FINANCIAL MANAGEMENT

CASE STUDY
QUIZ (1 HOUR)

Submitted by:
AR Anthony G. Salvacion

Submitted to:
Faustina C. Rana
 BACKGROUND OF
THE STUDY
It was early August 1996 and Leon Caballo, manager of
Olympian Backpacks, Inc. had a worried look on his face. He
had just completed three months as manager of the company.
Olympian backpacks manufactured nylon bags used in school,
camping and sports. Caballo thought that the company’s
financial problems were fast catching up on him. Caballo
knew that the company was short of cash and that he had to
pay overdue accounts with several major suppliers within the
next two days.
His first reaction was to call up Oriental Bank to ask for an
increase in the company’s existing credit line. As he was about
to lift the phone. He remembered that the present short – term
loan of 1 million was due at the end of the month. . Caballo
sank bank in his chair and though about his options.

Company Background

The company was started in feb. 1995 by the spouses Merlin

and Carl Gatdula. Merlina and owned and managed a
number of companies involved in the leather, shoes, and
stuffed toys and houseware businesses. His spouse, Carl, was a
former government employee. She managed the shoes
company for the family, the spouses Gatdula were prominent
families in Novaliches and owned many properties in the area.
Caballo moved into his new job at Olympian Backpacks on May 1,
1996 from a garments company where he was a production
manager. The owner of Olympian Backpacks, Merlin Gatdula, hired
him because the operation of the business was quite similar to
garments manufacturing. Gatdula left all the decisions making to
Caballo concentrate on his other business. Gatdula started the nylon
bags business with his spouse. Carl, together, they designed the
products that became a “hit” with students.

Gatdula designed and produced backpacks that were higher in

quality compared to those available in the market. Their backpacks
had superior features compared to those of competitor. The
Olympian brand used heavy – duty nylon straps designed for
carrying heavier loads compared to the undersized straps of
competitors. It had a world-renowned brand – name zippers and
sliders and all lock stitching of other bags.
The spouses Gatdula had friends in the movie industry who arranged
for well known movie stars to endorse their products in prominent
advertisements. Customer acceptance of the company’s products
followed.
Merlin Gatdula also attributed the success of their products to his
policy of using only high – quality imported nylon materials as raw
materials.

Caballo scheduled production, by types of bags weekly based on

orders received by salesmen. At the end of each month. Gatdula came
by the company to give his opinion of what items were saleable. When
he felt necessary, he revised the production schedule of the following
month. Production was simple, involving only cutting and sewing
using high speed sewing machines. There were always problems in
obtaining materials, primarily of nylon, taffeta and accessories like
zippers and leather patches.
There were few suppliers of these materials, and they strictly
enforced the 30 days – credit period. Gatdula and Caballo after
him, kept monthly purchases at a steady level to maintain good
relationship with suppliers.

A manager, Vio Dayap and four salesmen handled sales and

distribution. Olympian Backpacks sold on credit terms of 60 days.
The company-maintained accounts for about 20 retailers, ranging
from large departments stores to medium sized specialty stores
and retail outlets. Sales of the backpacks and camping gear were
highly seasonal . Most of the company’s sales were in the school
break up to school opening from April to July. There were another
two months of good sales in November and December, but sales on
other months were quite lean. There appeared to be very little
management could do to influence its sales pattern.
Financing
The spouses Gatdula organized the company using their personal
capital.

In August 19, 1995, Gatdula took out a 1 million loan from Oriental
bank with maturity of one year. Gatdula conserved funds by
producing bags according to the sales pattern. Workers received
wages on piece – rate basis. They worked longer hours during peak
months and took breaks on rotating work schedules during periods
of low sales. The company had no other debts besides those to
suppliers. The short-term loan and a minimal amount of accruals.
Due to the capital requirements of their other businesses, the spouses
Gatdula had not provided Olympian Backpacks with new capital.
Merlin Gatdula asked Caballo to source his own requirements from
banks and other sources.

Current Financial Position

Caballo thought that he had good control over the company’s

production and sales in the three months that he had spent with the
company. When he arrived during the peak season, he devoted his
time supervising the production. Bags produced during this period
were of high quality and met the requirements of their retailers there
were no sales returns from retailers. Sales for the three months
exceeded sales for the same period last year.
Caballo estimated that sales for the entire year 996 would be
about 19 Million. This figure was higher than the sales of 12.9
million last year. Sales had been low in the early part of the year,
amounting to 3, 213, 000 with income of 209, 000 from January to
March this year. Since cost were in control and workers were
paid on a piece – rate basis, caballo was sure that the company
was profitable.

upon seeing the financial statements, Caballo became

even more puzzled about his financial problems. The cash
balance at the start of the year of 3.6 Million went down to the
current balance of 82, 758. “ How can I have high sales, good
profits, and be so short of cash? He lamented.
Now with only 82, 758 of cash on hand caballo worried that he
might not have sufficient cash to pay off suppliers and operating
needs. The company owed its suppliers a total of P 2.9 Million as
of July 31 of which more than two thirds, or about 2.03 Million,
were due within the month. The short-term loan from Oriental
bank was due on August 20, Caballo scheduled an appointment
with the Oriental Bank branch Manager, Pal Lolin.

