Spr|ngf|e|d Nat|ona| 8ank Case

W Case Context !ohn uawson !r presldenL of uawson SLores lnc ls requesLlng for a
credlL llne of $1000000 from Sprlngflled naLlonal 8ank (Sn8) 1he credlL llne ls
requesLed Lo be avallable for one year on unsecured basls !ohn uawson provlded Lhe
company's flnanclal sLaLemenLs for Lhe lasL four years for Lhe revlew of Sprlngfleld
naLlonal 8ank Llkewlse Lhe bank obLalned reporLs of prevlous conLacLs by bank
personnel wlLh uawson SLores lnc whlch lL has revlewed for Lhe approval/dlsapproval
of Lhe credlL llne requesL Sn8 musL declde wheLher lL would exLend a credlL llne Lo
uawson SLores lnc for one year 1he declslon resLs on Lhe followlng glven facLs
1 !ohn uawson would llke Lo obLaln Lhe $1000000 credlL llne on an unsecured
basls
2 1he credlL llne shall cover for shorL Lerm needs
3 uawson SLores lnc had noL used bank credlL ln Lhe lasL Len years
W Ana|ys|s lL ls assumed LhaL uawson SLores ls a chaln of reLall sLores whlch sold largely
on credlL Llke mosL small buslness Lhey have a relaLlvely slmple caplLal sLrucLure and
Lhelr lncome sLaLemenL reflecL Lyplcal revenues and expenses lnvenLory conslsLs
prlmarlly of merchandlse obLalned on accounL from accredlLed suppllers whlle aL Lhe
same Llme lLs sales are mosLly on accounL on a 30 day credlL Lerm As a credlLor Sn8
would look aL Lhe followlng
1 rof|tab|||ty
uawson SLores asseL Lurnover raLlo was 178 for flscal year 2008 and dld noL ellclL a
dramaLlc change for Lhe nexL Lwo years Clven LhaL Lhe lndusLry average ls 31 for slmllar
buslness we noLe LhaL sales performance ls unsaLlsfacLory for lLs avallable resources
AlLhough Lhe proflL margln raLlo has lncreased on Lhe pasL Lhree years lL may noL be
aLLrlbuLed Lo sales alone because Lhe lnvenLory Lurnover raLlo has noL slgnlflcanLly
changed over Lhe same perlod 1he lnvenLory Lurnover raLlo was only sllghLly below Lhe
lndusLry average and has been Lurnlng over only once every 70 days Conslderlng LhaL lL
ls a small reLall lndusLry Powever Lhe lncrease ln proflL margln may be aLLrlbuLed Lo a
mark up ln prlce as an effecL of Lhe modernlzaLlon and/or expanslon of Lhe company
1hls ls evldenced by Lhe lncrease ln L over Lhe years

2 L|qu|d|ty
Whlle Lhe lnvenLory Lurnover raLlo has remalned consLanL Lhe A8 has lncreased over
Lhe four year perlod lndlcaLlon a problem ln collecLlon uawson SLores operaLes on a 30
day credlL Lerm Powever Lhe compuLed average age of accounLs recelvable ls
approxlmaLely 34 days represenLlng low shorL Lerm llquldlLy and lnefflclency ln Lhe
company's collecLlon sysLem conslderlng Lhe A8 balances comprlse a ma[or porLlon ln
Lhe LoLal asseLs of Lhe company lL was also noLed LhaL Lhe company pracLlces Lhe
wrlLlng off of bad debLs LhaL have maLured over a 12
Lh
monLh perlod 1hls poses a rlsk Lo
Sn8 especlally for Lhe unsecured llne of credlL LhaL uawson ls requesLlng because
paymenL Lo Lhe requesLed credlL llne are hlghly dependenL on Company's qulck asseLs
on whlch a ma[or porLlon of lL ls on Lhe A8
lurLhermore Lhe decreaslng currenL and qulck raLlos lndlcaLe very low shorL Lerm
llquldlLy for uawson as shown by lncreaslng llablllLy aLLrlbuLed Lo lncrease ln payables
1hls slgnlfles LhaL Lhe company falls Lo meeL lLs shorL Lerm obllgaLlons Cne of Lhe
conLrlbuLlng facLors Lo Lhls ls Lhe facL LhaL Lhe company prlorlLlzes Lhe perlodlc
declaraLlon of lLs dlvldends over Lhe paymenL of lLs llablllLles



