Surecut Case Essay Example

materials, work in process (additional raw materials and labors), and work in process additions are averaged over an annual rate. But ridiculous considering change in seasonal sales. Not paying the bank from December to May??

Why was SureCut unable to repay its bank loan by December 31, 1995 as originally forecasted?

According to Mr. Fischer the main reason why he was not able to liquidate his company’s loan to the Hudson National Bank of New York by the end of 1995, was due to the significant recession in the retailing industry. As a onsequence of this recession, sales dropped and consequently so did the company’s revenues. Furthermore, while sales were falling, costs remained practically the same. In fact, the only attempt of Mr. Fischer to reduce manufacturing costs required a further $6. 0 million investment. This forecast was also proved wrong as later in the same year additional funds were required in order to finish the modernization program that would enable the company to decrease its manufacturing costs. Also, SureCut did not have the budget required to cover its inventories, which led the company to increase its payables.

When firms take this kind of decisions it only makes it more difficult to liquidate the accumulated loans. On top of this, according to the company’s financial statements, SureCut seems to have extremely high receivables. To conclude this explanation we can say that SureCut was unable to repay its bank loan by the end of 1995, due to the industry’s recession, as well as, the poor management used to deal with this downturn.

Has SureCut’s financial condition worsened sufficiently to cause Mr. Stewart

any great concern?

Profit margins are good; in fact for each dollar of sales we have 10% of profit. There is no concern about profitability; even if the sales are not as good as expected Mr. Fischer found a way to have lower expenses so that his profitability wouldn’t suffer. The turnover ratio shows that the receivables are collected at a good rate. So SureCut’s clients pay in a reasonable amount of time. The main concern is the cash ratio. Mr. Fischer made too optimistic assumptions about his future cash-flows and has now a really low cash ratio which can indicate financial distress.