case study

MGMT 413, Fall 2019 West Point Supply, Inc. - 1

West Point Supply, Inc.

It is the second week of January 2018. The Chief Executive Officer (CEO) of West Point

Supply, Inc. (WPS), Mr. Donnie Glover, is preparing for a meeting with the company’s bank,

Welles Forgo Bank & Trust (Welles Forgo). To prepare for the meeting, Mr. Glover is

reviewing the company’s 2017 financial statements. He is working with the knowledge that

2017 was a very good year for WPS both in sales and in profits, and he is hopeful the company’s

bank will recognize this achievement. Such an outcome is important because in early 2017 WPS

had arranged a term loan, for the first time ever, and its initial repayment installment of $40,000

is due in February 1, 2018. Mr. Glover hopes that the company’s strong results during 2017 will

impress Ms. Carrie Lowe, the bank’s loan officer. He is confident that the approaching loan

payment is within WPS’s financial capacity following its best year ever. He expects to send Ms.

Lowe the company’s 2017 financial statements soon so that she can review them before the due

date of the loan.

The Company

WPS was organized by Mr. Glover in 2001 as a wholesaler of electrical supplies and

equipment to building contractors in and around Pittsburgh, PA. After a contraction during the

recession of 2007-2009 its sales had grown through the following 10 years. The company has

built a reputation for rapid delivery on a wide array of materials required by builders, many of

whom are not well-capitalized and cannot finance an extensive inventory themselves. Mr.

Glover believes WPS’s competitive advantage depends on this reputation. An implication of this

strategy is that WPS must carry substantial inventory. As a result, through time, the company

had to rent warehouse space in growing capacity.

To stock its inventory WPS purchases supplies from an array of dealers. WPS’s

suppliers sell to WPS on credit terms of 2/15, net 30 days. All of WPS’s purchases are on credit.

In turn, the company sells to builders on credit terms of net 30 days and all sales are credit sales.

During the latter part of 2016, a decision was made to construct a new warehouse

adjacent to the company’s main offices and existing storerooms. The new building meant that

WPS no longer needed to rent warehouse space - - which represents a saving for the company.

The Loan

When the financial statements for the year 2016 were completed, Mr. Glover had visited

Welles Forgo to secure a loan. Historically, WPS maintained operating cash balances with the

bank ranging from $20,000 to $60,000.1 Never before, however, had the company sought a loan

either for seasonal or longer-term capital requirements. Mr. Glover discussed with Ms. Lowe the

possibilities for bank support of WPS’s building expansion. He presented to her the 2016

statements, together with a forecast for 2017 which included the anticipated expenditures for

construction, and savings on warehouse rental fees (see Exhibits 1 and 2).

1 The numbers in this case may appear to be “too small” to be realistic or worth worrying about. If so, just add three

zeroes to all numbers. The concepts employed will be the same regardless of the dollars involved.

MGMT 413, Fall 2019 West Point Supply, Inc. - 2

Based on these financial statements, on her conversations with Mr. Glover, and on her

general knowledge of the building and building-supply business, Ms. Lowe and the bank agreed

to loan $120,000 to WPS to help finance the proposed new facilities and the customary seasonal

increase in sales that occurs during the spring and summer of each year. The loan was structured

as a three-year loan, with repayments of principal of $40,000 due on February 1 of 2018, 2019,

and 2020. The loan carries an interest rate of 12 percent per year.

Mr. Glover visited Ms. Lowe periodically throughout 2017 to update the bank on the

company’s progress. The new warehouse was completed in May of 2017 and Ms. Lowe

participated in the “grand opening” ceremonies. She had been informed in October of 2017 that

an especially good sales record was expected for the full year.

* * * * * *

Assignment:

a. Use key financial ratios to determine what events occurred during 2017 to affect the company’s financial position. Ratios are presented in the case packet reading “Financial

Planning, Financial Ratios and Pro Forma Financial Statements” and in RWJ&J.

Be prepared to address at least the following questions:

• Is the company growing (i.e., calculate the year-to-year growth rate of sales)?

• Are receivables in control? (Calculate days sales outstanding (DSO) through time.)

• Is inventory in control? (Calculate days of inventory through time.)

• Are payables being managed prudently (Note: See footnote a to the income statements)?

• Is the company’s debt usage in control?

• Is cost of goods sold in control?

• Are operating and administrative expenses in control?

• Is the company profitable? Is profitability improving? In addressing these questions, calculate the ratios for each year’s actual financial statements

and for the forecast financial statements. In calculating ratios, use end-of-period balances

except for profit ratios. (Use the beginning of year balance sheet data in calculating profit

ratios.)

b. What implications do the deviations from plan and the general 2017 operating results have for the company and the bank? What financial strategies seem desirable during 2018? (Be

especially aware of the implicit cost of trade credit.)

c. If you were WPS’s banker, what would you do?

MGMT 413, Fall 2019 West Point Supply, Inc. - 3

Exhibit 1

West Point Supply, Inc.

Balance Sheets as of December 31

ASSETS Actual Forecast Actual

2016 2017 2017

Cash $ 93,700 $ 52,000 $ 55,000

Accounts Receivable 198,100 228,000 278,200

Inventory a 265,300 300,000 504,600

Current Assets $557,100 $580,000 $827,800

Gross fixed assets 72,500 117,500 b 148,500

b

Less: Accumulated depreciation (31,500) (16,500) b (17,000)

b

Net fixed assets $ 41,000 $101,000 $131,500

Total Assets $598,100 $681,000 $969,300

LIABILITIES

Accounts payable $ 34,600 $ 34,000 $213,500

Miscellaneous accrued liability 7,100 5,000 11,900

Accrued income tax due c 32,400 47,000

c 49,200

c

Current Liabilities $ 74,100 $ 86,000 274,600

Capital stock (par $50) 180,000 180,000 180,000

Retained earnings 344,000 387,000 394,700

Total Liabilities & Owners Equity $598,100 $653,000 $849,300

(before bank loan)

Funds needed (Bank loan) $ 28,000 $120,000

Total Liabilities & Owners Equity $681,000 $969,300

(after bank loan)

a Inventory accounted for on a FIFO basis.

b After planned write-off during 2017 of fully depreciated equipment originally costing $20,000.

c Payable in March 2018.

MGMT 413, Fall 2019 West Point Supply, Inc. - 4

Exhibit 2

West Point Supply, Inc.

Income Statements for Years Ended December 31

Actual Forecast Actual

2016 2017 2017

Sales $1,555,800 $1,873,000 $2,540,600

Cost of goods sold a (1,012,500) (1,183,000) (1,685,200)

Gross margin 543,300 690,000 855,400

Operating expenses (432,200) (517,000) (664,900)

Operating income 111,100 173,000 190,500

Depreciation expense (2,600) (5,000) (5,500)

Earnings before tax 108,500 168,000 185,000

Interest expense b

Federal income tax (52,000) (80,000) (89,300)

Earnings after tax 56,500 88,000 95,700

Dividends paid (30,000) (45,000) (45,000)

Retained earnings $ 26,500 $ 43,000 $ 50,700

a Actual purchases during 2016 were $1,052,000.

Forecast purchases for 2017 were $1,217,700.

Actual purchases during 2017 were $1,924,500.

b Interest expense is negligible (i.e., too small to be of importance) in 2016 and for 2017

forecast and actual.