Luxor_CS_05_221 - IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO....

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Unformatted text preview: IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO. 2, ART. 1, JUNE 2009 1 You have just made a big career move. After graduation you spent several years with a large consulting firm and you were happy with the progression of your career. But a satisfied client recommended you to Phil Luxton, the founder and still principal stockholder of Luxor Cosmetics. Mr. Luxton invited you to lunch and explained that Luxor was in trouble. “The company’s sales are declining and its cash flow seems to be negative—even though the firm is still profitable. I need some new blood to help turn the company around. I confess I am somewhat hesitant to turn to an accountant. Accountants have a reputation for being very narrowly focused. But the friend who recommended you assures me that you are different.” You immediately recognized that Luxor presented a tremendous opportunity. It would give you experience with a wider range of business issues than those to which you are accustomed. Further, if you are successful in helping to turn the company around, that success may open up additional career opportunities. You were also encouraged by the sense that you and the founder of Luxor would have an excellent working relationship. Several days after your lunch meeting you called Mr. Luxton and expressed an eagerness to work with the firm. Mr. Luxton was delighted. A week later he informed you that the chief financial officer (CFO) at Luxor had retired. He offered you the position and you accepted. On your first day at Luxor, Mr. Luxton made a surprise visit to your office (he no longer maintained an office at the firm). He explained there was a matter needing quick attention. “Unfortunately, our prior CFO was not doing any forward planning. The firm needed to borrow $2.2 million in 2009. This came as a surprise to the board of directors. The company had to scramble to get the funds. We also had no advance warning that the cash balance in 2010 would fall so low. Our cash needs are highly seasonal, so we strive to have at least $7.0 million at the end of each year. When we recently approached the bank for an additional loan, the loan officer indicated a reluctance to extend us further credit. Thus we quickly need a budget that can be brought to the bank to justify a new loan.” Mr. Luxton then gave you a brief history of the firm. He started the firm after he developed a material that was easily colored and that produced a thick, creamy lipstick. Heavy makeup was the fashion at the time and the lipstick quickly became a market success. The firm then developed a line of matching nail polishes and added several skin creams to round out the company’s offerings. The products were an “instant market success,” but that success created its own problems. “In those early years I devoted almost all of my time to issues involving the building of the necessary production facilities and the hiring of staff. My personal financial resources were soon exhausted and the lack of funds limited the firm’s growth. So I also devoted a lot of funds limited the firm’s growth....
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This note was uploaded on 11/21/2010 for the course ACC ACC692 taught by Professor Smith during the Spring '10 term at Northwestern Michigan College.

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Luxor_CS_05_221 - IMA EDUCATIONAL CASE JOURNAL VOL. 2, NO....

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