Competition Case

During 1995-96, sales began to fall from projected levels due to a retailing downturn. However, the company may have been slow to react resulting in an accumulation of excess inventory and related inability to repay its bank loan prior to the next seasonal increase in demand.

SureCut Shears in theory should be able to pay off its loan to the bank on time. One reason the company is finding it can't is because of its continual decline in sales during the period of time the loan was to be paid off. The retailing recession was what the company believed caused this decline in sales. A company's ability to pay off a short-term loan relies heavily on the company's sales and profit. If these are declining then there is no way the company would be able to pay off the loan at the original forecasted time.

Along with the downturn in sales SureCut Shears did not accurately forecast its financial needs. The company's proforma statements did not take into account any external factors such as a retail recession taking place. The amount of money invested in inventory is almost double what was forecasted for the nine-month period. Profit margin was only 10%, which was much lower than the forecasted 15-30%. By October of 1995 it should have been obvious to SureCut Shears that sales were not keeping up with what was forecasted causing inventory to build up.