FIN 610 Module Four Case Study Review: Office Smart

To respond to the following questions, you will need to review the Office Smart case study on pp. 238–240 of your textbook, Working Capital Management: Applications and Case Studies; the questions were adapted from the same section of the textbook. Respond in complete sentences as appropriate. 

1. Given Eric’s philosophy of just-in-time in meeting customer requirements, is he too accommodating in this inventory policies, and could this potentially lead to a cash-flow problem? Do you have any specific suggestions or recommendations, such as a loan covenant limiting inventory to a certain percentage of sales? Type your three- to four-sentence response below.

The just in time inventory management allows the organization to maintain minimum inventory. This may be essential in reducing procurement costs; however, Eric maintains extra inventory which may increase storage costs and reduce stock turnover. Considering that Eric is increasing the limit from $200,000 to $400,000, a loan covenant limiting inventory to a certain percentage of sales may reduce risks for the bank.

• What is your assessment for receivables in terms of credit quality? In other words, how did Office Smart increase its market share—possibly by lowering credit standards? Would it be prudent to ask for detailed data on receivables for at least the top 10 customers? Type your three- to four-sentence response below.

Office smart has prudent receivables as can be seen from its collection rates which are better than the industry. A net-30-day basis could have been instrumental in increasing market share. It would therefore be more prudent to ask for receivables data from the top 10 customers to assess first how much revenues they provide the organization and how efficiently they contribute to cashflow needs.

• What documentation will you require? Customary documentation includes monthly income statements, statements of cash flows, and balance sheets. In addition, you may wish to see data on forecast economic activity in the Connecticut–Massachusetts–Rhode Island area, student enrollment projections at area universities, tax returns for each year, and other information that supports the loan. Type your three- to four-sentence response below.

A balance sheet would be instrumental to assess if the organization has any other, and to assess the outstanding liability, and to compare the worth of its assets which could be used as collateral. A statement of cashflows would also be essential to assess the value of the organizations investing opportunities while an income statement would help assess the Office Smart’s revenues and expenses. Tax returns would help assess the organizations annual tax liability. The enrollment projections for the universities would provide justification for Office smart’s growth prospects.

• Which firm would be acceptable as an outside auditor? Is your bank going to be satisfied with a local accounting firm that may have Office Smart as an important client? Recall that Arthur Andersen was differential to Enron on its audit due to substantial consulting fees and the fear of losing that company as a client. Type your three- to four-sentence response below.

Considering the risk, the bank may not be satisfied with a firm that may have Office Smar as an important client. Arthur Andersen would be an ideal auditor due to its size, reputation and experience in tax matters. Office Smart has increased risk due to an increased loan limit. Office Smart however faces ideal growth prospects  and increased business and should therefore consider having Arthur Andersen as their outside auditors.