The O.M.

Scott
and Sons
Company
Cristina Cataldo|260532717
Fathima Mullick|260400364
Karim El-Hajj|260509922
Mark Muchantef|260482101
Olivia Julia Lanni|260535306

Began
distributin
g in
stores

Company
was
founded
1868

History

1920s

1930s

New
product,
mailorder
business,
and
extensive
advertisin
gs Problem

Problem
Analysis

Introduce
Trust
Receipt
Plan
1950s

1960

Increased
field sales
force,
retail
dealers,
and
products

Alternatives

Recommendat
ion

Problem: Scotts
distribution system had not
evolved adequately in
response to developing
market opportunities

History

Problem
Analysis

Alternatives

Recommendat
ion

INCOME STATEMENT
Sales Growth

25.30% 30.61% 25.63% 12.35%

1957 1958 1959 1960 1961

$18,67 $23,40 $30,56 $38,39 $43,14
Net sales
6
0
4
6
0
COGS
15,501 18,915 24,120 30,417 34,332
Expenses
1,817 2,134 2,499 2,854 3,851
Depreciation
263
186
378
584
590
Interest charges
200
213
411
882 1,132
Total cost of sales 17,781 21,447 27,407 34,736 39,904
Earnings before
taxes
895 1,953 3,157 3,660 3,237
Income taxes
444 1,052 1,671 1,875 1,666
Net income after
taxes
$451 $901 $1,486 $1,785 $1,571
Problem
Recommendat
History
Alternatives
Analysis
ion

The Effect of the Trust Receipt Plan on Operating and Cash Cycle

1958
1959
1960
1961

History

Problem
Analysis

Alternatives

Recommendat
ion

Accounts Receivable Analysis

DUE

DUE

Total AR turnover
Standard plan AR
turnover
Receipt plan AR
turnover

SHI
P
SHI
P

History

Problem
Analysis

Alternatives

Recommendat
ion

The Effect of the Trust Receipt Plan on Operating and Cash Cycle

1958
1959
1960
1961

History

Problem
Analysis

Alternatives

Recommendat
ion

Balance Sheet: Liabilities

Accounts payable

1957
1958
1959
1960
1961
1,540.
8 2,134.6 4,140.2 2,791.0 6,239.2

Notes payable banks

300.0

Accrued expenses

674.3 1,437.7 1,900.7 1,941.2 1,207.7

- 1,000.0

Current sinking fund

77.0
173.9
324.3
382.5
512.5
2,592.
1 3,746.2 7,365.2 5,114.7 7,959.4
Total current liabilities
Long-term debt:
Of parent company
Of subsidiary
Total liabilities

History

2,186.
12,000.
7 2,059.7 1,777.2 9,000.0
0
- 5,162.6 4,649.5 4,170.4
4,778.
14,305. 18,764. 24,129.
8 5,805.9
0
2
8

Problem
Analysis

Alternatives

Recommendat
ion

The Effect of the Trust Receipt Plan on Operating and Cash Cycle

1958
1959
1960
1961

History

Problem
Analysis

Alternatives

Recommendat
ion

Ratios
Year

1957

1958

1959

1960

1961

2.13
1.22
0.10

2.48
1.58
0.13

1.97
1.02
0.12

4.30
3.53
0.11

3.59
2.88
0.05

1.17
1.39
5.48
6.80

1.02
1.22
10.18
11.06

1.92
1.58
8.69
9.61

1.68
1.84
5.15
5.81

2.08
1.83
3.86
4.38

2.42%
5.08%
11.01%

3.85%
8.85%
18.42%

4.86%
8.94%
22.64%

4.65%
6.91%
19.22%

3.64%
4.79%
13.81%

Liquidity (ST)

Current
Quick
Cash Ratio
Financial Leverage(LT)
Debt Ratio
EquityMultiplier
Interest Coverage(income)
Interest Coverage(cash)
Profitability
Net profit margin
Return on assets(ROA)
Return on equity(ROE)

History

Problem
Analysis

Alternatives

Recommendat
ion

Cash Shortage
Dec.
1960
Cash (with loan)
Cash (without loan)
Cash (without loan and with debt
covenant*)

