Basics Finance Busines Case

Total Construction Wholesalers

 Total Construction Wholesalers Inc.

TCW is a small chain of wholesale construction materials for SME and individual
small contractors. The company was founded by its main shareholder, John
Kemers 8 years ago, always enjoying an excellent economic and financial
situation.

Together with Mr. Kemers participate in the capital of the company, which
amounts to €180,000, the following persons:

Partner 1 Peter Catts 16.66%

Partner 2 David Simms 16.66%
Partner 3 Albert Villeneuve 16.66%
Partner 4 John Kemers 50%
TOTAL 100%

The company’s accounting systems are rinky-dink at best, as the only updated
accounting record is a cash book. This book records the collections, payments
and balance available in cash. This cash balance never fits the tonnage. Some
days the differences reach up to €120.

Mr. Kemers does not control any of the previous records. No Daily record of
banks is carried even though the movements that occur in them are important.
No one in the company controls bank statements, and no reconciliation of
accounts is made.

Also, the customer files are not updated, even though they are more than 600,
or from suppliers, or from bank records. Some of the clients must have
purchases made more than half a year ago.

Payments to providers are often made by submitting pre-dated checks, and

some of them are often presented before check date. These uncontrolled
conditions are held because of the early payment discount of 3% that suppliers
provide. Purchases must be paid on average at two weeks’ notice.
The debt with banks, destined basically to the financing of current assets, is
constituted by the following detail of accounts of credit (limits in thousands of
euros):

Bank A 90

Box B 90

Bank C 60

Bank D 60

Bank E 48

Bank F 42

Other (In total 7) 205

TOTAL 595

Although a portion of sales is also charged through advanced-date checks,

especially to low-volume customers.

The company works giving low prices to customers and leaning on strong
relationships of Mr. Kemers in the industry, often meaning customer service
goes up and above to satisfy customers based on relationships more than
profitability.

Recently tensions in current cash availability have increased its frequency, and
Mr. Kemers thinks that being his business profitable for the sector standards,
it’s well worth a shot unifying all credit lines and negotiating with one only bank
an increase of credit limit up to 800k instead of the current 500k.

What would you do?

The financial statements (in thousands of euros) are attached.

PROFIT AND LOSS ACCOUNT:

P&L (thousand euros) 2004 2005 2006

Sales 5.006 5451 5944

COGS 4.321 4712 5115

Gross margin 685 739 829

Salaries 293 320 345

Overhead 34 22 25

EBITDA 358 397 459

Depreciation 24 24 30

EBIT 334 373 429

Financial results 186 210 282

Profit before taxes 148 163 147

Taxes 34 32 24

Net income 114 131 123

BALANCE SHEET STATEMENT:

Balance Sheet (1.000s) 2004 2005 2006

Fixed Assets 300 277 294,5

Stock 168 191 363,5

Receivables 1046 1070 1136

Cash 199 207,25 125,25

Current Assets 1413 1468,25 1624,75

Total Assets 1713 1745,25 1919,25

Shareholders Eq. 180 180 180

Retained Earnings 716 734 782,00

P&L 114 122,25 110,25

Equity 1010 1036,25 1072,25

ST Debt 547 493 595

Payables 156 216 252

Current Liabilities 703 709 847

Total Liabilities 1713 1745,25 1919,25