Case Study 4
SEEDS OF DISTRESS
Jim Layton, controller for Kitty (Hawk Food), Inc. (KHF) was under considerable stress as he walked toward the chief executive's office. Marshall Horne, the CEO, was not known to take bad news well. In his hands, Jim held two letters from food suppliers that threatened to cancel KHF's trade credit accounts. KHF had developed difficulties in cash flow such that their payments on the accounts had been late, at best. The suppliers provided normal trade terms to KHF, with a 2% discount for early payment (within 10 days), and a 30 day limit. No purchase limits had been placed on the firm.
KHF had depended heavily on trade credit for the recent expansion of its service area into the Outer Banks of North …show more content…
KHF was not a significantly large customer to either supplier. It would be unlikely that
KHF could convince them to make further concessions; already the accounts were more than
60 days old. It was possible to find other suppliers for similar products, but KHF would need trade credit to fund purchases. Given the firm's record of lateness and new suppliers' reliance on credit references, the chance of establishing effective new relationships was questionable.
Another concern was that, although other suppliers had similar products, they were seldom exactly the same. Jim knew that restaurant owners were sometimes very picky about the character of the food they served. Last year, one of the popular products that KHF supplied, breaded chicken tenders, was replaced with a similar product, which had a different texture and flavor in the breading. The severity of the outcry from restaurant owners forced
KHF into an emergency search for the prior product. KHF ended up buying the tenders directly from the producer, and restored the restaurant owners' confidence.
The relationships with the other suppliers was considerably less strained. KHF had been able to pay within the 30-day limits, albeit usually on day 30. The firm's other short term creditors, two local bankers, were aware of KHF's cashflow problems, but had not pulled credit availability. This was probably because of Horne's