Question

You have decided you would like to expand your business by opening up another coffee shop. You’ll need to apply for a bank loan in the amount of $200,000.

1. Develop a professionally formatted business letter to the bank justifying this decision. Support your decision based on your ratio analysis. You must explain your ratio analysis, just providing the ratio calculations will not suffice.

Include the following in your letter: desired loan amount, time in business, industry type, annual business revenue and profit, and disclosure of present debt

Current ratio: 2.55- The company could pay the currently due liabilities 2.5 times over the current assets it has at the end of the year.

Debt to Equity Ratio: The company has a much larger balance of equity (common stock, retained earnings, and additional paid-in capital) than it does debt at the end of the year. 0.23

Efficiency Ratios: Inventory turnover- 45.00- The company is selling its inventory slightly slower than the industry average. However, the company is moving inventory at a healthy rate.

Accounts Receivable turnover- 7.01- The company is not collecting the receivables at a fast rate. This could be an indication of granting credit sales to customers that do not pay quickly.

Profitability Ratios- Gross profit percentage- 68.29% slightly above industry (Bean Counters, Inc.) average.

Net profit margin- net profit/revenue- 36%- Above industry average likely indicating that the company has lower selling and administrative costs.

Leverage ratios-Debt to asset- 0.19- The company is financing its assets with earnings generated and reported in retained earnings or other forms of equity such as sales of common. The company is not using much debt to finance its assets.

Answer 1

To

The Bank Manager ,

Dear Sir,

We are in the expansion of our existing Coffee chain Retail shop in wider area . For expansion of this business , we need bank support . We are presently looking for loan amount to $ 200,000 for further expansion of our business .

For your easy reference , We are presenting couple of Key Performance indicator , which represents about current Financial health of our company .

Performance ratio – from Performance point of view , We are doing excellent in terms of Industry Average . At present , we are able to generate Gross Profit ( operating profit) =68.29%, which is We believe best as per our Industry structure .

In other way m after absorbing all Indirect cost to run our present business, We derived Net profit Margin – 36% , which is also above Industry Average .

The above ration represents that we are maintain our selling and general / Admis cost at low level.

Leverage Ratio – We are not very debt dependent company . As per out Debt to Asset ration , which is less than 1 ( 0.19)

It represents that our assets are quite revenue generating in nature and we can easily cover up our present Debt and keep ratio less than 1 .

We have very strong Equity ( common stock +Retained Earnings+ additional paid up capital) , which will cover up our present Debt position . So we are not very nervous about present Debt obligation .

With help of addition Interest amount ( for business expansion purpose) , we can easily able to pay off through our Operating Margin . We are trying to highlight that our EBITDA is good enough to support any additional Interest amount .

Presently we have little concern area is collection days . our collection days are little low as per Industry average . Same way we are not able to clear all our Inventory at fast rate . This represents increase in Inventory days . Due to above reason current ratio is little higher position .

We are confident that above working capital issue is cyclic in nature . We are hopeful this will over shortly and we can again back to Industry standard in terms of Current ratio concern .

Rather than Current ratio , present challenge , we are doing excellent at per Industry Average .

I will appreciate , if you can look into this matter and please sanction our require Loan amount on urgent basis . We need to expand our business and We are ready to provide you our Term Sheet relates to this project ( NPV , IRR , project profit, Pay back period etc. )

Hope to hear good from your side.

Thanks

Name ------

CFO of the company