithin a year' e'g',

7%ndr" creditors

Interest accr%ed b%t not d%eProvisions

Lon( ter& !oan rea"&ent

insta!&ents d%e within 8 "ear$an) borrowin( for wor)in( caita!

An" other ite& d%e within 8 "ear


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6W:;

peratin! Cycle


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I&ortant e0%ations

OperatingC"c!e 5,(nventory :o!din( * Receivab!es Conversion Period or Avera(e Co!!ectionPeriod

6 Ass%&e 8DD of sa!es are on credit

6 Ass%&e that be(innin( of "ear acco%ntsreceivab!e was >D and sa!es was DD

days

SalesCredit

ceivablesAverage

1#.4/##!!01

2!1!30

/#$e

=

+

=

=


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OPERATING AN+ CA7: C;CLE7 FOR+OBG47 +I7TRI$BTOR7 INC*

?* Pa"ab!es +eferra! Period6 ass%&e be(innin( of;ear acco%nts a"ab!e was>D

@* Oeratin( C"c!e5 Inventor" Conversion Period da"s

* Cash C"c!e 5 Oeratin( C"c!e 6 Acco%nts

Pa"ab!e +eferra! Period 5 @*> da"s 3 >*DH da"s 5 >*8 da"s

days

SoldGoodsofCost

PayablesAccountsAverage

!5.1//##!0 1

2!1!30

/#

=

+

=

=


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+otal %ost

Carr"in(

Cost

7horta(e

Cost

%urrent Asset

,Optimal-

Carr"in(costsand

shorta(ecosts


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I t 7t d


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Iss%es to 7t%d"#WORKING CAPITAL

MANAGEMENT8* What t"es and a&o%nts of c%rrent assets

sho%!d a fir& ho!d.

>* What t"es and a&o%nts of short6ter&financin( sho%!d a fir& e&!o".

?* :ow do fir&s ens%re the" have eno%(h

cash to &eet on6(oin( ob!i(ations.

@* :ow do fir&s forecast their cash needs.


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Wor)in( Caita! Po!icies and theC%rrent Ratio

C%rrent Ratio is a &eas%re of the e9tent towhich c%rrent Assets are financed b"c%rrent !iabi!ities

C%rrent Ratio 5 C%rrent Assets C%rrentLiabi!ities

+o%(4s +istrib%tors has a c%rrent ratio ofHDD or 8*@

A c%rrent ratio of 8*@D &eans that for ever"

8*@D of c%rrent assets there is one do!!ar

Ris) Ret%rn ,Li0%idit"


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Ris) Ret%rn ,Li0%idit"Profitabi!it"- Trade6off# C%rrent

Assets

Bs + 67%!!

+


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Ris) Ret%rn Trade6off#C%rrent Liabi!ities

interest

!!8/!!


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Profitabi!it" vs Ris) Trade6off6A!ternative Financin(7trate(ies ,8-


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Profitabi!it" vs Ris) Trade6off6A!ternative Financin(7trate(ies,>-

Profitabi!it" vs Ris) Trade6off6


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Profitabi!it" vs Ris) Trade6off6A!ternative Financin(

7trate(ies ,?-


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:ow a Conservative Wor)in( Caita! Po!ic"Lowers Profitabi!it" and Ris)

,=ice6versa for A((ressive Po!ic"-

>mpact ;igher 9evelof Cash and+arketableecurities

;igher 9evelof ccounts$eceivable

;igher9evel of>nventory

9ess hort-term(ebt ?@reater9ong-term9iabilities and


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Wor)in( Caita! Levera(e,WCL-

WCL5 chan(e in ROI. chan(e in%urrent Asset

i'e' sensitivity of RO( earning po!er-

to change in %ARO(/EB(+.+A

If %Ais reduced&y 0 %A 0 %A.%A-, 1

increase in RO(/23EB(+.+A40 %A-4

EB(+.+A-5.EB(+.+A6/0%A.+A40%A

W%$/0 %A.+A40 %A-.0

Wor)in( Caita! Po!icies


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Wor)in( Caita! Po!iciesBnderstandin( Li0%idit"

To %nderstand how we!! a co&an" can&eet its on(oin( cash ob!i(ations ,its!i0%idit"-' "o% need to %nderstandwhether the fir& is %sin( or (eneratin(

cash f!ow To he! "o% %nderstand the nat%re of

cash f!ows' "o% need to )now how todeve!o and interret a state&ent of

cash f!ows $efore deve!oin( a state&ent of cash

f!ows' !et %s review how the ba!ancesheet and inco&e state&ents arecreated


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7%&&ar"

Wor)in( Caita! 5 7hort6ter& Assets3 7hort6ter& !iabi!ities

Cash Conversion C"c!e

. Oeratin( c"c!e. Cash c"c!e

Po!icies

. A((ressive. Conservative


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7tate&ent of Cash F!ows

Bnderstandin( Cash F!ows


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O%t!ine

Prearation of ba!ancesheet and inco&e

state&ent fro&transactions

7tate&ent of Cash F!ows

Prearin( Pro For&a# 7%!e&entar"


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Prearin( Pro For&a# 7%!e&entar"Review of Financia! 7tate&ent

Prearation A ba!ance sheet is a Jsna shot of a

co&an"4s affairs it shows what theco&an" owns ,its assets-' what it owes

,its !iabi!ities- and how &%ch shareho!dershave invested in the fir& ,e0%it"-

Assets 5 Liabi!ities < E0%it"

An inco&e state&ent shows how &%ch theco&an" se!!s ,its reven%e-' what it coststo oerate the b%siness ,its e9enses- andhow &%ch is !eft over for shareho!ders

,rofit-

Prearation of the $a!ance 7heet and


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Prearation of the $a!ance 7heet andInco&e 7tate&ent# A ste6b"6ste

e9a&!e

Ste/ 1 nitial nvestment in Business

Sylvia invests 20000 in her ne business a clothin$ retailer

name' Sylvia+s Satins, he 4irm establishes an over'ra4t

4acility ith a bank 4or 20000,

Sylvia+s Satins Balance Sheet 5%i$ures in 000+s6

Assets Liabilities

Cash 20 7ver'ra4t 0

Sharehol'ers ()uity

Current Assets 20 Common Shares 20

otal Assets 20 otal Liabilities an' Sharehol'ers+ ()uity 20



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e9a&!e

Ste/ 2 Accountin$ 4or Set-u/ costs o4 business

Sylvia s/en's "000 to /ay 4or le$al 4ees

4or settin$ u/ business


Assets Liabilities

Cash 1" 7ver'ra4t 0

Sharehol'ers ()uity

Current Assets 1" Common Shares 20ntan$ibles "



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e9a&!e

Ste/ ! Accountin$ 4or 4i&e' asset /urchase

Sylvia buys e)ui/ment 4or 10000,

Sylvia+s Satins Balance Sheet 5%i$ures in 000+s6Assets Liabilities

Cash 0 7ver'ra4t 0

Sharehol'ers ()uity


()ui/ment 10

Leasehol' m/rovement "

ntan$ibles "

otal Assets $20 otal Liabilities an' Sharehol'ers+ ()uity 20



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e9a&!e

Ste/ " Accountin$ 4or /urchase o4 inventory

Sylvia+s 4irm buys 80000 o4 shirts 4rom a su//lier on cre'it


Assets LiabilitiesCash 0 7ver'ra4t 0

Accounts Payable 80

nventory 80

Sharehol'ers ()uity


()ui/ment 10


ntan$ibles "


reara on o e a ance eed b


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and Inco&e 7tate&ent# A ste6b"6

ste e9a&!eSte/ 8 Accountin$ 4or sales

Sylvia+s 4irm sells 30000 o4 inventory 4or !0000 on cre'it


Assets Liabilities

Cash 0 7ver'ra4t 0

Accounts Receivable !0 Accounts Payable 80

nventory 30Sharehol'ers ()uity

Current Assets #0 Common Shares 20

()ui/ment 10 Retaine' (arnin$s 10


ntan$ibles "

otal Assets :0 otal Liabilities an' Sharehol'ers+ ()uity :0

ncome Statement o4 Sylvia+s Satins

Revenue !0

Cost o4 ;oo's Sol' 30

;ross


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Prearation of the $a!ance 7heetand Inco&e 7tate&ent# A ste6b"6

ste e9a&!eSte/ # Accountin$ 4or /ayments to su//liers

Sylvia /ays o44 20000 o4 /ayables

Sylvia+s Satins Balance Sheet 5=C7


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reara on o e a ance eed I 7t t t A t b


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ste e9a&!eSte/ : Account 4or /ayment o4 interest

