Mattatall Signs Limited
Bob Mattatall was the president and sole shareholder of Mattatall Signs Limited, a sign manufacturing company located in Dartmouth, Nova Scotia. In March 1988, Bob sat behind a tall stack of work orders and considered his cash flow problem. "Business is booming but we just can't seem to make ends meet. It seems every time a bill comes due, we have to increase our bank loan. What is going wrong?"
Mattatall Sips Limited produced a wide range of indoor and outdoor sips for private sector businesses in the Maritime provinces. The company, privately held by Bob Mattatall, employed nineteen people primarily in sales, design, production, and installation of signs. The company prided itself on quality products and service.
Mattatall Sips began as a sole proprietorship in February, 1979. At that time there was only one employee who was responsible for production. Six months later another employee was hired. Bob Mattatall incorporated his company in May 1979, and chose January 31 as the accounting year end. Sales for the first fiscal year were $66,000 with a net deficit of $7,500. By 1987, the company's sales reached $1 million, and yielded a profit of $65,000. Although sales and net income both declined in the year ending January 1988, Bob expected sales to increase to approximately $1.2 million in 1989. Assets had grown from $49,000 in 1980 to $569,000 in 1988. Exhibits 1 to 3 present financial statements.
This case was prepared by Professor Shelley L MacDougall of Acadia University for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management. The author would like to acknowledge the contributions of S Hamilton Hinds, Karen Floyd, Dawn Lewis, and Arthur Dawson.
Copyright © 1991, the Atlantic Entrepreneurial Institute, an Atlantic Canada Opportunities Agency funded organization. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.
The company's primary products were florescent and neon2 illuminated (electrical) signs. It also sold painted plywood sips, truck lettering, directory signs, illuminated awnings, magnetic signs, motioned sips, individual letters, and electronic communication displays. The company was uncertain which product lines provided the greatest profit margin, but electrical sip sales were by far the greatest in volume. See Exhibit 4 for a breakdown of sign sales and costs.
Mattatall Sips was the only company in Atlantic Canada actively promoting sips from Toronto based King Products. King Products specialized in elaborate directional signs such as those used inside front entrances of shopping malls and office buildings. Gross profit from sales of King Products signs amounted to $17,000 in 1987 and $9,000 in 1988. The company also represented Claude Neon of Montreal (a division of the Jim Pattison Sip Group), as well as other national companies. Mattatall installed and serviced these sips on a subcontract basis.
The company's main revenue generators were 1) illuminated signs, 2) architectural graphics, 3) out-of-house purchases (installation of ready made signs), and 4) installation and servicing of sips for King Products and Claude Neon.
Neon signs were tremendously popular both as store front and indoor signs. Mattatall Signs purchased blown and shaped glass tubes from Atlantic Wholesale Neon and then completed the manufacture in-house. It was considerably less expensive for the company to purchase the glass tubes even when costs of damage and transportation were added. However, delivery time was the major drawback of this system. Mattatall differentiated itself from its competitors primarily on the basis of service. "We provide expedient, coordinated service from the sale through to the manufacture and installation of a sign. We emphasize prompt delivery and will turn away orders if we feel we cannot promise and meet a reasonable deadline." Since Mattatall had to automatically add at least two weeks to the neon supplier's delivery time to complete production, this arrangement for neon was inadequate. Mattatall was thus in the process of setting up the facilities necessary to blow and shape glass in-house. This was expected to require a capital outlay of approximately $70,000 for equipment, start-up inventory, and leasehold alterations such as installation of tables, etc.
2 Illuminated signs were commonly seen on store fronts inside shopping malls. They were generally a florescent or neon tube encased in aluminum and opaque, painted plastic. A second type of neon sign was a coloured, unencased tube shaped into the companys name or logo.
The demand for neon signs had traditionally been unpredictable. At this time, it accounted for approximately 10% of Mattatall's electrical sign sales. Bob Mattatall felt current demand for neon was sufficient to support the $70,000 investment.
Neon was the mainstay of Day-Nite Neon Signs (a major competitor also located in Dartmouth) and it was produced in-house by that company. Bob Mattatall realized he needed to be competitive and was thus taking on full production to reduce delivery time of neon signs to his customers, and to maintain the company's market share.
