Business Plan and Loan Package
Running head: TOOTSIE ROLL INDUSTRIES, INC. LOAN PACKAGE Tootsie Roll Industries, Inc. Loan Package ACC561 22 September 2011 Introduction Now that the small business idea has become more that just fine print, it is time to put together a loan package that explains the story of the company. There are important questions to answer, demonstrating the company’s ability to correctly make important financial decisions, and detail how the business will pay off the loan. This paper will include the requirements of a loan package, creditor requirements, a ratio analysis, loan justification, and how the company plans to use the proceeds.
Tootsie Roll Industries, Incorporated Loan Package Loan Package Requirements Like a job application, the business will start the loan package with a cover letter as well as an updated business plan. A description of the company’s history, vision statement, market, products and services, the management, the reason for the loan, how it will impact the business, and method of repayment is also required.. The United States Small Business Administration (SBA) requires the business owner to complete an Application for Business Loan, “SBA Form 4” (www. ba. com) that will be completed by the lending institution. A personal background information statement also needs to be completed on SBA Form 912. Bank loan officers require financial statements assembled by an accountant that include three to five years of balance sheets, income and cash flow, and audits. Tax returns are also required that authenticate the company numbers. According to Robyn Barrett, managing member of Factors Southwest which is an alternative lender says, “do not put a package together until your taxes are done”. (www. actorssouthwest. com). 90 percent of the lenders’ decisions are based on tax returns and financial data. Forecasts or projections included in the loan package should consist of at least three to five future years or the complete loan term. The forecasts need to show the best, middle, and the worst case scenarios as based on current market assumptions. Ultimately, the banks’ goal is for you to repay the loan. Collateral is required as a means for repaying the loan in the event that the business cannot pay with the primary revenues of cash flow.
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Banks may also request a business guarantee repayment of loans with personal assurances such as the assets of the executives or owners. Ratio Analysis Liquidity Ratios: a short-term measurement of how maturing obligations are paid Current Ratio – short-term debt paying ability Current Assets = $ 199,726 = 3. 45 Current Liab. = $ 57,972 Working Capital – a measurement of financial health (Kimmel, 2009) Current Assets – Current Liabilities $ 199,726 – $ 57,972 = $141,754 Current Cash Debt Coverage Ratio – accounts for the ratio between cash and liabilities
Cash provided by operations = $ 90,064= 1. 50 Average Current Liabilities = ($ 57,972 + $ 62,211)/2 Solvency Ratios: measurement of a company’s long time survival Debt to Total Assets Ratio – a measurement of the creditor’s risk assessment Total Liabilities = $ 174,495 = 21% Total Assets $ 812,725 Cash Debt Coverage Ratio – a measurement of a company’s cash solvency Cash provided by operations = $ 90,064 = 54% Average Total Liabilities ($ 174,495 + $ 160,958)/2 Profitability Ratios: measurement of income and operating for a period of time.
Return on common stockholders’ equity ratio – the amount of net income dollars a company earned for stockholders’ equity Net Income – Preferred Stock Dividends = $ 90,064 – $ 46,685 = 7% Average Stockholder’s Equity($ 638,230 + $ 630,681)/2 Return on assets ratio – measures the profitability of a company Net Income = $ 90,064= 13% Average Total Assets = ($ 812,725 + $ 791,639)/2 Profit margin ratio – measures the extent by which selling price covers all expenses (Kimmel, 2009) Net Income = $ 90,064 = 18% Net Sales = $ 492,742
Loan Justification Tootsie Roll Industries, Inc. needs a loan to supplement operational expenses and decrease the negative impact market risk factors may have on sales volume. In 2007, the product cost of goods sold increased from costs incurred 2006 as a result of significant increases in prices of many commodities purchased by Tootsie Roll. These commodities consist of some of the major ingredients used in Tootsie Rolls and other products, such as corn syrup, dextrose, milk products, vegetable oils, sugar, and gum base ingredients (Tootsie Roll Industries, 2011).
