FISHER FILE SYSTEMS
INC.
Comp #1 – Winter 2011
CASE SUMMARY - FFS
Founder: Richard Fisher and his wife Helen in
1993
Product: Rolling filing system
Competitive advantage: overcome the
traditional system’s design weaknesses
Decision making:
• Dale wants to invest an extra $100 000 to
FFS. Should Dale invest or not invest? If
invest, mortgage his house or withdraw
Helen’s RRSP?
TIMELINE
1996 June 30, Dec 31, 1998
Enter 1998 Corporate
Contract Year-End Tax Return
with LMI
1993 1997 Sept, Jan 1,
FFS Loan of 1998 1999 Loan
operations $200,000 Now Expire
began
STEP I – DETERMINE THE USER, SCOPE,
AND ROLE OF THE REPORT
User of report: Memo to Partner
Scope of report: report on the operations of FFS
Role:
• CA, advisor to Dale
• CA, assurance (FFS)
STEP II: THREATS AND
OPPORTUNITIES
Threats:
Investor groups lost interest in FFS and wanted
to withdraw.
Lawsuit with LMI
Dale has only obtained 49% of FFS after
invested $100,000. Therefore he is unable to
obtain the control of FFS.
Opportunities:
The growth potential of FFS since FFS’s rolling
file system concept is well-known.
STEP III – GOALS AND OBJECTIVE
Dale wants to:
Retire in 5 years
Capitalize on a risky small
business investment opportunity.
STEP IV – CRITICAL SUCCESS
FACTORS
Financing is tight
The owner of FFS is disorganized
The owner of FFS is the key to success
Dale’s resources are modest
Control
STEP V – IDENTIFY AND RANK
CRITICAL ISSUES
Need to consider case facts and what is needed
by the decision maker (DM):
(i) Dale: “This is the opportunity I have been waiting for
all my life” (evaluate investment)
(ii) Dale: “The financing is very important” (evaluate
financial shortfalls)
(iii) Dale: “Our presentation of the forecast is more
important than the financials” (evaluate forecast)
(iv) Dale: “We are willing to consider suggestions for
operating improvements” (make operational
suggestions)
(v) Dale: “I would also appreciate advice on the best way
to structure my current and future investment”
(analyze FFS investment structure)
(vi) Mary: “It has been a while since I have been involved
in an audit” (look at assurance on FOFI)
THE CIRCLE APPROACH
Go to
Is FFS an Is FFS Suggest Structure of Is Dale’s Invest FOFI
attractive profitable operating investment? $100,000 another assurance
investment? as is? improvements? (control) enough? $100,000
15 min.
in FFS?
+
NTR GAAP
Errors
Qualitative Quantitative Qualitative Qualitative Quantitative Qualitative 15 min.
(risk, etc.) (revised FOFI) (MIS and (finance (financial (overall
shortfall) recommendation +
30 min. general) and tax)
+ based on
+ Misc. Tax
25 min. 25 min. previous
Qualitative
Analysis (FOFI Qualitative Quantitative and 15 min.
assumptions) (going Qualitative
concern analysis)
50 min. issue)
10 min.
15 min.
Primary Indicator #1
1 A S The student recognizes that the engagement is not clearly defined. The student needs to recognize that we
must have specific requests for the forecast. The student identifies the key assumptions that was considered
NA - Does not NC - Provides a RC - Provides an C – The HC – discusses
address this superficial analysis with some student the majority of the
indicator or does discussion. Uses depth that recognizes assumptions
not attain the case facts to a generally uses the key used.
standard of minimal degree. case facts. assumptions
nominal (at least 3
competence. items) that
were used
and
addresses
the requests
that would
be required.
Overview –
ENGAGEMENT ISSUES
Need to mention a possible engagement conflict
Who are we advising? Dale or Fishers?
This is an important issue since it could determine
our approach
Should have an engagement letter drawn up so
that the engagement relationships are well defined
from start
Primary Indicator #2
2 GS S The student considers Dale’s investment consideration
RM
NA - Does not NC - Provides a RC - Provides an C– HC – Provides a
address this superficial or analysis with some Recognizes complete, indepth
indicator or does technically weak depth that the key analysis and
not attain the analysis. Uses generally uses consideratio considers more
standard of case facts to a case facts. ns in making than 3 items.
nominal minimal degree. decision - $
competence. at risk, past
history of
FFS,
additional
funds to
continue to
operate,
lawsuit and
the potential
perks. (3
items)
IS FFS AN ATTRACTIVE
INVESTMENT FOR DALE?
Dale’s Needs and Financial Situations:
• Wanted to retire within 5 years
• Estimated retirement needs $4500, but pension
income $3500
• Whether Dale can afford to make the necessary
mortgage payment without additional income.