Com/any s char$e' 1000 o4 interest an' bank char$es relate' to over'ra4t,


Assets Liabilities

Cash 0 7ver'ra4t 11,0

Accounts Receivable 30 Accounts Payable !0

nventory 30

Sharehol'ers ()uity


()ui/ment 10 Retaine' (arnin$s :


ntan$ibles "

otal Assets 90,0 otal Liabilities an' Sharehol'ers+ ()uity 90,0

Sylvia Satin+s ncome Statement

Revenue !0,0

Cost o4 ;oo's Sol' 30,0

;ross


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ste e9a&!eSte/ 10 Account 4or 'e/reciation an' amorti@ation

Com/any 'e/reciates e)ui/ment on strai$ht-line basis over " years 5use4ul li4e

o4 e)ui/ment6 an' over 10 years 5lease term6 4or leasehol' im/rovements


Assets Liabilities

Cash 0 7ver'ra4t 11


nventory 30

Current Assets 80 Sharehol'ers ()uity()ui/ment 9 Common Shares 20

Leasehol' m/rovement !," Retaine' (arnin$s 8,"

ntan$ibles "

otal Assets ##," otal Liabilities an' Sharehol'ers+ ()uity ##,"


Revenue !0,0Cost o4 ;oo's Sol' 30,0

;ross


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ste e9a&!eSte/ 11 Accountin$ 4or a&eshe income ta& rate is !0, e ill i$nore 'e4erre' ta&es,

Com/any on+t /ay ta&es until a4ter year en',


Assets Liabilities

Cash 0 7ver'ra4t 11,0


nventory 30 a&es Payable 2,8

Current Assets 80

()ui/ment 9 Common Shares 20

Leasehol' m/rovement !," Retaine' (arnin$s 3,:

ntan$ibles "

otal Assets ##," otal Liabilities an' Sharehol'ers+ ()uity ##,"


Revenue !0,0

Cost o4 ;oo's Sol' 30,0;ross


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I&ortance of Cash F!ows# Li0%idit"

A!tho%(h 7"!via4s fir& is rofitab!e' it is

i&ortant to %nderstand how it was ab!e to(enerate eno%(h cash to &eet itsob!i(ations* In other words' how !i0%id is7"!via4s 7atins.

Li0%idit" is a critica! asect of a co&an"4sfinancia! erfor&ance* The a"ro!! &%st be&et* $efore a fir& can (et a !oan fro& aban) or credit fro& a s%!ier' it &%st

show itse!f to be !i0%id* To assess !i0%idit"' we need to %nderstand

the factors affectin( fir&4s on6(oin( abi!it"to (enerate cash*

7t t t f C h F!


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7tate&ent of Cash F!ows7a!es

6 Cost of Goods 7o!d

6 7e!!in(' Genera! and Ad&inistration E9enses NetIncome

6 Interest

6 Inco&e Ta9es


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7tate&ent of Cash F!owsfor 7"!via4s 7atins

Sales !0,0

- Cost o4 ;oo's Sol' 30,0

;ross Pro4it 10,0

- Sellin$ ;eneral an' A'ministration (&/enses 2,"

- nterest 1,0

- ncome a&es 2,8

=et ncome 3,:D =on-cash (&/enses 5'e/reciation amorti@ation6 2,"

Cash %los 4rom 7/eratin$ Activities 8,!

- ncrease in Accounts Receivable 30,0

- ncrease in nventory 30,0

D ncrease in Accounts Payable an' other Payables !2,8

- Purchases o4 %i&e' Assets an' other Ca/ital (&/en'itures 20,0D Sales o4 %i&e' Assets 0,0

- Payments to 7ners o4 Business 7ther than Salary 0,0

Cash ;enerate' 5>se'6 By Business Available 4or Re/ayment o4 *ebts -31,0


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Financin( Cash F!ow +eficiencies

If 7"!via4s 7atins %sed % ?8'DDDcash in its on6(oin( oerations' howwas this financed.

Oenin( Cash $a!ance>D'DDD

Less# Cash Bsed

?8'DDD

Cash 7%r!%s ,+eficienc"- 688'DDD

+eficienc was financed b ban)


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Cash F!ow +rivers

E!even Ke" Cash F!ow +rivers


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E!even Ke" Cash F!ow +rivers Re!ationshi with Cash F!ow

8* 7a!es Growth Bs%a!!" ne(ative

>* Gross Mar(in ,Gross Profit7a!es-ositive?* 7e!!in(' Genera! and Ad&inistration

,7GA- as of 7a!es ne(ative@* Interest E9ense

ne(ative

* Non6cash E9enses ositive* Inco&e Ta9 Rate

ne(ativeH* Avera(e Co!!ection Period ,ACP- ne(ative* Inventor" Conversion Period

ne(ative* Acco%nts Pa"ab!e Period ositive8D* Net Caita! E9endit%res ne(ative88* Owner4s Withdrawa!s fro& Fir& ne(ative

R ! i hi f E


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Re!ationshi of E9enses toCash F!ow

Co&anies with hi(her rofit &ar(ins,fir&s with !ow cost of (oods so!d and !ow7GA as of sa!es- (enerate &ore cash

Converse!"' fir&s that inc%r !osses(enera!!" %se % cash and wi!! enco%nterrob!e&s rea"in( !oans if !osses are notste&&ed* LOAN7 7:OBL+ NOT $EGRANTE+ TO FBN+ 7B7TAINE+ LO77E7

OF $ORROWER7* 7i(nificant non6cash e9enses rovideso&e re!ief b%t on!" where re(%!arcaita! e9endit%res are not re0%ired


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Re!ationshi of Inventor" ConversionPeriod to Cash F!ow

Inventor" Conversion Period is ca!c%!ated as# Inventor" Cost of Goods 7o!d?

In case of 7"!via4s 7atins' Inventor" Conversion Period is?D,?D?- or ? da"s

One can esti&ate Inventor" as#Cost of Goods 7o!d Inventor" Conversion Period

? If cost of (oods so!d do%b!es to D and Inventor"

Conversion Period re&ains %nchan(ed' then Inventor"wo%!d a!so do%b!e i*e* ,D?-? 5 D

If Inventor" Conversion Period decreases in ha!f to 8?da"s' endin( inventor" wo%!d e0%a! ,?D8?-? 5 8and fir& wo%!d (enerate 8 &ore cash in the "ear


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Re!ationshi of Acco%nts Pa"ab!ePeriod to Cash F!ow

Pa"ab!es +eferra! Period5 ,Pa"ab!es-,Cost of Goods 7o!d < Other Oeratin( E9enses- ?

In case of 7"!via4s 7atins' Pa"ab!es +eferra! Period is

,@D-,?D?- or @H da"s One can esti&ate Acco%nts Pa"ab!e as#Cost of Goods 7o!d Acco%nts Pa"ab!e Period

? If cost of (oods do%b!es and Pa"ab!es +eferra! Period

re&ains %nchan(ed' then Acco%nts Pa"ab!e wo%!d a!so

do%b!e i*e* ,D@H-? 5 D If co&an" a"s its s%!iers in ha!f the ti&e' endin(

acco%nts a"ab!e wo%!d e0%a! ,?D>@?-? 5 >D andfir& wo%!d %se % >D &ore cash in the "ear

! i hi f ! h h


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Re!ationshi of 7a!es Growth to CashF!ow

If a co&an" is se!!in( on credit' an increasein sa!es %s%a!!" %ses % cash as the fir&b%"sb%i!ds &ore inventor"' se!!s it and thenhas to wait to (et aid b" its c%sto&ers i*e*there is an increase in both inventor" and

acco%nts receivab!e* Even for fir&s that strict!" se!! on a cashbasis' an increase in sa!es sti!! &eans that itneeds to increase its inventor"*

In &ost cases' the cash re0%ired to b%i!d6%

inventor" and receivab!es &ore than offsetsa"ab!es increase as we!! as the increasedcash f!ow fro& oerations


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R ! i hi f 7 ! G h C h


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Re!ationshi of 7a!es Growth to CashF!ow

With increased sa!es' 7"!via4s 7atins wo%!dincrease its rofit fro& ?'DD to 'HDD b%te9erience an increase in cash o%tf!ow fro&6?8'DDD to 6@?'DDD and therefore end the

"ear with a hi(her ban) overdraft 7it%ation wo%!d be worse where fir&

e9eriences s%bstantia! (rowth and iscaita! intensive i*e* it needs &ore caita!

e9endit%res to faci!itate e9ansion These e9endit%res !ace (reater ress%re

on the cash f!ow of the fir&

Re!ationshi of Profitabi!it" and


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Re!ationshi of Profitabi!it" andLi0%idit"

Most often' c!ients who strive to be &orerofitab!e %s%a!!" i&rove their !i0%idit" ashi(her rofit &ar(ins and better costcontro!s enhance cash f!ows

F%rther&ore' a &ore rofitab!e b%siness&a)es it easier for the fir& to attract otherso%rces of credit as we!! as o%tside e0%it"

:owever' as shown in the !ast e9a&!e'

so&eti&es fir&s see) to e9and theirb%sinesses to increase or at !east reserverofitabi!it"* This %ts the c!ient4s desire forrofitabi!it" at odds with the need to&aintain !i0%idit"

Re!ationshi of Caita!


