Case Study #2: Working Capital Management WE BE TRUCKS, INC. INTRODUCTION For as long as he could remember, Y.U. YanKee had enjoyed car trips. As a child he had spent summers traveling with his family, by car, to most part of the United States. To him, road trips were the most fun one could have, especially if you could stop along with way and enjoy the sights. Not surprisingly, Y.U. became a long-haul trucker after college. It paid good wages and had the advantage of allowing him to see the country from the cap of his truck. He couldn?t do any sightseeing this way, of course, but he figured that there was always time for that later. Six years of open road trucking took its toll, however, and Y.U. was tired of the long hours and poor working conditions. As he became more and more discontent with the trucking industry, he started to look for ways to use his knowledge to start a business of his own. Y.U. founded We Be Trucks, Inc. in the late 1980s. We Be Trucks specialized in ?jobber? sales at truck stops and travel centers across the U.S. and Canada. ?Rack jobbers? came in and stocked one part of the store, maintaining inventory and keeping track of customer interests and popular products. In many cases, these items were the only shopping opportunity that truckers had during the week. Y.U. had been able to start small by capitalizing on his knowledge of the trucker lifestyle and the needs of those on the road. Initially, he contracted for shelf space at truck stops in his region and filled that space with wholesale goods he found at closeout sales and business auctions. Truckers had responded by snapping up the toys, books and small appliances that Y.U. thought would be appreciated. Within two years Y.U. had hired a dozen other employees to help with his routes, and after another two years he needed dozens more. In addition, he had found ways to buy imported goods and keep his inventory consistent across the country. GET YOUR MOTOR RUNNING By the end of 2011, We Be Trucks had become one of the largest jobbers in the U.S. The firm sponsored many products for import, with its own brand names, and had successfully offered Internet ordering only a year before. The company sold everything from video games and textbooks to laptop computers online and maintained job racks and gifts in thousands of locations across the country. Finally, Y.U. thought he would be able to take the time to travel and be a tourist again. In order for Y.U. to do this, however, it was necessary for him to spend less and less time in the office. To this end, he had spent time the previous year hiring and training a new assistant and teaching her the intricacies of the rack jobber business. Polly Fisher was just a few months out of school and trying as hard as she could to learn everything about Y.U. and his business. Mr. YanKee had placed a great deal of faith in her, and it was obvious that he planned to put at least part of the future of his company in her hands. THE CASH-TO-CASH CYCLE Y.U. had challenged Ms. Fisher using a series of exercises involving the firm?s accounting numbers. This week, the lesson was in the area of ?working capital management.? In addition to her regular tasks, Polly was expected to work on this problem and present her findings to Mr. YanKee at the end of the week. Y.U. had prepared a balance sheet (Exhibit 1) and some additional information about the firm?s cost structure (Exhibit 2). Both statements were based upon 365 days in the firms? fiscal year. Y.U. stressed that working through the difference between the cash-to-cash cycle for assets and the cycle for liabilities could help Polly understand the need for short-term borrowing. ?We can only get so much credit from our suppliers,? he reminded her. He gave her an outline of the process and its importance (Exhibit 3). REQUIRED 1. Using the information in Exhibits 1 and 2, calculate the company?s average daily sales, average daily cost of goods sold, average purchases, and the average operating expenses. How much control does the firm have over each of these items? 2. Convert the asset portion of the firm?s balance sheet in Exhibit 1 into its daily equivalent. How many days does the firm have in its asset ?cash-to-cash? cycle? 3. Convert the short-term liabilities on the balance sheet into their daily equivalents. How many days are in We Be Truck?s liability ?cash-to-cash? cycle? 4. Using your answers from 2 and 3, above, determine the number of days that the firm may need to finance itself during the cash-to-cash cycle. How can this number be used to determine the amount of external financing necessary? 5. What type of external funding sources is appropriate for supporting a working capital deficit of the type that is described in Mr. YanKee?s memo? Why are some sources more appropriate than others? 6. What are some of the ways that Y.U. could make the assets in the cash-to-cash shorter? 7. What are some ways that Y.U. could make the liabilities in the cash-to-cash shorter? 8. What considerations would need to be made when changing the company?s terms on receivables, and changing policies on other current assets or liabilities? What complications and/or difficulties has Mr. Yankee left out of his memo? ? EXHIBIT 1. We Be Trucks, Inc. Balance Sheet, December 31, 2011 Cash $ 140,000 Accounts receivables 1,225,000 Inventory 875,000 Total current assets 2,240,000 Net fixed assets 2,135,000 Total assets 4,375,000 Accounts payable 700,000 Accruals 140,000 Notes payable ? bank 788,000 Current maturities of LT debt 87,500 Total current liabilities 1,715,000 Long-term debt 962,500 Common stock and PIC 297,000 Retained earnings 1,400,000 Total liabilities and equity 4,375,000 EXHIBIT 2. SELECTED INCOME STATEMENT INFORMATION, DECEMBER 31, 2011 Sales Revenues, net $15,968,750 Cost of Goods Sold, net $10,675,000 Purchases, net $11,252,500 Operating expenses $ 4,462,500 ? EXHIBIT 3. MEMO REGARDING THE FIRMS CASH-TO-CASH: 12/31/11 Polly: The usual thing to worry about is the difference between assets and liabilities. If assets convert to cash faster than liabilities, that?s a good thing, but that?s a very unusual situation. More often, your liabilities will be ?due,? essentially, before your receivables have come in fully. Cash sales, when they actually happen, will help shorten the asset cash-to-cash cycle and make your job easier ? we rarely have significant cash sales, as you?ve probably learned in the past few months. To figure out how the assets and liabilities work together on this, you?ll need to have some numbers in front of you. In particular, you?ll want to know what our average daily sale and cost of goods sold are, and what our average purchases are. Finally, it would be useful to know our average daily operating expenses, too. Once you have all of that stuff, convert the balance sheet into its daily equivalent. For example: part of the assets cash-to cash cycle is the daily level of cash on hand. You can find this by dividing the cash amount on the balance sheet by the average daily sales figure to get ?days cash?. Accounts receivable is also directly related to our sales figures, but when looking at average inventory be sure to consider our daily COGS instead. On the other side of the balance sheet, payables are closely related to average daily purchases and accruals are related to operating expenses. The asset cash-to-cash cycle is the combination of the ?days cash?, the similar measure for accounts receivable, and the inventory ?days?. This is roughly how long it takes us to covert a sale into cash, on average. For the liabilities, we look at ?days payable? and ?days accruals? as mentioned. These two numbers tell us how much we rely upon suppliers and employees for credit, and added together give us the number of days in liability cash-to-cash cycle. The difference between the total days in the asset cycle and the total days in the liability cycle is the number of days? worth of financing we?ll need during the period. When used with our daily COGS number, it can tell us how much bank financing we might need during that time. If nothing else, it provides a rough estimate for using when we plan for a new year, and it helps us evaluate the rest of our working capital.
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