HORTON BUILDING

SUPPLIES
Final Project

PRESENTED TO:
PROFESSOR EESHAH TARIQ
GROUP MEMBERS:

A TIF ARIF L1F0BBAM0!"!
#AIN LATIF
 $AFFER %H  ALID

M& #EESHAN 'OUNUS
(OURSE:
FINAN(IAL ANAL'SIS
DATE:
9TH JANUARY, , 2014
 HORTON BUILDING SUPPLIES -
WORKING CAPITAL

INTRODUCTION
Horton B)il*in+ S),,lie- .HBS/ i- a co,an locate* in Mill-2a)+3 (o)nt locate* a
4e5 ile- -o)t3 o4 %an-a- (it& 6it3 o,,ort)nit t3at aro)-e 4ro %an-a- Ne2ra-7a Act
in 189; T3oa- Horton .a lan*<o5in+ 4arer in In*iana/ o=e* to Mill-2a)+3 in 1898&
Horton -tarte* 3i- o5n 2)-ine-- t3at t3at *ealt in:

• Retail L)2ara* Sellin+ to local contractor- an* to5n-,eo,le

• Paint
• Har*5are line-
• Fini-3e* an* Sei<>ni-3e* L)2er ite- li7e *ec7 ?oorin+ an* 4encin+

HBS 3a- 2een contin)o)-l r)n 2 >=e +eneration- an* all t3e i,ortant ,o-ition i-
occ),ie* 2 a 4ail e2er& Since; t3e co,an -ale- are -ea-onal; t3e co,an
-lo5- *o5n in col*er ont3-& $an)ar i- re+ar*e* a- t3e lo5 ,oint o4 t3e ear an*
t3en t3e -ale- -tart- to 2)il*& La2or i- e,loe* in ,ea7 -ea-on&

ISSUES WITH HORTON BUILDING SUPPLIES
One o4 t3e o-t i,ortant or critical a-,ect o4 t3e co,an i- t3at t3e )-e- t3e con-
er=ati=e a,,roac3 4or t3e 5or7in+ ca,ital ana+eent& H)+e ca-3 i- ,ile* in t3e
o@<,ea7 -ea-on- an* in ,ea7 -ea-on- t3e ca-3 le=el- are re*)ce* an* acco)nt
recei=a2le- are increa-e* *)e to lon+er collection ,erio*& Since t3e co,an i-
a2o)t to +ro5 in " to 9 ear-; A2i+ail Horton i- t3in7in+ a2o)t t3e e,an-ion an*
nee* 4or >nancin+& T3e are con-i*erin+ o,tion- 2et5een -3ort ter >nancin+ an*
lon+ ter >nancin+&
 PROBLEMS

Q1 !"#

HBS- (a-3 (cle 4or t3e Fo)rt3 C)arter

Fro t3e ca-e:

A%&)"& C(..&/'+($ A%&)"& P"*".&

I$%&$'()* P&)+( P&)+( P&)+(
Da-.(GSAcco)nt-
Da-.(GSIn=entor/ Da-.Sale-Recei=a2le-/
Paa2le-/
0 0
0.11&"0&/!"&8"
.11&1"0!&1/101&1 .19"&1""8&8/8&0

Cash Cycle = Average Collection Period + Inventory Period – Average Payment Period

= 78.04 + 101.91 – !.8 = 156 Days

!# Meanin+ o4 t3e E-tiate

19 *a- ca-3 ccle i- )ite lar+e ca-3 ccle 53ic3 i- in o@ -ea-on o4 t3e >r& T3e
re-)lt o4 t3e )arter ca-3 ?o5- -3o5- t3at t3e >r- ca-3 ?o5 i- in=er-el relate* to
t3e -ea-onalit o4 t3e 2)-ine--& T3at i-; t3e >r- ca-3 ?o5 increa-e- *)rin+ o@<
,ea7 )arter- an* *ecrea-e *)rin+ ,ea7 tie-&

Q2 "or#ing Ca$ital = Acco%nt &eceiva'les + Inventory – Acco%nts Paya'le

199 Q")'&) Q")'&) Q")'&) 3 Q")'&) 4

I$%&$'()* 1 2
A//($' 1  1 ;8&  1 ;&! 1;"0!&1
R&/&+%".& ;10&"
A//($' 1  ! ;!  1 ;!&"  1 ;""8&8
P"*".& ;00"&! 1"&
W()5+$
 9 &   1"&"   8&  " 0&
C"6+'".

