Shearcut Shears

(1) There were many compounding factors that caused SureCut Shears to be unable to pay its bank loan by March 31, 1996. When looking at the pro forma income statement as compared to the actual income statement we see the following inconsistencies, which are contributing to SureCut’s financial problems:

Anticipated Actual Dollar Loss Contributed

Sales 25,800 22,987 2,813

COGS (% to Sls) 70.5% 73.8% 768

Gross Profit (% to Sls) 29.5% 26.2%

SG&A Expenses (% to Sls) 9.4% 10.6% 269

Total dollar loss contributed by increase in expenses 1,037

Total dollar loss contributed by decrease in sales 2,813

As expenses increase, profits are squeezed and SureCut continues to pay dividends at the same rate and amount, further squeezing the retained earnings, and thus net income of the company. In total over the nine months, the percentage increase in COGS and SG&A expenses contributed to over a $1 million loss based on the actual sales during that time.

In addition the case refers to a plant modernization program, which is claimed to be the reason for an increase in needed funds. However, when examined more closely, the plant modernization project was supposed to create efficiencies that would save $900K in manufacturing costs (to show up in COGS). If we look at the overall increase in actual COGS through March vs. the anticipated amount, we find that this savings of 3% is not realized and the process has actually reduced in efficiency.

By looking at the pro forma balance sheet compared to actuals through March we see this play out – actual cash on hand in March is $1.68 million lower than anticipated. Since SureCut did not make financial adjustments to their payables or receivables period to increase cash flow, this loss directly contributed to their inability to pay the $1.25 million loan at the end of March.

(2) To assess the financial situation of SureCut Shears we examined a few financial ratios. Based on our assessment, SureCut Shears’...