• Dale’s ownership might cause him to be liable for
the previous tax return.
IS FFS AN ATTRACTIVE
INVESTMENT FOR DALE?
FFS’s current situations:
• Unable to have the reliable and timely financial info.
• FFS appears to be relying on a single supplier.
• Richard and Helen suggest that they like to control
all aspect of the operations.
• $100,000 can only satisfy the min. cash needs.
• Lawsuit with LMI
• Perks that Fishers get through FFS
Primary Indicator #3
3 F S The student prepares a revised forecast.
NA - Does not NC - Provides a RC - Provides an C – Provides HC – Provides a
address this superficial or revised case flow a reasonable complete, indepth
indicator or does technically weak with some depth forecast . and technically
not attain the analysis. Uses that generally Reasonable correct analysis.
standard of case facts to a uses case facts. calculation The revised
nominal minimal degree. Analysis may for sales forecast is around
competence. contain minor estimates, $16,000 for 1999
technical cost of and $69,000 for
weaknesses. sales, gross 2000.
margin
adjustment,
Expenses,
lawsuit and
income
taxes.
SHORTCOMMINGS OF
RICHARD’S FORECAST
Weaknesses in sales forecast:
One time sale of static shelving of $225,000 is
included.
A consignment sale of $25,000 is included.
10% sales increase over 1998 was assumed, and
ignored new sales to MBO and new dealer.
Does not take into account the unit sales projected
by Richard.
SHORTCOMMINGS OF
RICHARD’S FORECAST
Weaknesses in expenses forecast:
Changing cost structure were not considered.
Sales expenses includes the cost of brochures, which
inflates sales forecast expense.
Does not include wages for the new salesperson
hired.
Income taxes have not been provided for.
Wages remain stable even though revenues are
projected to increase.
REVISED FINANCIAL
FORECAST
Revised Financial Forecast
Quantity Avg Revenue/Unit 1999 2000
Sales
1000 Series 28 $ 5,400 $ 151,200 $ 181,440
2000 Series 20 12,800 256,000 307,200
3000 Series 20 18,500 370,000 444,000
Map Cabinet 30 2,800
Shelving 137,500 151,250
914,700 1,083,890
Costs of Sales Historical 10% decrease
1000 Series $ 3,775 $ 325 $ 96,600 $ 115,920
2000 Series 9,250 850 168,000 201,600
3000 Series 13,650 1,275 247,500 297,000
Map Cabinet 2,500 250
Shelving 108,036 118,839
Total cost of sales 620,136 733,359
GM before map cabinets 294,564 350,531
Adjsut for diff. in margin
on map cabinets -12,650 -15,180
Gross margin 281,914 335,351
Expenses
Offices salaries 52,000 52,000
Management 75,000 75,000
Sales salaries for new employee 13,200 13,200
Office admin 39,140 40,314
Sales Expense 18,540 19,096
Interest 14,640 14,000
Idle time 53,025 53,025
CONTRIBUTION
MARGIN
Systems without map cabinets Map Systems with map cabinets
1000 Series 2000 Series 3000 Series cabinet 1000 Series 2000 Series 3000 Series
Cost information
Avg # of cabinets/system 3 8 12
Number of cabinets sold 75 120 168 22
Subfloor length in metres 4 10 15
Installation hours 35 50 60
Calculation
Avg floor ($250/metres) $ 1,000 $ 2,500 $ 3,750 $ 1,000 $ 2,500 $ 3,750
Cabinet cost ($750 each) 2,250 6,000 9,000 $ 2,500 4,000 7,750 10,750
Installation cost ($15/hr) 525 750 900 525 750 900
Cost $ 3,775 $ 9,250 $ 13,950 $ 2,500 $ 5,525 $ 11,000 $ 15,400
Revenue/System $ 5,400 $ 12,800 $ 18,500 $ 2,800 $ 6,400 $ 14,000 $ 19,760
Markup on cost 43% 38% 36% 12% 16% 27% 28%
Gross margin $ 1,625 $ 3,550 $ 4,850 $ 300 $ 875 $ 3,000 $ 4,360
Gross margin % 30% 28% 26% 11% 14% 21% 22%
MAP CABINET
MARGIN ADJUSTMENT
without map with map without map with map without map with map
cabinets cabinets cabinets cabinets cabinets cabinets
Revenue $ 5,400 $ 6,400 $ 12,800 $ 14,000 $ 18,500 $ 19,760
Variable costs
Floor 900 900 2,250 2,250 3,375 3,375
Cabinets 2,025 3,600 5,400 6,975 8,100 9,675
Installation 525 525 750 750 900 900
Total variable costs $ 3,450 $ 5,025 $ 8,400 $ 9,975 $ 12,375 $ 13,950
Unit contribution margin $ 1,950 $ 1,375 $ 4,400 $ 4,025 $ 6,125 $ 5,810
Map cabinet systems sold 10 10 10
Margin adjustment/system $ 575 $ 375 $ 315
Total adjustment $ 5,750 $ 3,750 $ 3,150
EXCESS
INSTALLATION TIME
1000 series 25 systems * 35hr/system 875
2000 series 15 systems * 50hr/system 750
3000 series 14 systems * 60hr/system 840
2465
* $15/hr
Installation expense based on systems sold $ 36,975
1998 actual installation $ 90,000
Idle time $ (53,025)
Net Income
Comparison
1999 2000
Richard's Financial Forecast NI $ 43,240 $ 124,367
Revised Financial Forecast NI $ 16,369 $ 68,716
Difference -$ 26,871 -$ 55,651
In percentage -164% -81%
Primary Indicator #4
4 GSRM DThe student makes recommendations to improve future operations
NA - Does not NC - Provides a RC – The student C – The HC – Provides
address this indicator superficial or discusses 2 student more than 4
or does not attain the technically weak recommendations discusses at recommendations
standard of nominal analysis. to improve future least 3 to improve future
competence. operations. recommenda operations
tions to
improve
future
operations.