The sign industry in the Maritime provinces included a range of companies from small garage-type operations with extremely low overhead, to large companies such as Day-Nite. Many of the smaller companies offered only one type of sign, such as painted plywood. Mattatall Signs, Day-Nite, and Young Signs, however, offered more diverse product lines.3 Bob did not consider the small firms to be in direct competition with Mattatall Signs.
Mattatall Signs was the second largest sign company in the region, smaller than Day-Nite Neon Signs Ltd. Young Signs Limited of Dartmouth ranked third in size.
There were several national sign companies based in Toronto and Montreal which actively solicited customers in the Maritime region. Such companies included Claude Neon, Trans Canada Signs, and Steel Art Signs. Installation of these companies' signs was contracted out to the local sign companies. Mattatall claimed 70% of this work.
According to Bob Mattatall, there was a new company entering the market which was offering an innovative service to sign customers. This service was leasing. Sign-O-Lite, a Vancouver based firm, offered signs to customers on a monthly payment basis. Since purchasing a sign required a substantial up-front investment, most difficult for a new business, leasing was an attractive alternative. Furthermore, in the event of business failure, the company was not "stuck" with a useless sign, the resale value of which would be very small. Mattatall S igns was interested in entering this area of the market but had neither the capital nor the administrative infrastructure to do so.
3 Mattatall had a broader product line than both Day-Nite and Young Signs. Day-Nite concentrated more on illuminated displays. Young Signs sold approximately 75% of the same items as Mattatall but did little architectural/institutional work.
Bob Mattatall felt product quality and pricing policies of the three largest sign companies were roughly equivalent although comparison was difficult due to the high degree of custom work in sign manufacture. Bob Mattatall refused to sacrifice quality or service for cost. Ibis ensured the best product for Mattatall's customers and provided for favourable word-of-mouth advertising. For the same reasons, Mattatall Signs refused orders from those customers who wanted low grade signs because, as Bob pointed out, an inferior product reflected badly on the company.
Bob Mattatall placed his customers into one of three categories: 1) the "money makers", 2) the "marginal" customer, and 3) the "fun" customers. Bob felt the third type was also important because work "had to be fun sometimes." Mattatall's largest customer was Maritime Beverages Limited of Dartmouth (regional distributor of Pepsi-Cola), which provided approximately $75,000 in annual sales. It was this customer's loyalty which allowed Mattatall Signs to survive the lean times. The company did not rely on Maritime Beverages nearly as much as it had previously because it expanded its customer base considerably over the years.
Mattatall lost fewer than five accounts since its founding. It had approximately 350 clients who were considered current, with a great deal of repeat business from many of these clients.4
Mattatall leased three adjoining bays in the Burnside Industrial Park in Dartmouth. In 1987, the company acquired the third bay although the space was not required at the time. Bob always intended to expand into the next bay when sales volume warranted it. However, when another potential renter expressed interest in the space, Bob, who had the right of first refusal, decided to take it before he lost the chance. He was consequently planning to expand the company's product line to fill the unused space. Some of the space was used for extra management offices and a stationery room. The installation of the neon plant in the new bay was under way but occupied very little space. One option Bob was looking into was a screen printing facility.
4 Repeat customers were those who purchased a sign from Mattatall on more than one occasion. During the year ending January 1988, these sales represented 73% of total sales revenue.
There were four suppliers to the sip industry in the region. These were: Acme (Montreal), EM Plastics (Dartmouth). East West (Dartmouth), and Alliance Sip Supply (Toronto). Thew companies were suppliers of plastics and electrical parts. Their primary market was the sign industry. Mattatall bought its standard materials from the local companies, East West and EM Plastics, to minimize transportation costs. Approximately 80% of its purchasing was from East West. Delivery time from suppliers was becoming a problem and as a result, the company was beginning to build up its raw materials inventory.
Processing of Work Orders
Prior to the fiscal year ending 1987, all the accounting had been done manually. A computer was purchased in June of 1986, and all subsequent data were recorded on the computer. Marjorie Siddall, the accounting clerk, also entered all the back data to February 1, 1986. This allowed a full year of basic data for the closing statements on January 31, 1987.