Q3 !"# Fir- -ea-onal 5or7in+ ca,ital

Sea-onal 5or7in+ ca,ital i- t3e *i@erence o4 5or7in+ ca,ital at ,ea7 tie- an*
,eranent 5or7in+ ca,ital& In t3i- ca-e in )arter ! t3e >r o,eration at ,ea7 an* in
)arter  t3e >r- o,eration- at t3e lo5 ,oint& Hence
 (easonal )or#ing ca$ital = *%arter  )or#ing ca$ital – *%arter 4 )or#ing ca$ita l

(easonal )or#ing ca$ital = 99. – !!., = -!.7

!# Fir- ,eranent 5or7in+ ca,ital
6or7in+ ca,ital at t3e lo5 ,oint o4 o,eration; 53ic3 4or t3e o-t co,anie- i-
Dece2er; +i=e- an e-tiate o4 t3e >r- ,eranent 5or7in+ ca,ital& In t3i- ca-e
5or7in+ ca,ital o4 )arter  5ill 2e t3e ,eranent 5or7in+ ca,ital& Hence;

Permanent )or#ing ca$ital = *%arter 4 )or#ing ca$ital = -!!.,

Q4

(a-3 ccle i- *e>ne* a- t3e tie 2et5een ca-3 *i-2)r-eent an* ca-3 collection&
63en *e>nin+ ca-3 ccle in ter- o4 5or7in+ ca,ital ana+eent it i- -3o5n a-
o,eratin+ ccle le-- acco)nt- ,aa2le ,erio*& 63en 5e nee* to co,are t3e ca-3
ccle o4 a retailer li7e HBS an* t3at o4 in-)rance -er=ice; t3en it i- o2=io)- t3at a
retailer 5o)l* 3a=e a lon+er ca-3 ccle& (a-3 ccle i- calc)late* a-:

Cash Cycle = Inventory Period + Average Collection Period – Average

Payment Period

It i- clear 4ro t3e e)ation t3at ca-3 ccle i- calc)late* t3ro)+3 t3e in=ol=eent
o4 in=entor; acco)nt recei=a2le- an* acco)nt- ,aa2le& A retailer can 3a=e =arie*
ao)nt- o4 in=entor le=el; acco)nt- recei=a2le- an* acco)nt- ,aa2le& A retailer
li7e HBS ,riaril 4oc)-e- on t3e >e* a--et-; 3ence t3e are ca,ital inten-i=e&
Fie* a--et- li7e lan*; 2)il*in+ an* 5are3o)-e- are )-e* to contin)e
t3eir o,eration-& In or*er to contin)e t3eir *ail o,eration-; t3e *e-er=e t3e
+reate-t attention 53en it coe- to 5or7in+ ca,ital anal-i-&

On contraril; -er=ice- -ector 5o)l* 3a=e a -3orter ca-3 ccle; a- t3ere are 4e5er or
no in=entor le=el-; acco)nt recei=a2le- are le-- a- co,are* to a retailin+ 2)-ine--
an* acco)nt- ,aa2le 5o)l* 2e o4 ini) le=el&

Q

199 Q")'&) 1 Q")'&) Q")'&) 3 Q")'&) 4

C"7 2
A//($'  1 ;!10&!   19&"  8 !0&0  1 ;!9&8
R&/&+%".&
 1 ;00"&!  ! ;!  1 ;!&"  1 ;""8&8
I$%&$'()*
1"&

 T3e (a-3 2alance o4 t3e co,an -3o5- an in=er-e relation 5it3 -ea-onalit o4 t3e
2)-ine--& Fro t3e a2o=e ta2le; 5e can clearl -ee t3at *)rin+ t3e !n* an* "r*
)arter-; ca-3 2alance i- re*)ce* an* t3e recei=a2le- are increa-e*& 63ile; in o@<
-ea-on t3e re-)lt- are =ice =er-a& I4 t3e co,an 5ant to ,rocee* 4or t3e loan to
3an*le t3eir 5or7in+ ca,ital t3en Acco)nt Recei=a2le- 5o)l* 2e t3e ajor rea-on
rat3er t3an in=entor&
 D) e to lon+er collection ,erio* in ,ea7 -ea-on; a re)ire t3e co,an to +o 4or
loan a- t3e ca-3 re-o)rce- arent eno)+3& Ne=ert3ele--; i4 t3e co,an 5ant to
i+nore +oin+ 4or loan t3en t3e nee* to re*)ce t3e a=era+e collection ,erio* to rai-
e t3e le=el o4 ca-3&

Q8

 T3e >r- ,eranent 5or7in+ ca,ital 5ill re*)ce 2 ti+3ten t3e collection
,roce*)re-& T3e ti+3ten collection ,roce*)re- re-)lt- in lo5er acco)nt recei=a2le-
ao)nt 53ic3 in re-)lt lo5er t3e ,eranent 5or7in+ ca,ital&

