Applied Case StudyMILLER BUILDING SUPPLIES (MBS)Anne Arundel County is located south of Baltimore MD, and is the home of Annapolis MD, thelocation of the U.S. Naval Academy. Annapolis and the surrounding area has become a popularrecreational and retirement community due to its access to the Chesapeake Bay, historic areasand decent medical care. Furthermore, a major airport (BWI Thurgood Marshall Airport) is lessthan one hour away, and Washington D.C. is approximately the same distance.The potential growth of the county has attracted numerous businesses with more expected tofollow. The economy is diverse. Roughly 75% of employment is in service, education andgovernment; retail; financial; and the hospitality industries. Many MD state offices are in thearea of Annapolis, and the county has such institutions of higher learning as St. Johns Collegeand Anne Arundel Community College in addition to the Naval Academy.JOSEPH MILLER STARTS MBSJoseph Miller founded his building supply company after returning from the Korean War. Hesaw the migration of economic activity in the county from agriculture to a diversified mix ofbusinesses, and located MBS in the town of Glen Burnie in 1953. His choice of Glen Burniewas motivated by access to the major highways in that part of the state and the recent opening ofthe Chesapeake Bay Bridge to enter the Eastern Shore of MD.The firm began as a wholesale distributor of various building supplies like paint, lumber,flooring, drywall, fencing and cleaning supplies. As Miller developed his customer base, hecame to realize that construction companies needed a full range of electrical, plumbing andheating/air conditioning supplies and equipment in additional to basic building materials.MBS has been run by Joseph Millers children and now his grandchildren. As of 2010, JosephIII is the president, although he has been considering retiring. Joseph IIIs cousins are the chieffinancial officer (CFO), the marketing vice-president and the chief purchasing officer. Thefamily has been quite successful in managing the business, and MBS is continuously profitabledespite the fact that sales are sensitive to the economy of Anne Arundel County, of Southern MDand the Eastern Shore Counties.VARIATIONS IN WORKING CAPITAL REQUIREMENTSThe companys sales are seasonal and during the colder months building activities slows down.If the winter is mild, some building projects continue, but large new projects are not usuallystarted until the Spring. The low point of the year is January, and from that time on, sales build.MBS has a small year-round labor force and employs seasonal workers during peak businessperiods.Management is quite aware of the seasonal variation in the working capital position of thecompany. Historically, MBS has maintained large cash positions, and when receivables andinventory have increased, they have been primarily financed by drawing down cash. However,the company is taking a critical look at this strategy. The CFO realizes that further expansion ofMBS may be difficult using internally generated funds. The cash philosophy may beunnecessarily tying up capital, and it may be appropriate to use short-term financing for seasonalworking capital needs.The president thinks that the CFOs suggestion is worth pursuing, particularly as it would free uplong-term capital for expansion. The marketing vice-president is not convinced and thinks thatthe companys financing methods continue to be appropriate. In addition, he is opposed toadditional interest expense and having to deal with a bank. His cousin, the sales manager, is notopposed to using debt to finance working capital and argues that receivables and inventoryshould be supported with short-term debt.A BANKERS ASSISTANCEThe Bank of Maryland (the Bank) has dealt with MBS for four decades. The company hasnever established much of a relationship with the Bank except for an occasional term loan,depository and disbursement services, and a few other services. As noted, long-term capital hasgenerally been internally generated. The Bank has tried to develop a stronger relationship as itconsiders MBS to be a stable, well run company. When William Horton, the Banks callingofficer, received a phone call from the president of MBS, he was more than willing to meet him.The CFO asked for help in analyzing MBSs working capital needs to:Estimate MBSs working capital needs.Determine if the Bank is willing to extend MBS a line of credit sufficient tofinance the companys working capitalQUESTIONS (Justify your answer(s) and / or show your calculations).1. What is the amount of working capital that is required during each quarter of the year?2. Does MBS have excess working capital during these periods? If so, what do you suggest?3. Are there specific working capital management suggestions that you can make to thecompany?4. If a line of credit is requested from the Bank, should it be offered? At what interest rate?Specify terms that the Bank can reasonably require.5. Would a monthly cash budget improve forecasting and support for a line of credit? If so,provide a cash budget (to the best of your ability based on the data in the case). Assumethat the contractors who purchase from MBS pay when they are paid by their residentialand commercial customers, which is one-half in the second month and one-half in thethird month following sales. Assume also that MBS must pay one-half of its payables inthe month the expense is incurred, and one-half in the following month.Recent MBS Quarterly Financial Statement Results, in $0001st Quarter: Sales, $11,191; Net Income, ($83)2nd Quarter: Sales, $25,309; Net Income, $1,2473rd Quarter: Sales, $27,877; Net Income, $1,5544th Quarter: Sales, $15,439; Net Income, ($21)1st Quarter: Beginning Cash, $12,102; Total Current Assets (TCA), $38,708;Current Liabilities (CL), $7,5792nd Quarter: Beginning Cash: $6,768; TCA, $43,454; CL, $11,1013rd Quarter: Beginning Cash, $1,484; TCA, $40,773; CL, $6,8094th Quarter: Beginning Cash, $8,392; TCA, $39,456; CL, $5,121Selected Industry Ratios (median)Current Ratio: 1.8 timesQuick Ratio: 0.9 timesTotal Debt Ratio: 55.4%Average Collection Period: 45 daysAsset Turnover: 2.5 timesMBS Income Statements, 2008-2010 (year ending January 31st), in $00020082009Sales$57,496.3$69,619.2Cost of Goods Sold40,990.551,352.6Gross Profit16,505.818,266.6Sales & Administrative12,164.713,397.2CostsDepreciation1,265.01,532.8Earnings before Interest &3,076.13,336.6TaxesInterest Expense159.6104.9Earnings before Taxes2,916.53,231.7Taxes1,168.61,293.1Net Income$1,747.9$1,938.6MBS Balance Sheets, 2008-2010 (year ending January 31st), in $00020082009AssetsCash$9,262.1$10,651.6Accounts Receivables10,821.312,838.9Inventory11,499.412,563.4Other Current344.6418.9Current Assets31,927.436,472.8Gross Fixed Assets19,312.719,734.5Accumulated Depreciation-10,948.2-12,480.1Net Fixed Assets8,364.57,254.4Total Assets$40,291.9$43,727.2Liabilities & Owners EquityAccounts Payable$2,568.6$3,063.72010$79,816.158,505.721,310.414,810.21,756.34,743.9171.04,572.91,826.9$2,746.02010$12,568.913,388.613,021.2479.039,457.720,853.8-14,236.56,617.3$46,075.0$3,044.7AccrualsCurrent Portion of Debt DueCurrent LiabilitiesLong-Term DebtCommon StockRetained EarningsTotal Liab. & OwnersEquity917.3500.03,985.91,542.410,000.024,763.6$40,291.91,247.8500.04,811.52,221.510,000.026,704.2$43,737.21,577.6500.05,122.31,510.310,000.029,442.4$46,075.0
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