The Columbia Mills, Inc. was a company which chiefly specialized in the production of denim, among other products like fabrics whose target market was both local and international. As it was revealed, the Columbia Mills, Inc. incurred occasional losses which resulted into many shortcomings in its struggle to remain in the industry of textiles; as its competitors seemed more superior. Further, the company’s management seemed to be less competitive in strategic planning as compared to other related companies in the industry; which also led to loss of popularity of the company’s products in the market. In this paper, a critical evaluation of the company would be made in pursuit of the correct course that should be taken by the company’s chief loaner, the Peachtree National Bank.
Perhaps, the Columbia Mills, Inc. needed to be provided with another loan so as to reinstate its then business performance. The Peachtree National Bank, which was the company’s chief loaner, should have closely monitored the management of the Columbia Mills, Inc.; hence offering any possible assistance in terms of finance and advice was crucial. As it could be seen from the major covenants the bank had made with the company, the minimum cash flow/current maturities ratio had to be maintained at 1.0: 1.0 which was not violated. Based on the fact the company’s net-worth was $10,973,000, it was justified to borrow another loan as its net-worth was still more than $ 10,000,000 as agreed in the covenant with its bank. The company’s Debt/Capital ratio of 1.0:1.02 indicated that, the company’s net worth could not be able to compensate the liabilities at its then current state.
Though there is uncertainty about the future demand for denim the key problem that faced Columbia Mills, Inc. was the lack of management talent among the top controllers of the company. For instance, it could be seen that; the demand for denim was rising from year to year like in the year 1976 to the year 1977, the demand for denim rose from 723 to 790 square yards. As it was studied, the company lacked management guidelines that could conform to the dynamic market conditions so as to secure a better performance of the company; and reduce the losses incurred within the company. More so, the company’s total current assets were $11,804,000 which was a higher figure than the total liabilities which amounted to $11,138,000. On this basis therefore, the company stood at a position for better performance if the loan of $5 million was advanced to it.
Further, the advancement of the loan to Columbia Mills, Inc. would have helped replace some of the company’s less effective machinery due to depreciation. As it was revealed, the company’s net sales dropped from $60,858 to $52,201 in the year 1976 to the year 1977 respectively. Specifically, this observation implied that; the fixed/current net worth ratio of 1.0:1.2 was observed to drop significantly.
Generally, the advancement of another loan for the Columbia Mills, Inc. was more preferred than its liquidation. This was because in the long-run, the performance of the company seemed promising; once the management of the company was also corrected. This decision also favoured the Peachtree National Bank because according to the terms of the loan, more interest was also accrued from it. For instance, the terms involved a revolving credit for the whole year of 1977 whose interest rate was compounded differently within a specific bracket of time. This meant that, the company could benefit very much in the short-run; in which its liabilities were to be paid in a due future time of seven years, as opposed to liquidation which would totally terminate the company. More so, the company is in a position to repay the loan within the given period of seven years because; from the trend of its Current liability/asset ration of 1.0:1.5, the banks company’s income is likely to go up faster than the liabilities.
As it was revealed, the Columbia Mills, Inc. trend of performance justified its position for being advanced with a $5 million loan so as to restructure its operations for a better performance. More so, the company should have pursued at acquiring a competent management team which would have helped propel the company to a better performance. It therefore necessitated the Peachtree National Bank to advance the $5 million loan to the company which would have replenished its capital for a better performance.