Agape Media 

Co-founder and president of Agape Media, Dan Brown, doesn''t want to forget the early struggles he and partner Steve Jones, vice president of Production, endured to get their fledgling television and video-production business off the ground back in 20x2. The company provides production and postproduction services, video brochures, teleconferencing, marketing and syndication, and consulting and equipment rentals. 

In its first year, the company grossed $90,000 and Brown drew a $900 a month salary. They worked out of Jones cramped garage. These days, with 20 employees, the company fills 2,400 square feet of space at Plantation Office Mall. Across the street are its production facilities, with about $1,500,000 worth of high-tech equipment. 

Its been total chaos," Dan says. "Our big break came in 20x3, when a company come to us and asked us to produce two documentaries for no more than $100,000 a piece. We couldn''t believe it." 

"Tears were coming out of our eyes when we heard the price," added Steve. "Our average job then was $8,000. That really kicked us off and led to more work." 

In 20x3, Agape Media sales totaled $725,000. By mid-20x4, with more than $600,000 for the first six months, they incorporated. By fiscal 20x6, the company had hauled in $1.5 million. In fiscal 20x7, the company expects sales to hit $2.3 million. 

Along the way, the filmmakers have produced pieces for The Family channel, CBN, HBO, Habitat for Humanity, TeleCable Corp, Black Entertainment Television, and Plasser American Corp. But Dan Brown isn''t taking success for granted. "Competitive advantage is fleeting at best," he says. "We service the little guys just the same, because one day the $500 customer is going to become a $50,000 client." 

Agape Media lives up to its name. Earlier this year the company traveled to Eastern Europe to film and produce a documentary. It also produced five days of live broadcasts of the Christian Broadcasting Network''s 700 Club from South Africa and set up a five-day satellite link from Moscow for radio broadcasts in the United States. 

"There''s an increasing amount of competition in this market," Dan Brown says. "We constantly need to diversify and to find new market niches to maintain our market share and increase our customer base." 

Brown and Jones and partner Megan Nelson, Vice President of Administration and Finance, who joined the company in 20x3, are guided by principles developed in their Christian faith. "We just happen to be a media corporation that is run by Christians." Steve Jones says. "We try to reflect good, basic, moral and ethical qualities taught in the Bible. But we don''t want people to use our business because of that. We want them to use us because we are the best at what we do." 

Megan Nelson says, "Christians need to do a better job as communicating, and Agape Media sees a need for its services in Third World countries. We have an interest in the church overseas and are busy setting up a non-profit organization. It will be developing media in the Third World." 

Due to their concern about consumer and commercial debt, the credit policies of Agape Media have always been extremely stringent. Currently, the company will only grant credit to customers who have annual sales or contributions of $500,000 and who have had no losses for the past four years. Also, if an individual customer''s debt becomes more than 45 days past due, given terms of n/30, the credit line is temporarily suspended. 

At a recent sales planning meeting, the following discussion regarding the company credit policy took place between Dan, Steve and Megan. 

Megan: If we want to see any significant growth and reach our projected goals we are going to have to have to liberalize our credit policies. With the ever increasing level of competition, if we hope to reach our long-term sales goals, we are going to have to be more generous with our sales terms. 

Steve: You both know how I feel about credit and being in debt. The borrower is servant to the lender. Individuals and businesses lose sight of their fiscal responsibility and become overburdened financially. 

Megan: That's kind of old fashioned. 

Steve: God will provide all of our needs. The use of credit does not give God an opportunity to work. I just don't think that liberal credit terms are in accordance with God's word. 

Megan: Would you get off your spiritual high horse. 

Dan: I agree with you Steve. However, when I go out to solicit new sales with customers, the people like our product but just can't live with our payment requirements. Times are tough with the economy now and cash flow now is real critical for many companies. 

Steve: That's just my point Dan. This is the worst possible time to liberalize our credit policies. If this recession hangs on much longer, many of the customers who have been granted this liberal credit policy may default on their payments and them we will be left with a bunch of bad debts. 

