ANNE ARUNDEL COUNTY IS LOCATED south of Baltimore, MD, and is the home of Annapolis, MD, the location of the
U.S. Naval Academy. Annapolis and the surrounding area has become a popular recreational and retirement
community due to its access to the Chesapeake Bay, historic areas, and decent medical care. Furthermore, a major
airport (BWI Thurgood Marshall Airport) is less than one hour away, and Washington, DC, is approximately the same
distance. The potential growth of the county has attracted numerous businesses, with more expected to follow. The
economy is diverse. Roughly 75 percent of employment is in service, education, and government; retail; financial;
and the hospitality industry. Many Maryland state offices are in the area of Annapolis, and the county has such
institutions of higher learning as St. John’s College and Anne Arundel Community College, in addition to the Naval
Academy.
JOSEPH MILLER STARTS MBS Joseph Miller founded his building supply company after returning from the Korean
War. He saw the migration of economic activity in the county from agri- culture to a diversified mix of businesses,
and located Miller Building Supplies (MBS) in the town of Glen Burnie in 1953. His choice of Glen Burnie was
motivated by access to the major highways in that part of the state and the recent opening of the Chesapeake Bay
Bridge to access the Eastern Shore of Maryland. The firm began as a wholesale distributor of various building
supplies like paint, lumber, flooring, drywall, fencing, and cleaning supplies. As Miller developed his customer base,
he came to realize that construction companies needed a full range of electrical, plumbing, and heating/air
conditioning supplies and equipment in addition to basic building materials. MBS has been run by Joseph Miller’s
children and now his grandchildren. As of 2010, Joseph III is the president, although he has been considering
retiring. Joseph III’s cousins are the chief financial officer (CFO), the marketing vice president, and the chief
purchasing officer. The family has been quite successful in managing the business, and MBS is continuously
profitable despite the fact that sales are sensitive to the economy of Anne Arundel County, of southern Maryland,
and the Eastern Shore counties.
VARIATIONS IN WORKING CAPITAL REQUIREMENTS The company’s sales are seasonal, and during the colder
months building activities slows down. If the winter is mild, some building projects continue, but large new projects
are not usually started until the spring. The low point of the year is January, and from that time on, sales build. MBS
has a small year‐round labor force and employs seasonal workers during peak business periods. Management is
quite aware of the seasonal variation in the working capital position of the company. Historically, MBS has
maintained large cash positions, and when receivables and inventory have increased, it has primarily financed them
by drawing down cash. However, the company is taking a critical look at this strategy. The CFO realizes that further
expansion of MBS may be difficult using internally generated funds. The cash philosophy may be unnecessarily
tying up capital, and it may be appropriate to use short‐term financing for seasonal working capital needs. The
president thinks that the CFO’s suggestion is worth pursuing, particularly as it would free up long‐term capital for
expansion. The marketing vice president is not convinced and thinks that the company’s financing methods
continue to be appropriate. In addition, he is opposed to additional interest expense and having to deal with a bank.
His cousin, the sales manager, is not opposed to using debt to finance working capital and argues that receivables
and inventory should be supported with short‐term debt.
A BANKER’S ASSISTANCE The Bank of Maryland (the “Bank”) has dealt with MBS for four decades. The company
has never established much of a relationship with the Bank except for an occasional term loan, depository and
disbursement services, and a few other services. As noted, long‐term capital has generally been internally
generated. The Bank has tried to develop a stronger relationship as it considers MBS to be a stable, well‐run
company. When Sara Williams, the Bank’s calling officer for MBS, received a phone call from Joseph Miller III, she
was more than willing to meet him. The CFO asked for help in analyzing MBS’s working capital needs to do the
following: ◾ Estimate MBS’s working capital needs. ◾ Determine if the Bank is willing to extend MBS a line of credit
sufficient to finance the company’s working capital.
QUESTIONS
1. Using the data in Exhibit C3.1, estimate the amount of working capital that is required during each quarter of the
year. Does MBS have excess working capital during these periods? If so, what do you suggest? 2.
Aretherespecificworkingcapitalmanagementsuggestionsthatyoucan make to the company?
3.If a line of credit is requested from the Bank, should it be offered?At what interest rate? Specify terms that the
Bank can reasonably require. You should refer to Exhibits C3.2 through C3.4 in your analysis.
4. Wouldamonthlycashbudgetimproveforecastingandsupportforaline of credit? If so, provide a cash budget (to the
best of your ability based on the data in the case). Assume that the contractors who purchase from MBS pay when
they are paid by their residential and commercial customers, which is one‐half in the second month and one‐half in
the third month following sales. Assume also that MBS must pay one‐half of its payables in the month the expense
is incurred, and one‐half in the following month.
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