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Working Capital Case Study Miller Building Supplies....




Applied Case Study;MILLER BUILDING SUPPLIES (MBS);Anne Arundel County is located south of Baltimore MD, and is the home of Annapolis MD, the;location of the U.S. Naval Academy. Annapolis and the surrounding area has become a popular;recreational and retirement community due to its access to the Chesapeake Bay, historic areas;and decent medical care. Furthermore, a major airport (BWI Thurgood Marshall Airport) is less;than 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 to;follow. The economy is diverse. Roughly 75% of employment is in service, education and;government, retail, financial, and the hospitality industries. Many MD state offices are in the;area of Annapolis, and the county has such institutions of higher learning as St. Johns College;and Anne Arundel Community College in addition to the Naval Academy.;JOSEPH MILLER STARTS MBS;Joseph Miller founded his building supply company after returning from the Korean War. He;saw the migration of economic activity in the county from agriculture to a diversified mix of;businesses, and located MBS in the town of Glen Burnie in 1953. His choice of Glen Burnie;was motivated by access to the major highways in that part of the state and the recent opening of;the 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, he;came to realize that construction companies needed a full range of electrical, plumbing and;heating/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, Joseph;III is the president, although he has been considering retiring. Joseph IIIs cousins are the chief;financial officer (CFO), the marketing vice-president and the chief purchasing officer. The;family has been quite successful in managing the business, and MBS is continuously profitable;despite the fact that sales are sensitive to the economy of Anne Arundel County, of Southern MD;and the Eastern Shore Counties.;VARIATIONS IN WORKING CAPITAL REQUIREMENTS;The 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 usually;started 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 business;periods.;Management is quite aware of the seasonal variation in the working capital position of the;company. Historically, MBS has maintained large cash positions, and when receivables and;inventory 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 of;MBS may be difficult using internally generated funds. The cash philosophy may be;unnecessarily tying up capital, and it may be appropriate to use short-term financing for seasonal;working capital needs.;The president thinks that the CFOs suggestion is worth pursuing, particularly as it would free up;long-term capital for expansion. The marketing vice-president is not convinced and thinks that;the companys financing methods continue to be appropriate. In addition, he is opposed to;additional interest expense and having to deal with a bank. His cousin, the sales manager, is not;opposed to using debt to finance working capital and argues that receivables and inventory;should be supported with short-term debt.;A BANKERS ASSISTANCE;The Bank of Maryland (the Bank) has dealt with MBS for four decades. The company has;never 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 has;generally been internally generated. The Bank has tried to develop a stronger relationship as it;considers MBS to be a stable, well run company. When William Horton, the Banks calling;officer, 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 to;finance the companys working capital;QUESTIONS (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 the;company?;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). Assume;that the contractors who purchase from MBS pay when they are paid by their residential;and commercial customers, which is one-half in the second month and one-half in the;third month following sales. Assume also that MBS must pay one-half of its payables in;the month the expense is incurred, and one-half in the following month.;Recent MBS Quarterly Financial Statement Results, in $000;1st Quarter: Sales, $11,191, Net Income, ($83);2nd Quarter: Sales, $25,309, Net Income, $1,247;3rd Quarter: Sales, $27,877, Net Income, $1,554;4th Quarter: Sales, $15,439, Net Income, ($21);1st Quarter: Beginning Cash, $12,102, Total Current Assets (TCA), $38,708;Current Liabilities (CL), $7,579;2nd Quarter: Beginning Cash: $6,768, TCA, $43,454, CL, $11,101;3rd Quarter: Beginning Cash, $1,484, TCA, $40,773, CL, $6,809;4th Quarter: Beginning Cash, $8,392, TCA, $39,456, CL, $5,121;Selected Industry Ratios (median);Current Ratio: 1.8 times;Quick Ratio: 0.9 times;Total Debt Ratio: 55.4%;Average Collection Period: 45 days;Asset Turnover: 2.5 times;MBS Income Statements, 2008-2010 (year ending January 31st), in $000;2008;2009;Sales;$57,496.3;$69,619.2;Cost of Goods Sold;40,990.5;51,352.6;Gross Profit;16,505.8;18,266.6;Sales & Administrative;12,164.7;13,397.2;Costs;Depreciation;1,265.0;1,532.8;Earnings before Interest;3,076.1;3,336.6;Taxes;Interest Expense;159.6;104.9;Earnings before Taxes;2,916.5;3,231.7;Taxes;1,168.6;1,293.1;Net Income;$1,747.9;$1,938.6;MBS Balance Sheets, 2008-2010 (year ending January 31st), in $000;2008;2009;Assets;Cash;$9,262.1;$10,651.6;Accounts Receivables;10,821.3;12,838.9;Inventory;11,499.4;12,563.4;Other Current;344.6;418.9;Current Assets;31,927.4;36,472.8;Gross Fixed Assets;19,312.7;19,734.5;Accumulated Depreciation;-10,948.2;-12,480.1;Net Fixed Assets;8,364.5;7,254.4;Total Assets;$40,291.9;$43,727.2;Liabilities & Owners Equity;Accounts Payable;$2,568.6;$3,063.7;2010;$79,816.1;58,505.7;21,310.4;14,810.2;1,756.3;4,743.9;171.0;4,572.9;1,826.9;$2,746.0;2010;$12,568.9;13,388.6;13,021.2;479.0;39,457.7;20,853.8;-14,236.5;6,617.3;$46,075.0;$3,044.7;Accruals;Current Portion of Debt Due;Current Liabilities;Long-Term Debt;Common Stock;Retained Earnings;Total Liab. & Owners;Equity;917.3;500.0;3,985.9;1,542.4;10,000.0;24,763.6;$40,291.9;1,247.8;500.0;4,811.5;2,221.5;10,000.0;26,704.2;$43,737.2;1,577.6;500.0;5,122.3;1,510.3;10,000.0;29,442.4;$46,075.0


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