BE OUR GUEST INC

Be Our Guest Inc



Be Our Guest Inc

Be Our Guest Inc., a Boston based company, is a rapidly growing equipment rental company with substantial seasonality in its revenues and profits. In the spring of 1998, the senior management team is reviewing its financial plans in preparation for a meeting with the company's bank. The case provides an opportunity to forecast financial needs and consider the appropriate structure and amount of bank borrowing. For years the company has been renting party supplies and furniture to caterers, event planners and hotels, it has also managed to grow gradually in a very volatile and seasonal business. The founder, Stephen Lizio and co-owners Al Lovata and Simone Williamson found it difficult to fund daily operations because of seasonal cash shortages.

Stephen Lizio met Anne Granger, Vice President at State Street Bank, at a networking event in 1995. She became interested in learning more about Be Our Guest, Inc. and over the next few months she maintained contact, visiting the company and becoming acquainted with the management team. In 1996, the company had secured a $100,000 revolving line of credit at the prime rate plus 1.5%, and a $390,000 five-year loan at a fixed rate of 9.25%. The term loan's monthly payment was more than $8,000.

By the end of 1997, the term's loan outstanding balance was reduced to $315,000. On the contrary, the credit line had been increased to $140,000 and tapped out to fund a large jump in receivables in December. While a rise in receivables usually is a welcome event, many of Be Our Guest's customers had followed up their annual holiday rush, then party-equipment rentals peak, with their annual winter slump, leaving them unable to pay their bills until late spring, when business could be counted on to pick up again.

Trying to finance such sharp swings in demand has been one of the biggest challenges that the owners had to face. Holiday seasons in the fall and winter typically accounted for half of the company's annual revenues. By contrast, the big drop in rental activity in the first quarter of each year usually requires the company to operate at a loss. While the company hires 15 to 20 temporary workers to handle its high seasons, it keeps 30 to 35 workers on its payroll year-round to reduce employee turnover. Moreover, the size of the seasonal rises is unpredictable. For instance, revenue in June 1997 was 35% higher than a year earlier. As a result of such unforeseeable results, forecasts for each year are guesswork until halfway through the year. However, the company wanted to ensure it had sufficient financing to handle a 15% rise in revenue in 1998. It also was evaluating investing in new computer and phone systems, and such long-term plans as moving into a larger building, expanding its product line, or buying a competitor.

But while the company's annual revenue from 1995 to 1997 had risen 49% to $2.7 million, net income for 1997 had declined 37% to ...