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Re!ationshi of Caita!E9endit%res and Li0%idit"

Most fir&s eriodica!!" need to &a)es%bstantia! caita! e9endit%res' at the ver"!east to &aintain their oerations or to )ee% with the co&etition. Grocer" stores need to re!ace free2ers. Fashion retai!ers need new fi9t%res. +e!iver" fir&s need to re!ace vans

These e9endit%res !ace a heav" drain oncash f!ow and conse0%ent!"#

. C!ients sho%!d e9tend !ife of their fi9ed assetsthro%(h reventative &aintenance. C!ients sho%!d ac0%ire assets with stron(

warranties and ins%rance rotection

Re!ationshi of Caita!


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Re!ationshi of Caita!E9endit%res and Li0%idit"

Financin( of Caita! E9endit%res sho%!dbe str%ct%red so that the eriod of therea"&ent of rincia! &atches the !ife

of the asset.Ter& financin( or !ease arran(e&ent for

e0%i&ent

. Lon(6ter& &ort(a(e for rea! estate

E9cessive %se of short6ter& debt createstoo &%ch de&and on cash f!ows in theeriod when the asset is first ac0%ired

Identif"in( Trends in Cash F!ow


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Identif"in( Trends in Cash F!ow+rivers# Case of a co&an" !osin( to

co&etition2000 2001 2002 Possible Concern 5*irect m/act on Cash %loSales ;roth " -: -10 Losin$ sales to com/etition

;ross


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Identif"in( Trends in Cash F!ow +rivers#Case of a co&an" e9andin( sa!es ate9ense of !ower (ross rofit &ar(ins

2000 2001 2002 Possible Concern 5*irect m/act on Cash %lo

Sales ;roth " 10 1" A$$ressively sellin$

;ross


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7i(ns of Li0%idit" Prob!e&s

+ec!ine in dai!" or wee)!" cash inf!ows

Profitabi!it" and Oeratin( Cash F!ow 70%ee2e66 Increased costs that the fir& is %nab!e to asson to c%sto&ers

Bne9ected b%i!d6% of Acco%nts Receivab!e

Bne9ected b%i!d6% of Inventor"

+ec!ine in fir&4s net wor)in( caita!' c%rrentratio or an increase in its short6ter& and tota!debt ratios ,7hort6ter& +ebt Tota! Assets and

Tota! +ebt Tota! Assets


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Cash $%d(ets 1 Pro For&a

7tate&entsForecastin( Cash F!ows

!i


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O%t!ine

Wh" forecast cash f!ows.

Cash b%d(et

Pro For&a

. Inco&e 7tate&ent

. $a!ance 7heet

Percent of sa!es &ethod


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Mana(in( Li0%idit" and the Need to


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Mana(in( Li0%idit" and the Need toForecast Cash F!ows

Co&anies need to !an for their cash needs toens%re the" have s%fficient cash to#. Meet on6(oin( ob!i(ations s%ch as the a"ro!!

. Meet contin(encies s%ch as an increased need forwor)in( caita! ,sensitivit" ana!"sis is esecia!!"

i&ortant-

. $e ab!e to invest when attractive oort%nities arise

The" need to roect a cash b%d(et thatforecasts cash inf!ows and o%tf!ows on a

&onth!" basis* Cash b%d(etin( is esecia!!" i&ortant in

seasona! and (rowin( b%sinesses*

Cash b%d(ets sho%!d tie in with ro for&a

inco&e state&ents and ba!ance sheets*

Prearin( Co&rehensive Pro


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( For&a Financia! 7tate&ents

ales Forecast *roduction Forecast

Cash Flo& Forecast

*ro Forma >ncome

tatement

*ro Forma Balance heet

ales, production and cash flo& forecasts are usually done on

a monthly basis &hereas pro forma income and balance sheets

are done an annual basis

EAMPLE OF CA7: $B+GET AN+


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EAMPLE OF CA7: $B+GET AN+

PRO FORMA FINANCIAL 7TATEMENT7

8ey Assumptions for 9adget %ompany

Startup Business-

Sales

Month!" sa!es of 8D'DDD %nits

First &onth of sa!es is Febr%ar" >DD?

$ased on contract with distrib%tor

Cash $%d(et

AR 6 Q sa!es co!!ected within one6&onthfo!!owin( sa!e and the other Q co!!ected two&onths fo!!owin( sa!e

Cash Co!!ections fro&


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7a!esMonth January February March April

Sales of ad!etCo"pany

0 1"900 1"900 1"900

Cash #nflos fro"

A% Collection&

'urin! Month

After Sale

#:00 #:00

'urin! 2nd MonthAfter Sale

#:00

Total Collections 0 0 #:00 1"900

ey ssumptions: Company &ill sell !,!!! units a month 70.#4 each.

;alf of accounts receivable &ill be collected one month after sale.

;alf of accounts receivable &ill be collected t&o months after sale.

Cash Co!!ections and Acco%nts


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Cash Co!!ections and Acco%ntsReceivab!e

Month (ctober )o*e"ber 'ece"ber Total for

+earSales of ad!etCo"pany

1"900 1"900 1"900 1#3900

Cash #nflos fro"

A% Collection&

'urin! MonthAfter Sale

#:00 #:00 #:00 #:000

'urin! 2nd MonthAfter Sale

#:00 #:00 #:00 #1100

Total Collections 1"900 1"900 1"900 1"0100

ey ssumptions: Company sold 05,4!! of goods but received only 0#!,!!.

)he difference of 01,5!! represents the increase in accounts receivable during

year. f the 01,5!! in accounts receivable at year end, (ecember sales represent

0#,4!! and half of ovember sales represent 05,D!!.

Cash Pa"&ents to


85/174

"7%!iers

Month January February March April

,urchases ofad!et Co"pany

10000 10000 10000 10000

Cash ,ay"ent toSuppliers

$-0.000 $-0.000 $-0.000

ey ssumptions: Company &ill purchase one month in advance of sales.

- +onth-end inventory &ill e=ual the current months purchases.


86/174

Cas a" e s a d cco% sPa"&ents

Month (ctober )o*e"ber 'ece"ber Total for

+ear,urchases ofad!et Co"pany

10000 10000 10000 120000

Cash ,ay"ents toSuppliers

$-0.000 $-0.000 $-0.000 $--0.000

ey ssumptions: Company purchased 01!,!!! of goods but paid for only

0!,!!! by year end.

)he difference of 0!,!!! represents the increase in accounts payable during year.

)he 0!,!!! accounts payable at year end is for (ecember purchases.

Forecastin( Cash F!ow6


87/174

Forecastin( Cash F!owsreadsheet

Ke" Ass%&tions for Gad(et Co&an"


88/174

" ( "

%ash Budget

Genera! and ad&inistration costs 5?'HD er &onth

Interest is char(ed on revio%s &onth4s!oan ba!ance at an ann%a! rate of 8>*

The &onth!" rate is 8>8> or 8*

8D'DDD oenin( cash ba!ance

*ro Forma (ncome Statement

+ereciation 5 >D er &onth no accr%a! is &ade for interest e9ense

at "ear end


89/174

Cash $%d(et


90/174

(Month (ctober )o*e"ber 'ece"ber Total for

+ear

Total Collections 1"900 1"900 1"900 1"0100

Cash (utflos&

Cash ,ay"ent toSuppliers

$-0.000 $-0.000 $-0.000 $--0.000

eneral E/penses 3#"0 3#"0 3#"0 !"000

#nterest E/pense -4 0 0 404

Total Cash (utflos 13#88 13#"0 13#"0 1""808

=et 7/eratin$ Cash%lo

203! 20"0 20"0 5""086

Be$innin$ CashBalance 5Borroin$6

5183:6 3:! 2!!! 10000

(n'in$ Cash Balance5Borroin$6

3:! 2!!! !!:! !!:!

an Feb Mar Ari! Ma" %ne %!"

