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Classic Fixtures and Hardware Company Case Solution

Solution Id Length Case Author Case Publisher
2833 1737 Words (6 Pages) W. Carl Kester & Craig Stephenson Harvard Business School : 915523
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Mr. Matocha is a senior lending officer at Southwest national bank concerned with Classic Hardware, manufacturer and distributor of Home and kitchen fixtures, seasonal loan facility which is well above the forecasted levels. Mr., Matocha expresses his concerns on multiple telephonic calls with Classic Hardware CFO, Mr. Watkins, who briefs the reasons around the situation and assures Mr. Matocha that things are under their control. However, in the last conversation, Mr. Watkins admits that the company will not be able to pay off the loan balance for the year, on which Mr. Matocha immediately arranges a meeting to dissect the gravity of the situation at Classic Hardware. Mr. Matocha examines Classic Hardware's financial statements to prepare for the meeting. He gathers information regarding the Home-improvement market to determine the nature of the problem and propose necessary steps to overcome the difficulty confronted by Classic Hardware.

Following questions are answered in this case study solution:

  1. Why are Classic's seasonal loan balance of $37M greater than was forecasted for the end of July?

  2. Are the problems at Classic permanent or transitory?

  3. How much should Mr. Matocha worry about the bank's exposure to the loan at Classic?

  4. What should Mr. Matocha suggest the management at Classics DO to reduce their loan balance?

  5. What are possible negative implications of these suggestions?

Case Study Questions Answers

1. Why is Classic's seasonal loan balance of $37M greater than was forecasted for the end of July?

The root cause behind Classic Hardware's larger seasonal loan balance of $ 37 million than anticipated was the approved plan for 2008. The plan was based on high sales, which were much lower than the company had expected. The sales, at the start of the year 2008, fell short by 2 million, and later on in spring and summer, when Classic Hardware had a pattern of witnessing higher sales, sales fell short by nearly $13 million. Lower sales revenue had detrimental effects on the working capital of the company. Classic Hardware had increased its production and sales effort based on higher sales expectations, which, as a result of lower revenue, led to high inventory levels. The inventory levels at the start of the year exceeded the expectation by $0.79 million. Later in the summer, the company had to hold more than $12.7 million in inventory than expected. As a result, Classic Hardware could not release the cash stuck in the inventory levels, which led to a working capital shortage and hence more need for Southwest's loan facility. However, high inventory levels weren't the only culprit behind higher loan balances; the company needed to be more effective at collecting debts from its credit customers. The account receivables balance, on average, rose by nearly 9% throughout the six-month period, which lengthened the average number of days taken by Classic Hardware to receive payments from its credit customers to 60 days, five days more than what the company had anticipated and led to working capital shortage.

As a consequence of higher inventory levels and longer collection time, the company's cash operating cycle, i.e., the days required by the business to receive inventory and sell it for cash, increased by nearly 18 days than what the company had planned, requiring Classic Hardware to borrow more from the Southwest bank. In addition to operational inefficiencies, the high seasonal loan can also be attributed to the capital expenditures of Classic Hardware. The company planned plant expansion and modernizing programs and budgeted around $174 million for this capital project. However, the actual data shows the capex exceeded $180 million. Also, the long-term debt was $ 0.9 million, implying that the borrowings from Southwest Bank were being used to finance the expansion project, causing the loan facility to exceed the forecasted amount. 

2. Are the problems at Classic permanent or transitory?

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