L'Ecole des Etudes Commerciales

"How can this be?" exclaimed Helene Leclerc, President of L'Ecole Des Eludes Commerciales. It was Monday, March 12, 1991, and Helene had just been told by Jean Roy, her bank manager, that her four year old company in Moncton, New Brunswick, had borrowed $40,000 more than its allowed line of credit. The bank had given her 30 days to bring the account back within the assigned credit limits. "Our enrolment has grown from 400 students in 1986 to 1,100, and our revenues have grown correspondingly. What has gone wrong with my organization?"

Background Information

Helene and Robert Leclerc had incorporated L'Ecole Des Eludes Commerciales during the summer of 1986 to take over the operation of a privately-run business school. "The company grew so rapidly we thought things were going well. We started with only 400 students and now have an enrollment of over 1,000, with 22 faculty members. Because we have a much lower student-teacher ratio than other privately-owned schools, our main competition, our courses specializing in travel agency, secretarial, and microcomputer training, have been very well received. But I am very concerned that our cash problem and the fact that I was totally unaware of it will have an adverse effect on the school's credit rating. I really need a system to tell me where I stand. I thought I had that, but I guess there are some problems with it."


This case was adapted from a case prepared by Professor Wayne King for tile Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management. Material in this case has been disguised.

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.


After a very difficult first year, the company had gradually increased in size and stability. Now, one of Helene's main concerns was that the company's bank could lose confidence in her company.

Organization

The company's President and Chief Executive Officer was Helene Leclerc. Helene's main responsibility in the school's operation was to communicate with various government funding agencies. "These agencies are very important to us," she explained. "The education programs that they fund are constantly changing, and we must keep abreast of the changes. Although our basic course offerings remain the same, I find that they need modification from time to time. Also, part of each student's training allowance is assigned directly to us to pay for tuition and supplies. It is important that this flow of money be kept running smoothly." Up until August, 1990, Helene had supervised the company's bookkeeper rather closely. However, at that time a new Comptroller had been hired. "With the addition of this professional person," Helene said, "I felt I could now spend more time at other things that needed my attention." One of these things had been a recent appointment to the Board of Directors of a major Crown Corporation based in Ottawa. "Although this was a prestigious appointment," said Helene, "I do regret the amount of preparation required for the monthly meetings, which are usually two days in length."

The company's Comptroller, Anna Kruger, was employed as a result of Helene's belief that she herself was spending too much time supervising the accounting. Anna had recently graduated from university with a Bachelor's Degree in Commerce, and had majored in accounting. This was her first job, and Helene and Robert gave her complete responsibility for the accounting department. Her duties included opening the mail, preparing the bank deposits, reconciling the bank accounts, paying suppliers, preparing payrolls, and maintaining the computerized accounting system. Anna had impressed Helene with her expertise, especially in some of the school's activities which would not normally be considered accounting functions. "Anna always seemed to have the answer", Helene said in retrospect. "No matter what I asked she could tell me without referring to her records. I came to rely on her advice in many aspects of the business."

The School Principal, Elaine Long, had been with the company and its predecessor since it began, a total of eight years. She was responsible for the day to day operation of the school, dealing with students' problems, and scheduling classes and instructors. "Elaine and I always had an excellent working relationship, but recently I've noticed a tension which wasn't there before," Helene commented. "She doesn't seem to like Anna much, either. Elaine does an excellent administrative job for us and is critical to the school's success."

The Problem

After her initial shock from the banker's Monday morning telephone call had subsided, Helene reflected on his comments and what she had to do. Anna had left on a two week vacation on Friday and had, as usual, left her weekly cash report with Helene. According to that report, if all the issued but uncashed cheques cleared the bank, the company would be borrowing $60,000. This was well within the company's negotiated line of credit which allowed them to write cheques on the bank account up to $75,000 in excess of the actual cash in the bank. This excess at any particular point in time is known as the overdraft position. The banker had told her, however, that the company owed $115,000, and had inquired pointedly as to whether any other uncashed cheques had been issued. Helene had been unable to answer this question, and had become even more concerned when the bank manager said that this was not the first time the company had recently exceeded its limit, but that on the other occasions the amounts had been smaller and the Comptroller had immediately made deposits to cover the amounts. I should point out that the bank has viewed this situation with growing concern", Jean told her. 'We will need an immediate report on any other uncashed cheques, and we want to know your plans for bringing the account back within the negotiated limit. The bank is prepared to give you 4 weeks to do this. As a friend, Helene, I want to say that your inability to answer my questions tells me that you have some real problems in your cash management system. You should be able to give me the required information right away."

By thoroughly searching Anna's office, Helene compiled the following information:

  1. The $60,000 figure quoted by Anna was the actual amount owed the bank on Friday, but did not include the issued but uncashed cheques written that day.
  2. Helene found that cheques dated on the Friday that Anna's vacation commenced totalled $80,000 and covered payments made to suppliers.
  3. The company's bi-weekly payroll of $30,000 had been issued on Friday.
  4. Most of the data processing equipment used in the school was leased and required monthly payments of $20,000.
  5. The school normally paid its suppliers every two weeks. Helene felt that because of this, there should be very few outstanding cheques other than those issued on Friday.

Because a relatively large percentage of the school's cash came from government funding and student loans, cash flow tended to follow a bi-weekly pattern. Helene estimated that cash in-flows averaged $175,000 every two weeks, with the next one coming in two weeks time. Excluding payrolls, all cash payments averaged $60,000 per week.

Helene had also found that the company's bank account had not been reconciled since Anna had joined the company and that Anna had made only sporadic efforts to keep the computerized accounting system up to date.

Summary

Helene was very upset by her company's financial situation, and decided to hire a consultant to determine whether the bank's requirements could be met. She also requested that the consultant identify weaknesses in the company's operations and cash management system, and suggest improvements.

"I really thought that Anna was doing an excellent job for us," said Helene. "I knew that she and Elaine weren't getting along well, but I'm sure that Elaine would have helped her in any way she could have. I know I would have. We must deal with this situation and convince the bank that we have a sound system of controls in place. I also have to consider the impact of this situation on our expansion plans."

Study Questions

  1. a) If all of the cheques issued on Friday are cashed, what will the overdraft position be?

    b) Assuming the overdraft position on March 12, 1991 is as determined in a) above and regular cash payments and collections, what will be the overdraft position in 4 weeks?
  2. Identify any weaknesses in the company's operations and the cash management system that have contributed to their problems with the bank. Provide recommendations for improvements.
  3. Discuss the relationships between Helene, Elaine and Anna. How have they had an effect on the company and its operations?