HOW CAN FFS
IMPROVE ITS FUTURE
OPERATIONS?
Avoid hiring inexperience employees:
Waste resources on training and supervising staff
Delegation:
Delegate the less essential functions of the business
Job focus based on talents:
Richard and Helen should focus on sales and marketing
aspects of FFS
Layoff the inexperience salesperson
Hire a person with accounting knowledge to perform
the office duties
Create a marketing strategy:
Create a permanent display model
HOW CAN FFS
IMPROVE ITS FUTURE
OPERATIONS?
Computer program corrections:
Spend additional money to make the program
work
Potentially hire someone to help with the
programming changes
New pricing strategy on bids:
The current cost-plus formula is not suitable
Possibility to increase the end user price
Reduce underutilized resources:
Eliminate installers’ idle time by $55,000
Sub-contract out all installations or pay installers
on a contract basis
HOW CAN FFS
IMPROVE ITS FUTURE
OPERATIONS?
Simplify and shorten the bidding process to
increase efficiency:
Richard spends 90% of time preparing detailed
drawings and costs for bids
Bidding prices mark-up varies based on external
factors
Not enough time to prepare extra bids
Increase bids will increase sales volume
Create a formal management reporting
systems:
Encourage the use of monthly financial
statements, cash flows and budgets
Primary Indicator #5
5 F S The student provides recommendation on structure alternatives for the investment
NA - Does not NC - Provides RC - Provides an C – The student HC – Provides a
address this a superficial or analysis with considers at least 3 complete,
indicator or does technically some depth that options for structuring indepth analysis
not attain the weak analysis. generally uses the investment – Dale of the financing
standard of Uses case case facts. to buy out the options.
nominal facts to a investors’ loan; FFS to
competence. minimal borrow the funds
degree. directly from Dale or
Equity Investment for
Dale in FFS
STRUCTURE OF
INVESTMENT
Debt:
Buy out the investor’s group loan
Lend FFS funds to repay loan
Equity:
Could consider Cumulative preferred shares
Common shares would not be likely obtained
since the Fishers might lose control
Might not have a resale market for these shares
Dividend income is preferred since it is subject
to a lower tax rate
STRUCTURE OF
INVESTMENT
Income splitting opportunity:
Could consider selling the shares to his wife, and
have her finance it with loan
Pay off loan with dividends and would have access
to a 500k capital gains exemption
Need to ensure that FFS maintains it’s Qualify
Small Business Corporation status.
STRUCTURE OF
INVESTMENT:
MORTGAGE OR RRSP?
RRSP:
Taxable to his wife
If contributed last 3 years attributes to Dale
Large withdrawal amount to get net $100,000
because of tax
Mortgage:
Mortgage house through RRSP
Interest payments are Tax deductible
Primary Indicator #6
6 F S The student provides recommendation on financing issues. How much cash does
FFS need? Is $100,000 enough?
NA - Does not NC - Provides RC - Provides an C – Calculation of the HC – Provides a
address this a superficial or analysis with financing available complete,
indicator or does technically some depth that from the bank based indepth analysis
not attain the weak analysis. generally uses on the a/r and of the financing
standard of Uses case case facts. inventory values. options.
nominal facts to a
competence. minimal
degree.
IS DALE’S INVESTMENT
ENOUGH?