As a percentage of net sales, product cost of goods sold increased from 62. 8% in 2006 to 66. 5% in 2007 (Kimmel, Weygandt, & Kieso, 2009). Light freight and delivery costs increased as a result of increases in energy costs, such as oil used for fuel. Exchange of foreign currency on products manufactured in Canada has generated an adverse effect as well, even though sales growth has increased. Tootsie Roll Industries, Inc. has made efforts to offset the increases in costs of commodities through selective price increases and reducing costs where possible (Kimmel, Weygandt, & Kieso, 2009).
However, the company has not been able to recover all of the costs associated with the increases in commodities. The company does not want to risk product price increases having an adverse effect on consumers’ acceptance. It is aware that competitors may face the same risk factors. However, obtaining financing provides a cushion to supplement significant increases in operational expenses. Management believes cash flows from operations and maturities of short term investments will be sufficient aid in meeting the financing needs of the company, along with expected capital expenditures in 2008 (Kimmel, Weygandt, & Kieso, 2009) .
Company’s Plan for the Proceeds The foundation of Tootsie Roll Industries is the commodities which the company uses to produce its delightfully sweet confections and these commodities are one of the company’s largest annual investments (Tootsie Roll Industries, 2011). With the current economic conditions creating rising inflation the future cost of commodities is sure to rise significantly and creates a market risk factor for Tootsie Roll Industries.
These commodity price increases would normally be passed on to the customer in the form of price increases but these increases could have a negative impact on future sales. Although management seeks to substantially recover cost increases over the long-term, there is risk that price increases and weight declines cannot be fully passed onto customers and, to the extent they are passed on, they could adversely affect customer and consumer acceptance and resulting sales volume” (Tootsie Roll Industries, 2011, p. 12).
Another business concept for offsetting the rise in commodities prices is to buy guaranteed futures contracts. “The Company utilizes commodity futures contracts and commodity options contracts as well as annual supply agreements to hedge and plan for anticipated purchases of certain ingredients, including sugar, in order to mitigate commodity cost fluctuation” (Tootsie Roll Industries, 2011, p. 12). The company can also hedge against future rises in commodity prices is to purchase forward foreign exchange contracts. The Company also may purchase forward foreign exchange contracts to hedge its costs of manufacturing certain products in Canada for sale and distribution in the United States, and periodically does so for purchases of equipment or raw materials from foreign suppliers” (Tootsie Roll Industries, 2011, p. 12). Many of Tootsie Roll Industries competitors use similar business tactics. Tootsie Roll currently has $7. 5 million in interest bearing debt but has $115. in cash and cash equivalents on hand (Tootsie Roll Industries, 2011). This abundance of cash and cash equivalents on hand offsets problems for future liquidity should Tootsie Roll fail to reimburse the proposed loan package. Therefore, the loan package will be used to purchase commodity futures contracts and commodity options contracts and forward foreign exchange contracts to hedge against a rise in future manufacturing costs. Conclusion To succeed in getting a small business loan, preparation and organization are needed.
Knowing exactly how much the company will need, why it is needed, and when the proceeds can be expected to be paid back are the key elements to convince the lender that your business is a good credit risk. References Kimmel, P. , Weygandt, J. , & Kieso, D. (2009). Accounting: Tools for business decision making (3rd Ed. ). Hoboken, NJ: John Wiley & Sons. Loans. Business Finance. Small Business Loans. Retrieved 20 September 2011 from http://www. businessfinance. om/small-business-loans. htm Loans. U. S. Small Business Administration. Small Business Loans. Retrieved 19 September 2011 from: http://www. sba. gov/category/navigation-structure/starting-managing-business/starting- business/loans-grants-funding/loans Taxes. Paying Taxes. Retrieved 20 September 2011 from: http://factors-southwest. com/Management-Team Tootsie Roll Industries. (2011). Tootsie Roll Industries Annual Report 2010. Retrieved from http://www. tootsie. com/ financial/fin_203. pdf