7a!es Forecast 8'DD 8'DD 8'DD 8'DD 8'DD 8'DD

Cash I nf!ows Fro& Co!!ections H'DD 8'DD 8'DD 8'DD 8'DD


91/174

P%rchases Fro& 7%!iers 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

Cash O%tf!ows to 7%!iers 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

Genera! 1 Ad&in E9enses ?'HD ?'HD ?'HD ?'HD ?'HD ?'HD ?'HD

+ereciation >D >D >D >D >D >D >D

Interest D D H 8?@ 88 H

Ta9es D D D D D D DNet Cash F!ow 6?'HD 68?'HD 6'> 8'8 8'? 8'@ 8'H@

$e(innin( of Month Cash 8D'DDD '>D 6H'DD 68?'@> 688'D 6'H@ 6H'>D

End of Month Cash '>D 6H'DD 68?'@> 688'D 6'H@ 6H'>D 6'@

D >DD> an Feb Mar Ari! Ma" %ne %!"

7a!es D D 8'DD 8'DD 8'DD 8'DD 8'DD 8'DD

Cost of Goods 7o!d D D 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

Gross Mar(in D D 'DD 'DD 'DD 'DD 'DD 'DD

Genera! 7a!es 1 Ad&inistrative E9enses D ?'HD ?'HD ?'HD ?'HD ?'HD ?'HD ?'HD

+ereciation D >D >D >D >D >D >D >D

Interest E9enses D D D H 8?@ 88 H

Profit $efore Ta9es D 6@'DDD 8'DD 8'H> 8' 8' 8'HD@ 8'H>@

Ta9es D D D D D D D D

Profit After Ta9es D 6@'DDD 8'DD 8'H> 8' 8' 8'HD@ 8'H>@

>DD> an Feb Mar Ari! Ma" %ne %!"

Cash 8DDDD '>D D D D D D D

Acco%nts Receivab!e D D 8'DD >?'HDD >?'HDD >?'HDD >?'HDD >?'HDD

Inventor" D 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

8DDDD 8'>D >'DD ??'HDD ??'HDD ??'HDD ??'HDD ??'HDD

Net Fi9ed Assets >DD >'>D >'DDD >H'HD >H'DD >H'>D >H'DDD >'HD

Tota! Assets ?DD @@'DD ?'DD 8'@D 8'>DD D'D D'HDD D'@D

Acco%nts Pa"ab!e D 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

$an) Loan D D H'DD 8?'@> 88'D 'H@ H'>D '@

D 8D'DDD 8H'DD >?'@> >8'D 8'H@ 8H'>D 8'@

7hareho!ders4 E0%it" ?DD ?@'DD ?'?DD ?'D> ?'8 @8'?H @?'DD @@'D@

?'DD @@'DD ?'DD 8'@D 8'>DD D'D D'HDD D'@D

A%( 7et* Oct Nov +ec >DD?

7a!es Forecast 8'DD 8'DD 8'DD 8'DD 8'DD 8H?'DD

Cash Inf!ows Fro& Co!!ections 8'DD 8'DD 8'DD 8'DD 8'DD 8D'8DD

h !i


92/174

P%rchases Fro& 7%!iers 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8>D'DDD

Cash O%tf!ows to 7%!iers 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 88D'DDD

Genera! 1 Ad&in E9enses ?'HD ?'HD ?'HD ?'HD ?'HD @'DDD

+ereciation >D >D >D >D >D ?'DDD

Interest ?H 8 D D D

Ta9es D D D D D D

Net Cash F!ow 8'@ >'D8? >'D?@ >'DD >'DD 6'D

$e(innin( of Month Cash 6'@ 6?'? 68'? ?@ >'@@@

End of Month Cash 6?'? 68'? ?@ >'@@@ @'@@

D >DD> A%( 7et* Oct Nov +ec >DD?

7a!es D 8'DD 8'DD 8'DD 8'DD 8'DD 8H?'DD

Cost of Goods 7o!d D 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 88D'DDD

Gross Mar(in D 'DD 'DD 'DD 'DD 'DD ?'DD

Genera! 7a!es 1 Ad&inistrative E9enses D ?'HD ?'HD ?'HD ?'HD ?'HD @'DDD

+ereciation D >D >D >D >D >D ?'DDD

Interest E9enses D ?H 8 D D DProfit $efore Ta9es D 8'H@@ 8'H? 8'H@ 8'DD 8'DD 8'8@

Ta9es D D D D D D D

Profit After Ta9es D 8'H@@ 8'H? 8'H@ 8'DD 8'DD 8'8@

>DD> A%( 7et* Oct Nov +ec >DD?

Cash 8DDDD D D ?@ >'@@@ @'@@ @'@@

Acco%nts Receivab!e D >?'HDD >?'HDD >?'HDD >?'HDD >?'HDD >?'HDD

Inventor" D 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

8DDDD ??'HDD ??'HDD ?@'D@ ?'8@@ ?'8@ ?'8@Net Fi9ed Assets >DD >'DD >'>D >'DDD >'HD >'DD >'DD

Tota! Assets ?DD D'>DD 'D D'D@ 8'@ ?'@ ?'@

Acco%nts Pa"ab!e D 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD 8D'DDD

$an) Loan D ?'? 8'? D D D D

D 8?'? 88'? 8D'DDD 8D'DDD 8D'DDD 8D'DDD

7hareho!ders4 E0%it" ?DD @'@H @'?88 D'D@ 8'@ ?'@ ?'@

?'DD D'>DD 'D D'D@ 8'@ ?'@ ?'@

Gad(et Co&an"# Proected Inco&e 7tate&ent


93/174

Gad(et Co&an"# Proected Inco&e 7tate&entfor ;ear Ended +ece&ber ?8' >DD?

7a!es 8H?'DDCost of Goods 7o!d#P%rchases 8>D'DDDLess# Endin( Inventor" 8D'DDD

88D'DDDGross Profit ?'DDGenera! E9enses @'DDD+ereciation ?'DDD

Interest D@'D

Net Profit 8'8@


94/174

of 7a!es Method# Pro For&a Mode!


95/174

In(redients

7a!es Forecast +rives the &ode!

Pro For&a 7tate&ents The o%t%t s%&&ari2in( different

roections

Asset Re0%ire&ents Invest&ent needed to s%ort sa!es

(rowth

Financia! Re0%ire&ents +ebt and dividend o!icies

The JP!%( +esi(nated so%rce,s- of e9terna! financin(

Econo&ic Ass%&tions 7tate of the econo&"' interest rates'

inf!ation

:istorica! Financia! 7tate&ents for 7t*


96/174

+i!bert Phar&ace%tica!s

>ncome tatementales 0#!!

Costs 1# "56 of ales

(epreciation 1! 1!6 of et FiAed ssets

>nterest "! !6 of last periods (ebt

)aAable >ncome !#

)aAes / "6 of )aAable >ncome

et >ncome 0/D

$etained 01

(ividends 0"/ /56 of et >ncome

Balance heet

Current assets 0"!! )otal (ebt 0"#!

et fiAed assets /!! &ners DD of sa!es*,> ofassets for ever" 8 ofsa!es*-

SFi9ed assets areD of tota! assets'

or 8>D of sa!es*

Pro For&a Financia! 7tate&ents Bsin(


97/174

( of 7a!es Method

SAss%&e that sa!es (row b" >D to DD >ncome tatementales 0/!!

Costs 141 "56 of ales

(epreciation n.a. 1!6 of et FiAed ssets

>nterest n.a. !6 of last periods (ebt

)aAable >ncome n.a.

)aAes n.a. "6 of )aAable >ncome

et >ncome n.a.

$etained n.a.

(ividends n.a. /56 of et >ncome

Balance heet

Current assets 0"4! )otal (ebt n.a.

et fiAed asset 51! &ners ofassets for ever" 8 ofsa!es*

SFi9ed assets are Dof tota! assets*

Fi!!in( in the $!an)s


98/174

Fi!!in( in the $!an)s

+ereciation. Fir& needs > of assets for ever" 8 of sa!es ,tota! asset t%rnover is

D* or tota! assets are >DD of sa!es-

Tota! Assets &%st rise to 8'>DD to s%ort DD of sa!es

Fi9ed Assets are D of Tota! Assets

C%rrent Assets are @D of Tota! Assets

+ereciation is >D of Fi9ed Assets+ereciation 5 D*> ,D* 8'>DD- 5 8@@

This dereciation ca!c%!ation wron(' b%t c!ose and si&!e

. 7ho%!d ca!c%!ate dereciation as of additions to (ross fi9edassets !%s of !ast "ear4s net*

Interest

. $ased on the !ast end6of6eriod +ebt !eve! ,short and !on(6ter&-*

. Interest 5 D*8 @D 5 @

Pro For&a Financia! 7tate&ents Bsin(


99/174

of 7a!es Method

>ncome tatementales 0/!!

