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9A97B009 BIG CITY COURIER Michelle Theobalds prepared this case under the supervision of Professor Murray Bryant solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 1997, Ivey Management Services Version: (A) 2010-02-02 On Monday, April 7, 1997, Geoffrey Taylor looked over the accounts of Big City Courier (BCC) for the period January 1 to March 31, 1997. Geoffrey was the owner and manager of BCC, which began operations almost two years ago in Toronto. In general, he was quite pleased with the company’s performance to date. However, he was concerned about BCC’s cash position. He had to pay his drivers on Friday, and BCC’s overdraft was dangerously close to the limit set by the bank. Geoff wanted to understand the reasons for his company’s negative cash position, and to develop a plan to rectify the situation. THE COURIER BUSINESS Courier companies provided delivery services for documents and small packages. Two basic levels of service were offered. Expedited services delivered time-sensitive items within the same day for local deliveries or overnight for inter-city and overseas deliveries. Within a city or region, couriers walked, rode bicycles, or drove cars or small vans to make pick-ups and deliveries. Air transportation was the primary mode used for delivering time-sensitive shipments to distant cities and countries. For less urgent deliveries, surface courier services were slower and cheaper, and usually delivered within two to eight days. The courier industry consisted of three main groups: large corporations, small businesses and independent operators. In general, the large corporations, such as Purolator, Federal Express and United Parcel Service, specialized in overnight delivery to national and international destinations. These companies operated large fleets of vans, cars (and in some instances, airplanes) and made large capital investments in sorting and tracking facilities. There were many small businesses with less than $1 million of sales per year in the industry. Primarily, they provided same-day service within a city or region, using the vehicles of their employees or independent operators. The capital investment required to start a small courier business was modest: radio equipment and office space were the major up-front expenses. Independent operators subcontracted their services to the courier companies. They provided local pick-up and delivery services within a city or a region. They provided their own vehicles, or worked using bicycles or on foot. Independent operators were usually paid a fixed percentage of the cost of the delivery.
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The courier industry was very competitive, and was dominated by the large corporations. It was estimated that over two-thirds of annual sales accrued to approximately 30 large corporations, a small fraction of the over 2,000 courier companies operating across Canada.1 The small companies battled for the remaining business, often undercutting their competitors to gain a new customer. The major clients of the courier industry were service organizations (60 per cent of total sales), particularly wholesalers, retailers, law offices, consultants and financial institutions. The general public only accounted for approximately one per cent of total industry sales. The economy and technological advances had a major effect on the industry. During periods of economic growth, couriers prospered as their clients experienced increased demand for their products and services. On the other hand, the increased usage of the Internet, e-mail and the facsimile machine had negatively affected the courier document market. In general, courier companies had adapted to the changes in the environment by seeking new markets (e.g., catalogue shopping), providing additional services to customers (e.g., faster delivery, delivery confirmation of packages) and minimizing administrative expenses. COMPANY BACKGROUND Prior to BCC, Geoffrey worked as a driver at a courier company in Toronto for a few years. Eventually, the owners of the company, wishing to retire, offered to sell the business to Geoff and his wife. After several months of negotiations, the deal was cancelled because of a disagreement over a legal liability. Geoffrey decided to start his own business, and on May 1, 1995, Big City Courier was launched. He leased office space in Etobicoke, Ontario, and negotiated an overdraft facility of $14,000 (fully secured) with his bank. BCC started with one driver, an office manager/dispatcher, and Geoff to oversee the operations. At the end of the first week, BCC had made only $300 in sales. However, by the last quarter of 1995, BCC collected an average of $3,200 per week. For the eight months ended December 31, 1995, the business made sales of $76,600 and a net loss of $17,800. In 1996, BCC expanded rapidly. Geoffrey hired an experienced salesperson who added several new customers to the client list. Gaining a new customer usually involved visiting the potential client, discussing pricing and delivery zones, and then finally leaving a rate sheet and several waybills2 with the client. Several follow-up calls or visits were made after the initial contact. Finally, if the client became a regular customer, pre-printed waybills (with the client’s name and address) would be sent to them for their convenience. Many times, BCC gained new customers when the clients’ existing courier services failed to make a delivery. Hence, reliability and on-time delivery were crucial in order to retain customers. When asked about the competitive environment, Taylor commented:
A potential customer could call 10 courier companies and offer the delivery to the first courier to arrive. This business is so competitive, that all 10 couriers would send drivers for the delivery!