Loans A vailable From Bank's Lending Formula:
Total A ccounts Receivables: 148
Less Consignment Sale -25
Net A ccounts Receivables 123 X 65% 80
Total Inventory 59
less: Laser Machine Programs -10
A dd Consignment Inventory: 18
Net inventory 67 X 50% 34
A mount f rom Bank 114
Long term debt needed -166
Shortage -52
Bank w ould also consider:
Shareholder Loan -40
Cash 20
Total Shortage -72
Working Capital:
Current A sset (less laser machine) 225
Current Liability (less personal share of loans) -234
Working Capital -9
IS DALE’S INVESTMENT
ENOUGH?
From the quantitative analysis done, there would
still be insufficient cash flow even if Dale invests an
additional of $100,000
Need to consider if the company would be able to
generate additional cash flow from other sources
such as:
(i) Government grants
(ii) Venture capital funds
(iii) The federal development bank
Primary Indicator #7
7 PM S The student applies technical knowledge to case facts in discussing the accounting treatment for Sales and
cost of sales to the new deal; the treatment of the advertising and promotional materials for the new sales
brochures; the treatment of the lawsuit; the treatment of the laser machine program; the treatment of the
computer software and programming costs; the current liability treatment of the loan from Beagle and his
group of investors and the treatment of the line of credit
NA - Does not NC - Provides RC - Provides C - Provides a HC - Provides a
address this a superficial an analysis with technically correct complete,
indicator or does or technically some depth that analysis for at least 3 indepth and
not attain the weak generally uses accounting issues. technically
standard of analysis. case facts. correct
nominal Uses case Analysis may analysis.
competence. facts to a contain minor Consistently
minimal technical uses case facts.
degree. weaknesses.
Accounting Issues
Accounting issues:
Consignment of systems
Disclosure of lawsuit with LMI
Capitalize Vs. Expense
• Treatment of new sales brochures
• Treatment of laser machine programs
• Treatment of computer software and
programming cost
Primary Indicator #8
7 T S The student identifies and discusses taxation matters.
NA - Does not NC - Provides RC - Provides an C - Provides a HC - Provides a
address this a superficial analysis with technically correct complete,
indicator or does or technically some depth that analysis in sufficient indepth and
not attain the weak generally uses depth. Uses case technically
standard of analysis. case facts. facts. correct analysis.
nominal Uses case Analysis may Consistently
competence. facts to a contain minor uses case facts.
minimal technical
degree. weaknesses.
Taxation Issues
Tax issues:
Recommendation to file tax returns
Loss carryforwards available
File GST remittances
Miscellaneous issues:
Taxable benefits to Fishers
Primary Indicator #9
8 PQ S The student provides opinion on how to proceed with the investment in FFS.
NA - Does not NC - Provides RC - Provides an C - Provides a HC - Provides a
address this a superficial analysis with supported complete,
indicator or does or technically some depth that recommendation. indepth and
not attain the weak generally uses Uses case facts. technically
standard of analysis. case facts. correct analysis.
nominal Uses case Analysis may Consistently
competence. facts to a contain minor uses case facts.
minimal technical
degree. weaknesses.
RECOMMENDATION: SHOULD
DALE INVEST ANOTHER
$100,000 IN FFS?
Recommend not to invest further in FFS
FFS is a risky investment compared to Dale’s
investment profile (age and financial status)
Consider risk such as insufficient funding and
lawsuits which could be detrimental to the company
Need cooperation from Richard and Helen to
reorganize the corporation
If Dale wants to proceed, recommend that he has a
shareholder agreement written up so he can free
himself when necessary and contain clauses such as
personal benefits limitations, salary caps, etc.
NC RC C HC
The student recognizes that the engagement is not clearly defined.
The student needs to recognize that we must have specific
requests for the forecast. The student identifies the key
1 A assumptions that was considered 2 3 5 5
The student considers Dale’s investment consideration.
2GSRM Consideration of the SWOT of the investment 3 5 10 10
3F The student prepares a revised forecast. 5 10 20 20
4GSRM The student makes recommendations to improve future operations 4 8 15 15
The student provides recommendation on structure alternatives for
5F the investment 2 3 5 5
The student provides recommendation on financing issues. How
6F much cash does FFS need? Is $100,000 enough? 2 3 5 5
The student applies technical knowledge to case facts in
discussing the accounting treatment for Sales and cost of sales to
the new deal; the treatment of the advertising and promotional
materials for the new sales brochures; the treatment of the lawsuit;
the treatment of the laser machine program; the treatment of the
computer software and programming costs; the current liability
treatment of the loan from Beagle and his group of investors and
7PM the treatment of the line of credit 4 8 15 15
8T The student identifies and discusses taxation matters. 3 5 10 10
The student provides opinion on how to proceed with the
9PQ investment in FFS. 4 8 15 15
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