It was February
1990; the day had started like any other mid- February day in St.
John's. Steve got out of bed, looked in the mirror and said "make it
a good day." This was all part of his new outlook on life. Be
positive and things will go your way. Steve didn't realize how
important this statement was going to prove over the next few
off to a day of classes at university where he was in the Bachelor
of Commerce program, Steve checked his answering machine. There was
only one message, but it was the one he had feared the most. The
call was from his loans officer at the bank. And she needed to talk
to him urgently. Steve knew he was late on his last payment and his
bank account was not healthy enough to have another payment taken
out. His unfortunate cash flow situation as a result of his seasonal
sales had finally caught up with him. He knew once he returned the
bank's call that they would not be very sympathetic to his
situation. But it was not his way to run away from his problems. He
called Katherine, the loans officer, and arranged a meeting for the
Steve was a
university student and an entrepreneur. During his years at
university he became interested in videography. It was a hobby, a
break from the routine of studying.
case was prepared by Frank Dormody for the Atlantic Entrepreneurial
Institute as a basis for classroom discussion, and is not meant to
illustrate either effective or ineffective management.
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.
To learn more
about his newly acquired hobby he volunteered his time and natural
talent with a local community cable channel. It was here that his
interest turned from a hobby into a part-time job and a means of
paying his way through school.
In 1988 he met
Scott, a guy much like himself who operated his own video
productions business. Steve was given the task of assisting Scott
with their hectic summer schedule of wedding videos. He enjoyed his
job and quickly developed a " good eye " for making videos.
Eventually Scott realized Steve's potential and began letting him go
on jobs by himself.
The summer of
1988 was very busy and Steve made a lot of money working with Scott.
Fall was approaching and school was starting. Steve had decided to
continue his study at school by entering the Commerce program. He
knew he would not have as much time to spend working for Scott, but
it was just as well. The wedding season was coming to a close and
business would naturally be a lot slower, a lesson Steve would soon
following winter of 1989, Steve contemplated starting his own video
company. A few months later, with a little help in the form of a
personal loan from the bank and encouragement from family and
friends, Steve started R.S.V.P. ( Really Sensational Video
Productions ), a sole proprietorship. He operated out of his garage
which he converted to an editing studio and business office. He had
business cards printed and spread the word about his new business
any way he could. That first year went well. He was fairly busy and
gained a reputation for good work in a highly competitive market.
But just as in the previous year when he had worked with Scott, the
phone stopped ringing in the fall and business slowed down. At the
time it wasn't a big deal; his bank account was sound. He had a plan
and with some of his profits he purchased some much needed equipment
to expand his editing capabilities. Steve dreamed that the sky was
the limit! In a couple of years he would be the biggest and the best
video production company in the city.
As Steve walked
home from classes that cold February day, he wondered how he could
convince the loans officer the next morning that he could still make
his loan payments. He knew that the bank would want to see some sort
of operating plan for the remaining term of the loan to ensure that
no more payments would be late. If he did not convince the bank, he
knew that the future of his video business was as bleak and cold as
that winter day.
The only cash
flow that he had managed in the last two months was deposits from
couples who had already booked wedding videos for the summer months.
The cash would still not be enough to get him through the winter.
And he could never book enough weddings. Besides, he could only do
one wedding per day and that usually meant one on Friday and one on
Saturday with editing and copying on Sunday and maybe Monday. He
differentiated himself from other operators by delivering his
product within two days of the wedding. For him, it meant long hours
on the weekend, but Steve was certain that it was his competitive
advantage. Other operators often took weeks to deliver a wedding
for wedding videos was very stiff with dozens of operators in the
city alone. Steve discovered from his first year of experience that
the majority of couples book their videographer based on reputation
and price. Most operators offered similar packages and could always
negotiate on price if business was slow. Since last year was his
first year, Steve undercut other operators to get bookings which he
needed to establish his reputation. All the couples who booked with
him that first year gave him positive feedback on his work. He hoped
that in 1990, he would not have to underbid the competition to get
work, especially considering his financial situation. ( See Exhibit
1 for video pricing information).
Steve knew that
this summer he had to make enough money to pay for his tuition and
books in the fall, as well as make his loan payments for the coming
year, and of course make a profit for all his hard work. He had
estimated that his expenses for school would come to $2,750. The
loan payments from February 1990 to the following April 1991
totalled $7,500 ( 15 months @ $500 ). As well, Steve thought a
reasonable return for his work during the summer would be $2,500 (
See Exhibit 2 for financial information ).
characteristic of the business that he discovered last year was the
spare time he had during the week. The weekends were often 16 hour
days, but he found that the weekdays were not busy at all. He
thought, if only people would get married during the
Video is a very
powerful media. It's like being there, again. Steve noticed that
more and more of his professors had resorted to videotape as a
teaching tool in the classroom. A lot of the videos were produced to
train managers at seminars offered to local companies. Steve noticed
that the quality of these videos was never as good as many wedding
videos that he has seen. This seemed liked an excellent opportunity
to generate more sales. If he could position himself in this market
maybe his cash flow problems would go away. The classroom /business
video market was not as seasonal as the wedding video market and the
workload was not concentrated on the weekends.
It was all very perplexing and
Steve needed a solution in fewer than 24 hours. The alternatives
were clear; he could sell his equipment and pay off his loan, ask
the bank to refinance the loan, increase his wedding bookings, or
diversify into the business video market. He had all this
information going through his head and he needed to sort it out. He
was confident that he had what he needed to talk to the loans
officer. He just had to make sure he presented it the right
- Calculate the result of each
of the alternatives outlined in the case and discuss their
advantages and disadvantages.
- Select the alternative or
combination of alternatives that have the best outcome for Steve.
Formulate this decision into a plan to present to the
Pricing and Cost
Typical R.S.V.P. Wedding Video
( the package includes footage
Bride and Bridegroom before the
the ceremony itself, and the
also included 3 copies of the
The booking required a deposit
of $100 and was
refundable should circumstances
Cost per Wedding
Margin per Wedding Video
Additional Wedding Video copies
* Steve currently
had 18 bookings from May I to September 30. All deposits have been
Loan and Banking
Original loan taken out in May
1989 for 36 months, interest was fixed at 10% for the term of the
loan and blended payments of $500 were required
Loan History -- all payments
from May 31, 1989 to November 30, 1989 made on time. December 1989
payment was made on January 13, 1990.
It is now the middle of
February and January's payment has yet to be made. Within two weeks,
February's payment is due. Steve's current account balance is
Estimated market value of video