SureCut Shears, Inc.

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Executive Summary

The case is about estimating fund requirements for short term sources of finance. In June 1995, Mr. Fisher, treasurer of SureCut Shears arranged a line of credit of $3.5 million with the Hudson National Bank to cover the seasonal sales peak. After going with the analysis, much of these funds were used to fund the capital modernication program. Facing the declining sales, SureCut is facing difficulty in paying its short term loan obligations to Hudson National Bank. After thorough analysis, the need for short term fund requirements should not be used in capital expenses since the cash needed to repay the short term fund requirements comes from the sales of inventory which was the intention of the additional cash to stock up more inventory. Proper utilization of funds is a must for SureCut to be able to manage its payables to its business partners.

Case Context

SureCut Shears, Inc. manufactures a complete line of household scissors and industrial shears. Their products are distributed through wholesalers to specialty, hardware and department stores around the country. In June 1995, Mr. Fisher, treasurer of SureCut Shears arranged a line of credit of $3.5 million with the Hudson National Bank to cover requirements for the fall anticipating that the loan would be fully paid off by December of the same year. In September 2005, Mr. Fisher called Mr. Stewart of Hudson National Bank to inform him that the company would need an additional $350,000 to cover peak seasonal needs. In January 1996, there was a decrease in sales demand. In April 1996, Mr. Fisher called Mr. Stewart to tell him that SureCut Shears would not probably be able repay its outstanding short-term loan of $1.14 million in June.

Problem Definition

What factors contributed to the reasons behind SureCut’s inability to repay its loan?

Framework for Analysis and Areas of Consideration

The company is producing inventory at an even rate throughout the year. The treasurer of SureCut is assuming that sales would continue to increase during their seasonal period from July to December. The case provided us actual and forecast data.We compared actual and forecasted data of their sales, inventory.

Analysis

The forecast data showed an increase in sales from July ($2,100) to October ($4,500) of 1995. But during October 1995, actual sales are not keeping up with the forecasts and continued to decrease up to March 1996. (October Actual $4,066; December Actual $2,799; March Actual $1,498) Despite the decrease in demand SureCut Shears continued to create inventory that is way above the forecasts for inventory beginning in October 2005. Mr. Fischer should have a better understanding of AP and how forgiving their suppliers will be on their credit terms after being in business for several years.

Decision

SureCut reacted late to the decrease in sales demand. They have accumulated excess inventory. They failed to repay their bank loan before the next seasonal period. Mr. Fischer needs to forecast the market demand for the products he is selling and reduce future orders so inventory can be reduced to match market demand. The discounted payback for the capital project needs to be re-examined to determine the impact of reduced sales. Perhaps the project will not make sense at the level of current sales.
After his operations are scaled back to his share of the worse-than-expected market, his working capital needs will be greatly reduced. But in the interim, he will need leeway from Mr. Stewart in the repayment of the loan because nothing can be done immediately about the high inventories and the capital tied up in the improvement project.