Costs 141 "56 of ales

(epreciation "" 1!6 of et FiAed ssets

>nterest "# !6 of last periods (ebt

)aAable >ncome 1D

)aAes "" "6 of )aAable >ncome

et >ncome 4#

$etained 014

(ividends 0#5 /56 of et >ncome

Balance heet

Current assets 0"4! )otal (ebt 0"#!

et fiAed assets 51! &ners


100/174

Financia! P!annin(

E0%it" is the !%( variab!e*

E0%it" rises fro& D to HD' b%t > of this is fro&retained earnin(s*

The difference' 8H>' is additiona! e0%it" inco&e necessar" to

s%ort the increase in sa!es* +ebt co%!d a!so be the !%(* Fir& co%!d borrow 8H> and +ebt

co%!d rise to >>*

If new caita! not avai!ab!e' then can4t finance sa!es increase*

Balance heet &ith (ebt as *9E@

Current assets 0"4! )otal (ebt 0/11

et fiAed assets 51! &ners


101/174

Cash 1 Mar)etab!e

7ec%rities

Overview of :ow Co&anies


102/174

Maintain Li0%idit"

$" ho!din( cash and &ar)etab!esec%rities

$" havin( read" access to so%rces of

financin(. Access to e0%it" ,not a!wa"s ossib!e or

attractive-

. Access to debt thro%(h riorco&&it&ents fro& !ender e*(* !ine ofcredit


103/174

Criteria in 7e!ection of Mar)etab!e7ec%rities


104/174

7ec%rities8* Li0%idit" 3 the sec%rit" sho%!d be eas" to se!!

before &at%rit" and the costs invo!ved in se!!in(,transaction costs- sho%!d be &ini&a!

>* +efa%!t Ris) 3 when investin( in bonds' theresho%!d be !itt!e chance the borrower wi!! not rea"rincia! and interest ,%s%a!!" stic) with hi(h6(radeborrowers-

?* Mar)et Ris) 3 there sho%!d be !itt!e ris) that thesec%rit"4s rice wi!! decrease before &at%rit"

beca%se of chan(es in overa!! &ar)et conditions,!eve!s of interest rates and stoc) &ar)et indices-this &eans that sec%rities are %s%a!!" short6ter&'fi9ed inco&e sec%rities ,not !on(6ter& bonds andnot e0%ities-

@* Attractive Ret%rn 3 fir&s wi!! accet &ore of theabove three ris)s in order to hi(her ret%rn

* Ta9 I&!ications 3 ret%rn is considered on after6ta9basis

Criteria in 7e!ection of Mar)etab!e7ec%rities


105/174

7ec%rities9i=uidity (efault $isk +arket $isk ield

3Feb. ", 1!!2

)-bills ;ighest 9o&est?obligation ofFederal@overnment

9o&est 1.416 3-montht-bill2

Bankerscceptance

;igh 9o& ?guaranteedby a bank

9o& 1.456 3highestrated2

Commercial*aper

;igh to+edium

9o& to+edium ?

depends onrisk ofcorporateborro&er

9o& to +edium ?corporate

borro&er may beaffected by stockmarket conditions

1.456 3highestrated2

ield is higheron lo&er ratedpaper

Other 7hort6ter& Invest&ents


106/174

Bsed for Li0%idit" P%roses

Overni(ht !oans ,!ar(e fir&s !end &one"on an overni(ht basis-

Certificates of +eosits ,interest6bearin(rather than disco%nt instr%&ents iss%ed b"

ban)s and tr%st co&anies- Ne(otiab!e Certificates of +eosit ,can be

so!d before &at%rit" in &ar)et-

Mone" Mar)et M%t%a! F%nd ,oo! of short6ter& &one" &ar)et instr%&ents-

Effective Interest Rate on a7hort ter& +isco%nt


107/174

7hort6ter& +isco%ntInstr%&ent

Effective rate over !ife ofinstr%&ent

Effective ann%a! interest rate

+ a t u r i t y * r i c e C u r r e n t * r i c e

C u r r e n t * r i c e

+

+ a t u r i t y * r i c e C u r r e n t * r i c eC u r r e n t * r i c e

/ #

( a y s t o + a t u r i t y

Effective Interest Rate on a7hort ter& +isco%nt


108/174


E9a&!e of effective ann%a!interest rate ca!c%!ation

T6bi!! has D da"s to &at%rit"

&at%rit" rice is 8'DDD b%t itc%rrent!" se!!s for D

! ! ! " / 6+ =0 D D !

0 D D !

/ #

D !

, .

Aro9i&ate Ann%a! ;ie!d7hort6ter& +isco%nt


109/174


0 0 D D !

0 D D ! D !

/ #,.

! ! !" ! 6

=X

+ a t u r i t y * r i c e C u r r e n t * r i c e

C u r r e n t * r i c e ( a y s t o + a t u r i t y

/ #

X

>n the case of t-bills, the approAimate yield is referred to as the bond

e=uivalent yield. )he bond e=uivalent yield on the D!-day t-bill is

sho&n belo&.


110/174

Acco%nts Receivab!e

O%t!ine


111/174

O%t!ine

Ter&s E9tendin( Credit to New Acco%nts

C4s of credit

Monitorin( Acco%nts Receivab!ethro%(h A(in( of Acco%nts

Acco%nts Receivab!e


112/174

+ecisions

Ke" +ecisions to Ma)e

8* Ter&s and conditions of credit sa!es

>* Credit ana!"sis

?* Credit decision* Whether to e9tendcredit to a c%sto&er.

@* Co!!ection o!ic"

Acco%nts Receivab!e and Credit


113/174

Ter&s

Ter&s and conditions of creditdecisions

.No ter&s 3 cash on de!iver"

.T"ica! Credit Ter&s 3 >8D net ?Dthis &eans that a"&ent is d%e ?Dda"s fo!!owin( date of invoice andif c%sto&er a"s b" da" 8D' heshe

receives a > disco%nt off invoicedrice ,an incentive to &a)ec%sto&ers a" ear!"-

Acco%nts Receivab!e and


114/174

Choice of Credit Ter&s

Choice of Credit Ter&s

. A !on(er net ter& &eans

More sa!es and (ross rofit

$%t it a!so &eans' :i(her bad debt

Increased credit deart&ent costs

(iven need to chec) new a!icants Increased invest&ent in acco%ntsreceivab!e and otentia!!" inventor"

Acco%nts Receivab!e and CreditAna!"sis


115/174

Ana!"sis E9a&!e of I&act of E9tendin( Credit to a New 7et

of C%sto&ers

. The new set of c%sto&ers co%!d increase sa!es b"D'DDD* The (ross rofit &ar(in is > and baddebt is esti&ated to be ?* Credit deart&entcosts are e9ected to be ?'DDD ann%a!!"* Theavera(e co!!ection eriod is e9ected to be @&onths* Given an inco&e ta9 rate of @D' what isthe after6ta9 rate of ret%rn on rovidin( credit tothe new set of c%sto&ers.

Chan(e in after6ta9 rofit 5 ,D'DDD,>6?- 3?'DDD-,86D*@D-

5 '8>D

Invest&ent needed 5 D'DDD@8>,86>-58'DDDRate of ret%rn 5 '8>D8'DDD 5 @D*

The after6ta9 rate of ret%rn on rovidin( credit to thenew set of c%sto&ers is @D*D

E9ercise U8


116/174

E9ercise U8

A new set of c%sto&ers co%!d increasesa!es b" 8DD'DDD* The (ross rofit &ar(inis 8D and bad debt is esti&ated to be* Additiona! credit deart&ent costs aree9ected to be ?'DDD ann%a!!"* Theavera(e co!!ection eriod is e9ected to be? &onths* Given an inco&e ta9 rate of

@D' what is the after6ta9 rate of ret%rn onrovidin( credit to the new set ofc%sto&ers.

7o!%tion


117/174

7o!%tion

Chan(e in after6ta9 rofit

5 ,8DD'DDD,D*8D 6 D*D- 3

?'DDD-,86D*@D-5 8'>DD

Invest&ent 5

8DD'DDD?8>,86*8D-5>>'DD Rate of ret%rn 5 8'>DD>>'DD 5

*?

