2022-11-16

Role/Decision
Arthur Greenway, Shareholder and Silent
Partner of More Vino Ltd.

More Vino founders Christian and David Stone

are requesting additional funding from
Greenway in the form of a $600,000 loan to
expand the patio

Also needs to check if $1.5 million line of credit

is sufficient

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2017 2016 2017 2016

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2017 2016 2017 2016

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More Vino
Ratios & Cash Flows Projected Income Statement
For the years ending February 28

Revenue Two years

Assumption 2018 2019
 Profitability, Efficiency, Liquidity, Stability, Cash Net Sales Owner’s estimates, 40% incr. $12,127,828 $ 14,553,393
2018, 20% incr. 2019

Cost of Goods Sold

 Discuss the trends, relationship to industry
(3) Beginning Inventory Last Yr’s EI $ 708,984 $ 1,644,733
 Possible causes?
(5) Purchases COGS + EI - BI $ 7,606,054 $ 8,333,313
 Focus on insights and conclusions – not facts 90 ×INV
Days × (COGS)
90 × ($8,004,366)
($6,670,305)
COGAFS 365365 $ 10,299,874
$ 8,315,038 365
 What do each tell you about the business?
(4) Ending Inventory Owner’ estimate, 90 days of $ 1,644,733 $ 1,973,679
 How do each impact a possible loan decision? COGS
(1) Total COGS Owner’ s estimate, 55% in 2018 $ 6,670,305 $ 8,004,366
& 2019
(2) Gross Profit $ 5,457,522 $ 6,549,027

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Expenses Assumption 2018 2019 Expenses Assumption 2018 2019

Administrative Exp. Same % (2.8%) $ 339,579 $ 407,495
Operating Income $ 937,581 $ 1,303,125
Amortization Same $ + $1,060,000 expansion/20yrs $ 285,104 $ 285,104
Insurance Same % (0.5%) $ 60,639 $ 72,767 Other Income Assume $0 $0 $0
Marketing & Ad Exp. Owner’s Estimate (3.5%) $ 424,474 $ 509,369 Interest Exp. Same $ + New Loan Int. (9% on $703,256 + $1,060,000
$ 798,656 x 9%
$ 798,656
Miscellaneous Same % (2.2%) $ 266,812 $ 320,175 $1,060,000)
Net income before Taxes $ 138,925 $ 504,469
Rent Owner’s Estimate, incr. 20% in 2018, $ 623,887 $ 623,887
same $ 2019 Taxes Owner’s Estimate (23%) $ 31,953 $ 116,028
Repairs & Maintenance Same % (3.4%) $ 412,346 $ 494,815
Net Income (Loss) $ 106,972 $ 388,441
Security Same % (1.6%) $ 194,045 $ 232,854
Supplies & Expenses Same % (2%) $ 242,557 $ 291,068
Telephone Same % (1.6%) $194,045 $ 232,854 Interest – based on who you assume is asking for interest.
Travel & Entertainment Same % (0.8%) $ 92,252 $ 116,427 As long as you explain assumption you’re good!!
Utilities Same % (0.6%) $ 74,214 $ 87,320
Vehicle Exp. Same % (0.7%) $ 86,834 $ 101,874
Wages Owner’s Estimate, incr. by ($921,768
$ 1,221,768 $ 1,469,893
+ $300,000)
$300,000, total = 10% of S
Total Operating Exp. $ 4,519,941 $ 5,245,902
($1,221,768/$12,127,828) = 10.1 %
Operating Income $ 937,581 $ 1,303,125

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More Vino Ltd.

Projected Statement of Retained Earnings
For the years ending February 28 More Vino Class 1- Growth
Assumption 2018 2019
Beginning Retained Earnings Last Yr’s SORE ($ 3,002,156) ($ 2,895,184)
 Sales were increasing rapidly which is good as it
Add: Net Income PSOE $ 106,972 $ 388,441
should improve net income
Less: Dividends Same $ Amount $0 $0  Net income was also improving but it was still a loss
Ending Retained Earnings ($ 2,895,184) ($ 2,506,743)  Really want to know if this will improve in the future

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Profitability Efficiency
 COGS has decreased significantly. This is excellent as it will  A/R is very low which is expected. It is a cash business.
improve net profit. Likely due to higher prices charged to Customers pay for their food/drinks before they leave. Retail
individuals as opposed to sales to hotels & restaurants. customers are likely given 30 to 60 days to pay but they
appear to be a small proportion. Good for cash. No risk
 Operating expenses as a percent of sales have also issues here.
improved a great deal. This shows good management  Inventory age dropped significantly. This is good for cash but
because it will improve profitability. It is due to the fact may be an issue for customers due to stock outs of some
that these are costs that don’t vary directly with sales are brands. Some of the drop may be due the switch from
divided by increasing sales numbers. restaurants to individuals
 Overall profit is improving due to decreasing COGS &  Age of A/P has increased a lot. This was arranged with
Operating expenses (as a % of sales ). This is a good sign permission of the suppliers. And this large increase will help
but the profitability is still negative. More Vino is still losing More Vino’s cash position but the company now owes its
money and this poses significant risk if Arthur lends money. supplier a great deal of money. This poses a great deal of
risk to Arthur if he is to lend MV even more money

