om

r.c
Polar Sports, Inc.

lur
Estimating Financing Needs for a

nb
Seasonal Business

tu
ar
Sm
Gailen L. Hite
via
d

Where does Polar Sports fit in the course?

e
ar

With seasonality, an annual pro forma misses the

peak funding need during the year
Sh

Exhibit 1 Balance Sheets under Seasonal Production

Actual Pro Formal
is

12/31/11 12/31/12
Accounts payablee 966 1,170
file

Notes payable, bank 826 847

Accrued taxesf 139 111
Long-term debt, current portion 100 100
is

Current Liabilities 2,031 2,228

Long-term debtg 1,000 900
Th

Total liabilities 3,031 3,128

Shareholders' equity 6,929 8,076
Total liabilities and equity 9,960 11,204
2 / 42

1
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 What is the seasonal plan?
• Wait until orders arrive to produce

om
• Maintain constant inventory throughout the year
– no inventory accumulation
∴ Annual Production = Annual Shipments

r.c
lur
nb
tu
ar
Sm
3 / 42
via
e d

Seasonal Production
ar

5,000
Sh

4,000
is

3,000
NP bank

Production
file

Shipments
2,000
is

1,000
Th

0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

4 / 42

2
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 Funding Requirements: Seasonal Production
• Financing "Receivables" Oct-Dec

om
– Financing R/M purchases
• Pay in 30 days
– Finance labor costs

r.c
• Pay in current month

lur
– Collect AR in 60 days
• Finance expenditures for 1-2 months total

nb
tu
ar
Sm
5 / 42
via
d

What is the level production plan?

e
ar

Equal monthly production

Excess (production - shipments) goes to warehouse
Sh

– Inventory builds up until October

– No Inventory accumulation Dec 2011-Dec 2012
is

∴ Annual Production = Annual Shipments

file
is
Th

6 / 42

3
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 Level Production
5,000

om
4,000

r.c
3,000
Production

lur
Shipments

2,000

nb
1,000

tu
0

ar
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sm
7 / 42
via
d

Funding Requirements: Level Production

e
ar

• Finance "Inventory Accumulation"

– Finance R/M purchases
Sh

• Pay in 30 days
– Finance labor cost
is

• Pay in current month

– Sell 6 months later
file

• Collect AR in 60 days
• Finance expenditures for 7-8 months total
is
Th

8 / 42

4
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 Overview
Savings From Level Production

om
Benefits: Overtime wage premiums 480,000
Other direct labor savings 600,000

r.c
Costs: Increase in storage cost 300,000
Increase in interest expenses ?

lur
Reduction in interest income ?

nb
Must do the pro formas to estimate monthly loan balance:
1. Determine the adequacy of $4.0 million line of credit

tu
2. Estimate extra interest charges
3. Estimate lost interest on cash balances

ar
Sm
9 / 42
via
d

Original Plan: produce as orders arrive

e
ar

Seasonal %Sales annual

Sales 18,000
Sh

Cost of goods sold 66% 11,880

Raw materials: 0.5 CGS 33% 5,940
is

Prod exp (old): 0.5 CGS 33% 5,940

file

Operating expenses (old) 24% 4,320 360/mo

is
Th

10 / 42

5
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 Revised Plan: equal monthly production
Level %Sales annual

om
Sales 18,000
Raw materials 33% 5,940

r.c
Production expenses (old) 5,940
─ Over me wage premiums 480

lur
─ Other direct labor savings 600
Production expenses (new) 27% 4,860
Cost of goods sold 60% 10,800

