Really Sensational Video Productions
Introduction

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 days.

Before heading 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 following day.

Background Information

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.


The 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 discover.

During the 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.

The Facts

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 video.

The competition 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 ).

Another 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 week.

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.

Summary

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 way.

Required

  1. Calculate the result of each of the alternatives outlined in the case and discuss their advantages and disadvantages.
  2. Select the alternative or combination of alternatives that have the best outcome for Steve. Formulate this decision into a plan to present to the bank.

Exhibit 1

Pricing and Cost Information

Typical R.S.V.P. Wedding Video Package

( the package includes footage of the

Bride and Bridegroom before the ceremony,

the ceremony itself, and the reception. It

also included 3 copies of the video.)

$625

The booking required a deposit of $100 and was

refundable should circumstances warrant.*

Cost per Wedding Video

Materials

$40

Meals

20

Assistant

50

Total Cost

110

Margin per Wedding Video

$515

Additional Wedding Video copies (each)

$10

* Steve currently had 18 bookings from May I to September 30. All deposits have been received.

Exhibit 2

Loan and Banking Information

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 monthly.

$15,500

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 $400.

Current Loan Balance

12,750

Estimated market value of video equipment

9,500