Case no.

1
Financial Management
Sea & Snow Sports, Inc.
Ms. Suzanne Montague had just delivered on unsettling news to Mr. Jason Wu, president and
owner of the Sea & Snow Sports, Inc. (S&SS). Ms. Montague, the company's accountant reported that the
firm's cash balance had fallen to approximately $1,250. 1 Ms. Montague, a local CPA, went on to explain
her estimate for the coming 60 days showed that the collection of accounts receivable during this period
would be insufficient to pay certain 'trade obligations on which speedy payment was essential. These
projections, in fact, showed that the company's planned level of purchases and sales to June 1 would
result in substantially greater accounts payable on that date than at present.

S&SS had been criticized by trade suppliers for its failure to make payment within stated
terms of sale. These complaints had increased sharply in recent months. Two important suppliers had
suggested that they would have to put future shipments on a C.O.D. basis unless rapid improvement in
payment was made. Connection with several of these suppliers included valuable franchises and
distributorships. As a consequence, Mr. Wu was eager to maintain good relations.

After examining Ms. Montague's forecasts with great care, Mr. Wu concluded that the only
solution to his problem was in obtaining, as soon as possible, an increased loan from his bank of
account, the First Sailor's National Bank (FSNB). S&SS was currently borrowing $10,000 from the
bank on six-month, unsecured, renewable notes. Mr. Wu disliked large-scale borrowing as a matter of
principle and had hoped to be able to avoid asking for an increase, but he was confident that the growing
size of his business, together with its record of increasing profits, would prevail upon the bank to increase
the loan to $100,000 for a few months until matters were squared away. He thought that this amount
would enable him to "clean up his balance sheet" and thus make it unnecessary to spend time constantly
worrying about day-to-day financial problems such as trade payments and payrolls. He was also aware that
the business was losing a growing number of prompt payment discounts. Additionally, he thought the
company should target a minimum cash balance of $25,000 in the long run. With these ideas in mind,
Mr.Wu thought that it would be advantageous to borrow funds for this purpose. Accordingly, he visited
Mr. Steiner, vice-president of FSNB, and made his request.

Mr. Steiner initially expressed some surprise at the size of the proposed loan increase, but after
skimming the company's financial statements (Exhibits 1 and 2), he remarked that he was clearly not up
to date on the company's status and had not realized the extent of the progress which Mr. Wu had made
in his sales volumes. Periodic renewal of the modest current note, he said, had been made in a routine
fashion. Before granting such a substantial increase as had been requested, he would have to study the
entire situation thoroughly. He promised to let Mr. Wu know of his decision shortly.

S&SS was located in Stoney Shore, Connecticut, a north-shore suburb of New Haven. Mr. Wu
had established the business in 1988 after a successful career in the travel business. He had lived in the
New Haven area all his life and the formation of his own company was a goal he had been striving
toward since graduating from a major state university. In his youth, he had won numerous regional
sailing prizes and, as the years passed, had established a reputation as a yachtsman of some renown. In
1988, he had sold his interest in the travel agency and with the proceeds, together with $50,000 of
savings and family funds, established S&SS (initially the company was named Sea Side Sports). He
succeeded in finding a satisfactory building and storage area on Stoney Shore harbor which he
secured on a ten-year lease and, largely through his reputation, quickly obtained two important
wholesale distributorship franchises for marine products.

1
The numbers in the case may appear "too small" to be realistic or worth worrying about. If so, just add three 0's to all
numbers. The concepts employed will be the same regardless of the dollars involved.
 The business had been profitable in each year since its founding. Sales volume had continued to
grow, and Mr. Wu had, from time to time, added new product lines which he felt had attractive growth
possibilities. The company's employee staff was small, consisting mainly of clerical help and semiskilled
warehouse labor. Mr. Wu believed the company could handle substantial increases in sales volume with
its present facilities and personnel. In 1998, S&SS sold, as wholesale distributor, a variety of small sail
and power boats made, of wood and fiberglass, as well as outboard motors, water skis, skin-diving
equipment, surfboards, and marine hardware and accessories.
In 1995, in an effort to smooth the seasonal character of sales, Mr. Wu diversified into
winter sporting goods. Currently, sizable revenues from winter recreational items are now being realized.
These items included skis, snowmobiles, sleds, skates, and hockey equipment.
Purchases of the various products are generally on terms of 2% ten days, net 30 days, from
the manufacturers. S&SS has, however, seldom taken advantage of the discounts offered and has, in
fact, been meeting the 30-day deadline less and less often as volume growth has strained the firm's
capitalization.
In the fall of 1997, Mr. Wu had competed for and won a valuable franchise, on a one-year trial
basis, for the distribution of a line of high-end yachts made by a South American manufacturer. Purchase
terms from this producer were for net amounts 30-days after purchase. Since shipment time from South
America sometimes exceeded 30 days, it was necessary on those occasions to make payment prior to the
receipt of the shipment. In April 1998, S&SS had completed an extensive publicity campaign relative to
this new line. Dealers were just beginning to place orders, and Mr. Wu thought that in another three
months the boats would "really be moving."

