Case Study #2
Highland Mime Players Case Study
JulieVW
Non-Profit Financial Management AA661
SMU
March 22, 2003
Memo
To: Loans' Board of The Commonwealth Bank
RE: Highland Mime Players Loan Application
After extensive consideration and review, I have come to the conclusion that The Highland Mime Players do not demonstrate the capacity to repay a $100,000 loan within the next year. In the attached report, I advise the Loans' Board not to approve The Players application.
Failing to grant a loan to The Players could translate to some short term disadvantages for the Commonwealth Bank, however, despite the potential ramifications, I believe Commonwealth would risk far more if the board decided to approve a $100,000 loan to The Players.
Sincerely,
Sam Saxon
Loan Officer
Commonwealth Bank
Boston, MA
Highland Mime Players Case Study
I. Statement of Problem
The Highland Mime Players have found themselves in a desperate situation, needing $100,000 to meet short term obligations and pay off long term loans. As with most emergencies, The Players did not expect to have a cash problem at this point, something obviously went wrong with financial projections and budget processes. The Highland Mime Players have not disclosed (and possibly not identified) why they have an unplanned deficit this year. Without a clear understanding of what went wrong, The Players run a very real risk of repeating past mistakes and accumulating more debt than they are able to repay.
II. Recommendation
Based on the information provided by the trustees of The Highland Mime Players, I can not recommend approval of a $100,000 loan from the Commonwealth Bank. The Players fail to demonstrate stability, accuracy, logic, or effective planing in the organization. While the dedication of the group is admirable, I doubt their capacity to repay a loan.
III. Discussion and Analysis of Recommendation
Inaccurate Projections and Statements. The Players' projections for next year do not match up with their own documentation. For example, the Board of Trustees predicted the number of subscribers will increase to 15,000 next year. However, for the purposes of projection, they used "a stabilized figure of 12,000." The exhibits submitted by The Players projects only 11,500 subscribers. Later in their application, The Players write they don't expect subscriptions to reach the 15,000 level for another three years! The inaccuracies of the application cause me to doubt the accuracy of the projections.
Lack of Stability. In the eight years, The Players have changed their basic organizational structure three times (from a limited partnership, to a profit-making corporation, to a not-for-profit corporation). This lack of stability also extends to their financial situation. The Players current ration for financial year ‘99 was .37 (exhibit 1). Adding $100,000 to cash via a loan would bring the ratio up to 1.3, (exhibit 2) far below the standard of 2. With a total margin of -.21, (exhibit 3) The Players lost money for every dollar that came into the organization. Even with next years predicted total margin of .13 (exhibit 3) The Players will not have the cash to maintain a solid financial picture and pay off old debts.
Poor Logic. The Players have failed to consider all the implications of their choices. They believe once debts are paid, the company can operate on a "Pay as You Go" system. However, the Pay as You Go method of financial management fails to consider many important questions: How The Players will pay the electric bills during the off season? What will happen in the event of an unexpected difficulty? The Highland Mime Players have correctly assumed that canceling the annual holiday show will eliminate expenses associated with the show. However, no one mentioned how canceling the holiday show will affect The Players revenue.
IV. Limitations
By rejecting The Highland Mime Players loan application, the Commonwealth Bank risks losing Mr. Greensboro's sizable account with the bank. Some might argue that failing to grant a loan to The Players means the bank misses an opportunity to promote good will and positive relationships with the community. Despite the potential implications, I believe the commonwealth bank would risk far more if the board decided to approve a $100,000 loan to The Players.