The after6ta9 rate of ret%rn on

E9ercise U>


118/174

E9ercise U>

;o% have been aroached b" "o%rsa!es staff abo%t se!!in( 8DD'DDD of(oods on credit to a new c%sto&er* The

cost of (oods so!d on "o%r fir&4srod%cts is D* Credit deart&entcosts are e9ected to be >'DDDann%a!!" to hand!e this acco%nt* The

avera(e co!!ection eriod is e9ected tobe ? &onths* The inco&e ta9 rate is>D* If "o% want to earn a 8 after6ta9 rate of ret%rn on rovidin( credit tothe new c%sto&er' what wi!! be the

7o!%tion


119/174

7o!%tion

Let $+ be bad debt e9ense as of sa!es Gross Mar(in 5 8DD 6D 5>D*

Chan(e in after6ta9 rofit 5 ,8DD'DDD,>D6$+- 3>'DDD-,86D*>D-

Invest&ent needed 5 8DD'DDD?8>,D-5>D'DDD

We need to so!ve for $+ with e0%ation'

Rate of ret%rn 5 ,,8DD'DDD,>D6$+- 3>'DDD-,86D*>D-->D'DD5 8

,,8DD'DDD,>D6$+- 3>'DDD-,86D*>D--5?'DH

,8DD'DDD,>D6$+- 3>'DDD-5 ?'@@

8DD'DDD,>D6$+-5'@@

>D6$+5*@@ $+58@*8

The &a9i&%& bad debt e9ense is 8@*8

T:E C47 OF CRE+IT ANAL;7I7


120/174

Character of wner+Mana!er

Capacity to Repay Financial Forecast Business 'lan &ncome or 'rofits

Collateral )iuidation .alue /nforceability

)iuidity

Credit Conditions (bility to (ccess 0ew

Financin! Credit Checks 1erms of )oan

Capital (deuate (mount of)on!-1erm Funds

/specially /uity

7C:E+BLE OF AGE OFRECEI=A$LE7


121/174

RECEI=A$LE7

A(e +a"s A&o%nt ,DDD- Percent of Tota!D 3 ?D >DD @*8

?8 3 D 8D ?@*

8 3 D D 88*?

Over D ?D *Tota! @?D 8DD

Trade6off $etween Non6Co!!ection and 7trin(ent andE9ensive Co!!ection Methods as we!! as Loss of C%sto&er

Goodwi!!


122/174

Inventor"

Financia! Overview ofI t M t


123/174

Inventor" Mana(e&ent

$enefits of Increased Inventor". 0%antit" disco%nts for %rchasin(

. avoids stoc) o%ts

. !essens orderin( costs Costs of Increased Inventor"

. :i(her carr"in( costs ,Financin('stora(e' ins%rance' etc*-

. Potentia! obso!escence


124/174

7hort6Ter& Financin(

O%t!ine


125/174

O%t!ine

7e!ection Criteria Covenants

Effective Ann%a! Rate of $orrowin(

Instr%&ents. Line of Credit

Cost of Trade Credit


126/174


127/174


128/174

Criteria in 7e!ectin( 7hort6ter&


129/174

Finance

Lowest effective net cost considerin(. interest. fees. offsettin( benefits in red%ced

ad&inistrative costs. net a&o%nt borrowed

F!e9ibi!it" of Rea"&ent Ter&s A&o%nt of Credit Avai!ab!e

Conditions of Credit e*(* co!!atera!'covenants etc*

>nterest Fees: li i


130/174

C$)

*:CB:@ncluding$epayment chedule

@uarantees *ersonal $elated Company )hird *arty

:mount


131/174

PRIVATE & CONFIDENTIAL

=ictoria Main Office

8>> +o%(!as 7treet

=ictoria' $*C*=W >E

$an) of Montrea! is !eased to offer the fo!!owin( !ines of credit to__________________%on and s%bect to the fo!!owin( ter&s and conditions*

$oan +ypes

A!! !oans are a"ab!e on de&and' s%bect to eriodic review b" the $an) not !essfre0%ent!" than ann%a!!"' %n!ess otherwise indicated*

(nterest Rates

For the %rose of this Offer' Pri&e Rate is the f!oatin( ann%a! rate of interestestab!ished fro& ti&e to ti&e b" the $an) of Montrea! as the base rate it wi!! %seto deter&ine rates of interest on Canadian do!!ar !oans to c%sto&ers in Canadaand desi(nated as Pri&e Rate* Pri&e Rate is c%rrent!" *>

$oan Structure

8- First $an) Cash Mana(e&ent Acco%nt ,FCMA- >'HD'DDD*

4

7ete&ber th' 8>


132/174

P%rose# Oeratin( assistance*

Interest Rate# Pri&e !%s 8@

Rea"&ent# Interest on!"' a"ab!e &onth!"* E9act do!!ar borrowin(*

Above oeratin( !ine inc!%des#

Ma9i&%& 8DD'DDD Letter of Credit faci!it" to cover eriodic i&ort of foodst%ffs*

Ma9i&%& >D'DDD overdraft faci!it" to cover eriodic sett!e&ent of B*7*a"ab!es*

Mar(in Conditions#

S Oeratin( advances contained within * e!i(ib!e acco%nts receivab!e ,Dda"s and %nder- !%s D inventor" at cost as indicated b" &onth!" si(nedInventor" +ec!arations' E!i(ib!e receivab!es to inc!%de c%rrent ?DD da" acco%ntsthat have for&a! rea"&ent ro(ra& estab!ished for an" over 8 da" a"&ents*Esti&ate of Priorit" Pa"ab!es to be rovided on &onth!" Inventor" +ec!aration*

7econdar" Mar(in

S Oeratin( advances are not to e9ceed e!i(ib!e receivab!es*

Infor&ation Re0%ire&ents#


133/174

Month!" a(ed Acco%nt Receivab!e Listin(s' Inventor" and Acco%nt Pa"ab!e+ec!arations si(ned b" co&an" 7i(nin( Officer*

$" October 8th' 8> X In6ho%se $a!ance 7heet and Inco&e 7tate&ents as at%!" ?8st' 8>*

>- Co&&ercia! Mort(a(e 8'D'DDD* ,Aro9* $a!ance-

P%rose# Refinance e9istin( Co&&ercia! Mort(a(e 8'H8'DDD withadditiona! ?>'DDD to rea" +e&and Loan' Non6Revo!vin( ?DD'DDD ba!ance

>'DDD to co&an" c%rrent acco%nt* Interest Rate# 88*DD' ? ;ear Ter& d%e October 8st' 8@ ,> "ear

a&orti2ation-*

Rea"&ent# Month!" b!ended a"&ents 8'?DD' > "ear a&orti2ation*

Security ; Already (n *lace

X +ebent%re sec%rit" rovidin( overa!! Fi9ed Char(e ?'DD'DDD over roert"and vario%s co&an" owned vehic!ese0%i&ent a!on( with F!oatin( Char(eover a!! other co&an" assets*

+ebent%re Restrictive Covenants#

Not to dec!are or a" dividends witho%t $an) arova!*

Co&an" not to rovide G%arantee to an" other financia! instit%tion witho%t


134/174

X 7tandard Mort(a(e C!a%se FireA!! Peri!s Ins%rance*

X Assi(n&ent of $oo) +ebts*

X 7%bro(ation of shareho!der !oans si(ned b"_______

X 7%bro(ation of !oan b"___________:o!din(s Ltd*

X Cororate Letter of Bnderta)in( re# Financia! Test Covenants ,To be re!aced 6re!ace&ent !etter attached-*

X First Co&&ercia! Mort(a(e >'DDD'DDD rovidin( Fi9ed Char(e over =ictoriawareho%se co&!e9' inc!%din( char(e over co&an"Ys freeho!d and !easeho!dinterest in the s%bect roert"*

X Genera! Assi(n&ent of Rents*

X Priorit" A(ree&ent over e9istin( $an) of Montrea! +ebent%re char(es*

Security ; +o Be O&tained

X Revised Cororate Letter of Bnderta)in(' detai!ed as fo!!ows#

8- Maintain debte0%it" ratio &a9i&%& >*H#8 as deter&ined b" Fisca! 8? "earend Financia! 7tate&ents with e0%it" defined as 7hareho!der Loans' RetainedEarnin(s and net ta9 $on%s Pa"ab!e*


135/174

>- Achieve Wor)in( Caita! ratio &ini&%& 8*>#8* ,C%rrent !iabi!ities to e9c!%de+irectors Wa(es after ta9-*

?- Restrict Ann%a! Caita! E9endit%res to 8'DD'DDD as detai!ed in Contro!!erreared Fisca! 8? Caita! E9endit%re 7%&&ar"*

P!ease note Caita! E9endit%res at 8'DD'DDD !eve! are aroved in rinci!e in

that the $an) wi!! be reviewin( the anticiated and res%!tant financin(re0%ire&ents with "o% in the near f%t%re*

X Revised FCMA A(ree&ent*

X Ins%rance Waiver*

Given the sca!e and co&!e9it" of co&an" financia! oerations' we wo%!d

areciate the oort%nit" to revisit the need for rovision of Ann%a! A%dited "earend Financia! 7tate&ents*

cont4d

E9a&!e of T"ica! $an) LoanCovenants for C!ose!" :e!d Co&an"


136/174

Covenants for C!ose!" :e!d Co&an"

Gordon Man%fact%rin( is 8DD owned b" 7a&Gordon

Mini&%& C%rrent Ratio of 8*> to ens%re

!i0%idit" Mini&%& Ad%sted Net Worth of > &i!!ion to

ens%re so!venc"

Ad%sted Net Worth e0%a!s

7hareho!ders E0%it" fro& $a!ance 7heet !%sLoans fro& 7hareho!derRe!ated Co&anies!ess Loans to 7hareho!derRe!ated Co&anies!ess Goodwi!!