Also in 1996, several additional drivers were contracted, bringing the total number of couriers to 12 by the end of 1996. For the year ended December 31, 1996, BCC had sales of $303,500 and made a net profit of $26,800. Financial statements for the first two fiscal years are shown in Exhibits 1 and 2. 1Source: Industry, Science and Technology Canada, “Couriers, Industry Profile,” 1991. 2A waybill is a pre-printed form filled out in triplicate. It includes information on the shipper, consignee name and address, service level, driver number and an area for the signature of the consignee on receipt of the parcel. One copy of the waybill is kept by the shipper, another by the driver, and the third copy is returned to the shipper with the billing.
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The company’s major expense was the drivers’ commissions, which were 65 per cent of the delivery fee. The drivers were paid every two weeks. Customers were also billed every two weeks; however, many clients did not pay their bills on time. BIG CITY’S CASH POSITION Geoffrey had high expectations for his company’s performance in 1997. BCC had already experienced some weeks with over $10,000 in sales in the first quarter and profits were increasing. Financial statements for the first three months of 1997 are shown in Exhibits 3 and 4. However, despite the good results, the company had a persistent cash flow problem. Geoff had to call his banker a few times for permission to temporarily exceed BCC’s overdraft limit so that the drivers could be paid. Fortunately, the bank had accommodated his requests in the past. Exhibit 5 shows the bank transactions for the first quarter in 1997. Geoff felt stifled by the tight cash position. He knew that if he could hire another salesperson, his business would grow even faster. He wanted to completely understand the reasons for BCC’s cash flow problems, and devise a suitable plan of action to ease the situation.
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Exhibit 1
BIG CITY COURIER BALANCE SHEET as at December 31
Exhibit 2
BIG CITY COURIER INCOME STATEMENTS
for the period ended December 31
1996 1995 Current Assets Accounts Receivable 47,526 18,493 Deposits Paid 1,213 900
Total Current Assets 48,739 19,393
Fixed Assets 4,258 3,947 Total Assets 52,997 23,340
Liabilities Overdraft 9,688 7,044 Accounts Payable - 274 Sales Tax Payable 22,386 3,509
Total Liabilities 32,074 10,827
Equity Capital 11,876 30,302 Retained Earnings 9,047 (17,789) Total Equity 20,923 12,513
Total Liabilities and Equity 52,997 23,340
(one year) (8 months) 1996 1995
Sales 303,474 76,633
Business Expenses 276,638 94,422 Net Profit 26,836 (17,789) Au th
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Exhibit 3
BIG CITY COURIER BALANCE SHEET
as at
31-Jan-97 28-Feb-97 31-Mar-97 Current Assets Accounts Receivable 45,592 52,789 62,053 Deposits Paid 900 900 900
Total Current Assets 46,492 53,689 62,953
Fixed Assets 4,258 4,435 4,435 Total Assets 50,750 58,124 67,388
Liabilities Overdraft 9,231 11,580 13,217 Accounts Payable 411 271 1,100 Sales Tax Payable 23,967 26,212 28,265
Total Liabilities 33,609 38,063 42,582
Equity Capital 10,544 9,057 7,476 Retained Earnings 6,597 11,004 17,330 Total Equity 17,141 20,061 24,806
