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Part 7 Integrative Case 16 Total Liabilities and 103 219 Working Capital Management This case Sreas ans teria frem Chaptes 18-20 See My Finenalab for the dats in Takls C To compensate for its weak sales and marketing efforts, Idexo has sought to maintain the loyalty of its retailers, in part through a very lax credit policy. This policy affects Idexo's working capital requirements: For every extra day that customers take to pay, another day's sales revenue is added to accounts receivable (rather than received in cash). From Idexo's current income and balance sheet (Table 1), we can estimate the number of days of Operational Improvements dexo Corparation s a privately held designer and manu aturer oliomsed college apparel n Cincinnati, Ohio, In ae 201, ae several years of lacikluster peiormance, the Erm wner anvd Scurder, Rebecca Ferris, retumed from retirement to replace the curreat CE0, emngoratethefir, and plan fr its eventual sale or possible IPO. She has hired you to ssis with developing the firm's fimandial plan for the next five years On the operational side, Ferris is quite optimistic regaring the company's prospects. The market is expected to grow by 6% per year, and Ideo produces a superior product. Ideos market share has not grown in recent years because prior management devoted insufficient resources to product development, sales, and marketing.At the same time, Idexo has overspent on administrative costs. Indeed, from Table 1, Idexo's current administrative expenses are $15 million, $100 milion-18% of sales, which exceeds its expenditures on sales and marketing (15% of sales). Competitors spend less on administrative overhead than on sales and marketing. Ferris plans to cut administrative costs immediately to 15% of sales and redirect resources to new product development, sales, and marketing, By doing so, she believes ldexo can increase its market share from 10% to 14% over the next four years. Using the existing n 2015, Ideso had total assets of about $303 million and areual sales o $100 millien (see Table 1C. The firn was protrable, with expecied 2016 earmings of more than $9 million, or net peofit margin af 9.1%.1 However, revenue g owth has slewed dramatically in recent ear, and the firm'sprofit manon has actualy been ded ining, Ferris is convinced the s as Accoants Receivable Days m cam do better. After orly several weeks at the helm, she has already identified a mumber potertial impravemerts to drive the firm's future grouth Rever 8s) 20 Million/ 100 Million x 365 = 73 Days Table 1 Idexo's 2016 Income Statement and Dalance Sheet The standard for the industry is 45 days. Ferris believes that Idexo can tighten its credit policy to achieve this goal without sacrificing sales. Year 2 Income Statement($000s) 2016 100,000 Cost of Goods Sold SRaw Materials 6 Direct Labor Costs Ferris does not foresee any other significant improvements in Idexo's working capital management, and expects inventories and accounts payable to increase proportionately with sales growth. The firm will also need to maintain a minimum cash balance equal to 30 days sales revenue to meet its liquidity needs. It earns no interest on this minimal balance, and Ferris plans to pay out all excess cash each year to the firm's shareholders as dividends. production lines, the increased sales demand can be met in the shoct run by increasing overtime and running some weekend shifts. The resulting increase in labor costs, however slikely to lead toadedne in the firm's gross margin to 53%, Table 20shows sales and operating-cost projections for the next five years based on this plan, including the Gross Profit 8 Sales and 54,667 reallocaticn of resources from admunistration to sales and marketing over the five-year period and an increase in Ideo's average selling price at a 2% inflation rate each year. -6,667 3 Interest Expense (net) 4 Pretax Income Capital Structure Changes: Levering Up -4,893 Table 2 Idexo's Sales and Operating Cost Projections Ide o currently has S20 million in debt outstanding with an interest rate of 68%, and it will pay interest only on this debt during the next five years. The firm will also obtain additional financing at the end of years 2019 and 2020 associated with the expansion of its manufacturing plant, as shown in Table 40, While Idexo's credit quality will likely improve by that time, interest rates may also increase somewhat. You expect that rates on these future loans will be about 6.8% as well. 2016 2017 2018 2019 2020 2021 2 Balance Sheet (5000s) 2 Sales Data 3 Market Size,000s unis)6.0% 20,000 21.200 22,472 23,820 25.250 26.765 4 Market Share 5 Average Sales Price (Sunit) 2.00%. 