Management of Organization: Lawsons Case
It is necessary for him to save some money and reduce the outdraw from Lawson. General merchandising retailer in Riverside, Ontario. A closer look indicate that this request would certainly require careful attention and scrutiny. Subprograms 1 . Jackie is a newly appointed loans officer, Lawson is her first loan request. She is reporting to her superiors. Therefore, she wants the information to be accurate and reliable. 2. Industry data is not available for all ratios. 3. Lawson is sole proprietorship. The financial condition of the firm is same as the financial condition of Paul.
Paul is suffering depleted savings. 4. Low earnings and accessory owner withdrawals has contributed to Pall’s increasing trade debt. 5. Lawson faces tight months of cash shortage. Analysis Ratio analysis and implications Profitability Cost of goods sold: The trend is downward from 2001 to 2003. Because of the arrangement with FOWL, the product cost is lower. It shows good cost control. As a result, gross profit ratio shows an upward trend. Operating expenses: Store salaries ratio decline from 7. 8% to 6. 9% because of improved employee productivity. Depreciation of furniture and fixtures is increasing from 0. % to 1. 2%. Plus, depreciation of leaseholds increase
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Return on equity: There has been a huge increase in ROE from 83. 5% to 241. 1%. However, the industry ratio is only 31. %. Paul withdraws too much money, which makes the equity too small. Liquidity Current ratio: This ratio is a measure of a company’s short-term liquidity. It has declined from 2. 97:1 to 1. 02:1 . In addition, the industry ratio is 1. 8:1, which is higher than the ratio of Lawson in 2002 and 2003. This shows that Lawson has some liquidity issue, it can not quickly pay off some of its current liabilities. Acid test ratio: The industry ratio is 1. 1:1 . However, the ratio of Lawson is only 0. 0:1 . The difference is so huge, which means that a huge amount of cash is tied up in the inventory. Sign for the company. Working capital: The amount has dramatically decreased from $58,650 to $5,466, which shows a big liquidity issue in 2003. Current liabilities are too large, Lawson should pay attention to it. Efficiency Age of receivables: This ratio is very low, 7 days in 2003, which is well below the industry ratio of 19. 1 days. Even though the trend is increasing but it is still a positive sign for the company and it shows that probably Lawson has few credit sales.
Age of inventory: This ratio measures how quickly the merchandise moves through the business. Lagoon’s age of inventory is almost six times of the industry average of 25. Days which is a major issue that needs to be addressed. Higher inventory levels tie up larger amount of the company’s money. The company should try to decrease its age of inventory and the new inventory control system should be considered carefully. Age of payable: It has increased from 55 days to 154 days. Due to the liquidity issues, it is hard for the company to pay its purchases quickly. The company is depending too much on its trade credit.
Stability Net worth/total assets: The trend is downward. The industry ratio is 61. 5%, which is much higher than Lawson. It may cause difficulty in raising additional capital and a anger of encouraging irresponsibility by the owners and of leaving inadequate protection for the company’s creditors. Lawson Industry Average AZ L+SE 98. 6 +1 . 4 A L + SE 100= 38. 5+61. 5 Interest coverage: It has decreased from 1. 9 times to 1. 6 times. The ratios indicate large risks for investors and potential risks for increasing loans. Growth Sales ratio has increased from 9. 4% to 23. 5%. Net profit ratio is high in 2003(55. %). However, the growth is not stable, in 2001, net profit is negative. What’s more, net worth ratio is high negative, which shows Pall’s capital is declining. Overall, ratios are not good. Inventory issue will need to be addressed and the company should pay more attention to Pall’s financial condition. In addition, large trade debt to FOWL needs to be addressed. Statement of changes and implications Time Period – January 31, 2000 to January 31, 2003 Change in cash – $7,068 Changes in Sources and Uses ( Appendix 1) Major short-term source is accounts payable and depreciation.
