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BUSINESS CASE1

Twin Peaks Building Supplies           

Introduction

Chris White telephoned his friend John Noel to inform him that Twin Peaks Building Supplies was for sale and added that "the price is right". John replied, "That’s great we don't have any knowledge in that type of business but at least we won't have to make a plan and work as hard as if we were starting a new business." in a month, with their personal savings, an operating line of credit and a mortgage on the property, Chris and John acquired their first business. On July 30, 2008, the sign on Twin Peaks Building Supplies read "open under new management."

After just nine months of the operation, Twin Peaks Building Supplies was notified by its bank that it was concerned with its financial position. The bank requested that the company give a plan to address the current condition and also a strategic plan to raise the company's profitability.

Background Information

Chris White was a forestry technician who had been searching for numerous years for a business opportunity to combine with his forestry career. While he had no business experience, he always thinks that he had what it took to be an entrepreneur. His friend, John Noel, was also very interested in supplementing his salary as a sales representative for a national shoe company. Both Chris and John considered themselves to be hard workers and comfortable with taking on computed risks.

Twin Peaks Building Supplies was a family-owned business that had existed in the same location, in a declining business area of downtown Lewisporte, for several years. In its 25 years of operation, it had built up a considerable amount of goodwill. The owners wanted to sell in order to convert their holdings to cash and give up work. An examination of the records of the business showed a small drop in net profit in each of the last two years. When problemed about this drop, the owners replied, "We can attribute this to our lack of commitment to the business throughout these years."

The new owners hired Peter Jones as the new manager and retrained the five other existing employees. Jones had been an assistant manager at Pioneer Building Supplies in Catalina. Since both partners had full-time employment, all attributes of management and day-to-day operations were delegated to Jones. Several times a month, Chris and John would run into the store and ask him how things were going. Every two months they would review monthly sales statements prepared by the part-time bookkeeper, Elsie White.

The pricing aim of Twin Peaks Building Supplies was to achieve satisfactory profits. This was to be achieved by the setting prices to cover costs plus a "reasonable" profit. However, on various occasions, profit margins had to be declined to keep prices at the same level as the competitions. The company's pricing policies allowed quantity discounts to buyers who bought large volumes and cash discounts to customers who paid their invoices within fifteen days of billing.

The first six months of operation were profitable, despite the fact that there was a large drop in housing starts, a downturn in the construction industry, and a large increase in interest rates, resulting in raised borrowing costs. With the goal of raising these profits, Chris and John decided to expand their business. The company borrowed additional funds and added a 20,000 square meter extension to the existing building. With this new extension, the company added a new line of furniture and appliances. As a result of this expansion, sales increased a little, but costs also rose due to require hire extra employees, both full time and part time.

However, the next three months were a different story. The introduction of the GST appeared to turn buyers away. The so-called "recession" began and consumers were hesitant to spend in hard times. Thinking that lower prices and major sales would entice the public to spend, Twin Peaks Building Supplies held several "blow-out" sales. These sales were unsuccessful in generating any additional revenues. The downturn in the fishing industry, public sector layoffs and the general increase in unemployment added to the already unhealthy economic situation. And as John exclaimed "the last thing we needed was more competition with the opening of a new Mr. Build-All Center."

The steady decline in sales during the winter months began to worry Chris and John. Cash outlays were greater than expected and a cash shortage in the near future was looming. The company's operating line of credit that was firstly established at $150,000 to aid in the purchasing of inventory was rapidly dwindling.

The Problem

On April 29, 2009, Chris received a telephone call from the company's bank manager, Marie Smith, "Twin Peaks' account is overdrawn and your manager Peter Jones has informed me that he has written checks totaling $8,000 to be placed in the mail today." Smith added, "It’s paramount that I meet with you and John Noel as soon as possible to discuss your solutions to this problem."

Realizing that the bank would need to know how much revenue the business was generating and what expenses were being incurred, Chris and John immediately requested their accountant to prepare an income statement for the nine months ended

April 30, 2009 (Exhibit 1).

After receiving the income statement from their accountant, Chris and John quickly realized that something had to be done. "We must take a day off and assess where we are going," said Chris. "We've got to devise several alternative solutions before we meet with the bank next Monday."

The Alternatives

On Monday, May 13,2009, Chris and John, accompanied by their accountant, met with their bank manager, Marie Smith. At this meeting she informed them that the bank was unhappy with the financial position of Twin Peaks Building Supplies. She asked, "how do you intend to bring the Company's account back to the agreed credit limit?" She further inquired, "how do you plan to increase the profitability of this company?" Chris replied, "we have considered three alternatives which we would like to discuss with

Alternative One:

"We would like to increase our line of credit by $50,000.00 for which we are prepared to offer personal guarantees," said Chris. Several reasons for this request were advanced by Chris and John. They were both confident that with the new construction season approaching, they would be able to turn things around. Chris added, "we intend to place more emphasis on marketing and have already determined ways in which we can become more cost efficient. In addition, we are currently assessing the viability of the furniture and appliance sector of our business, and we are prepared to close it out in order to improve the profitability of our Company."

Alternative Two:

After a lengthy discussion of the first alternative, John describeed, "the second alternative we are considering is to find a new investor willing to inject new capital into this business." He continued, "Twin Peaks Building Supplies needs more 'hands-on' management, and we have identified a possible investor who has management experience in this type of business." John asked Marie Smith, "are you prepared to allow us three weeks to negotiate with this prospective investor?"

Alternative Three:

A final alternative, and one we find the least attractive," said Chris, "is to close out our operation in order that your bank can recover its investment and we can limit our losses."

Marie Smith sat comfortably in her chair as she listened to Chris and John outline possible solutions to the problems facing Twin Peaks Building Supplies. Her response was simple and straightforward. "I am pleased that you have done your homework in putting together these alternatives. In any new business the first months are difficult. I am confident that you will be able to turn this business around. Come in to my office on Friday and I will outline the bank's position to you."

2349_income statement.jpg

Required:

Discuss the situation Twin Peaks Building Supplies finds itself in.  In your discussion, identify the major problems it faces, the factors that have contributed to the problems, and which alternative Chris White and John Noel should choose to dig themselves out from under the problems.

Make sure to thoroughly address all the potential problems and their present and future implications on the business. The case response should reflect your process of creative and critical thinking towards reaching the solution.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91609

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