S&SS's geographic area of distribution varied with different product lines. Some of the franchises
were only for the New Haven area or for the state of Connecticut. Others extended throughout the New
England region. Although there remained a pronounced seasonal pattern of sales for individual
products, the addition of the winter sport items to the firm's operations had resulted in a smoothing
out of volume for the company as a whole. In recent years there has, in consequence, been no
appreciable monthly variation- in sales within the steady growth experienced.

The financial condition of S&SS's customers is a major problem. Most are small retail
businesses that are usually undercapitalized. Although S&SS allows a 5% discount for ten-day payment,
few customers pay within this period. While the firm is thus forced to carry many dealers for weeks or
even months, the manufacturers of the various product lines insist that dealers' orders be promptly filled by
S&SS. There is heavy and growing competition in the industry at all levels and there is a constant
problem of losing dealers to another distributor of a competing product solely on the basis of credit
extension and speed of shipment. On the other hand, distributorships from important manufacturers are
much sought after and, therefore, S&SS is not in a position, as are its customers, of dealing at will with
whatever supplier provides the most liberal credit accommodation.
In 1998, Mr. Wu withdrew only a modest salary to support his family, preferring to reinvest
as much as possible of the company's profits in the business. He is convinced that the growing
popularity of boating, skiing and snowmobiling will continue for years, and that it will be of major
importance to be prepared in every way to participate in the growth. Current indications are that S&SS's
sales volume will reach about $1,800,000 for 1998 and that further increases of at least $300,000 per
year can reasonably be expected.
Mr. Wu has paid dividends from the business to provide funds for outside investments of unusual
promise. He has purchased, in this way, a part interest in the local franchise of a large national motel chain;
an option on a parcel of water-front real estate; and some stock in one of his suppliers' companies. Though
these investments are not directly related to his business, Mr. Wu believes that he owes it to his family to
diversify his estate as it grew in size. Furthermore, he believed in 1998 that the value of these holdings had
at least doubled over the total initially invested in them. Mr. Wu expected to continue paying $25,000
per year in dividends as he had in the past.
Mr. Steiner, the banker, contacted several other marine and sporting goods wholesalers in the
New Haven area and found that Mr. Wu is highly regarded by all. He is characterized by these sources as a
 "real competitor," an "imaginative salesman," and as "one who knows this business backward and
forward - - a man whose basic objective is and always will be growth."

Exhibit 1
Sea & Snow Sports , Inc.
Income Statements
Years Ended December 31, 1995-1997
and Three Months Ended March 31, 1998
(Dollar figures in thousands)

3 Mo.
1995 1996 1997
1998
Sales $ 926 $1069 $1464
$ 454
Cost of goods solda (685) 812 1127
3(54)
Gross profit $ 241 $ 257 $ 337
$ 100

Operating, selling,
and administrative expense (98) (129) (187)
(62)
Rent expense b (41) (42) (46)
(13)
Less: Sales discounts given (23) (25) (24)
(7)
Plus: Purchase discounts taken 7 8 10
2
Operating profitc $ 86 $ 69 $ 90
$ 20

Interest expensed (1) (1)

Earnings before taxes $ 86 $ 68 $ 89
$ 20
Taxes` 34 27 (36)
(8)
Earnings after taxes 52 41 53
12

Dividends (27) 30
(6)
Retained earnings 25 25 23
6

a
Cost of goods sold can be computed as follows:

Beginning inventory 122 153 181

263
Plus : Purchases 716 840 1209
388
838 993 1390
651
Less : Ending inventory (153) (181) 263
297
Equals : Cost of goods sold $ 685 $ 812 $1127
$ 354
b
Includes rental payments on lease which calls for a base payment of $30,000 plus
5% of gross profit each year.
c
Depreciation expense is negligible.
d
The interest rate on the bank loan is 7% per year. Interest expense has been about
$700 per year. As the size of the loan increases, interest expense will become a
more consequential item on the income statement.
e
The tax rate for S&SS is 40% of earnings before tax..
 Exhibit 2

Sea & Snow Sports, Inc.