"or#ing ca$ital $ermanent = "CP = &eceiva'les + Inventory – Acco%nt Paya'le

63en ti+3ten t3e collection ,roce*)re-

"or#ing ca$ital $ermanent = "CPA = &eceiva'les red%ce/ + Inventory – Acco%nt Paya'le

Hence;

"CP "CPA

Sea-onal 5or7in+ ca,ital i- alo-t ine@ecti=e 2 ti+3ter collection ,roce*)re-

2eca)-e 5or7in+ ca,ital o4 2ot3 ,ea7 an* lo5 o,eration ,oint- 5ill
re*)ce accor*in+l an* t3e *i@erence 2et5een 2ot3 reain t3e -ae&

(easonal )or#ing ca$ital

("C = )or#ing ca$ital at $ea# o$eration $oint – )or#ing ca$ital at lo) o$eration
 $oint 

 63en ti+3ten t3e collection ,roce*)re-

(easonal )or#ing ca$ital

("CA = )or#ing ca$ital at $ea# o$eration $oint red%ce/ – )or#ing ca$ital

at lo) o$eration $oint red%ce/

6or7in+ ca,ital o4 2ot3 ,ea7 an* lo5 o,eration ,oint- 5ill re*)ce accor*in+l an*
t3e *i@erence 2et5een 2ot3 reain t3e -ae .alo-t e)al; not c3an+e to +reat
etent/&

("C = ("CA

Q

 T3e co,an 3a- =er )c3 ca-3 in 3an*& In ,ea7 -ea-on- t3e co,an 4ace- t3e
re*)ction in ca-3 2)t -till t3e 3a=e eno)+3 ca-3 in 3an* to aintain t3e 5or7in+
ca,ital; -o t3e co,an *oe-nt nee* an -3ort ter *e2t to >nance t3e 5or7in+
ca,ital& B)t i4 t3e co,an 5ant- to e,an* it- 2)-ine--; t3e nee* -3ort ter *e2t to
>nance all t3e co,an 5or7in+ ca,ital& So t3e ar+)ent o4 $ane Horton Jall t3e
5or7in+ ca,ital nee*- to )-e -3ort ter *e2tK 5ill 2e a,,lica2le i4 t3e 2)-ine-- i- in
e,an-ion o*e&
Q: !"#

A%"$'"& (; C($&)%"'+%& "66)("/7<

1& E,en-e- can 2e ea-il co=ere* 5it3 t3e lar+e 2alance o4 ca-3 a=aila2le 5it3
t3e co,an& No nee* to +et >nancin+ 4acilitie- 4ro eternal -o)rce-&
!& Acco)nt recei=a2le- are +i=en lar+er ,aent ,erio* to re,a t3e ao)nt&
 T3i- re-)lt- an increa-e in -ale- re=en)e 4or t3e ten)re& Sale- 5o)l* +et etra
2oo&
"& In=entor i- al-o 7e,t 3i+3; 53ic3 ean- t3at c)-toer- are a2le to +et 53at
t3e 3a=e *ean*e* 4or& Hi+3er le=el o4 in=entor a7e- c)-toer 3a,,&

D+"%"$'"& (; C($&)%"'+%& A66)("/7<

1& Hi+3 le=el o4 collection ,erio* re-)lt- in 3i+3 le=el o4 2a* *e2t-&
!& (a-3 a=aila2le co)l* 2e in=e-te* an* +et an etra incoe 4or t3e co,an& "&
In=entor co)l* +et o2-olete an* a =)lnera2le to nat)ral an*
)ncontrolla2le *i-a-ter&

!# 'e-; 3e can re*)ce t3e le=el o4 ca-3 53ic3 3e 3ol*- to at lea-t !90;000& In
E3i2it  in )arter 1 53ic3 i- lo5 o,eratin+ ,oint t3e ca-3 i- 1!10&! an* in
)arter ! 53ic3 i- t3e ,ea7 o,eratin+ ,oint t3e ca-3 i- 19&"& T3e ca-3 re*)ce-
2et5een )arter 1 an* ! i- 90 53ic3 -3o5- t3at t3e >r )tilie- t3e ca-3 53en
it i- nee*e*&

