As Scott Miller, manager of commercial accounts at the Genesis Bank of Canada, I

have decided to not grant Envy Rides the figure of $60,000 of long term loan for their
tattoo parlour renovation and the additional $450,000 for their working capital loan. For
a company with a no foreseeable future, it is not in my best interest to grant them the
loan.

Previous business success was pure luck

For a company that does not know how to manage their cash and spend it, it would be
very difficult for them to survive through a recession. Although Envy Rides was able to
see light in their business through the recession because of the owner’s cunning
advertising tactics, efficient advertising campaigns would not suffice for a profitable
business. Envy Rides generated money in both years, which reflected great
performance for a start up business, but a slight decrease was seen in 2009. However,
this is not enough to conclude on their proper financial management, since they were
mainly relying on unstable and fluctuating accounts like accounts payable to fund their
assets and activities in 2008. Accounts payable will not continue to flourish into the
company because if their inventory is outdated, they would not be able to generate as
much receivables as they were, when their inventory was still new and up to date.
Comparatively, in 2009, although their net earnings decreased just a little bit, their net
cash flow from operations decreased almost three times. This is because of the
predication of improper money management, since their accounts payable decreased
and business was lost, they were not able to fund many of their activities. Funding their
vast, outdated, unnecessary inventory through unstable accounts like accounts payable
shows the company’s inability to manage their money and will use whatever money they
have on hand to continue their business operations. If I were to give them a loan, I
would like it to be responsibly used and potentially profitable. Although it is fortunate to
see shareholder advancements being paid back because it reflects the owner’s
intention to pay back investors and will potentially pay back creditors regardless of the
position of the company, their irresponsible use of cash deters me from wanting to give
them loans to be used irresponsibly. Although I would suggest them to take a working
capital loan to fund their business activities, taking on any more debt will continue to put
the business in a downwards spiral and will continue to negatively affect their business.

Poorly managed inventory is their biggest downfall

Although it is favourable to see Envy Ride’s expenses lowering each year, their low rate
of expenses is not maintainable due to their expansion and new recruitment for the
tattoo parlour. Their current ratio of 1.27:1 do not have a favourable outlook compared
to the favourable ratio of 2:1. Although they have increased in current assets in 2009,
their acid test result reflects their true state of liquidity, at 0.12:1. Having too much
inventory is not favourable, and does not support the business. In addition, another
unfavourable sight is their interest coverage, at 0. The company’s inability to generate
profit to pay back interest will result in interest expenses being funded by other unstable
accounts like accounts receivable, or the working capital account, to both of which are
not great choices for Envy Rides.
Outlook not so good
Although Envy Rides was projected to generate in the range of $160,0000 – $180,000
in 2010 and 2011, this amount generated is not sufficient to cover their unreasonably
large working capital loan needed. In 2010, the projected working capital loan Envy
Rides need is at $651,600, which is more than 30% higher than they figure they initially
requested. Things worsen in 2011 as their projected working capital loan will be
$889,700, which is almost double of their requested figure. Although situations should
be approached with optimism, Hessels’ low estimate of his expenses and unrealistic
sales growth for a company with unfavourable inventory is unrealistic, and the insanely
high projected working capital loan needed justify the situation.

Seasonality, Sensitivity, 4Cs