It won’t continue if the company strives for lower age of payable and wants to expand by more investments. Major short-term use is accounts receivable and inventory. Paul should try to reduce the large cash in the inventory. Major long-term source is other current liabilities. Major long-term use is long term bank loan, furniture and fixtures purchase and drawings. More attention should paid to Pall’s capital condition. Reconciliation of owner’s equity (Appendix 2) Paul withdraws too much money from the company, which makes the equity 3) Cash from operating is positive: The main reason is the very large accounts payable.
It means the company has depended too much on the trade credit. It owes FOWL too much. Cash from financing and investing are both negative, which means Lawson has a bad finance condition. The company may try to increase cash inflow through the bank loan. The company has a large number of accounts payable, which belongs to FOWL. The huge trade debt makes the company has a closely connection with FOWL. What’s more, the finance and invest condition are both bad, Paul needs to try improve them. The huge withdraw also needs been addressed.
The 4 Co’s of Credit Collateral: Paul had secured a $50,000 long-term loan from the bank in 1998. The bank loan had been secured by a pledge against all company assets and by a guarantee from FOWL. Since it is the same bank for the new bank loan, the assets need to be insider. The total value would be $102,880(Appendix 4). It is much smaller than the total amount of money being requested. It is insufficient to meet needs, the company will need to put lien on some assets and require personal guarantees. What’s more, Pall’s personal assets need to be considered during the pledge.
Capacity to repay: There are too many trade debt needed to pay off, which results in the new request. Current portion of the trade debt would be acceptable for this time of year. Stability ratios show large risks. To solve the trade debt, it is necessary for the company to request for new bank loan. But bank loan will add burden on the company and increase the liabilities. Conditions: Cash shortage: February through June are months of cumulative net cash outflow. Therefore, Paul needs a seasonal line of credit to manage the months with tight cash condition.
FOWL finances the improvements at Lawson. Overdue debt needs to be paid. Character: Paul is an active president and work hard, which increase his trustworthiness. Lawson gets the support from FOWL. It may has the capacity to achieve operating goals. Projected Financial Statements Statement of earnings(Appendix 5) Statement of balance sheet(Appendix 6) Inventory would be reduced to pre-2003 levels, as Paul gain greater experience in increase of sales volume. Accounts in 2004 Applying the balancing figure to bank loan to see how much bank loan request is suitable.
Alternative analysis 1. Do not grant the loan amount pros: Bank will reduce the risk of not recollecting money. Cons: Create bad relationship with the company (customer). Lawson is hard to pay off the trade debt. Lawson would be able to pay off the trade debt and reduce the interest payments. The improvement will have less risk. Strong chances exist that bank might not be able to recollect the loan. If the inventory system would not work then there is also some risk that company may not be able to pay back the loan owed. 3.
Grant a partial amount-$120,000 According to the projected balance sheet, if the company get some new bank loan, with the increase of sales, it is possible for Lawson to pay off the trade debt and long-term bank loan. Pros: Some chances exist that bank might not be able to recollect the loan. If the inventory pay back the loan owed. 4. Grant $26,000 line of credit Five months are accumulated cash outflow, through February to June. Therefore, a seasonal credit line for the five months is needed. Pros: Lawson would solve the cash shortage problem. The bank may fail to collect the money.
Decision/Recommendation According to the ratio analysis and changes in cash flow, it is necessary for Lawson to seek less expensive debt. Based on the projected financial statements, it is reasonable to grant partial amount. Since increased sales would provide more profit and inventory issue will be addressed, Lawson has the capacity to pay off the trade debt and bank loan. Therefore, alternative 3 and 4 are needed: granting a $120,000 bank loan and a $26,000 seasonal line of credit. Short-term: A great deal of money is tied up inventory, Paul needs to improve the inventory system to reduce age of inventory.
Reducing additional capital expenditures to strengthen the expansion. Controlling withdraw to the current amount. Long-term: Paul should pay attention to his personal financial condition. It is necessary for him to save some money and reduce the withdraw from Lawson. Bank and company will keep a long-term relationship. In future, bank would be able to recognize their interest revenue through the loans. Company should try to invest in some securities. The bank can reevaluate the company in 2005 from the perspectives of stability, efficiency and the process of new inventory control system.