"Case Study
Adobe Trading Company, Santa Fe, New Mexico
Summer is approaching and Robert and Julia Martinez-Fonts havefinally decided that their idea of a successful southwestfurniture, art, and jewelry trading company has come of age. Theyknow that summer is a popular tourist time in New Mexico and couldbe the best time to start this new business. The Martinez-Fontshave had a longtime interest in southwestern art and furniture.Robert graduated from Florida International University with afinance degree 15 years ago and received his MBA three years laterfrom Texas A & M University. He has been working in Dallas,Texas, as the controller of a major wholesale distributor companyfor many years. His wife, Julia, who is a full partner in thebusiness, spent the first 10 years of her career in retail sales.Over the last several years she has assumed more administrativeduties with the group she works with.
Robert and Julia know that together they bring the necessaryexpertise and skill to run a successful business, but to ensuresuccess they have been researching the market for over five years.They also know that they must be very careful and thoroughlyresearch the business and industry they are pursuing. They havetraveled extensively to New Mexico and spent a good deal of timegetting to know the local artists (primarily ski âbumsâ). Theybelieve that there is a great demand for southwestern furniturethrough the Southwest and prices are currently high.
They have informal commitments from local craftsmen to supply themwith goods that they will display and sell. They have also madetentative arrangements with a large and reliable firm to supply thefurniture and art pieces they will need to run the business.
The Martinez-Fonts have decided to open a shop in Santa Fe, NewMexico, under the name Adobe Trading Company, operating as both asupplier to furniture and art outlets and seller in the retailshop. Robertâs extensive contacts with suppliers in Dallas andHouston have given him the orders needed to get the business offthe ground as soon as they begin shipping the goods. Julia hasalready begun marketing the southwestern products. The arrangementswith the local craftsmen will allow very aggressive pricing of thegoods to retail establishments in the Southwest. This aggressivepricing has been well received and tentative orders are already inplace.
Robert has found an ideal location for the shop that is currentlyavailable. The owner is asking $275,000 for the space but AdobeTrading has a contract contingent on financing for $250,000. Basedon remodeling bids, Robert and Julia estimate that they will beable to fix up the place for about $45,000. Although they willpurchase the building, the land is leased on a transferable leasewith 65 years remaining. The Martinez-Fonts have decided to invest$235,000, which represents most of their savings, into the ventureto ensure success. Juliaâs sister is also lending Adobe TradingCompany $90,000. Repayment on the note is not expected to begin forfive years. The Martinez-Fonts estimate that they will need$130,000 in inventory to start the business
and will pay for the inventory in cash to build goodwill with thelocal craftsmen. They also estimate that they will need a minimumcash balance of $20,000 to conduct day-to-day operations and paybills. Finally they believe that all renovations to the buildingand inventory can be in place by June 30, 2011.
Robertâs approached Nancy Teachout the senior loan officer at Firstof Dallas Bank in Santa Fe, New Mexico, for financing. Hisbackground in finance allowed him to put together Adobeâspreliminary business plan using the
below assumptions:
1. Sales are expected to be a bit lower through 2011 becauseAdobeâs newness and it takes time for any firm to establish amarket presence. Sales are expected to grow significantly 1n 2012and 2013 with lower growth in 2014. Sales are expected to be$275,000 in the final six months of 2011, and $675,000, $800,000,and $900,000 during the three full years of operation (2012, 2013and 2014). Sales are expected to level off at $900,000 after2014.
2. Based on tentative agreements and orders, it is expected thatcost of goods sold will average 63% of sales.
3. General and administrative expenses are expected to be $70,000for the six months in 2011, increase to $100,000 in 2012 and leveloff at $120,000 from 2013 on. The land lease expenses and interestexpenses are included in operational expenses.
4. Selling expenses are expected to be 12% of sales and Julia isexpecting to undertake extensive marketing and promotion effortsthough the Southwest immediately after the business is opened.These additional promotional expenses will be $30,000 in 2011only.
5. Adobe will use a 10-year straight-line depreciation of thebuilding and improvements.
6. Adobeâs effective tax rate is expected to be 34%.
7. A relative large portion of business is expected to be on creditso that Adobe will carry about 48 days of accounts receivable.Based on the type of business that they are entering, Robert andJulia expect to turn their inventory three times a year.
