C.R. Plastics Case Analysis: Identifying Solutions For Financing Business Operations

Step 1: Identification of the Problem

C.R. Plastics is owned by Jamie Bailey. The venture is founded by Mr.Bailey who is president too. The company deals in manufacturing of recycled plastic outdoor furniture in Canada and has been providing quality product since its inception. The company has limited resources and there are lean and peak season in business and the requirement for additional finance crops every year to meet the production and demand of the product throughout the yeas especially during peak season of the business whereby the venture works on three shifts. Mr. Bailey is thinking of raising funds for meeting demands through a network television show Dragon’s Den but he is in a dilemma regarding the amount of funds to be raised for the purpose of financing as he cannot reduce the amount once sought in the show and less amount sought shall not come to his full aid.

Step 1: Identification of the Problem

The major problem identified in the report is the amount of finance to be sought by Mr. Bailey at the TV show to meet the production and demand of the business as the same involves offering of equity of the venture. Thus, the dilemma of identifying the correct amount of finance is the core issue of the report as the excess amount shall involve additional equity offered with no additional demand and lower amount demanded shall result in insufficient funds at the disposal of the company. Further, the Bailey does not wish to increase loan of the company.

Step 2: Formulation of Alternative Solution to the problem

 The alternative solution to the problem includes the following:

• To continue with the existing methodology of taking loan instead of offering equity to third party;
• Raising funds through debentures and Commercial Papers during peak season;
• Reducing Production to the level of capital available;
• Reducing inventory turnover ratio;
• Offering discount to debtors to ensure quick payment;
• Promoting Cash Sales.

The most viable solution among the following shall be

• To continue with the existing methodology of taking loan instead of offering equity to third party;
• Raising funds through debentures and Commercial Papers during peak season;
• Reducing inventory turnover ratio;
• Offering discount to debtors to ensure quick payment;
• Promoting Cash Sales.

Step 3: Evaluate and compare the alternative solution

To continue with the existing methodology of taking loan instead of offering equity to third party : Under the said system, company can continue with the existing methodology as sales are going to bolster and the financials of company are strong as it is making profit on sales. Thus, continuing with the existing methodology shall bolster future growth of the company. The weakness of the above method is that there is credit crisis

Raising funds through debentures, Commercial Papers or short term loan during peak season: Raising of funds during the peak season of the company shall help the company to meet its future credit requirement and shall support the business activity. Further, the loan can be secured against the working capital of the company to ease the availability of funds for the company. The major weakness is that there is credit crisis.

Reducing inventory turnover ratio: The third solution that can be think of is ejecting the issue through its roots by reducing inventory turnover ratio and using Just in time concept. However, the same might increase the cost of production of the company on account of double and triple shifts.

As an alternative company can try to maintain minimum inventory as per requirement to reduce capital blockage. Further Cash Conversion Cycles can also be reduced to combat the issue of financing.

Step 2: Formulation of Alternative Solution to the problem

Offering discount to debtors to ensure quick payment

As evident from Balance sheet of the company, a huge chunk of cash resource of the company is blocked in Account Receivable. Mr. James should chalk out incentive plan to enable speedy realisation of cash from the debtors of the company by offering them discount and thus manage the limitation of finance issue. The weakness is that the same may not suffice the requirement of financing by 100%.

Promoting Cash Sales

The company should promote cash sales to mitigate the issue as increase cash sale shall meet the requirement of finance of the company, thereby resulting in cash availability to meet the demand requirements. The weakness is that the same may not suffice the requirement of financing by 100%.

Step 4: Recommend and justify an effective Solution

The most effective solution to the proposed problem is the mixture of two or more alternative solution as both operating efficiency and external finance shall be mixed to combat the current problem. Thus, the company shall continue to use existing credit facility along with procuring additional loan from the market at peak seasons and shall offer discount to its debtors to ensure quick and speedy payment to reduce the overall finance requirement.

Thus, an effective combination of two or more alternative solution shall help the company to overcome the current problem stated in the report. The solution is effective as the availability of funds shall reduce the requirement of external finance and any shortfall can be easily manageable through line of credit or external borrowings. Thus, self-dependency shall also bolster the growth of the company.

As stated in the balance sheet too, that major of funds are blocked in the accounts receivable. Hence, managing the same shall help the company to meet its funds requirement.

Performance Assessment of C.R. Plastics for past years

The computation of Gross Profit Margin and Net Profit Margin has been presented here-in-below:

Sl No	Particulars	2006	2007	2008	2009
1	Sales	2390890	2767003	3352841	4288432
2	Gross Margin	869325	626475	787038	1622455
3	Gross Profit Margin (%)	36.36%	22.64%	23.47%	37.83%
4	Net Profit	259725	-143681	-200149	208992
5	Net Profit Margin (%)	10.86%	-5.19%	-5.97%	4.87%

On perusal of the above, it can be inferred that company is trying to recover from its lost making situation in past two years. Further, the gross margin has also shown a sharp increase in 2009. Thus, the company is trying to increase its operating efficiency and shall further try to curb its operating expenses by managing its production activity. On an overall basis, the company is running on a rough trajectory but its slowly coming back on line under cut throat competition.

The fund required by the company has been computed on the basis of difference in asset in present balance sheet and the proposed balance sheet with the highest total of assets. The same has been presented here-in-below:

Sl No	Particular	Present Balances heet	Future Balance sheet (June)	Difference
1	cash	89111	100000	10889
2	Prepaid Expense	39408	42000	2592
3	Account Receivable	381210	2300000	1918790
4	Inventory	35971	1084546	1048575
5	Furniture and Fixture	719338	22077	-697261
6	Computer Equipment	22077	21787	-290
7	Shop Equipment	888120	1560873	672753
8	Leasehold Improvements	96880	104033	7153
9	Total	2272115	5235316	2963201

Further, the intrinsic value of the company has been computed based on the balance sheet of 2010 estimated and the amount Mr. Bailey demand compared to 30% of intrinsic value of the company stands at 15.83. The same may be rejected. Further, no data regarding market comparable and the market value of the company is provided. Hence, a deep analysis could not be done.  

Sl No	Particular	Amount
1	Share Capital	250
2	Retained Earnings	623531
3	Total Equity	623781
4	30% of Equity	187134.3
5	Amount Demanded	2963201
6	Multiple	15.83462251

However, when the same is analysed based on September 11 Financials, the proposition shall seem feasible at 7.88 multiple.

Based on  September 11 Projected Balance sheet
Sl No	Particular	Amount
1	Share Capital	250
2	Retained Earnings	1251725
3	Total Equity	1251975
4	30% of Equity	375592.5
5	Amount Demanded	2963201
6	Multiple	7.889404075