3 Long 1erm Debt
1o valldaLe Lhe assumpLlons LhaL Lhe paymenL of long Lerm debLs affecLs Lhe llquldlLy of
Lhe company Lhe long Lerm debL raLlo was lncluded ln Lhe analysls Powever alLhough
Lhe long Lerm debL equlLy raLlo has decreased over Lhe years Lhe decrease was
lnslgnlflcanL hence Lhls proves Lhe assumpLlon lnvalld and cannoL be counLed as a
facLor conLrlbuLlng Lo Lhe llquldlLy problems

O Dec|s|on
Clven Lhe analysls on Lhe daLa presenLed hereln lL can be concluded LhaL Sn8 should
noL provlde Lhe requesLed unsecured credlL llne Lo uawson because lLs llquldlLy raLlos
shows LhaL lL may noL be able Lo meeL lLs shorL Lerm obllgaLlons Powever slnce Lhe
ma[or facLor affecLlng lLs llquldlLy ls low A8 Lurnover Sn8 mlghL conslder granLlng Lhe
credlL llne sub[ecL Lo followlng condlLlons
O 1he uawson's A8 collecLlon lmproves over Lhe year
O 1he uawson should defer dlvldend declaraLlon unLll Lhey have pald Lhe prlnclpal
amounL Lo Sn8

kat|ona|e
1he declslon was based solely on Lhe analysls of flnanclal sLaLemenLs presenLed by Lhe
company slnce Lhls company has no hlsLory of bank credlL slnce lasL Len years 1he
analysls revealed LhaL buslness was able Lo generaLe lndusLry average proflLs Powever
proflL was noL fully reallzed ln cash due Lo lnablllLy Lo collecL lLs recelvable and furLher
compllcaLed by uLs regular lssuance of dlvldends and mlsmanagemenL of lLs planLs and
asseLs 1hese problems are also reflecLed ln Lhe company's lnablllLy Lo seLLle boLh lLs
shorL Lerm and long Lerm payables
1he condlLlon seL ln granLlng secured credlL llne for uawson were based on Lhe facL LhaL
lmprovemenL ln paymenL collecLlon wlll generaLe enough cash for Lhe company Lo
cover Lhe prlnclpal and lnLeresLs of Lhe credlL
2007 2008 2009 2010
L|qu|d|ty kat|o
CurrenL raLlo(LllC) 212 202 174 167
CurrenL raLlo(8eLall) 223 221 188 181
Culck raLlo 114 117 104 101
Work|ng Cap|ta|
Worklng caplLal $2983 $2849 $2986 $3136

rof|tab|||ty kat|o
Cross roflL Margln 2996 2901 3100 3130
L81 Margln 378 333 633 734
neL roflL Margln 194 168 304 334
8CA 327 298 363 649
8Cl 442 400 787 939
8CL 802 708 1294 1467

Debt management (|everage)
rat|o

uebL Lo LqulLy 082 077 064 033
uebL Lo CaplLal 043 044 039 033
uebL Lo AsseLs 033 032 026 022
llnanclal Leverage 243 240 243 236
uebL Lo LqulLy (wlLh lease) 149 077 064 033
uebL Lo CaplLal (wlLh lease) 060 044 039 033
uebL Lo AsseLs (wlLh lease) 061 032 026 022

Act|v|ty kat|o
8ecelvable Lurnover 639 666 688 673
uays of sales ouLsLandlng 3709 3476 3302 3404
lnvenLory Lurnover 493 337 383 339
uays of lnvenLory 7403 6330 6263 6327
ayables Lurnover 1112 1197 1034 818
number of days payables 3284 3048 3330 4460
1oLal asseL Lurnover 169 178 186 183
Worklng caplLal Lurnover 613 671 733 786
uays of worklng caplLal 3931 3442 4846 4646