Q9

 T3e at)rit atc3in+ ,rinci,le -tate- t3at -3ort<ter a--et- -3o)l* 2e >nance*
5it3 -3ort<ter >nancin+ an* lon+<ter a--et- 5it3 lon+<ter >nancin+& S3ort<ter or
c)rrent a--et- incl)*e ca-3 an* in=entor& S3ort<ter >nancin+ -o)rce- incl)*e
acco)nt- ,aa2le an* -3ort<ter loan-& Lon+<ter a--et- incl)*e 2)il*in+- an*
e)i,ent& Lon+<ter >nancin+ -o)rce- incl)*e lon+<ter *e2t; coon -toc7 an*
,re4erre* -toc7& T3e at)rit atc3in+ ,rinci,le i- i,ortant to a co,an-
li)i*it an* ,ro>ta2ilit&

AD=ANTAGES AND DISAD=ANTAGES<
A%"$'"&

1& S3ort ter *e2t- 3el, to aintain a -oli* li)i*it 2eca)-e it re)ire-
co,anie- to atc3 t3e ter- o4 a--et- an* lia2ilitie-&
!& T3e are le-- e,en-i=e a- co,are* to lon+ ter *e2t-& On contrar; -3ort
ter a--et- are le-- ,ro>ta2le t3an lon+ ter a--et-& Mi-atc3 2et5een o)r
c3oice- can re-)lt in re*)ction in ,ro>ta2ilit an* an increa-e in o)r intere-t
e,en-e-&
D+"%"$'"&

1& To )-e t3i- a,,roac3 t3e co,an nee*- to ana+e t3eir re-o)rce- in tiel
anner; to a=oi* an late c3ar+e- re,aent-& S3ort<ter >nancin+ coe- 5it3
3i+3 intere-t rate- an* in or*er to 7ee, o)r -a4e -i*e t3en t3e
ana+eent nee* to 2e 5ell<e)i,,e*&
!& Tra*e<o@ 2et5een 3i+3 an* lo5 intere-t rate& Loan- 5it3 lo5er intere-t rate-
are rejecte* *)e to liitation o4 re-o)rce-&

Q10 Recoen*ation- to HBS to >nance it- 5or7in+ ca,ital

HBS -3o)l* >r-tl aintain t3e ,ro,er ana+eent o4 t3eir ,aa2le- in relation to t3eir
recei=a2le-& A- t3e -3o)l* 3a=e t3e a=era+e collection ,erio* e)al- to t3at o4
a=era+e ,aa2le ,erio*& B)t in t3i- ca-e t3e A=era+e collection ,erio* i- 8 *a-
53ile t3e a=era+e ,aent ,erio* i- !"&8! *a-& T3i- re-)lt- in le--er ca-3 in 3an*
4or t3e >r in ana+in+ t3e 5or7in+ ca,ital& So; i4 t3e ana+e t3e ,ro,erl eit3er
2 re*)cin+ t3e recei=a2le ,erio* or increa-in+ t3e ,aa2le ,erio* t3e co)l* increa-
e t3e ca-3 in 3an* 53ic3 5ill 2e )-e4)l 4or aintainin+ t3e -ea-onal 5or7in+ ca,ital
re)ireent- in ca-e o4 e,an-ion o4 t3e >r& Moreo=er; t3e 4ollo5in+
tec3ni)e- can 2e )-e* in t3i- re+ar*:

C(>>&)/+". P"6&)

(oercial ,a,er i- a one<ar7et -ec)rit 53ic3 can i--)e* 2 HBS to +et

one to eet -3ort ter re)ireent- an* it i- onl 2ac7e* 2 HBS- ,roi-e to
,a t3e 4ace ao)nt on t3e at)rit *ate -,eci>e* on t3e note&

B"$5 (%&))";'

A- HBS 3a- +oo* 3i-tor cre*it ret)rn- to %an-a- (it National Ban7; HBS -3o)l*
2ar+ain 5it3 %(NB to ,ro=i*e t3e 2an7 o=er*ra4t 4acilit ), to t3at ao)nt t3at 3a-
2een calc)late* 2 Ro2ert Miller; an acco)nt eec)ti=e at %(NB&

So; t3e 4oreo-t t3in+ t3e -3o)l* a*o,t i- to *ela ta7in+ loan 4ro 2an7 t3i- can 2e
ac3ie=e* 2 a*a,tin+ eit3er one or t3e co2ination o4 t3e a2o=e entione*
tec3ni)e- an* i4 t3e 4ail to 4)ll >ll t3e nee* o4 -ea-onal 5or7in+ ca,ital t3en t3e
-3o)l* +o 4or ta7in+ -3ort<ter loan&