nb
Operating expenses (old) 4,320 360/mo

tu
Additional storage cost 300 ? 25/mo
Operating expenses (new) 4,620

ar
Sm
11 / 42
via
d

Projection Assumptions
e
ar

Other Assumptions
Credit & cash sales 70%/30%
Sh

Collection period 60 days

Payment for raw materials 30 days
is

Tax rate t 34%

LTD rate rLTD 8%
file

Borrowing rate NP rNP 6%

maximum NP @ 6% rate threshold 2,000
Penalty rate rpenalty 5%
is

Rate earned on cash rcash 2%

Th

Minimum cash balance Cash @ min 500

Note: interest is computed on prior month's balances

12 / 42

6
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 Monthly pro forma income projections
Income Jan Feb Mar Apr

om
Net sales 702
COGS: 60% 421
Gross profit 281

r.c
Oper exp: 4,320/yr 360 Equal monthly allocation
S&H: 300/yr

lur
25 Equal monthly allocation
Int LTD & CPLTD: 8% ? December balance
Int NP bank: 6% ? December balance

nb
Add'l int NP bank: 5% ? December balance
Int income on cash: 2% ? December balance

tu
Profit (loss) b. tax
Income taxes: 34%

ar
Net income Sm
13 / 42
via
d

Interest Income and Expense

e
ar

Table B Balance Sheet at Dec 31, 2011

Cash 500 2%
Sh

Accounts receivable 5,245

Inventory 1,227
Current assets 6,972
is

PP&E 2,988
Total assets 9,960
file

Accounts payable 966

Notes payable, bank 826 6%
Accrued taxes 139
is

Long-term debt, CP 100 8%

Current liabilities 2,031
Th

Long-term debt 1,000 8%

Total liabilities 3,031
Shareholders’ equity 6,929
Total liab and SH equity 9,960
14 / 42

7
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 Monthly pro forma income projections
Income Jan Feb Mar Apr

om
Net sales 702
COGS: 60% 421
Gross profit 281

r.c
Oper exp: 4,320/yr 360 Equal monthly allocation
S&H: 300/yr

lur
25 Equal monthly allocation
Int LTD & CPLTD: 8% 7 December balance
Int NP bank: 6% 4 December balance

nb
Add'l int NP bank: 5% 0 December balance
Int income on cash: 2% 1 December balance

tu
Profit (loss) b. tax -115 -196 -223 -239
Income taxes: 34% -39 -67 -76 -81

ar
Net income -76
Sm -129 -147 -158

15 / 42
via
d

Project cash
e
ar

Uses Jan Feb Mar Apr

Sh

Cash @ min 500 500 500 500

AR ?
Inventory ?
is

Current assets
NP&E ?
file

Total assets
is
Th

16 / 42

8
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 Project Accounts Receivable
Accts. Receivable Jan

om
AR beg 5,245 = 0.70 of Nov & Dec sales
+ Credit sales 491 = 0.70 of Current sales
= sum 5,736

r.c
− collections 3,195 = 0.70 of Nov sales (60 days)
= AR end 2,541 = 0.70 of Dec & Jan sales

lur
Table C Monthly Sales
Sales Proj Sales

nb
2011 2012
Jan 702

tu
Feb 486
⁞

ar
Nov 4,564
Dec 2,928
Sm
17 / 42
via
d

Project Inventory
e
ar

Inventory Jan Annual

Inventory (beg)
Sh

Inv beg 1,227

+ Production ? 900  Production
= available 2,127  available
− CGS
is

− CGS 421
= Inv end 1,706  Inventory (end)
file

Annual CGS
Pr oduction 
CGS = 0.60 · 702 12
10,800
  900
is

12
Th

18 / 42

9
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 Inventory by month

om
7,000

6,000

r.c
5,000

4,000

lur
Average inventory = 3,914
3,000

nb
2,000

tu
1,000

ar
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sm
19 / 42
via
d

Storage & Handling: alternative allocation

e
ar

Inventory Jan … Jul Aug … Dec

Sh

Inv end 1,706 5,907 6,483 1,227

fraction of average 0.44 1.51 1.66 0.31
month's S&H 11 38 41 8
is

• Allocate in proportion to ending inventory?