Effective Ann%a! Cost of7hort6ter& Financia!


137/174

Instr%&ent Effective before ta9 rate over !ife

of instr%&ent

Effective before6ta9 ann%a! interestrate

> n t e r e s t F e e s a v i n g s

e t : m o u n t B o r r o & e d

+

> n t e r e s t F e e s a v i n g s

e t : m o u n t B o r r o & e d

/ #

( a y s t o + a t u r i t y

+ +

Effective Ann%a! Interest Rate onRe(%!ar Interest Ter& Loan


138/174

Re(%!ar Interest Ter& Loan

E9a&!e# A ban) char(es a ann%a! re(%!arinterest rate on a 8DD'DDD 86da" ter& !oan*There is an ann%a! fee of 8*

7o!%tion#

Interest aid is 8DD'DDD8? or 8'>@HFee is 88DD'DDD8? or >@

Net a&o%nt borrowed is 8DD'DDD 3 8'DDD or'DDD

Effective ann%a! interest rate e0%a!s

!

! ! , ! ! ! % / . 1 6

/ #

D !

+ +

1 " 5 1 " D,

Effective Ann%a! Interest Rate on+isco%nt Interest Ter& Loan


139/174

+isco%nt Interest Ter& Loan

E9a&!e# A ban) char(es a ann%a! disco%ntinterest rate on a 8DD'DDD 86da" ter& !oan*There is an ann%a! fee of 8*

7o!%tion#

Interest aid is 8DD'DDD8? or 8'>@HFee is 88DD'DDD8? or >@

Net a&o%nt borrowed is 8DD'DDD 3 8'>@H or'H?


!

D 4 , 5 # % / . 1 D 6

/ #D !

+ +

1 " 5 1 " D,

Line of Credits


140/174

Bsed to finance seasona! f!%ct%ations in

wor)in( caita!* Fir& can borrow % to a &a9i&%& !eve! over

a secified ti&e eriod* Rea"&ent ob!i(ation varies ,e*(*' ? of

rincia! er &onth-' a!tho%(h ba!ance &%stbe 2ero b" ter&ination of the !oan a(ree&ent* $orrowin( fir& &a" withdraw as need

re0%ires % to a reset &a9i&%&*. Committed&eans ban) ob!i(ed ,written !oan

a(ree&ent- 66 fee on %n%sed ba!ance abo%t 8*,Commitment fee-

. Uncommitted&eans ban) not ob!i(ed 66 no fee on%n%sed ba!ance*

$an) %s%a!!" has otion to ter&inate

Line of Credits


141/174

Ass%&e interest ca!c%!ated on avera(eba!ance of !oan %sed over eriod*

Ass%&e co&&it&ent fee ca!c%!atedsi&i!ar!"*

Ca!c%!atin( Effective Interest Rateon Line of Credit


142/174

on Line of Credit E9a&!e# A ban) char(es a interest rate on a 8DD'DDD

!ine of credit for a&o%nts %sed and a co&&it&ent fee of8 for a&o%nts avai!ab!e b%t not %sed* The fee isca!c%!ated based on the avera(e %n%sed ba!ance d%rin(the eriod* If avera(e !oan ba!ance was @D'DDD for 8Dda"s ' what was effective interest rate on !ine of credit.

7o!%tion# Interest E9ense 5 @D'DDD8D? or

Co&&it&ent Fee 5 8D'DDD8D? or >Net A&o%nt $orrowed 5 @D'DDD

Effective Ann%a! Interest Rate e0%a!s

!

" ! , ! ! ! % / . / 6

/ #

4 !

+ +

D 4 / 1 D /

E9ercise U8


143/174

E9a&!e# A 8>D6da" >DD'DDD !ine of credit* The !ine of creditwo%!d have an ann%a! interest rate of and an ann%a!co&&it&ent fee of 8 of the %n%sed ba!ance* +%rin( thefirst D da"s the !oan is o%tstandin(' D'DDD wi!! beborrowed* +%rin( the !ast D da"s' 8D'DDD wi!! beborrowed*

Interest E9ense 5 D'DDDD? Net A&o%nt $orrowed 5 D'DDDD8>D < 8D'DDDD8>D

5 8DD'DDD

Effective Ann%a! Interest Rate e0%a!s /.16!!!,!!

1D/"",

1!

/#

=

++

E9ercise U>


144/174

E9a&!e# A 8D6da" ?DD'DDD !ine of credit* The !ine of creditwo%!d have an ann%a! interest rate of and an ann%a!co&&it&ent fee of D* of the %n%sed ba!ance* +%rin( thefirst 8DD da"s the !oan is o%tstandin(' 8DD'DDD wi!! beborrowed* +%rin( the !ast D da"s' >D'DDD wi!! beborrowed*

Interest E9ense 5 8DD'DDD8DD? D'DDDD? 5 @'?>

Co&&it&ent Fee 5 D*>DD'DDD8DD? @* and >@*H and +avis and

Pinches

Ca!c%!atin( Effective Cost of+eferrin( Pa"&ent on Acco%nts


146/174

Pa"ab!e E9a&!e# A co&an" has >8D n@ ter&s with its s%!ier*

If the co&an" c%rrent!" a"s within 8D da"s and receivesthe > disco%nt' what is the effective ann%a! cost ofde!a"in( a"&ent %nti! da" @.7o!%tion#

Rather than a"in( of face va!%e on da" 8D' co&an"

(ets to a" 8DD of face va!%e on da" @* This ise0%iva!ent to borrowin( a disco%nt interest !oan e0%a! to of face va!%e on da" 8D and rea"in( !oan bac) onda" @*

Interest E9ense 5 > ,disco%nt fore(one-

Net A&o%nt $orrowed# 5 of face va!%e of a"ab!es

Effective Ann%a! Interest Rate e0%a!s

D 4 6

% 1 . " # 6

/ #

" # - !

+

1 6

Factorin( Receivab!es


147/174

7e!!in( receivab!es to a factor ,Financeco&an"- for disco%nted cash va!%e ,withadvance factorin(- witho%t reco%rse to these!!er ,borrower-

Factor bears ris) ,where no reco%rse- andco!!ection e9enses

Fees are fair!" hi(h in factorin( arran(e&entsin &ost ind%stries' factorin( is one of the &oste9ensive &ethods of short6ter& borrowin(

Factorin(# E9a&!e +on4t Pa" for One F%!! ;ear


148/174

+on t Pa" for One F%!! ;ear

7a!eserson screens c!ient for credite!i(ibi!it" with Citifinancia! on site %sin( Citi4sin6store co&%ter s"ste&* Citi contro!s credit0%a!it"* $ad ris)s are not offered credit*

Citi a"s Leon4s the disco%nted va!%e of the%rchase rice i&&ediate!"*

Citi co!!ects f%!! a"&ent fro& c!ient at end of"ear* If c!ient can4t a"' then Citi starts

char(in( interest*

Advanta(es of Factorin( OverP! d i f A t R i b!


149/174

P!ed(in( of Acco%nts Receivab!es

A!!ows Co&anies to Avoid CreditChec)in(' $oo))eein( and Co!!ectionCosts

With Advance Factorin(' Fir&s can 7hortenCash Conversion C"c!e

With Non6Reco%rse Factorin(' the Financia!