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Stability Liquidity
 Net worth to assets show N/A because the company  Current ratio makes sense as most of the inventory is
has no equity due to yearly losses which have wine which is not perishable
accumulated into negative retained earnings. This
company has more debt than assets which is a  Current ratio is very low. Below 2:1 rule of thumb.
serious risk to anyone lending it money Indicates that MV cannot cover its current liabilities
with current assets.
 Interest coverage is also N/A because the net profit  This is due to lowering inventory (current asset) while
is negative so it cannot cover the interest payments. increasing A/P (current liability)
Again – extreme risk. Why would I lend money to a  Again this poses a great deal of risk if Arthur lends
company that can’t pay the interest? money

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More Vino Ltd.

Projected Balance Sheet
Statement of Cash Flows (2nd year only) As At February 28
Assets Assumption 2018 2019
 Cash was generated from operations which is typically Current Assets:
expected Cash Same $ $ 20,706 $ 20,706
0.47 ×AR
Days × (Sales)
($14,553,392)
($12,127,828)
Account Receivable Same Days (0.47) $ 15,617 $ 18,740
 In this case however, the cash did not come from profit – it 365365
came from increasing accounts payable and decreasing Inventory PSOE $ 1,644,733 $ 1,973,679
inventory simultaneously. This cannot happen year after Total Current Assets $ 1,681,055 $ 2,013,125
year. Eventually cash needs to come from profit Fixed Assets:
 Significant amount of cash is used buying fixed assets – Automobiles Same $ $ 117,126 $ 117,126
expected in a new business but maybe MV is too aggressive Furniture & Fixtures Same $ $ 609,928 $ 609,928
here as the owners have had to also lend the company more Equipment Same $ $ 429,938 $ 429,938
shareholder loans to help cover this Leasehold Improvements Same $ $ 662,388 $ 662,388
 Overall this business looks like it will soon be starved of cash New Expansion $1,060,000 expansion cost $ 1,060,000 $ 1,060,000
which could lead to bankruptcy and is definitely a huge risk Subtotal
to lend money Prev. acc’d amortization
Less: Acc’d Amortization $606,096
$320,992 + $285,104 $ 606,096 $ 891,200
+ amortization exp.
Net Fixed Assets $ 2,273,284 $ 1,988,180
Total Assets $ 3,954,339 $ 4,001,305

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More Vino Ltd. More Vino Ltd.

Projected Balance Sheet Projected Balance Sheet
As At February 28 As At February 28
Liabilities Assumption 2018 2019
Shareholders’ Equity Assumption 2018 2019
Current Liabilities:
Common Stock Same $ Amount $ 720,000 $ 720,000
Working Capital Loan PLUG . .
Days of ×
88.4 × (Purchases)
AP($7,606,054)
($8,333,313)
Accounts Payable Same Days (88.4)
365
365
$ 1,842,124 $ 2,018,260 Retained Earnings PSORE ($ 2,895,184) ($ 2,506,743)
CP on LT Debt Same $ $ 78,784 $ 78,784
Total Equity ($ 2,175,184) ($ 1,786,143)
Total Current Liabilities: ? ?
Long-Term Liabilities:
New SH’s Loan (Greenway) Given $ 600,000 $ 600,000 Total Liabilities + Equity Must Equal Total Assets $ 3,954,339
? $ 4,001,305
?
New SH’s Loan (Stone Bros) $130,000 x 2 $ 260,000 $ 260,000
New Loan (Mrs. Stone/Mom) Given $ 200,000 $ 200,000
Loan Payable Same $ $ 800,000 $ 800,000
Existing SH Loans Same $ $ 666,000 $ 666,000
Bank Loan Reduce by $78,784 $ 102,136 $ 23,252

Total Long-Term Liabilities: $ 2,628,136 $ 2,549,352

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More Vino Ltd. More Vino Ltd.

Projected Balance Sheet Projected Balance Sheet
As At February 28 As At February 28
Liabilities Assumption 2018 2019 Liabilities Assumption 2018 2019
Current Liabilities: PLUG: Current Liabilities:
Working Capital Loan Total Liabilities + Equity $ 1,580,479
. $ 1,141,652 Working Capital Loan $ 1,580,479
. .
$ 1,141,652
− All Blue Numbers
Accounts Payable $ 1,842,124 $ 2,018,260
CP on LT Debt $ 78,784 $ 78,784 Will Seasonality Affect the Plug?
Total Current Liabilities: $ 3,512,998
? $ 3,253,035
?
Long-Term Liabilities:
New Loans Greenway + Stone Bros + Mom $ 1,060,000 $ 1,060,000
Loan Payable $ 800,000 $ 800,000 2018 2019
Existing SH Loans $ 666,000 $ 666,000
Working Capital Loan $ 1,580,479 $ 1,141,652
Bank Loan $ 102,136 $ 23,252
Add: Seasonal Adj. $ 120,000 $ 120,000
Total Long-Term Liabilities: $ 2,628,136 $ 2,628,136
Total Liabilities: $ 6,141,134
? $ 5,802,387
? Total Working Capital Loan $ 1,700,479 $ 1,261,652
Total Liabilities + Equity $ 3,954,339 $ 4,001,305

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More Vino Ltd. More Vino Ltd.

