Ski Equipment Inc. Case
I. INTRODUCTION
I. PROBLEM STATEMENT
Dan Barnes, financial manager of Ski Equipment Inc. (SKI) is anxious that the Company’s founder recently sold his 51% controlling block of stock to Kent Koren, who is a big fan of EVA (Economic Value Added). Koren rewards managers handsomely if they create value, but those whose operations produce negative EVAs are soon looking for work. Koren frequently points out that if a company can generate its current level of sales with fewer assets, it would need less capital. Shortly after he took control of SKI, Koren met with SKI’s senior executives. He noted that SKI’s designs of skis, boots, and clothing are acclaimed throughout the industry but that something is seriously amiss elsewhere in the company. Costs are too high, prices are too low, or the company employs too much capital; and he wants SKI’s managers to correct the problem. Barnes has long felt that SKI’s working capital situation should be studied—the company may have the optimal amounts of cash, securities, receivables, and inventories; but it may also have too much or too little of these items. Barnes also knows that decisions about working capital cannot be made in a vacuum. However, lower raw materials inventories might lead to production slowdowns and higher costs, while lower finished goods inventories might lead to the loss of profitable sales. So before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables.
II. AREAS OF CONSIDERATION
The areas to consider are to think about the pros and cons, distinguish between a relaxed but rational working capital policy, to match the maturity of its assets and liabilities, SKI’s payables deferral period, reduce its cash and securities without harming operations, bad debts, cash budget, company’s cash position in the short run and in the long run and risks in credit policy. The ongoing changes that may occur in the
I. PROBLEM STATEMENT
Dan Barnes, financial manager of Ski Equipment Inc. (SKI) is anxious that the Company’s founder recently sold his 51% controlling block of stock to Kent Koren, who is a big fan of EVA (Economic Value Added). Koren rewards managers handsomely if they create value, but those whose operations produce negative EVAs are soon looking for work. Koren frequently points out that if a company can generate its current level of sales with fewer assets, it would need less capital. Shortly after he took control of SKI, Koren met with SKI’s senior executives. He noted that SKI’s designs of skis, boots, and clothing are acclaimed throughout the industry but that something is seriously amiss elsewhere in the company. Costs are too high, prices are too low, or the company employs too much capital; and he wants SKI’s managers to correct the problem. Barnes has long felt that SKI’s working capital situation should be studied—the company may have the optimal amounts of cash, securities, receivables, and inventories; but it may also have too much or too little of these items. Barnes also knows that decisions about working capital cannot be made in a vacuum. However, lower raw materials inventories might lead to production slowdowns and higher costs, while lower finished goods inventories might lead to the loss of profitable sales. So before inventories are changed, it will be necessary to study operating as well as financial effects. The situation is the same with regard to cash and receivables.
II. AREAS OF CONSIDERATION
The areas to consider are to think about the pros and cons, distinguish between a relaxed but rational working capital policy, to match the maturity of its assets and liabilities, SKI’s payables deferral period, reduce its cash and securities without harming operations, bad debts, cash budget, company’s cash position in the short run and in the long run and risks in credit policy. The ongoing changes that may occur in the