Surecut Shears, Inc

PRIMARY PROBLEM

Mr. Fischer forecasted NOF of $4,492,000 but actually ended up being $3,465,000 due to a retailing downturn. Higher-than-expected inventory was being carried through the peak season as well. This was their peak sales period and it was hoped that proceeds from this season would pay off the seasonal loan for the capital expenditure. SureCut Shears now faced a credit problem because they no longer expected to be able to pay off the seasonal loan.

INTERPRETATION OF EXHIBITS

Due in part to a slackening of sales, inventory at the end of March 1996, the amount of additional money tied up in inventory over the 9-month period of interest is almost double the forecast. But by October 1995, it was apparent that sales were not keeping up with what was forecasted. Over the 9-month period, the Profit Margin is only 10%, far below the acceptable range of 15 вЂ" 30%. So one wonders why the planned orders with the manufacturer were not reduced to compensate. Instead, inventory was allowed to build. This tied up about $800,000 more than forecasted.

It’s interesting to note that less money than forecasted was spent on the capital project during the 9-month period. While we don’t have enough information in the case to draw conclusions, perhaps some savings could have been captured had the loan amount gone towards completion of the project. It is not known whether the project was behind schedule for operational or financial reasons. Perhaps money was diverted from the project to fund the working capital needs of the company through the peak season.

In the same 9-month period, they have paid off much of their Accounts Payable. They forecasted that they would pay off $84,000 but they actually reduced AP by $347,000. After being in business for several years, Mr. Fischer should have a better understanding of AP and how forgiving their suppliers will be on their credit terms.

RECOMMENDATION

Firstly, Mr. Fischer needs to forecast the market demand for the products he is selling. Mr. Fischer needs to reduce future orders so inventory can be reduced to match market demand. The discounted payback for the capital project needs to be re-examined to determine the impact of reduced sales. Perhaps the project will not make sense at the level of current sales.

After his operations