Working Capital Case Study Miller Building Supplies.............................
Question # 00031152
Posted By:
Updated on: 11/08/2014 08:10 PM Due on: 12/12/2014
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 (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
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 (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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Rating:
/5
Solution: Working Capital Case Study Miller Building Supplies.............................