Balance Sheets

December 31, 1995-1997 and on March 31, 1998

March 31,

1995 1996 1997 1998

ASSETS

Cash $ 15,620 $ 10,850 $ 5,030 $

1,660
Accounts receivable 134,660 184,240 239,890 302,510
Inventories, at cost 153,150 180,760 263,400 297,340
Total current assets $ 303,430 $ 375,850 $ 508,320 $
602,970
Net equipment 9,820 9,270 11,030 10,850
Deferred charges 5,190 7,350 8,610 9,930
Total assets $ 318,440 $ 392,470 $ 527,960 $
622,290
LIABILITIES & OWNER'S EQUITY

Accounts payable $ 62,820 $ 104,570 $ 213,750 $

301,290
Accrued expenses 4,140 6,210 9,680 10,720
Bank loan 5,000 10,000 10,000 10,000
Total current liabilities $ 71,960 $ 120,780 $ 233,430 $
322,010
Common stock 50,000 50,000 50,000 50,000
Retained earnings 196,480 221,690 244,530 250,280
Total liabilities
and owner's equity $ 318,440 $ 392,470 $ 527,960 $
622,290

Questions
1. Analyze S&SS’s profitability. (Eg. analyze S&SS’s profit margin on sales through
time using gross sales. Analyze other profit measures through time.)
2. Are operating expenses “in control”? (Hint: Analyze operating expenses through
time.)
3. Is Mr. Wu managing receivables and payables prudently? (Hint: Analyze DSO and
DPO over time.)
4. Is S&SS’s inventory “in control”?
5. Should S&SS take a loan to “get current in its trade credit?”
6. How large of a loan would be needed by 4/30/1998 from the bank to allow S&SS to
become current on its accounts payables so as to take advantage of early payment
discounts during April? Analyzing this question is the key to financial planning for
Mr. Wu. Every financial plan involves a host of assumptions. To get started consider
the following:
a. We must determine the size of accounts payable on 4/30/98. We must recognize that
accounts payable cannot exceed 10 days of purchases.
b. To address (a) we must project sales and purchases The case says sales are steady
throughout the year, so let’s use the January-March period as a basis for sales, cost
of goods sold, purchases, and operating expenses.
c. For simplicity, let accrued expenses, equipment, and deferred expenses be
unchanged from March.
d. The starting point for the analysis is the April pro forma income statement. To
construct the April pro forma income statement, we need also to estimate sales
discounts given. Let’s assume that the fraction of sales discounts given is about
the same as January-March.
e. We can use the relationship in footnote (a) under the income statement in Exhibit 1 to
come up with purchases. To do so, let’s assume inventory has the same
relationship to cost of goods sold in the future as in the recent past and calculate
the number of days of inventory. (That is, Ending inventory + Cost of goods –
Beginning inventory = Purchases. From our ratio analysis, we can project ending
inventory).
f. Assume dividends are paid on a monthly basis.
g. With these assumptions, we can construct a pro forma balance sheet for the end of
April. That pro forma balance sheet will tell us the size of loan needed to “clean up
S&SS’s balance sheet”.
7. Construct a long-term financial plan. Specifically, produce pro forma income
statements for the full year 1998, 1999, and 2000 and year-end balance sheets for
1998, 1999 and 2000. (We will need to make additional assumptions to construct
these pro formas. The assumptions from #6 above will serve as the starting point and
let’s accept Mr. Wu’s sales projections. We also must recognize that most items will
grow with sales including cost of goods sold and operating expenses. To calculate
receivables and inventory, let’s use historical DSO (or ACP) and historical Days of
Inventory. But, for simplicity, let equipment, deferred charges and accrued expenses
remain constant)
8. Calculate the g* and the actual g for the historical period and the projected period and
conclude whether the company has made a correct decision on financing its needs and
properly managed internal resources.