8. Based on the negotiations they have had with their craftsmen,suppliers, and other wholesale distributors, they estimate thatthey can count on about 28 days of accounts payable to help financethe business.
In preparing to go to the bank for the necessary loan, theMartinez-Fonts want to prepare projected financial statements forAdobe Trading Company showing the company can make a profit and payback the loan. They also want to know more precisely how much theywill need to borrow from the bank to open the doors for businessand help finance the initial years of the
business. The Martinez-Fonts plan to prepare five years of balancesheet, income statement, and cash budget data for the bank. Theyalso must develop an opening balance sheet as of the date they planto open the doors, June 30, 2011. These pro forma financialstatements will aid them and the bank officer in answering manyquestions including:
1. How much financing will be needed to open the doors of thebusiness in July of 2011?
2. Five years of pro forma balance sheet and income statement datamust be prepared to determine if additional financing is needed. Ifso, how much? Robertâs finance background tells him that theestimated financing needed each year will be an accounting plugfigure to ensure that the balance sheet balances. If projectedassets exceed liabilities and equity, the difference will be thebank borrowing needs. If liabilities and equity exceeds projectedassets purchases, these funds will be used to pay off debt orincrease cash or marketable securities.
3. Because this is a start-up business, it is important to identifywhat the loan proceeds will be used for, what the primary source ofrepayment is, and when to estimate total loan proceeds will berepaid. Using the pro forma projections, the primary source ofrepayment and when the loan will be repaid.
4. A cash budget or cash based income statement for each year needsto be prepared because Robert knows that the only thing thatmatters to the bank is cash.
5. Robert needs to prepare a collateral schedule. He knows that thebanker does not want the collateral but will need all he can get ifthe business is not as successful as expected.
On behalf of Robert Martinez-Fonts students are required toprepare:
⢠A pro forma balance sheet and income statements (five years) todetermine the initial and additional financing if any.
⢠A cash budget or cash based income statement for every year
⢠A pro forma collateral schedule
In the role of Nancy Teachout students are required to analyzeAdobe Trading Companyâs pro forma statements and answer thefollowing questions:
What is your recommendation concerning the loan request?Would you make or deny the loan? State your reasons.
"Case Study
Adobe Trading Company, Santa Fe, New Mexico
Summer is approaching and Robert and Julia Martinez-Fonts havefinally decided that their idea of a successful southwestfurniture, art, and jewelry trading company has come of age. Theyknow that summer is a popular tourist time in New Mexico and couldbe the best time to start this new business. The Martinez-Fontshave had a longtime interest in southwestern art and furniture.Robert graduated from Florida International University with afinance degree 15 years ago and received his MBA three years laterfrom Texas A & M University. He has been working in Dallas,Texas, as the controller of a major wholesale distributor companyfor many years. His wife, Julia, who is a full partner in thebusiness, spent the first 10 years of her career in retail sales.Over the last several years she has assumed more administrativeduties with the group she works with.
Robert and Julia know that together they bring the necessaryexpertise and skill to run a successful business, but to ensuresuccess they have been researching the market for over five years.They also know that they must be very careful and thoroughlyresearch the business and industry they are pursuing. They havetraveled extensively to New Mexico and spent a good deal of timegetting to know the local artists (primarily ski âbumsâ). Theybelieve that there is a great demand for southwestern furniturethrough the Southwest and prices are currently high.
They have informal commitments from local craftsmen to supply themwith goods that they will display and sell. They have also madetentative arrangements with a large and reliable firm to supply thefurniture and art pieces they will need to run the business.
The Martinez-Fonts have decided to open a shop in Santa Fe, NewMexico, under the name Adobe Trading Company, operating as both asupplier to furniture and art outlets and seller in the retailshop. Robertâs extensive contacts with suppliers in Dallas andHouston have given him the orders needed to get the business offthe ground as soon as they begin shipping the goods. Julia hasalready begun marketing the southwestern products. The arrangementswith the local craftsmen will allow very aggressive pricing of thegoods to retail establishments in the Southwest. This aggressivepricing has been well received and tentative orders are already inplace.
