n l ac e 20 02 th e p resident of R E Supplies visited the bank and r e qu e

N l ac e 20 02 th e p resident of r e supplies

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[n lace 2002, the president of R&E Supplies visited the bank and re-quested an increase in the short-term loan for 2003 to $500,000. The president explained that despite the company's growth, accounts payable had increased steadily and cash balances had declined. A number of sup-pliers had recently threatened to put the company on COD for furure purchases unless they received payments more promptly. When asked why he was requesting $500,000, the president replied that this amount seemed "about right" and would enable him to pay off his most insistent creditors and rebuild his cash balances. Knowing that the bank's credit committee would never approve a loan request of this magnitude without careful financial projections, the lend-ing officer suggested that he and the president prepare pro forma financial statements for 2003. He explained that these statements would provide a more accurate indication of R&E's credit needs. The first step in preparing the pro forma projections was to examine the company's financial statements for the years 1999 through 2002, shown in Table 3.1, in search of stable patterns. The results of this ratio ai:ia~ysis ap~ear in !able 3.2. The president's concern about declining liq-wd1ty and mcreasmg trade payables is well founded; cash and securities have f~llen from 6 percent of sales to 2 percent, while accounts payable have nsen from 9 to 16 percent. In terms of the payables period defined as accounts payable divided by cost of goods sold per day, the inc~ease has been from 39 to 66 days. Another worrisome trend is the increase in cost ~f goods sold and ~eneral, selling, and administrative expenses in propor-non to sales. Earnmgs clearly are not keeping pace with sales. T~e last_ column in Table 3.2 contains the projections agreed to by R&E s president and the lending officer In line wi·th · l . · recent experience sa es are predicted to increase 25 percent over 2002 Ge I llin d' . nera , se g, an
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I 86 Part Two P/111111i11g Fumr, Fi111111rial Pe1fon11a11re TABLE 3.1 Financial Statements for R&E Supplies, Inc., December 31, t 999-2002 ($ thousands) Income Statements 1999 Net sales Cost of goods sold $11,190 9,400 -1,790 Gross profit Expenses: General, selling, and administrative expenses 1,019 100 Net interest expense Earnings before tax Tax Earnings after tax Assets Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets Liabilities and Owners' Equity Current liabilities: Bank loan Accounts payable Current portion long-term debt Accrued wages Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and owners' equity ·uu.nutc. 671 302 -$ 369 Balance Sheets $ 671 1,343 1,119 14 3,147 128 $ 3,275 S 50 1,007 60 5 1,122 960 150 1,043 $ 3,275 2000 $13,764 11,699 -2,065 1,239 103 -723 325 $ 398 $ 551 1,789 1,376 12 3,728 124 $ 3,852 $ 50 1,443 50 7 1,550 910 150 1,242 $ 3,852 2001 2002* $16,104 $20,613 13,688 17,727 -----2,416 2,886 1,610 110 696 313 $ 383 $ 644 2,094 1,932 15 4,685 295 $ 4,980 $ 50 2,426 50 10 2,536 860 150 1,434 $ 4,980 2,267 90 529 238 S 291 $ 412 2,886 2,267 18 5,583 287 $ 5,870 $ 50 3,212 100 18 3,380 760 150 1,580 $ 5,870 administrative expenses will continue to rise as a result of an unfavorable labor settlement. After comparing R&E's cash balances to
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