Case: Hanson Ski ProductsFinancial Analysis
...eir customers and accounts were typically payable on the tenth day of the second or third month following shipment, depending upon the date of their requested shipment. (These terms were considered similar and slightly tighter than Hanson’s competitors.) The reorder period accounted for the remaining 10-20% of Hanson’s sales and started in July, when dealers were ordering to replenish their current supply. A 2% discount was available to these customers for payment by the tenth of the month following shipment. Sparse snow years had previously had an impact on reorders (specifically in two fiscal years). More so, it was felt during the stocking order period in the following spring as dealers were weary of placing large initial stocking order for fear of back to back sparse snow years that would leave them with much inventory. Hanson’s shipments began in July, peaked in August, and remained at a high level until December. The largest part of Hanson’s collections of accounts receivables begin in December following the shipment phase and in a normal business year, the collection phase was about 75 days (and in off years, the phase was significantly stretched). Production and Financing Manufacturing of the following season’s products began in January and productions schedules were subsequently modified as necessary. Hanson did not want to lay-off at least 50% of his workforce, which accounted for approximately 61 of his skilled workers who were important to the manufacturing of his ski boots and had sufficient confidence in its sales forecasts to manufacture up to 60% of such forecasts in advance of firm orders. The company employed efforts to conserve or stretch cashing within the firm to the extent possible. And although these efforts were employed, Hanson still found it necessary to arrange substantial short-term loans from bank, finance companies, and from principal stockholders. Commercial financing required more frequent audits for the borrower’s operations and finances than was typical of banks—and levied a higher interest charge. Hanson’s goal was to shift his loan reliance solely to commercial banks, and in February 1986, he obtained approval of a $4.2 million revolving line of credit for FY 1987 at 3.75% (*a .25% reduction from 4% in FY 1986) for the over prime. With this loan, Hanson could draw against this line of credit to the extent of 70% of the cost of inventories and 80% of current accounts receivable. As of June 1986, Hanson Ski had no plans to issue additional stock in the immediate future and no liquidations of plant or equipment were contemplated. The company had never paid a cash dividend, and it did not plan to initiate dividend payments in fiscal year 1987. For FY 1987, Henson was concerned that a set of loans from shareholders, totaling $841K would be come due in November 1986, could be paid off to ensure that he would maintain control of operations. And he hoped that the bank line of credit would be sufficient to enable the company to pay the loans in full and on time. Questions Does the balance sheet tell you whether or not the plans on which the budgets are based are feasible? Address the problem with paying off the $841K in shareholder loans in November? What can Hanson do to ensure the loans are paid? Analysis: At the end of the budget cycle, the Hanson’s Manager’s must test whether plans are feasible given financing arrangements and constraints. Cash needs are apparently great due to the company’s seasonality of operations. Needed loans must be calculated at five separate dates, and financial position projected; especially given the fact that Hanson wants to pay back shareholder loans in FY November. Denny Hanson is interested in maintaining a full workforce even though employees are essentially sitting idle on company time with nothing to do from June through November. The case does not specifically indicate that the employees that Henson wants to keep on payroll are full-time, but cutting back hours or reducing pay-rates during off season should be considered as an alternative to cut back overall employee wage costs; especially given the obvious fact that this is a “seasonal” business and while production and accounts receivables are, for the most part, at a stand still. The cash budget does not provide for the ability to reasonably pay for the salaries of 61 employees during off season. Hanson is paying above prime rates for an on going line of credit. Given the company’s successful past track record of sales and stability, Hanson should seek out better loan rate opportunities. Hanson wants to payback $841K in shareholder loans. He is concerned that he should pay back shareholder loans specifically in FY 1987. This is not very practical for a couple of reasons. First, the bank he is primarily dealing with is not making the shareholder loan repayment a contingency for qualifying for future loans he may want. Second, based on the proposed cash budget, Hanson is short approximate $400K in his ability to pay back the loan specifically in November. Hanson doesn’t like the idea that shareholders are bugging him. However, he is going to have to revisit the proposed budget and could co...