Riley Supply*
Jim Riley believed that the North Atlanta suburbs of Cherokee County and
Forsyth County were about to take off in the mid-1990s so he, along with his next door
neighbor, started a plumbing and heating supply business to benefit from the expected
growth. Fortunately, the targeted counties of Cherokee and Forsyth did experience
significant growth over the next decade as the following population table indicates.
Cherokee
Forsyth
1995
112,971
61,483
2006
195,327
150,968
Yet, despite the fact that profits were also growing, the company experienced
continued cash flow problems. As a result, Riley finds that an increasing amount of his
time is being devoted to dealing with the cash flow problems.
The company has normally relied on bank loan financing secured by accounts
receivable and inventory. However, in 2006 the company was unable to reduce its bank
loan during the seasonal slowdown period. Furthermore, the company's manufacturer
suppliers were becoming unhappy. Some had even started to demand payment on
delivery rather than offer the 2/10, n/30 terms standard in both the manufacturer and
wholesaler markets.
Riley is not sure what he should do. He expects that 2007 sales will be 30%
higher than the prior year and that there will be continued strength in sales in the
following years. Furthermore, his co-investor is becoming increasingly bothersome so
Riley would like to buy back the 40% ownership in the company that he does not now
control.
*
Copyright 2007 Peter C. Eisemann
Exhibit 1
Riley Supply
Balance Sheets
December 31
(thousands of dollars)
2004
2005
2006
75
90
66
Accounts receivable
1,206
1,440
1,875
Inventory
1,377
1,683
2,091
Prepaids
36
60
102
Net fixed assets
285
321
360
Total
2,979
3,594
4,494
Bank loan
750
831
1,020
Accounts payable
645
1,050
1,737
Misc. accruals
120
168
102
Mortgage
150
144
138
Equity
1,314
1,401
1,497
Total
2,979
3,594
4,494
Cash
Exhibit 2
Riley Supply
Income Statements
For the Year Ended December 31
(thousands of dollars)
2004
2005
2006
Sales
7,260
9,075
11,370
Cost of goods sold
5,874
7,440
9,438
Gross profit
1,386
1,635
1,932
Selling expense
567
696
843
Salaries
315
411
492
Interest
83
89
105
General expenses
140
173
201
Depreciation
45
36
48
1,149
1,404
1,689
Earnings before tax
237
231
243
Tax
93
84
87
Net income
144
147
156
Operating expenses
Total