short term financing
Introduction
Action Standard Manufacturing Company is a producer of top quality lawnmowers, garden tractors, tillers, and implements. It was established in 1920 and is nationally known, having growth steadily. In 2005, it made a decision to embark on a rapid expansion program to take the advantage of the growing market for all purpose tractor/lawnmowers/snow blower machines. So the product line expansion led to increase in assets of approximately 50% in both 2006 and 2007.
Dianne Covington, financial vice-president of the company saw some significant trends developing in the company while reviewing the financial projections for 2007 with the actual balance sheets for 2005 and 2006. She was pleased with the projections of the rate of return on net worth but was disturbed by the declining profit margin on sales, the falling rate of return on assets, and the deteriorating liquidity position and markedly higher projected debt ratio. By the end of 2006, the liquidity position was below the prescribed level and the projected level for 2007 was unacceptable. The debt ratio is also not good but since the ratio was let to climb to the level shown in 2007 at the last director's meeting, it was anticipated. However, the directors tentatively agree, to consider a cut in the dividend until the debt ratio can be reduced to approximately the level of the industry average but final action has not been taken.
Covington did not expect the declining profit margin on sales and the falling rate of return on assets. Rather, she had expectations that these both items would increase because of the increased level of efficiency due to modernization and expansion program. Later she realized the cause of decline of these items were that the company did not take the cash discounts in 2006 on all purchases on terms 3/10, net 30. Due to this, the cost increased, leading to decrease in profit margin and return rate.
Covington believes that some important changes must be done and this is
Action Standard Manufacturing Company is a producer of top quality lawnmowers, garden tractors, tillers, and implements. It was established in 1920 and is nationally known, having growth steadily. In 2005, it made a decision to embark on a rapid expansion program to take the advantage of the growing market for all purpose tractor/lawnmowers/snow blower machines. So the product line expansion led to increase in assets of approximately 50% in both 2006 and 2007.
Dianne Covington, financial vice-president of the company saw some significant trends developing in the company while reviewing the financial projections for 2007 with the actual balance sheets for 2005 and 2006. She was pleased with the projections of the rate of return on net worth but was disturbed by the declining profit margin on sales, the falling rate of return on assets, and the deteriorating liquidity position and markedly higher projected debt ratio. By the end of 2006, the liquidity position was below the prescribed level and the projected level for 2007 was unacceptable. The debt ratio is also not good but since the ratio was let to climb to the level shown in 2007 at the last director's meeting, it was anticipated. However, the directors tentatively agree, to consider a cut in the dividend until the debt ratio can be reduced to approximately the level of the industry average but final action has not been taken.
Covington did not expect the declining profit margin on sales and the falling rate of return on assets. Rather, she had expectations that these both items would increase because of the increased level of efficiency due to modernization and expansion program. Later she realized the cause of decline of these items were that the company did not take the cash discounts in 2006 on all purchases on terms 3/10, net 30. Due to this, the cost increased, leading to decrease in profit margin and return rate.
Covington believes that some important changes must be done and this is