Mar.
1961

June. Sept.
1961 1961

3,000 3,040 2,610 2,400

(3,250
) (8,960) (3,140) 2,400
(5,125 (10,835
)
) (5,015) 525

*Compensating balance of $1,875,000 [15%*$12,500,000]

History

Problem
Analysis

Alternatives

Recommendat
ion

EFN: Income Statement

Net sales
COGS
Expenses
Interest Charges
Total cost of sales
Earnings before
taxes
Income taxes
Net income after
taxes

Current: March
1961
% Sales
15,780.00
100%
11,730.00
74%
800.00
5%
240.00
n.a.
12,770.00
3,010.00
1,570.00

3,822.50
1,993.80

1,440.00

1,828.70

Retained Earnings

History

Proforma: March
1962
19,725.00
14,662.50
1,000.00
240.00
15,902.50

89.9%

Problem
Analysis

Alternatives

1,644.01

Recommendat
ion

EFN: Balance Sheet

Cash
Standard Plan
Trust Receipt Plan
Total Receivables
Inventories
Finished Goods
Raw materials and
supplies
Total Inventories
Current assets
Land, buildings,
equipment
Less: Accumulated
Depreciation
Net fixed assets
Other assets
History
Total
assets

Current:
March 1961
2,140.00
6,540.00
15,880.00
22,420.00

Problem
Analysis

% Sales
14%
41%
101%
142%

Proforma:
March 1962
2,675.00
8,175.00
19,850.00
28,025.00

5,850.00

37%

7,312.50

2,520.00
8,370.00
32,930.00

16%
53%
209%

3,150.00
10,462.50
41,162.50

2,190.00

14%

2,737.50

830.00
1,360.00
1,730.00
Alternatives
36,020.00

5%
9%
n.a.

1,037.50
1,700.00
1,730.00
Recommendat
44,592.50

ion

EFN: Balance Sheet

Accounts payable
Notes payable, Bank
Accrued taxes, interest, and other
expenses
Current liabilities
Subordinated promissory notes
Total liabilities
Preferred Stock
Commons stock and surplus
Retained Earnings
Net Worth
Total liabilities and net worth

History

Problem
Analysis

Proforma:
Current:
March
March 1961 % Sales
1962
3,680.00
23% 4,600.00
12,000.00
n.a. 12,000.00
950.00
16,630.00
9,000.00
25,630.00
2,380.00
8,010.00
10,390.00
36,020.00

Alternatives

n.a.
n.a.
n.a.
n.a.
90%

950.00
17,550.00
9,000.00
29,550.00
2,380.00
8,010.00
1,644.01
12,034.01
38,584.01

Recommendat
ion

EFN = Assets Liabilities

= $44,592,500
$38,584,010
= $6,008,490

History

Problem
Analysis

Alternatives

Recommendat
ion

EFN =
1962
$6,008,490

March
AR $28,025,000
Available debt:

Still need:

$900,000
$7,006,250
x (1
27.09%) =
Line of Credit:

$500,000

History

$5,108,490

Subordinated
Promissory notes:

$400,000
Problem
Analysis

Alternatives

Recommendat
ion

Reduce Growth Rate

EFN
$6,008,
490
$900,00
0
$0

History

12.68
%
Problem
Analysis

Alternatives

25
%
Recommendat
ion

InitialPlan
Standard
Problem

Trust
Receipt
Scotts
Plan

Solution

Rising Cash Cycle

No security
interest

Worsened

Solved

Solved: Retain
ownership of
goods until sold

Solved

Poorly stocked

Mild
improvement

Problem
Analysis

Solution

Solved: No longer
dependent on
dealer NWC

Wholesale Prices

History

Our
Consignment

Alternatives

Solved:
disincentive since
dealers NWC
unaffected
Solved: Full
product line
integral to
strategy

Recommendat
ion

Three Step Strategy

1. Factor accounts receivables

2. Reduce growth rate to a range between:
- Sustainable growth rate (12.68%)
- Highest growth rate given debt
capacity ( %)
3. Sell on consignment

History

Problem
Analysis

Alternatives

Recommendat
ion

Questions?