Spencer Sporting Goods Case Study

Solution Team 4

Spencer Sporting Goods

1. Sources of distress for Mr William Spencer:

- Low cash balance because of the difficulties in collecting debts from clients

- Pressure for prompt payments set by the suppliers

- Fear that some of the suppliers can cancel Spencer’s exclusive regional rights

- Losing discounts granted for prompt-payments

- Keen competition from other distributors

- Low performance of the partnerships Mr William Spencer invested in

2. Key elements that give competitive advantage:

- The image of Mr William Spencer (personality, prestige, charity, activating in community affairs). He was described as an „ideal combination of
businessman and bon vivant”, „near genius at selling who is determined to build a $50 milion business”

- Secured customers

- Exclusive regional distribution rights for proeminent manufacturers;

- Diversified lines of products (sporting goods, camping equipment, leisure-time products);

- Sales were not markedly seasonal (continuity)

3.
Market strategy and financial policy

Clients: department stores, discount houses, sporting-goods shops (slow in payments)

– Diversification – total sales were not affected by seasons – Exclusive distribution rights from some important Producers – Promotional ideas – from the award-trips with the rest of distributors

The financial policy of the company:

Trade credit, working capital and short-term loan.

Working capital needs (current assets less cash - current liabilities less notes payables bank) =(1805-15) – (1407-40) = 423

Working capital (equity – non current assets) = 563-165 (75+31+59)=398 + bank 25 = 423

Working capital needs is covered with the additional contribution of bank finance. However, the growth posibility is limited in case the credit facility is not increased.

Average collection period (net accounts receivables/average daily sales) = 1196/7197 : 365 = 60 days

Days payable outstanding (AP/average cost of purchase)= 1277/6191:365= 75 days

Days inventory held (inventory/average daily cost of sales) = 594/6045:365=35 days

So if we calculate cash convercion cycle: Days inventory held + Average collection – Days payable = 35 + 60 – 75 = 15 days deficit (SSG pays suplliers faster than collect the
cash)

SSG did not estimate correctly the need for bank financing as to be able to pay the suppliers and take advantage of the discounts.

4. Why get SSG into financial trouble?

Because of the dificulties in collecting debts from customers (big competition led to this), pressure for prompt payments from suppliers, not adequate financing (not enough own capital or loans).

5. What is the SSG management style?

Traditional style (family company), complete control, business based on personal relationships, connections acquired due to the owner football prestige, charity drives, personality, sales skills, etc

6. What will be the banker answer concerning the requested loan?

Positive answer from the banker, subject to the following recommendations: renegotiation of payment terms with suppliers and, if possible with retailers (customers)

7. What measures are to be taken to improve the future activity for SSG?

Increase the turnover of inventory by performing more promotions, marketing campaigns, renegotiate payment terms with suplliers; selling products with a higher profitability margin and first of all improve the collection period.