In November 2001, Ms. Carolyn Ringer, Treasurer of Menotomy Diaper Services (MDS), was preparing a loan request to go to the Norten Municipal Bank. Less than eight months earlier, MDS had expanded their staff by 30 percent. At that time, the company had been in a secure financial position and Ms. Ringer, anticipating no financial problems, had spoken to the company's board of directors in favor of the increase in services. However, in July, Ms. Ringer realized that although MDS had begun training and paying their new staff in June, the company would not receive the additional revenue generated by the new staff until later in the year. With the staff totaling about 30 employees (full and part-time), Ms. Ringer realized that MDS could not always have on hand the cash it would require.
Faced with these unexpected expenses, Ms. Ringer had gone to the Norten Municipal Bank to apply for a short-term line of credit to cover the additional costs. Mr. Jansen, the bank officer, had granted MDS a line of credit, which had reached almost $66,000 by September 2001. Although he had allowed the company to continue using its line of credit into its next fiscal year (which ran from October 1 to September 30) he had raised some important considerations.
He explained that the bank was willing to continue a line of credit for the company but he was concerned that Ms. Ringer had not adequately anticipated the company's cash needs. He asked Ms. Ringer to present the bank at the outset with a detailed monthly statement of MDS's projected cash needs for fiscal year 2002. Consequently, Ms. Ringer began to review the company's financial statements (contained in Exhibits 1 and 2) and collect data that would help her plan for MDS's future cash requirements.
Menotomy Diaper Services was founded in 1980 by four retired nurses. Each founder had between 10 and 35 years of experience working with infants in Norten's hospitals. Realizing that parents increasingly were using cloth diapers, the nurses saw a need for a diaper service, and started their own company. At first, MDS was small and operated out of one person's home. The company then employed the four founders, a part-time laundry worker, and three drivers. . . .
- Prepare the cash flow worksheet contained in Exhibit 4. What does this tell you about the operations of MDS?
- Prepare pro forma financial statements for FY 2002 (including a statement of cash flows). What do these tell you about the operations of MDS? How can you reconcile the information in the cash flow worksheet with that in the financial statements?
- Calculate those ratios that might be important to the bank for each year in the 4-year period. What do these ratios tell you about the company?
- Prepare a SCF for the entire 4-year period. What does it, in conjunction with the financial statements and the ratios for the same period, tell you about the operations of MDS?
- What changes in financing policies took place in the most recent year as compared to previous years?
- What recommendations would you make to Ms. Ringer?