Instit%tion Absorbs $ad +ebt Losses

Effective Ann%a! Interest Rate of AdvanceFactorin(

E9a&!e# A co&an" has >DD'DDD or acco%nts receivab!e* A


150/174

" 'finance co&an" char(es a 8 co&&ission on a!! receivab!esfactored* The finance co&an" wi!! !oan an a&o%nt e0%a! to HDof the receivab!es factored and wi!! char(e a 8> ann%a! interestrate on this a&o%nt* :owever' credit deart&ent costs wi!! bered%ced b" HD a &onth* The avera(e co!!ection eriod is Dda"s ,> &onths-* What is effective ann%a! cost of factorin(.

7o!%tion#

Fee is >DD'DDD8 or >'DDDNet a&o%nt borrowed is >DD'DDDHD or 8@D'DDD

Ann%a! interest aid is 8> >DD'DDDHDD? or >'H>

7avin(s over > &onths 5 HD> 58'DD


" ! , ! ! !

% # . ! " 6

/ #/ !

+ +

1 5 / 1 1 ! ! ! # ! !,

E9ercise U8


151/174

;Z Cor* c%rrent!" has &onth!" receivab!es of ?'???*It advance factors a!! receivab!es to $an)* Receivab!est"ica!!" co!!ected on >thof &onth' so ter& 5 > da"s*$an) !ends H of receivab!es' char(es 8* co&&issionand ? above Pri&e ,Pri&e5-* ;Z Cor' saves 8'DDD

a &onth on boo)6)eein( and co!!ection e9enses* Whatis the net cost to ;Z.

Co&&ission 5 D*D8 ?'??? 5 8'>D

7avin(s 5 68'DDD

Interest 5 D*DD*H?'???,>?- 5 ?*>H

Tota! 5 ?*>H

#.D60/1,"DD.5#

0/#.15k

1#/#


152/174

$ea&scoe &onth!" receivab!es of @DD'DDD* It advancefactors a!! receivab!es to $an)* Receivab!es t"ica!!"co!!ected at the end of each &onth' so ter& 5 8 &onth*$an) !ends HD of receivab!es' char(es D* co&&issionand > above Pri&e ,Pri&e5-* $ea&scoe' saves

8'DDD a &onth on boo)6)eein( and co!!ection e9enses*What is the net cost.

Co&&ission 5 D*DD @DD'DDD 5 >'DDD

7avin(s 5 68'DDD

Interest 5 ,D*D8>-D*H@DD'DDD 5 >'H

Tota! 5 ?'H

/."6014!,!!!

0,#/5k

1


153/174

Ratio Ana!"sis

O%t!ine


154/174

Ratios +% Pont Ana!"sis

Ratio Ana!"sis


155/174

GFinancial ratios sho& relationships among financial statement

accounts.

G>nvestors predict future earnings and dividends of firm in order

to value shares

GCreditors predict likelihood of default by firm on claim

G+anagement decides upon investment in short and long-term

asset and establish amount and type of credit financing

Ratio Ana!"sis

teps: (ecide on ratios that are appropriate


156/174

teps:

)ype:

. (ecide on ratios that are appropriate

1. Calculate ratios

. Compare ratios to industry norms

". dentify trends in ratios over time/. f discrepancies arose because of

underlying problems, evaluate

alternative solutions to problems.>. 9i=uidity>>. sset +anagement $atios

>>>. (ebt +anagement $atios

>H. *rofitability $atios

H +arket Halue $atios

&&2 (sset Mana!ement Ratios

- measures ho& effectively management is utiliIing the companys assets

1 M


157/174

1urnover Measures

2 >nventory EtiliIation % ales?>nventory

)oo JhighK )oo Jlo&K

- loss of profitable sales - obsolescence

from stock outs - &arehousing constraints

-costs from eAcessive - financing and insurance

reordering costs are eAcessive

12 verage Collection *eriod % $eceivablesLLLL

verage ales per (ay

)oo Jlo&K )oo JhighK

- loss of profitable sales from - bad debt tight credit terms - financing costs

2 FiAed sset EtiliIation % ales?et FiAed ssets

"2 )otal sset EtiliIation % ales?)otal ssets

&&&2 Debt Mana!ement 3)evera!e4 Ratios

measures eAtent to &hich non e=uity financing is used


158/174

- measures eAtent to &hich non-e=uity financing is used

2 )otal (ebt?)otal ssets

12 )otal (ebt?)otal


159/174

- creditors &ill charge higher financing rates to firms &hich are highly

levered

2 @reater likelihood of bankruptcy because of added

interest costs

12 9oss of creditors upon li=uidation of firm is likely higher because

amount of debt increases but li=uidation value of assets does not.

2 Common shareholders have smaller stake in firm that is financed by

debt rather than solely by e=uity - may lead them to misappropriate firm

assets or take eAcessive risks especially &here firm is nearing

bankruptcy.

if firms are too highly leveraged, they may be unable to obtainfinancing from creditors.

(dvanta!es to %hareholders from )evera!e

2 leverage allo&s firms to eAperience higher returns in


160/174

2 leverage allo&s firms to eAperience higher returns in

JgoodK times 3but lo&er returns in JbadK times2 -

generally eApected


161/174

operating results

2 @ross *rofit +argin on ales % @ross +argin?ales

12 et *rofit +argin on ales % et >ncome vailable to

Common hareholders? ales

2 Basic


162/174

- measures the stock market s evaluation of li=uidity, asset

management, debt management and profitability

2 *rice


163/174

9i!hli!hts relationship beteen financial ratios

R7(

R7A

=et /ro4itmar$in

Assetturnover

&

&

1D 'ebtGe)uity


164/174

(uto

'arts

Buildin!

Materials

5old and

'recious

Metals

Food and

Bevera!e

1echnolo!y 'ipelines

verage >ndustry $atios


165/174

Metals

)iuidity

Current 1./D .D/ !.5 1.5/ 1."5 !.5

Muick ./! .! D./5 .#5 .41 !.#

(sset

Mana!ement

(ays alesutstanding

"".5 #D.D 1.1 #.D 5!./ "/.#

>nventory)urnover

5.// .# 5.5/ .! ".#1 1/.11

9ong-term:sset $atio

#.! .4" !.#D /."! D.4# !.4D

Debt

Mana!ement

)otal (ebt to)otal :ssets

!.! !./ !.1# !."D !.# !./5

)imes >nterest


166/174

(uto'arts

Buildin!

Materials

5old and

'recious

Metals

Food and

Bevera!e

1echnolo!y 'ipelines

'rofitability

+argin 362 #.D/ #.15 351.52 #.D/ 31.!2 #.!

$eturn on:ssets 362

4./ 5.14 3D.#12 5./ !.!D /.4

$eturn on


167/174

Castone Case# Wor)in(Caita! and Financia!

7tate&ent Ana!"sis$ea&scoe Canada

Castone Case# Wor)in(Caita! and Financia!7tate&ent Ana!"sis


168/174

7tate&ent Ana!"sis

)he chart belo& sho&s the price of the stock of Beamscope, a

distributor of electronics products in Canada and outh

merica, from DD5 to 1!!.

$ea&scoe4s Wor)in( Caita!Mana(e&ent

)hree maOor problems occurred &ith &orking capital in DD5-DD4:


169/174

$atio DD/ DD5 DD4 DDD 1!!!

Current .D ./ .5! .# .!

Muick .4 .!/ .!/ !.#4 !.""

verage Collection *eriod /1 4" 4! #" #!

(ays >nventory 1D "/ # /" //

(ays *ayable # 5 /D "5 "D

perating Cycle D 4 #

Cash Cycle 4 /! /" 5 /5

)hree maOor problems occurred &ith &orking capital in DD5 DD4:

. Company couldnt cope &ith gro&th in managing inventory P $1. Company didnt properly process goods returned from customers.

. Company didnt have an ade=uate returns policies &ith suppliers.

$ea&scoe4s +ebt Mana(e&ent

>ncreased (ebt 9evels $elative )o


170/174


)otal (ebt?)otal ssets 0,!9 0,": 0,"# 0,#1 0,##

)otal (ebt?nventory needed to be financed.

1. Company &rote off Encollectible ccounts $eceivable and vervalued

>nventory in DDD.

9o&er (ebt ervicing bility because of higher interest and lo&er profits.

$ea&scoe4s Profitabi!it"

Company became very unprofitable in DDD


171/174


;ross Pro4it


172/174

>ndMethod of Lendin( ,>-


173/174

%RE"(+


174/174

CM( data is a tool used by the bankers to assess the

reuirement of workin! capital2 &t is divided into six parts:

Form & 'articulars of /xistin! 6 'roposed )imits

Form && peratin! %tatement

Form &&& (nalysis of Balance %heet

Form &. Comparative %tatement of Current (ssets 6

Current )iabilities

1slideshar.working-capital-management.ppt

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