Spencer Sporting Goods

In January 1998, Mr. William Spencer, president of Spencer Sporting Goods, was distressed to discover that the company’s cash balance had fallen to $11,700, its lowest level in several years. Mr. Spencer believed that this amount was clearly too low to support the company’s current scale of operations. He was further concerned because the cash balance had been declining for a considerable period of time, despite his company’s impressive record of growth.

The decline in cash was a particular worry to Mr. Spencer because of difficulties that he was currently experiencing with a number of the company’s trade suppliers. These suppliers were pressing Spencer Sporting Goods for prompter payment of their invoices. Mr. Spencer feared that his company’s future trade credit might be curtailed. He realized that this could be detrimental to his company’s prospects for continued growth. A deeper fear was that some suppliers might cancel Spencer’s exclusive regional distribution rights for their products. Moreover, its low cash balance would make it extremely difficult for Spencer Sporting Goods to accelerate its payments to trade suppliers. Purchase terms were typically 2%/10 days/net 30 days. The company had been unable to take advantage of many prompt-payment discounts because of its delays in making remittances.

Mr. Spencer’s first step upon learning of the cash crisis was to pay a call upon Mr. Colin Wilcox, vice president of Fidelity Bank & Trust Company. Fidelity Bank had served as Spencer’s bank of account since the company’s founding. It had also provided financing for the company for several years on the basis of renewable short-term notes. The interest rate on these notes was currently one and one-half percent above the bank’s prime rate. The notes had been routinely renewed in the past, with only a cursory review by Mr. Wilcox of Spencer Sporting Good’s financial condition.

Mr. Spencer explained his company’s