Morley Industries, Inc.

January 2000, Sarah Quintrod, vice president and treasurer of Morley Industries, was working
on a loan request to be presented to the company's bank of account, First Security Bank. Ms.
Quintrod had to determine how large a loan to request, as well as the length and type of loan,
and to appraise the likelihood of the bank's granting the loan.
Morley Industries is a manufacturer of architectural aluminum products and a major producer of
aluminum frame windows. Founded in 1970, the company has experienced considerable growth
in sales. Operations have been consistently profitable, except for three years when small losses
were incurred. Recent balance sheets and income statements are shown in Exhibits 1 and 2.
Morley Industries sells most of its products directly to construction firms, although an increasing
portion of its sales are to distributors of construction products and to distributors to home
building centers.
During the past 3 years, Morley had undertaken a major expansion and modernization program
aimed at providing the efficient production facilities its management considered vital to the
company's survival in a competitive environment. In anticipation of growth in the demand for
aluminum products, plant capacity had been increased to a point sufficient to handle a volume
of $75 million per year. It was anticipated that the company's expansion program would be
completed in March 2000 with the installation of new equipment costing $3.2 million.
The expansion had been timely because Morley was hoping to increase its market share in
2000 with an all-out marketing and selling effort. Management estimates the company will reach
$54 million in sales in 2000. Further sales growth of $5 to $7 million per year is expected in
2001-3.
The company's sales, like those of the industry as a whole, are highly seasonal. Over two-thirds
of annual sales usually come during the first 6 months of the year. Exhibit 3 forecasted monthly
sales for 2000; the pattern is similar to that of the previous years. On the other hand, production
is held relatively steady through the year. This policy is necessary to give employment to and
thereby retain the skilled workforce required in the company's manufacturing operation.
Additional economies come in better utilization of equipment.
Morley Industries had borrowed seasonally from First Security Bank for 8 years. These loans
occurred under a line of credit arranged annually in January. The bank requires that the loan be
completely repaid and "off the books" for 2 months during the year. In previous years, Morley
had not experienced difficulty in obtaining seasonal loans and meeting loan requirements. First
Security Bank had always granted the company's seasonal needs, which in 1999 had amounted
to $ 8.1 million at its peak.
Normally, the company began borrowing in early January arid repaid its loans by mid June.
However, in 1999 the company had been unable to liquidate its loan until mid September and by
early November had again required a bank loan. At the end of 1999, the bank loan outstanding
amounted to nearly $4.5 million. Although the bank had not hesitated to extend the credit, its
officers expressed disappointment at not being given greater forewarning of the continued need,
particularly at a time when the federal bank examiners were conducting an examination and
were critical of aberrations of this sort. They suggested that it would be helpful if Ms. Quintrod
could plan Morley's requirements more carefully for 2000.
Ms. Quintrod also was disturbed by the unexpected increase in borrowing and what it might

Financial Planning Example : Morley Industries, Inc.

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mean in terms of future requirements. Therefore, she began collecting data that might be helpful
in making plans for 2000. These plans would need to be cleared with the company's founder
and president, Roger Morley, before presentation to the bank.
The companys nominal terms of sales were net 30 days. However, for competitive reasons
these terms were not strictly enforced, and the average collection period slipped to around 40
days. All sales are credit sales, and Ms. Quintrod feels that a 40-day average period to
collection is a reasonable estimate for 2000. There has been deterioration in collection
experience through 1999, but downtrend has been arrested. (Of November 1999 sales of
$1,683,000, $1,122,000 was collected in December; none of the December sales was collected
in that month. All of October and earlier sales had been collected by December 31, 1999.)
Production is scheduled to be fairly level throughout 2000, except for 2 weeks beginning
Monday, August 7, when it is planned to shut down the plant for the annual vacation period.
Also, in February through June, production is scheduled to be moderately higher. Material
purchases are scheduled as follows:
Purchases 1999-2000
November (actual)
December (actual)
January (forecast)
February
March
April
May
June
July
August
September
October
November
December

('000)
$1,430
$1,473
$1,503
$1,583
$1,583
$1,583
$1,583
$1,583
$1,503
$907
$1,503
$1,503
$1,503
$1,503

The company purchases its materials on varying terms, depending on the supplier, but on
average pays for them in 33 days. Depreciation of $2.6 million is forecast for the year and is
included in cost of goods sold. For simplicity in preparing a pro forma balance sheet, it is
assumed that the entire depreciation burden is allocated to inventory. Cash disbursements
related to labor and other overhead (not including depreciation, a non-cash charge) are planned
at $1,480,000 per month throughout 2000, except for the months of February through June
when $1,512,000 per month is planned. It should be noted that planned production not only
embraces that associated with estimated sales but also reflects a moderate build-up in
inventory.
General and administrative expenses are estimated to total $10,632,000 in 2000.
Disbursements for these expenses are expected to run fairly evenly through the year. Twentyfive percent of the estimated income taxes for 2000 are to be paid quarterly in March, June,
September, and December. New equipment costing $3.2 million is to be delivered in March. It
will be paid for in five equal monthly installments, beginning in March. Advertising and promotion
expenditures, not included elsewhere, are forecast at $50,000 per month in January and
February, $30,000 per month in March through August, and $65,000 per month in September
through December 2000.