Robert has found an ideal location for the shop that is currentlyavailable. The owner is asking $275,000 for the space but AdobeTrading has a contract contingent on financing for $250,000. Basedon remodeling bids, Robert and Julia estimate that they will beable to fix up the place for about $45,000. Although they willpurchase the building, the land is leased on a transferable leasewith 65 years remaining. The Martinez-Fonts have decided to invest$235,000, which represents most of their savings, into the ventureto ensure success. Juliaâs sister is also lending Adobe TradingCompany $90,000. Repayment on the note is not expected to begin forfive years. The Martinez-Fonts estimate that they will need$130,000 in inventory to start the business
and will pay for the inventory in cash to build goodwill with thelocal craftsmen. They also estimate that they will need a minimumcash balance of $20,000 to conduct day-to-day operations and paybills. Finally they believe that all renovations to the buildingand inventory can be in place by June 30, 2011.
Robertâs approached Nancy Teachout the senior loan officer at Firstof Dallas Bank in Santa Fe, New Mexico, for financing. Hisbackground in finance allowed him to put together Adobeâspreliminary business plan using the
below assumptions:
1. Sales are expected to be a bit lower through 2011 becauseAdobeâs newness and it takes time for any firm to establish amarket presence. Sales are expected to grow significantly 1n 2012and 2013 with lower growth in 2014. Sales are expected to be$275,000 in the final six months of 2011, and $675,000, $800,000,and $900,000 during the three full years of operation (2012, 2013and 2014). Sales are expected to level off at $900,000 after2014.
2. Based on tentative agreements and orders, it is expected thatcost of goods sold will average 63% of sales.
3. General and administrative expenses are expected to be $70,000for the six months in 2011, increase to $100,000 in 2012 and leveloff at $120,000 from 2013 on. The land lease expenses and interestexpenses are included in operational expenses.
4. Selling expenses are expected to be 12% of sales and Julia isexpecting to undertake extensive marketing and promotion effortsthough the Southwest immediately after the business is opened.These additional promotional expenses will be $30,000 in 2011only.
5. Adobe will use a 10-year straight-line depreciation of thebuilding and improvements.
6. Adobeâs effective tax rate is expected to be 34%.
7. A relative large portion of business is expected to be on creditso that Adobe will carry about 48 days of accounts receivable.Based on the type of business that they are entering, Robert andJulia expect to turn their inventory three times a year.
8. Based on the negotiations they have had with their craftsmen,suppliers, and other wholesale distributors, they estimate thatthey can count on about 28 days of accounts payable to help financethe business.
In preparing to go to the bank for the necessary loan, theMartinez-Fonts want to prepare projected financial statements forAdobe Trading Company showing the company can make a profit and payback the loan. They also want to know more precisely how much theywill need to borrow from the bank to open the doors for businessand help finance the initial years of the
business. The Martinez-Fonts plan to prepare five years of balancesheet, income statement, and cash budget data for the bank. Theyalso must develop an opening balance sheet as of the date they planto open the doors, June 30, 2011. These pro forma financialstatements will aid them and the bank officer in answering manyquestions including:
1. How much financing will be needed to open the doors of thebusiness in July of 2011?
2. Five years of pro forma balance sheet and income statement datamust be prepared to determine if additional financing is needed. Ifso, how much? Robertâs finance background tells him that theestimated financing needed each year will be an accounting plugfigure to ensure that the balance sheet balances. If projectedassets exceed liabilities and equity, the difference will be thebank borrowing needs. If liabilities and equity exceeds projectedassets purchases, these funds will be used to pay off debt orincrease cash or marketable securities.
3. Because this is a start-up business, it is important to identifywhat the loan proceeds will be used for, what the primary source ofrepayment is, and when to estimate total loan proceeds will berepaid. Using the pro forma projections, the primary source ofrepayment and when the loan will be repaid.
4. A cash budget or cash based income statement for each year needsto be prepared because Robert knows that the only thing thatmatters to the bank is cash.
5. Robert needs to prepare a collateral schedule. He knows that thebanker does not want the collateral but will need all he can get ifthe business is not as successful as expected.
On behalf of Robert Martinez-Fonts students are required toprepare:
⢠A pro forma balance sheet and income statements (five years) todetermine the initial and additional financing if any.
⢠A cash budget or cash based income statement for every year
⢠A pro forma collateral schedule
In the role of Nancy Teachout students are required to analyzeAdobe Trading Companyâs pro forma statements and answer thefollowing questions:
What is your recommendation concerning the loan request?Would you make or deny the loan? State your reasons.