Financing Problems
Caballo saw that his receivable from retailers had built up to
large amount . However, he felt unable to pressure them for
payment. He did not consider sales his strong point because he
had always been in production. Even now he believed that he
could sell as long as he produced the best bag from the best nylon
materials
In contrasts, he felt the pressure from their suppliers. To large
suppliers of nylon threatened to deliver only on cash basis if the
company did not pay within the week. These two suppliers alone
accounted for half of the amount due within the week.

Caballo wanted to Call oriental Bank’s Branch Manager Lolin to ask

him not only to extend the maturing short-term loan but also to
increase it. He thought that an increase from the present 1 million to a
nice figure like 4 million should cover requirements for the month.

As he was about to call Oriental bank , the phone rang. It was Carl
Gatdula, who said:
“ We are quite successful here in our shoe store in
Galleria! Now we are planning to open outlets in two
other malls. I am calling to ask you to set aside 4
million to help us put up these new outlets within the
year. I know from Vio that you just had a profitable
season, so I think it’s not going to be hard for you to
meet the requirement. Congratulations!

Caballo was not able to answer but he promised

Carl Gatdula that he would call later.
 Olympian Backpack Case Study

I. Viewpoint

Leon Caballo, a newly hired manager of Olympian

Backpacks.

II. Time Context

August 1996
III. Definition of the Problem

Paying the company’s loan of 1M pesos due at the

end of the month, initially with 1-year maturity
and amount owed to suppliers amounting to 2.9
Million where 2.03 Million is due within the
month.
IV. Objectives
• Must:

To prioritize collections of the

accounts receivable and to obtain a
short – term loan to finance the debt
suppliers to maintain the credit line
with its suppliers.
•Wants

To take a long – term loan to finance

the fixed assets and high value items
capital like the expansion of outlets
that will cost 4 Million Pesos.
IV. Areas of consideration

Strength
 Higher product quality
 Skilled workers
 Market expansion

Weaknesses
 Mismanagement of cash
 Aged accounts receivables
 Weak collection effort
 Opportunities
 There is a strong demand for the products
 Market growth and opportunities
 Good brand recognition from the students

Threats
 Higher tariff and quota imposition on imported materials
used by the company to produced their product.
 Loss of supplier and customer’s loyalty
 Customers will shift to other brands.
 Weight Weighted Score Rating

Strength 1 1 3
Higher product 1 0.9
quality

Skilled workers 1 0.7

Market expansion 1 0.5 Rating (2.1)

Weakness 1 1 3
Mismanagement of 1 0.8
cash
Aged accounts 1 0.8
receivable
Weak collection 1 1 Rating (2.6)
effort
 Weight Weighted Score Rating

Opportunities 1 1 3
Strong demand for the 1 0.9
products
Market growth and 1 0.7
opportunities

Good brand recognition 1 0.5 Rating (2.1)

from the customers

Threats 1 1 3
Higher tariff and quota 1 0.5

Loss of supplier and 1 1

loyal customer

Shifting of customer to 1 0.8 Rating (2.3)

other brands
Key factors Weight Alternative 1 Alternative 2 Alternative 3
Rating Score Rating Score Rating Score
collection effort 1 0.9 1 0.8 2 0.5 3

Management of cash 1 0.6 3 0.7 2 0.5 1

Sources of cash 1 0.9 1 0.4 3 0.8 2

Credit Terms 1 0.8 3 0.9 2 1 1

Total 4 3.2 1 2.8 2 2.8 3

V. Alternative course of action

• ACA #1: Prioritizing collecting of accounts receivable

by Implementing a strong collection policy.

• ACA #2: Shortening of credit terms of the customers’

account receivable from 60 days to 30 days

• ACA #3: Obtaining a short – term loan for the

upcoming dues and long - term loan for the business
expansion

• ACA #4: Managers can ask the suppliers to extend the

credit terms.
VI. Conclusion
Working capital management is important to the company’s
fundamental financial health and operational success as a business. A
good working capital has good receivables management that helps
prevent overdue payment or non-payment. It is therefore a quick and
effective way to strengthen the company's financial or liquidity
position. A well-run firm manages its short-term debt and current and
future operational expenses through its management of working
capital, the components of which are inventories, accounts
receivable, accounts payable, and cash.
VII. Recommendation
I strongly recommend ACA #1 as it is
a good source of cash for the payment
of maturing debt from suppliers and
from the bank.

VIII. Action Plan

 Activities Objective Strategy Key Timeframe
responsible
Collection of To get a source of funds for Implementing a Collection 24 months
accounts the payment of maturing debt strong collection Manager
receivables from the suppliers and the policy. /staff
banks.

Refinance To maintain the credit line Restructured the Manager 24 months

Short-Term with its suppliers. short – term debt to /finance
Debt with longer -term. Manager
Long-Term
Debt

Increase To reduce and prevent the Sell the inventory Sales/ 24 months
Inventory overstocking of products. for premium, warehouse
Turnover discounts, bazaar,

Sell Long- To increase the networking Offer unused long- Warehouse 30 days
Term Assets capital term assets like old Manager
for Cash office equipment /Marketing
Thank you and God bless…