7 Pages Posted: 21 Oct 2008
While preparing a financial forecast, the newly promoted CFO of a small and profitable but financially constrained ready-mix concrete company must choose between renegotiating debt obligations, postponing long overdue capital improvements that will prevent more costly future repairs, or reducing the dividend payment to a parent company that just recently purchased the firm.
Rev. Jan. 28, 2016
Alliance Concrete was a small ready-mix concrete producer in Michigan's northern lower peninsula. The company operated 14 mixing plants and owned a fleet of 240 mixing trucks. Its customers were predominantly in the residential and commercial construction industry with some additional sales related to road construction and repair. The company had been extremely successful, with substantial revenue and income growth over the last few years driven by a strong residential real estate market. Although Alliance was purchased a year earlier by National Industrial Supplies, a Canadian construction conglomerate with assets in both the United States and Canada, it continued to operate as a separate legal entity.
In late January 2006, Alliance CFO Martin Harris was putting together forecasts of the firm's operations for the coming year. Harris had been recently promoted to this position after the departure of some of Alliance's senior management when the acquisition was completed. In addition to facing a relatively new task, Harris was understandably nervous for two reasons. First, National's head office had made it abundantly clear that the accuracy of financial projections was a significant concern. In anticipation of an upcoming equity issue, National's current investors and numerous analysts were asking for guidance on National's expected future performance, and National was reluctant to provide such guidance unless it was quite sure of the numbers. Second, early the next week, Harris would have his first meeting with Alliance's bank to discuss progress on reducing the company's debt. While Harris was confident about Alliance's prospects and believed the principal repayment would be easily accommodated, it would be his first meeting with the bank as CFO.
As Harris began to put the final touches on his projections, what had been a slight case of nerves became something more akin to fear. Not only did he realize the full extent to which Alliance's operations might reasonably deviate from his projections, but it turned out that the company was stuck between a rock and a hard place. Despite Alliance's recent success and clear signs of continued growth, necessary capital improvements would make it impossible for the company to both meet its obligations to the bank and make an expected dividend payment to National. Someone was bound to be disappointed.
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Keywords: debt policy, forecasting, growth management
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