50.00 51.00 5202 5306 5412 5520 4 Cash and Cash Equivalents 5 Accounts Receivable , "10% 100% 110% 120% 130% 140% 140% 7 Total Current Assets 7 Operating Expense and Tax Data 547% 15.0% 18.0% 350% 530% 16.5% 15.0% 350% 530% 18.0% 15.0% 350% 530% 195% 14.0% 350% 530% 200% 13.0% 350% 530% 200% 10 Total Assets 1Liabilities and Stockholders Equity 2 Accounts Payable Sales and Marketing 1% 0 Administration(% sales Table 4 Idexo's Debt and Interest Forecast 350% 2016 2017 2018 2019 2020 2021 2 14 Total Liabilities 15 16 Total Liabilities and Equity Debt and Interest Table ($00Ds) 77,014 20,000 20,000 20,000 35000 40,000 40,000 ,360-1,360-1360-230-2,720 4 Inberest on Tem Loan 2 Given Idexo's outstanding debt, its interest expense each year is computed as: Part 7 Integrative Case 16 Total Liabilities and 103 219 Working Capital Management This case Sreas ans teria frem Chaptes 18-20 See My Finenalab for the dats in Takls C To compensate for its weak sales and marketing efforts, Idexo has sought to maintain the loyalty of its retailers, in part through a very lax credit policy. This policy affects Idexo's working capital requirements: For every extra day that customers take to pay, another day's sales revenue is added to accounts receivable (rather than received in cash). From Idexo's current income and balance sheet (Table 1), we can estimate the number of days of Operational Improvements dexo Corparation s a privately held designer and manu aturer oliomsed college apparel n Cincinnati, Ohio, In ae 201, ae several years of lacikluster peiormance, the Erm wner anvd Scurder, Rebecca Ferris, retumed from retirement to replace the curreat CE0, emngoratethefir, and plan fr its eventual sale or possible IPO. She has hired you to ssis with developing the firm's fimandial plan for the next five years On the operational side, Ferris is quite optimistic regaring the company's prospects. The market is expected to grow by 6% per year, and Ideo produces a superior product. Ideos market share has not grown in recent years because prior management devoted insufficient resources to product development, sales, and marketing.At the same time, Idexo has overspent on administrative costs. Indeed, from Table 1, Idexo's current administrative expenses are $15 million, $100 milion-18% of sales, which exceeds its expenditures on sales and marketing (15% of sales). Competitors spend less on administrative overhead than on sales and marketing. Ferris plans to cut administrative costs immediately to 15% of sales and redirect resources to new product development, sales, and marketing, By doing so, she believes ldexo can increase its market share from 10% to 14% over the next four years. Using the existing n 2015, Ideso had total assets of about $303 million and areual sales o $100 millien (see Table 1C. The firn was protrable, with expecied 2016 earmings of more than $9 million, or net peofit margin af 9.1%.1 However, revenue g owth has slewed dramatically in recent ear, and the firm'sprofit manon has actualy been ded ining, Ferris is convinced the s as Accoants Receivable Days m cam do better. After orly several weeks at the helm, she has already identified a mumber potertial impravemerts to drive the firm's future grouth Rever 8s) 20 Million/ 100 Million x 365 = 73 Days Table 1 Idexo's 2016 Income Statement and Dalance Sheet The standard for the industry is 45 days. Ferris believes that Idexo can tighten its credit policy to achieve this goal without sacrificing sales. Year 2 Income Statement($000s) 2016 100,000 Cost of Goods Sold SRaw Materials 6 Direct Labor Costs Ferris does not foresee any other significant improvements in Idexo's working capital management, and expects inventories and accounts payable to increase proportionately with sales growth. The firm will also need to maintain a minimum cash balance equal to 30 days sales revenue to meet its liquidity needs. It earns no interest on this minimal balance, and Ferris plans to pay out all excess cash each year to the firm's shareholders as dividends. production lines, the increased sales demand can be met in the shoct run by increasing overtime and running some weekend shifts. The resulting increase in labor costs, however slikely to lead toadedne in the firm's gross margin to 53%, Table 20shows sales and operating-cost projections for the next five years based on this plan, including the Gross Profit 8 Sales and 54,667 reallocaticn of resources from admunistration to sales and marketing over the five-year period and an increase in Ideo's average selling price at a 2% inflation rate each year. -6,667 3 Interest Expense (net) 4 Pretax Income Capital Structure Changes: Levering Up -4,893 Table 2 Idexo's Sales and Operating Cost Projections Ide o currently has S20 million in debt outstanding with an interest rate of 68%, and it will pay interest only on this debt during the next five years. The firm will also obtain additional financing at the end of years 2019 and 2020 associated with the expansion of its manufacturing plant, as shown in Table 40, While Idexo's credit quality will likely improve by that time, interest rates may also increase somewhat. You expect that rates on these future loans will be about 6.8% as well. 2016 2017 2018 2019 2020 2021 2 Balance Sheet (5000s) 2 Sales Data 3 Market Size,000s unis)6.0% 20,000 21.200 22,472 23,820 25.250 26.765 4 Market Share 5 Average Sales Price (Sunit) 2.00%. 50.00 51.00 5202 5306 5412 5520 4 Cash and Cash Equivalents 5 Accounts Receivable , "10% 100% 110% 120% 130% 140% 140% 7 Total Current Assets 7 Operating Expense and Tax Data 547% 15.0% 18.0% 350% 530% 16.5% 15.0% 350% 530% 18.0% 15.0% 350% 530% 195% 14.0% 350% 530% 200% 13.0% 350% 530% 200% 10 Total Assets 1Liabilities and Stockholders Equity 2 Accounts Payable Sales and Marketing 1% 0 Administration(% sales Table 4 Idexo's Debt and Interest Forecast 350% 2016 2017 2018 2019 2020 2021 2 14 Total Liabilities 15 16 Total Liabilities and Equity Debt and Interest Table ($00Ds) 77,014 20,000 20,000 20,000 35000 40,000 40,000 ,360-1,360-1360-230-2,720 4 Inberest on Tem Loan 2 Given Idexo's outstanding debt, its interest expense each year is computed as