The data entered from the completed work orders were mainly sales information. Work orders were processed in batch. At this time customer invoices were printed and mailed. When this billing cycle was performed, the computer updated each customer's accounts receivable file.
The company did not yet have an inventory system, although the materials used in each job were assigned an inventory code, This code referenced the price to be charged to the customer for each item. Bob did all the coding manually. Once coded, the work order could be included in the next billing cycle.
Three billing cycles took place during the month. On average, the company processed 200 work orders/invoices per month. The December 1987 total of 236 invoices, was unusually high. Four customers accounted for 45% of the transactions.
Marjorie imposed some deadlines for data entry and for the closing of any one month. She required all the work orders for a given month by the 10th of the next month. She would then run all of the update programs (including invoicing), generate the month's financial reports and close the month (via the general ledger). The only deadline the company absolutely had to meet was the 20th of every month. At that time the provincial sales tax had to be paid. The federal ales tax was due by the end of the month, but Marjorie processed and remitted this amount at the same time as the provincial sales tax.
Obtaining all the work orders to close a month was often difficult. According to Marjorie, Bob was very involved in the daily operation of the company. Consequently, he often delayed the completion of work orders until he could find time to code them.
A description of the job order work flow is provided in Exhibit 5.
To meet short-term cash shortfalls, bank overdraft was used. In 1986 and 1987, the overdraft account was used almost continuously. The bank had authorized a $100,000 limit on this account. In addition, the company had an operating line of credit of $50,000. Bob's intention was to eliminate all risk by reducing long term debt to zero as quickly as possible.
Mattatall's usual policy for accounts payable was to pay within thirty days, although there were no interest charges for going beyond that time. Most bills were paid as soon as possible, but if funds were short, Bob let payables go as long as sixty days.
Credit terms of "net 30" were offered to Mattatall's customers, as was standard for the industry. Clients with overdue accounts received an occasional phone call from Marjorie.
Bad debt expense had shown some variability over the years, but averaged 1.2% of sales since 198 1. Bob was not inclined to grant credit to customers whom he believed were even slightly risky. In fact, Bob estimated he could have increased sales in 1988 if credit had been given more freely.
The company's financial statements for the years 1981 to 1988 are presented in Exhibits I to 3.
Bob felt the company's sales potential was $2 million by 1990 assuming additional human resources and a new Production layout. The company anticipated the opportunity to produce and install signs for clients such as Sobeys, a regional grocery store chain. If these opportunities were realized, they would amount to at least $150,000 in sales revenue. However, Bob would not welcome this growth until the company could recruit sufficient human resources to handle the volume.
The company was purchasing noon equipment and was undergoing plant expansion (leasing the adjacent bay). Bob was also considering setting up branch operations in New Brunswick. The company was in the process of computerizing its remaining accounting function. This had been slow and problematic. Bob was anxious to take full advantage of the capabilities of the new computer and thereby eliminate many of his more mundane tasks.
Bob had more immediate concerns, however. He shoved aside the work orders. "I have to straighten out this cash problem before the bank refuses us credit."
Mattatall Signs Limited
Statement of Income and Retained Earnings
Year ending January 31
Source: Company records.
Mattatall Signs Limited
Consolidated Balance Sheet
Year Ended January 31
Source: Company records.
Mattatall Signs Limited
Consolidated Statement of Changes in Financial Position
1986 to 1988
Source: Company records.
Mattatall Signs Limited
Noted to Financial Statements
January 31, 1988
Source: Unaudited corporate reports.
Breakdown of Sales and Costs by Sign Group
Source: Bob Mattatall.
Job Order Work Flow
Contact is made with customer.
Customer gives description of requirements.
Sip sketch (and sometimes a price quotation) is prepared and sent to client.
Customer approval is obtained, and a work order is typed in triplicate. One copy is placed in the work-in-process file and the other two stapled to a cost information envelope.
Work order is sent to the plant, and time spent working on the order recorded on the envelope.
After job completion, work order is given to Bob Mattatall, and entry deleted from work-in-process directory.
Bob determines appropriate prices for items used (coding).
Marjorie is given work order information, and sets up a new customer file or updates an existing one. Computer prints out two copies of invoice (one goes to customer, one to rile).
Source: Company files.