Total Liabilities and Equity 50,750 58,124 67,388
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Exhibit 4
BIG CITY COURIER INCOME STATEMENTS for the months ended
31-Jan-97 28-Feb-97 31-Mar-97 Year-to-Date Sales (Net of Sales Tax) 24,330 34,534 39,114 97,978
Expenses Drivers' Commissions 15,399 21,858 24,759 62,016 Salaries & Wages 2,300 2,300 2,300 6,900 Marketing & Advertising 2,221 2,221 2,221 6,663 Radio (Lease, Airtime, Repairs) 870 915 917 2,702 Rent 700 700 700 2,100 Utilities 501 494 497 1,492 Overdraft Interest & Bank Charges 211 215 223 649 Automobile Repairs & Expenses 2,673 247 333 3,253 Other Expenses 1,906 1,176 838 3,920
Total Expenses 26,781 30,126 32,788 89,695 Net Profit (2,451) 4,408 6,326 8,284
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Exhibit 5
BANK ACCOUNT FOR BIG CITY COURIER, JANUARY 1, 1997 TO MARCH 31, 1997
Transaction Date Description Debit Credit Balance 01-Jan-97 Balance (9,688) 02-Jan-97 Accounts Receivable 5,837 (3,851) 02-Jan-97 Rent 700 (4,551) 03-Jan-97 Drivers' Commissions 4,573 (9,124) 09-Jan-97 Accounts Receivable 5,798 (3,326) 13-Jan-97 Radio (Lease, Airtime, Repairs) 870 (4,196) 17-Jan-97 Drivers' Commissions 5,476 (9,672) 17-Jan-97 Salaries & Wages 1,150 (10,822) 17-Jan-97 Marketing & Advertising 1,111 (11,933) 22-Jan-97 Accounts Receivable 9,094 (2,839) 22-Jan-97 Automobile Repairs & Expenses 2,262 (5,101) 23-Jan-97 Miscellaneous Expenses 595 (5,696) 24-Jan-97 Utilities 501 (6,197) 27-Jan-97 Accounts Receivable 7,118 921 28-Jan-97 Drawings 1,332 (411) 29-Jan-97 Miscellaneous Expenses 998 (1,409) 31-Jan-97 Drivers' Commissions 5,350 (6,759) 31-Jan-97 Salaries & Wages 1,150 (7,909) 31-Jan-97 Marketing & Advertising 1,111 (9,020) 31-Jan-97 Overdraft Interest & Bank Charges 211 (9,231) 03-Feb-97 Accounts Receivable 7,634 (1,597) 03-Feb-97 Rent 700 (2,297) 07-Feb-97 Miscellaneous Expenses 495 (2,792) 14-Feb-97 Drivers' Commissions 9,976 (12,768) 14-Feb-97 Salaries & Wages 1,150 (13,918) 14-Feb-97 Marketing & Advertising 1,111 (15,029) 18-Feb-97 Accounts Receivable 10,734 (4,295) 20-Feb-97 Radio Equipment 177 (4,472) 20-Feb-97 Utilities 494 (4,966) 21-Feb-97 Radio (Lease, Airtime, Repairs) 915 (5,881) 24-Feb-97 Automobile Repairs & Expenses 387 (6,268) 25-Feb-97 Miscellaneous Expenses 681 (6,949) 26-Feb-97 Drawings 1,487 (8,436) 26-Feb-97 Accounts Receivable 11,214 2,778 28-Feb-97 Drivers' Commissions 11,882 (9,104) 28-Feb-97 Salaries & Wages 1,150 (10,254) 28-Feb-97 Marketing & Advertising 1,111 (11,365) 28-Feb-97 Overdraft Interest & Bank Charges 215 (11,580) 03-Mar-97 Rent 700 (12,280) 04-Mar-97 Accounts Receivable 13,675 1,395 07-Mar-97 Automobile Repairs & Expenses 33 1,362 07-Mar-97 Miscellaneous Expenses 309 1,053 14-Mar-97 Drivers' Commissions 12,954 (11,901) 14-Mar-97 Salaries & Wages 1,150 (13,051) 14-Mar-97 Marketing & Advertising 1,111 (14,162) 19-Mar-97 Utilities 497 (14,659) 19-Mar-97 Accounts Receivable 18,228 3,569 21-Mar-97 Radio (Lease, Airtime, Repairs) 917 2,652 24-Mar-97 Drawings 1,581 1,071 28-Mar-97 Drivers' Commissions 11,804 (10,733) 28-Mar-97 Salaries & Wages 1,150 (11,883) 28-Mar-97 Marketing & Advertising 1,111 (12,994) 28-Mar-97 Overdraft Interest & Bank Charges 223 (13,217)
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