Sensitivity Sensitivity

Days Inventory Amount Difference (Abs. Value) New PLUG

? Days × (COGS÷365) New INV – Old INV Old PLUG + Difference

Which Working Capital Account? 90 90×($6,670,305

= $ 1,644,733 ÷ 365) $1,644,733
=$0 - $1,644,733 = $ 1,580,479

46 =46×($6,670,305
$ 840,641 ÷ 365) $=840,641
$ 804,092
- $1,644,733 =
$ 1,580,479
$766,388 − $804,092
Inventory & A/P are both acceptable. The 120 120×($6,670,305
= $ 2,192,977 ÷ 365) $2,192,977
= $ 548,244
- $1,644,733 =$
$ 2,128,724
1,580,479 $548,244 +
Stones may not have accurately predicted the
change in Age of Inventory and More Vino’s
suppliers could decide to tighten the company’s
payable terms.

Assets = PLUG + All Other Liabilities + Equity

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More Vino Ltd.

Sensitivity
Sensitivity Accounts Payable
Days Inventory Amount Difference (Abs. Value) New PLUG
Days × (COGS÷365) New INV – Old INV Old PLUG + Difference
 Concern – what if suppliers lower terms from 90
90 = $ 1,644,733 =$0 = $ 1,580,479
days to 60 days?
46 = $ 840,641 = $ 804,092 = $766,388

120 = $ 2,192,977 = $ 548,244 =$ 2,128,724

 This will significantly increase the size of the plug

 More Vino would have a cash problem

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More Vino Ltd.

Sensitivity Collateral

Asset 2017 Value Factor Value Realizable Value

 Discuss the implications of your numbers relative to Accounts Receivable $ 11,064 65% =$11,064
$ 7,192x 65%
the loan decision Inventory $ 708,984 65% =$708,984
$ 460,840
x 65%
Net Fixed Assets $ 1,498,388 60% =$1,498,388
$ 899,033 x 60%
New Assets $ 1,060,000 70% =$1,060,000
$ 742, 000x 70%
 What risk does the situation present?
Total Realizable Collateral $ 2,109, 064
Less: Greenway Loan $ 600,000
Excess Collateral $ 1,509,064

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More Vino Ltd.

Collateral Capacity to Repay

Ratio P2019 P2018 2017 2016

 What risk does the collateral situation present for Current $2,013,125 $1,681,055
= 0.62 = 0.48 0.26 0.71
your loan decision? Ratio $3,238,696 $3,501,387

($20,706 + $18,740) ($20,706 + $15,617)

Acid Test = 0.01 = 0.01 0.01 0.03
$3,238,696 $3,501,387
 Explain your rationale
Interest ($504,469 + $798,656) ($138,925 + $798,656)
Coverage = 1.63x$798,656 = 1.17x
$798,656
N/A N/A

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Capacity to Repay Character

 What risk do the projected liquidity and interest + Both Stone Bros are well educated
coverage numbers present?
+ Committed and flexible
 Explain your rationale
+ Good working relationship
− May have unrealistic growth expectations
− Business has only shown losses to date
− Potential conflict in family business

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Sample Write Up - Character Character

 The brothers were both raised in Trinidad leading one to conclude that they  What is your risk assessment of the
understand the culture and how More Vino fits that culture. Additionally both
have university degrees in business related fields which should support their owners/management character?
restaurant venture.

 The brothers seemed to adapt quickly to the fact that individual customers were  Explain your rationale
more lucrative than wholesale customers (hotels & restaurants) – showing good
business sense

 However, despite the fact the business has only shown losses so far, the brothers
forecast a very high sales growth. Maybe too optimistic?

 There is also some concern about family conflict here. The family have all
loaned M.V. money and this may cause internal stress which may lead to some
poor decisions.

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Conditions Conditions

+ Great location  What risk do the industry conditions present?

+ Strong growth in retail and tourist markets  Explain your rationale

+ Few other businesses in their niche

− Subject to seasonal fluctuations

− Increasing taxes on alcohol products

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Decision Sample Decision

Reasons Against Granting Loan:

The PLUG shows working capital requirements that exceed
More Vino’s credit limit
More Vino has yet to be profitable and very poor liquidity
Sales projections may be overly optimistic

Reasons For Granting Loans:

Expansion may be necessary to support sales growth
Stone Bros are competent and committed
Promising industry trends
Preserve relationship with other More Vino stakeholders

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Decision Continued Decision continued

I do still have faith in the business idea as well as the Stone
brothers. I believe More Vino will eventually become a successful
stable business, but for now it should focus on earning profit and
repaying debt with its current resources.

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Decision
 Provide a comprehensive recommendation report
with your decision

 It is NOT a summary of the analysis you just did

 You are taking a position and making an argument

 Pretend you are convincing your boss that this is the

correct decision!

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