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In 1997, Morley Industries borrowed $12 million from a life insurance company under a 16-year
mortgage loan, secured by the entire plant and certain equipment. The loan is repayable in
equal semiannual principal installments in June and December each year. Interest at the rate of
10 percent per annum on the unpaid balance is also payable on these dates. In her financial
forecasting, Ms. Quintrod planned to treat differently the interest payments on the mortgage loan
and on the bank loan. The two mortgage interest payments due in 2000 would be shown
separately in the cash flow and income projections. In contrast, bank loan interest payments had
been roughly estimated and included in the total general and administrative expenses estimate
of $10,632,000.
In 2000, sales are forecast at $54 million, costs of goods sold (including depreciation) at 70
percent, and general and administrative expenses at $10,632,000. Advertising and promotion
expenses (not included elsewhere) are expected to total $540,000. Additional expenses of
$1,031,000 (rounded to the nearest thousand) for mortgage interest result in an estimated profit
before taxes of $3,997,000. The effective tax rate for 2000 is estimated at 35 percent.
In 1999, the company raised its common stock dividend to $0.10 per share, per quarter, payable
in March, June, September, and December. Ms. Quintrod knew that the directors of Morley
Industries would be reluctant to raise the dividend in 2000. However, maintenance of the
present dividend was essential. The company was not well known, and directors hoped that with
another several years of profitable operations and stable dividends an equity issue might be
feasible.
As chief financial officer of Morley Industries, Ms. Quintrod had given considerable thought to
the optimum cash position of the company. She had concluded that cash and cash equivalents
of atleast $1.5 million should be maintained at all times. This will take care of transactions needs
and provide a moderate amount of liquidity for emergencies.
On the basis of the plans outlined above, Ms. Quintrod asked her assistant treasurer to prepare
a monthly cash budget for 2000, which she hopes will indicate the amount and timing of the
bank credit that Morley Industries will require. She also asked the assistant treasurer to prepare
a pro-forma balance sheet for December 31, 2000. She suggested that the assistant assume no
change in other assets or in accruals from the amounts shown at year end 1999.

Exhibit 1
Balance Sheet
31/12/1977 31/12/1998 31/12/1999
('000)
('000)
('000)
ASSETS
Cash and cash equivalents
Accounts receivable
Inventories
Total current assets
Property, plant and equipment (net)
Other assets
Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Bank loan
Accounts payable
Accruals
Mortgage, current portion
Total current liabilities

$9,564
$2,633
$4,632
$16,829
$18,207
$806
$35,842

$2,187
$2,908
$5,547
$10,642
$24,300
$1,065
$36,007

$1,524
$3,779
$7,280
$12,583
$26,979
$1,110
$40,672

$0
$1,417
$837
$750
$3,004

$0
$1,564
$906
$750
$3,220

$4,478
$1,616
$867
$750
$7,711

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Mortgage payable
Common stock (3000000 shares @ $2 par
value)
Retained earnings
Total liabilities and equity

$11,250

$10,500

$9,750

$6,000
$15,588
$35,842

$6,000
$16,287
$36,007

$6,000
$17,211
$40,672

1997
('000)
$34,788
$24,838
$9,950
$6,755
$1,056
$2,139
$813
$1,326
$960
$366

1998
('000)
$38,373
$27,175
$11,198
$7,433
$1,181
$2,584
$925
$1,659
$960
$699

1999
('000)
$44,466
$30,930
$13,536
$9,147
$1,106
$3,283
$1,159
$2,124
$1,200
$924

Income Statements

Net sales
Cost of goods sold
Gross profit
General and admin. expenses
Interest expense
Profit before taxes
Income taxes
Net profit
Common dividends
Change in retained earnings

Monthly Sales
('000)
Net sales
November, 1999 actual
December, 1999 actual
January, 2000
February
March
April
May
June
July
August
September
October
November
December
Total

$1,683
$3,218
$3,720
$5,250
$7,410
$7,650
$8,550
$4,830
$4,020
$3,360
$1,920
$1,800
$1,890
$3,600
$54,000

Financial Planning Example : Morley Industries, Inc.

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