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 didn't decrease in line with sales.
From another hand, Sure Cut didn't 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 didn't 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. ...view middle of the document...
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 mean that Sure Cut should decreased their inventories (producing in line of what they are selling) and secured the payments of their Accounts Receivables (keeping close track of this figure). From another hand, it is important to determine if this is the right time to make the expansion. Finally, Sure Cut should provide a clear understanding of the market, knowing why the sales have decreased in order to make a more accurately forecast of the coming year.
Compare the nature of the financial problems faced by Surecuts Shears, Play Time and Wilson Lumber?
These companies have very different financial needs. First, Wilson Lumber needs money to finance its growing. With a very low profit margin, he is not able to finance the projected growing and needs the bank loan. Secondly, Play Time needs the bank finance a change in its production approach (from seasonal to a level production). With this change they increased their working capital in low sales months, but are able to release some capacity and decreased some labor costs in peak sales month. Finally, in the case of Sure Cuts, they need money as they are going through difficult times, where the shears market seems to be shrinking and at the same time they are in the middle of and expansion project (modernization of their operation)