Megan: But if we can't be competitive with our credit policy, we will never get the business to start with. In this recession, many of our contracts and customers could get cancelled. We have a lot of fixed cost associated with our technical equipment which caries a high degree of operating leverage, any slight change or drop in sales output could have a drastic effect on our earnings potential. 

Dan: As a Christian company we have an obligation to our stockholders and our employees. It is true that we need to prescribe the best possible policies to maximize our return to stockholders equity. At the same time we can't overlook what Steve is saying about our ethical and moral commitment to business practices. 

Steve: Megan, if you feel that a more liberal credit policy is important, how and why do you propose that we do it? 

Megan: Well, there are several things that can be done to improve our credit policy, which should really increase our level of sales. Let me show you, I have a list of possibilities in this handout which I will give to you now. These options are not listed in any order of importance, I might add. 

First of all, we could extend credit to all of our customers. Two, we could extend credit to all repeat customers. Three, we could extend credit only after a credit review through a respectable credit agency. You know, they would run a check and then we would go ahead with a deal. Four, we could offer cash discounts for a prompt payment. Five, we could keep the current credit restrictions but extend the payment terms to net 60 days. Six, eliminate some of the current restrictions such as the level of sales or loss restriction. And seven, develop a classification system for customers based on credit risk and allow different credit terms based on the level of customer risk. 

Any one or a combination of these new policies will certainly increase our level of sales and make our company even more attractive in this extremely competitive market. 

Steve: Yes, I'm sure our sales will increase, but will this increase be reflected in an increase in net income? To me the risk of a substantial increase in bad debts could wipe out any additional profits. Besides what kind of witness are we providing as a Christian company by encouraging debt. 

Megan: Dan, I've run some numbers on the implementation of a more liberal credit policy. Even after a consideration of an increase in bad debts, our net income should increase, anywhere from three to eighteen percent annually. When we are having to submit contract bids with relatively low profit margins, this level of increase in income can be substantial. 

Dan: Strictly speaking, number wise, these policies look good with regard to sales and net income. But have we considered all the facts. Steve, if we get a large balance in accounts receivable with an increased probability that a portion of these accounts may take a great deal of time to collect, if ever, aren't there other costs to consider. 

Steve: When I took finance at Regent University, I learned that cash is cash and all that other stuff is something else. There must be some costs, I think they call it a required rate of return on the balance of accounts receivable that must be considered on any evaluation. After all if our money is tied up in accounts receivable, as opposed to cash, we can't even earn simple interest through a savings account or use that money to invest in other assets until those receivables are paid. 

Dan: Right, good point Steve. Megan, did you consider a rate of return on the balance of receivables? That factor could have a dramatic impact on the overall effect of net income. 

Megan: Well, I don't really believe the return value is as critical a factor as Steve implies. There is just too much variability in the numbers. 

Steve: Numbers aside, we just can't make a decision on quantitative information. 

Megan: But you've got to at least consider quantitative information. 

Dan: I agree again Steve, but we do need to consider all factors both quantitative and qualitative. As a Christian company we should have total agreement now on what ever credit policy we've got. 

Credit Options 

Megan proposed several possible credit policies. 

1. Extend Credit to All Customers 
2. Extend Credit to All Repeat Customers 
3. Extend Credit after a Credit Review 
4. Cash Discounts for Early Payment 
5. Extend Payment Terms to n 60 Days 
6. Eliminate Current Restrictions on Sales Level and Loss 
7. Allow Different Credit Terms for Different Customer Risk 


Required: 

1. Do you believe Agape Media "liberalized credit policy" will lead to an increase in sales or more importantly, will this lead to an increase in net income? 

2. Is Steve justified in his concern about the biblical consequences of debt? Explain. 

3. Does Agape Media have the responsibility of determining what the debt ratio will be for customers? What impact does the recession have on the decision? Explain. 

4. What do you think about Dan''s conclusion that Agape Media needs to consider quantitative and qualitative factors and there should be unity with regards to whatever credit policy the company adopts? 

5. What course of action should Agape Media take regarding the credit proposals?