file
is
Th

20 / 42

10
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 Project net PP&E
net PP&E Jan

om
nPP&E beg 2,988
+ CAPEX ? 25
= sum 3,013

r.c
− Deprec 25
= nPP&E end 2,988

lur
nb
tu
ar
Sm
21 / 42
via
d

Project Uses of Funds & Sources

e
ar

Uses Jan Sources Jan

Sh

Cash @ min 500 Acc'ts Payable

Acct's Receivable 2,541 NP, bank
Inventory 1,706 Acc tax
is

Current assets 4,747 LT Debt, CP

net PP&E 2,988 Current liabilities
file

Total assets 7,735 LT Debt

Total liab
SH equity
is

Tot liab & equity

Th

Surplus (Deficit)

22 / 42

11
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 Project Accounts Payable & Purchases
Acc'ts Payable Jan Annual

om
AP beg 966 Raw Materials (beg)
+ Purchases ?495  Purchases
= sum 1,461  available

r.c
− Payments 966 − Usage
= AP end 495  Raw Materials (end)

lur
RM Usage
Purchases 

nb
12
5,940
  495
12

tu
ar
Sm
23 / 42
via
d

Project Accrued Taxes

e
ar

Accrued Taxes Jan Feb Mar Apr

Sh

Acc tax beg 139

+ current tax -39 -67 -76 -81
= sum
is

− Tax Pmts ? ? ? ?
= Acc tax end
file
is
Th

24 / 42

12
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 Tax Payments
1. Taxes due at year end (accrued taxes) 139

om
Payable in Mar

2. Estimated tax payments (safe harbor)

r.c
Previous year’s tax liability 462
Number of payments ÷4

lur
Minimum Quarterly payment 116

nb
Payments in Apr, Jun, Sep, and Dec ≈ 120

tu
ar
Sm
25 / 42
via
d

Project Accrued Taxes

e
ar

Accrued Taxes Jan Feb Mar Apr

Sh

Acc tax beg 139 100 33 -181

+ current tax -39 -67 -76 -81
= sum 100 33 -43 -263
is

− Tax Pmts 0 0 120

file

= Acc tax end 100 33 -181 -383

is
Th

26 / 42

13
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 Project Sources of Funds
Sources Jan Feb Mar Apr

om
Acct's Payable 495
Automatic
Acc tax 100 sources

r.c
NP, bank Financing
decisions
LT Debt, CP 100

lur
Current liabilities 695
LT Debt 1,000

nb
Total liabilities 1,695
SH equity

tu
Tot liab & equity

ar
Sm
27 / 42
via
d

Project Equity
e
ar

SH equity Jan
Sh

SH equity beg 6,929

+ NI -76
= sum 6,853
Dividends ?
is

− 0
= SH equity end 6,853
file
is
Th

28 / 42

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 Project Sources of Funds
Sources Jan Feb Mar Apr

om
Acct's Payable 495 Automatic
Acc tax 100 sources
NP, bank Financing

r.c
decisions
LT Debt, CP 100
Current liabilities 695

lur
LT Debt 1,000
Total liab 1,695

nb
SH equity 6,853
Tot liab& equity 8,548

tu
ar
Sm
29 / 42
via
d

Funding Gap
e
ar

Funding Gap Dec '11 Jan Feb Mar Apr

6,634 7,084 7,681
Sh

Total assets 7,735

Tot liab & equity 8,548 8,352 7,991 7,632
Surplus (Deficit) -826 813 1,718 907 -50
is

monthly CF ?1,639 906 -812 -956

file

• What was the cash flow for January?