Q11

Since HBS 5ant- %SNB to 4)n* a -3ort<ter loan o4 90;000; -o

C%rrent &atios CA2C3

Q")'&) 2 Q")'&) 3
4344?11101@391 0&"80&9&
Herein t3e-e t5o )arter- o4 ,ea7 -ea-on-; t3e c)rrent ratio- or t3e 5or7in+ ca,ital
ratio- are =er )c3 +reater t3an t3at o4 t3e i*eal -it)ation .i&e& 2et5een 1&! an*
!&0/& Here; %(NB can con-i*er +i=in+ t3e loan to HBS&

For 4)rt3er anal-i- %(NB can con-i*er t3e *e2t ratio- o4 t3e HBS a- 5ell&

In t3i- -cenario; t3e *e2t ratio alt3o)+3 i- increa-in+ 2)t -till it i- 5a le--er t3an
t3at o4 t3e in*)-tr a=era+e; -o it i- )ite con-i*era2le 4or t3e %(NB to +i=e t3e loan
to t3e HBS&

Miller )-t con-i*er t3e intere-t co=era+e ratio al-o 2eca)-e i4 in 4)t)re HBS 5o)l*
5ant to re-tr)ct)re t3e loan 4or lon+ ter t3en t3i- ratio 5ill 3el, t3e in
con-i*erin+ t3at ,oint o4 =ie5 a- 5ell

Interest coverage ratio = 5I62interest e$ense

1992 1993 1994 199

3904?11@22:
"0&19&1&"9 """&810&"!&0 "&91&1!&
3

 T3e-e are t3e t5o )arter- in 53ic3 ca-3 i- nee*e* 2 HBS 4or 5or7in+ ca,ital
ana+eent; -o t3e-e a2o=e calc)late* ratio- clearl in*icate t3at it 5ill 2e -a4er 4or
t3e Miller to +rant HBS a -3ort<ter loan&

!# Follo5in+ are t3e a**itional in4oration t3at 5o)l* 2e 3el,4)l in a7in+ a ore
in4ore* *eci-ion:

• Mont3l >nancial -tateent- o4 t3e 2)-ine--

• Mont3l (a-3 ?o5 Stateent-
• Foreca-te* Incoe Stateent; (a-3 Flo5 an* Balance S3eet o4 ),coin+
ear-

Q12

 'e-; in*ee* t3e increa-e in -ale- o4 HBS *)rin+ t3e ,ea7 -ea-on a@ect- t3e 5or7in+
ca,ital *ra-ticall
A- ca-3 ccle i- in=er-el relate* to t3e 5or7in+ ca,ital

"or#ing ca$ital = inventory + a2c receiva'les – a2c $aya'les

63ile;

Cash cycle = inventory Period +average collection $eriod – average $aya'le

 $eriod

D)e to increa-e in -ale- t3e in=entor *ecrea-e- 53ile t3e acco)nt recei=a2le-
increa-e& Moreo=er In t3i- ca-e; t3e in=entor *oe- not -3o5 a -i+ni>cant c3an+e
53ile t3e acco)nt recei=a2le- -3o5 a 3)+e *i@erence o4 a2o)t t5o 4ol*- in t3e
,ea7
-ea-on& So; 3ere in t3i- ca-e; it i- t3e acco)nt recei=a2le- 53ic3 are t3e ain ca)-e
o4 len+t3ene* ca-3 ccle&

Q13

Miller i- intere-te* in ont3l -tateent- 2eca)-e t3ro)+3 t3e 3e 5o)l* 2e in a

2etter ,o-ition to j)*+e t3e ont3l ,er4orance o4 t3e co,an& A c))lati=e
)arter re-)lt a i-+)i*e; alt3o)+3 it -till 4eel- 4ea-i2le; 2)t t3ere a 2e -oe
loo,3ole- in t3e& For in-tance; t3ere a 2e c3ance- o4 5in*o5 *re--in+ to o2tain
loan- 4ro t3e& Mont3l -tateent- ,re-ent a 2etter an* clear li)i*it ,o-ition o4 t3e
>r&

RECOMMENDATIONS AND CONCLUSION
HB- )-t +o 4or -3ort<ter >nancin+ tec3ni)e- *e-,ite o4 lon+<ter >nancin+
,o--i2ilitie-& Alt3o)+3; t3e intere-t rate- are 3i+3er in -3ort<ter >nancin+; lon+<
ter >nancin+ 5o)l* create 3a--lin+ 5it3 t3e 2an7&

Moreo=er; ont3l >nancial -tateent- )-t 2e ,ro=i*e*; )arterl *o not +i=e a

clear ,ict)re o4 t3e co,an ,er4orance& Ban7- re)ire ont3l -tateent- to
a7e a 2etter *eci-ion an* ca-3 ?o5 -tateent- )-t al-o 2e ,ro=i*e*&