Essay about Tire City Case Study

There are two chief participants in this case study, Paul Mackay and Jackie Patrick. Mackay, a sole proprietor of Lawsons (a general merchandising retail site in Riverdale, Ontario), has approached the Commercial Bank of Ontario in order to acquire an additional $194, 000 bank loan and a $26,000 line of Credit. Patrick, a first time loans officer, has been appointed to Mackay’s request. As such

Using the assumptions given in the case, all elements of income statement and balance sheet can be projected for next three years 2010, 2011 and 2012. Sales cycle of the products of the company is such that sales of a particular product increases initially for few years and then starts to decline as the new technology

Even though the company has been turning in profits, the ineffective collection practice, not availing trade discounts on time and ineffective inventory management has led the company in need of larger financing needs.

This is due to the fact that inventory and accounts receivable are left out of the equation. Based on the cash ratio, this company carries a low cash balance. This may be an indication that they are aggressively investing in assets that will provide higher returns. We need to make sure that we have enough cash to meet our obligations, but too much cash reduces the return earned by the company.

Case Background (who, what, when, where?): The company is Tire City, Inc. (Tire City), and their CFO (Jack Martin) is preparing for a meeting with their bank. Tire City is known for its high customer satisfaction, competitive pricing, and ability to quickly fill orders. They have previously borrowed from MidBank in 1991 to build a new warehouse, and also established a line of credit with the bank that they have not yet used.

Tire City Inc has increased its debt ratio from 44.17% in 1995 to 44.10% in 1997 by planning to take the bank loan for the additional fund needed. Also, Tire City time interest earned coverage increased from 23.50 in 1995 to 28.25 in 1997. L.T Debt decreased slightly in 1997 than 1995 due to the decrease in the long term debt from $750,000 in 1995 to $500,000 in 1997. Debut to equity ratio has increased slightly from 0.79 in 1995 to 0.82 in 1997.

Tire City, Inc. (TCI) was a rapidly growing retail distributor of automotive tires in Northeastern United States. Tires were sold through a chain of 10 shops located throughout Eastern Massachusetts, Southern New Hampshire and Northern Connecticut. These stores kept sufficient inventory on hand to service immediate customer demand, but the bulk of Tire City's inventory was managed at a central warehouse outside Worcester, Massachusetts. Individual stores could be easily serviced by this warehouse, which could usually fill orders from individual stores within 24 hours. TSI showed solid results for the year ended in December, 1995; TCI had sales of USD23.51m and net income of USD1.19m. During the previous three years, sales had grown at a

Cartwright is a retail distributor of lumber products. It built its competitive edge based on pricing and having a careful control over its operations. The company reported an operating income of $86,000 and $111,000 in 2003 and 2004, respectively. This is a 29% increase in operating income in one year, which shows the firm’s strong ability to generate cash. The firm’s account receivables and inventory are increasing from year to year which is a good sign of a growing business. Cartwright is not an asset intensive company. It does not have to have huge fixed assets; most of its assets are cash, accounts receivable and inventory which all depend on future sales. Sourcing of materials is managed very well, purchased at discounts most of the time and contribute to having lower prices.

Support: The inventory increase in 1997, YOY, was 58%. Additionally, the COGS to revenue ratio reduced from to 72% in 1997. This combination of increase in inventory and reduction in COGS as a percentage of revenue seems to indicate that the fixed costs may have been spread over a larger base through over production, thereby causing the COGS to reduce. This may be a cause for concern and could be a potential red flag.

5. Proposed location of the new warehouse and transportation distances from the new location to each retail outlet/customer

From a financial perspective, Costco’s income statement shows it has increased its total revenue from its domestic and foreign stores every year. Operating income, total and net assets, and number of warehouses have increased steadily each year. However, long-term debt has sharply increased after 2006 and stockholder’s equity has been inconsistent for the past few years. Newer warehouses are being built to its maximum size and top volume warehouses would exceed $5 million in sales per week.

The company’s creams inventory remains constant because it does not follow a trend in innovation and changes so often as the other products. The surplus in inventory is a big disadvantage since; last year’s products may not be in style this year in addition to the cost of storage. For all these reasons their cash flow is less in comparison with previous years causing that Luxor Cosmetics keeps increasing their bank loans, creating more debt, making it harder to pay out as 2011. In this particular situation the company could have either decrease its budgeted sales (productions) or increase its actual sales by improving more effective marketing strategy and research and development of its products in the markets. This way their inventory would decrease and their cash flow would increase. (Hopkins, 2009)

From the 2001 projections, the company`s sales revenues reached the 90.9 million mark in 2001 representing a 15 million rupees growth over the previous year. Despite this remarkable increase, there are a number of financial challenges that must be taken into account when evaluating the forecast. For example, based on the company`s total assets turnover which tells how efficient the company is using its assets to generate sales, Kota`s total assets turnover ratio is suboptimal. In 2000, the

Community Wheels will focus on providing one main service; transportation. Despite being limited to one service; the organization will go about providing this service in a variety of ways. As previously mentioned, Community Wheels will partner with Uber to provide rides; however, the organization will also attempt to make use of volunteer drivers. The partnership with Uber will entail clients requesting Uber for their transportation needs, with their payment being categorized by their level of income, requiring them to pay in-between 10% – 25% of their total trip cost (See the percentage breakdown for income in the Appendix C). The remaining balance will be paid by Community Wheels, and the partnering organization via a financial model in which Community Wheels bears a majority of the cost. Should the need for transportation be higher than the number of Uber vehicles available, volunteers from Community Wheels will drive the client. Unlike with Uber, Volunteers will not be paid by the rider, instead volunteers will be reimbursed for their mileage at the current government established rate. When using Volunteers, riders will not be responsible for any payment.

As Mr. Clarkson's financial advisor, we would caution him on expanding his business given the current financial trends and ratios of the company. The investment in inventory and receivables is too high. As a result, Clarkson Lumber's return on assets, return on equity and invested capital are lower when compared to other high profit outlets as shown in exhibit C. Additionally, a significant increase in debt, such as a $750,000 loan, will further reduce the current ratio of the company. Clarkson Lumber could benefit from some changes in its collection policies for