is
Th

30 / 42

15
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 Financing Activities
Notes payable Dec '11 Jan Feb Mar Apr

om
NP beg 826 0 0 0
+ new borrowing 0 0 0 50

r.c
= sum 826 0 0 50
− repayment 826 0 0 0

lur
= NP end 826 0 0 0 50

nb
tu
ar
Sm
31 / 42
via
e d

Level Production
ar

5,000
Sh

4,000
is

3,000
NP bank
Production
file

Shipments
2,000
is

1,000
Th

0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

32 / 42

16
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 Project Cash Balance = minimum + XSCash
Cash Dec '11 Jan Feb Mar Apr

om
Cash beg 500 1,313 2,218 1,407
+ monthly CF 1,639 906 -812 -956

r.c
= Cash b. financing 2,139 2,218 1,407 450
+ New borrowing 0 0 0 50

lur
− Debt repayment 826 0 0 0
= Cash end 500 1,313 2,218 1,407 500

nb
tu
ar
Sm
33 / 42
via
d

Compare funding requirements

e
ar

Funds Needed
Month Seasonal Level
Sh

Jan 0 0
Feb 0 0
Mar 0 0
is

Apr 0 50
May 0 1,003
Jun 0 2,151
file

Jul 0 3,227
Aug 0 4,251
Sep 0 4,537
is

Oct 785 4,728

Nov 80 2,258
Th

Dec 847 903

average 143 1,926

34 / 42

17
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 NP Comparison
5,000
4,728

om
4,000
Limit

r.c
3,000

Level

lur
Penalty rate threshold
2,000

nb
1,000

tu
Seasonal
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ar
• Level peaks at 4,728 in Sep
• Level exceeds borrowing limit in Aug thru Oct Sm
35 / 42
via
d

Compare funding requirements

e
ar

Seasonal production Level production

Sh

NP peak in Dec ($847) NP peak at in Oct ($4,728)

NP exceeds credit limit of $4,000

• Should he even ask for a higher limit?

is
file
is
Th

36 / 42

18
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 Is it worth switching, if they get extra funding?
∆NI from Switching Seasonal Level Diff

om
Overtime wage premiums 480
Other direct labor savings 600
Labor Cost Savings 1,080

r.c
Storage cost 300

lur
Interest expenses 94 239
− Interest income 32 16

nb
Net interest expense 63 224 161
Extra Costs 461

tu
Net pretax savings 619

ar
Less tax at 34% 211
Net savings Sm 409
37 / 42
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e d
ar
Sh

Polar Sports
is
file

Appendix:
is

(almost) Statement of Cash Flow (Jan)

Th

Gailen L. Hite

19
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 (almost) Statement of CF (Jan)
Actual Projected

om
Uses Dec 31, 2011 Jan 31, 2012 Change
Cash (total) 500 1,313 813
AR 5,245 2,541 -2,704

r.c
Inventory 1,227 1,706 479

lur
Current assets 6,972 4,747
NP&E 2,988 2,988 0

nb
Total assets 9,960 7,735

tu
ar
Sm
39 / 42
via
d

(almost) Statement of CF (Jan)

e
ar

Actual Projected
Sources Dec 31, 2011 Jan 31, 2012 Change
Sh

AP 966 495 -471

Acc tax 139 100 -39
is

NP, bank 826 0 -826

LT Debt, CP 100 100 0
file

Current liabilities 2,031 695

LT Debt 1,000 1,000 0
is

Total liab 3,031 1,695

Th

SH equity 6,929 6,853

Tot liab& equity 9,960 8,548

40 / 42

20
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 (almost) Statement of CF (Jan)
Statement of Cash Flow

om
Operating Activities
Net income -76
+Depreciation 25

r.c
less: Adjustments
+ ∆A/R -2,704

lur
+ ∆Inv 479
− ∆A/P -471

nb
− ∆Acc Tax -39
= Total adjustment -1,714

tu
CF from operations 1,664
Investing Activities

ar
less:CAPEX -25
CF before financing
Sm 1,639
41 / 42
via
d

(almost) Statement of CF (Jan)

e
ar

Statement of Cash Flow

Sh

CF before financing 1,639

Financing Activities
is

∆NP, bank -826

∆LT Debt repaid 0
file

CF from financing -826

Cash Flow 813

is
Th

42 / 42

21
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