Getting from A to B: a case study of HE Delivers Unlimited, Inc.
Williams, Jan L.
CASE DESCRIPTION
The primary subject matter of this case is entrepreneurship.
Secondary issues examined include female leadership, the impact of FICO
credit scores on interest rates, and for-profit versus non-profit
organizational status. The case has a difficulty level of four and is
appropriate for senior level courses. The case is designed to be taught
in one to two class hours and is expected to require two hours of
outside preparation by students.
CASE SYNOPSIS
"I need that money today. No I needed that money
yesterday," stated Lisa Smith. Lisa Smith, founder, president, and
CEO of HE Delivers Unlimited, Inc. is struggling to make ends meet. The
company is beginning its third year of operations and is experiencing
financial difficulties. Smith is faced with trying to turn around the
company and eradicate its financial woes. Its largest customer is
delinquent in submitting payments; and without the timely receipt of
these payments, the company does not have enough cash to maintain
operations. Smith is attempting to operate the company from owner
financed funds and cash from operations. Due to personal financial
circumstances in the past, Smith is trying to improve her credit score
and does not want to incur additional debt. Accordingly, she has not
obtained any external funding and has used cash to make major asset
purchases. Furthermore, Smith began operating her company without a
business plan. Without timely prepared financial statements, she does
not know the financial position of the company and is unable to make
sound financial business decisions. Smith has dreams of expanding the
company. However, she knows that this will not be possible unless she
can improve the company's financial position.
INTRODUCTION
Traffic came to a sudden halt. "Oh, no, not an accident on the
interstate today," Lisa Smith shouted. "I can't be late
today. We have a new driver starting today, and it's Thursday. I
can't be late getting to the office today." Smith inhaled and
exhaled slowly, and thought about what she could do while stuck in
traffic. She picked up her cell phone and called the accounting manager
at Simmeons to find out about the status of their payment. "I hope
they can pay us today. I need that money today. No, I needed that money
yesterday," Smith exclaimed.
Smith managed to make it to the office before the new driver
arrived. Before things got hectic, she got online to review the
company's bank balance. As she sat at her desk and stared at her
bank balance, she thanked God that Simmeons would be able to pay them
today. That check gave her the funds she needed to pay her employees.
Smith was the founder, president and CEO of HE Delivers Unlimited,
Inc. (hereafter referred to as HE Delivers), a transportation company
that was beginning its third year of operations. Every other week Smith
processed payroll for her employees. The company was having cash flow
problems and meeting financial obligations had become difficult. The
finances of the company had become a great concern to Smith. Smith had
visions of expanding the company into additional markets. She knew,
however, that before she could do so, she had to eradicate the
company's financial problems.
BACKGROUND INFORMATION
HE Delivers was located in Maryland and serviced Anne Arundel
county, Baltimore city, Baltimore county and Howard county. The company
concentrated on four areas of transportation: (1) Home-to-Work, (2)
Home-to-School, (3) Government Agencies, and (4) General Public. The
company did not solicit street sales but offered transportation through
pre-scheduled reservations. The mission of HE Delivers included
providing the very best in transportation to all who needed an
alternative way of travel while being a messenger and deliverer of
God's word that "He Delivers. "The objectives of the
company included the following:
* To provide a safe, licensed transportation service at reasonable
prices;
* To become a trusted, viable transportation source to the people
and businesses of the State of Maryland;
* To contract with area service agencies, corporations, daycares,
disadvantaged and disabled persons, preschools, and recreational
services that do not provide transportation; and
* To create jobs for people looking for part-time or full-time
work.
Smith got the vision to start the company while working for a
not-for-profit organization that serviced blind persons. The blind
volunteers would sometimes wait hours for mobility vehicles to pick them
up from the center for the blind and take them home. Every Friday a
blind volunteer at the center would use Smith's phone to call the
transportation company to find out why the van was delayed. Smith
thought that it was a shame that these persons did not have dependable
transportation. These incidents caused Smith to clearly realize the
need for reliable and safe transportation throughout the metropolitan
Baltimore area. Her goal was to bridge the gap between the need for
transportation and the lack of reliable transportation.
Smith purchased her first van from the not-for-profit organization
where she worked at the time. The organization was selling two
15-passenger vans for $2,200 each. She decided to purchase one of the
vans and paid for it through payroll deductions. After Smith shared her
vision with a friend, Sharon Jones, they agreed to become partners in
the business venture. Smith and Jones incorporated the business and each
became a 50% owner in the company.
The company began operations by providing transportation to the
general public. This included airport shuttle services and trips for
organizations and businesses to various events, activities and
destinations. During the first year of operation, the company used
$6,000 of its cash to purchase a children's transportation company
that was going out of business. The purchase included a van and a list
of 30 clients. This increased HE Delivers' services to include
home-to-school (and back) transportation for children. Also in that
year, the company increased its services to include reverse commuting to
government agencies and the general public. Reverse commuting included
picking up clients at a designated location, carrying them to work and
returning to pick them up at the end of the day to take them back to
their designated locations.
ORGANIZATIONAL STRUCTURE OF THE COMPANY
The company consisted of two female owners and nine employees. Lisa
Smith, the founder, president and CEO of the company, majored in
business administration and also studied computer technology at two
local community colleges in the Baltimore metropolitan area. In
addition, she worked in the administrative field for the past thirty
years gaining business knowledge. Her duties as president of the company
included cash management, development and implementation of client
contracts, payroll and human resource related activities, scheduling
transportation routes and the overall operations of the company. She was
also a certified For-Hire Driver with an excellent driving record. From
time to time, she participated in the transportation of clients when
additional drivers were needed to perform company services.
Sharon Jones, co-owner and vice-president of the company, had an
associates degree in mechanical design. After she realized the need for
dependable transportation in the Baltimore area, she decided to accept
the challenge of establishing and operating a transportation company.
Her company duties included managing the office, advertising for new
clients, implementing client contracts and scheduling transportation
routes. She was also involved in making business decisions (purchasing
and selling of vehicles, hiring new employees, etc.) with the president
of the company. She too was a certified For-Hire Driver and transported
clients when necessary.
The fleet manager was the son of the president. His
responsibilities included managing the certified drivers, scheduling and
performing required repairs and maintenance on the vans, refueling all
the vans at the end of the day, and transporting clients when necessary.
He reported to the vice-president of the company.
At the end of year 2, the company had six (6) drivers. The
certified drivers were responsible for providing safe, friendly, and
dependable transportation for the company's clients. They received
weekly schedule sheets on Monday, which detailed their clients'
pickup and drop-off information for the week. The schedules were updated
daily, as needed.
HE Delivers' board of directors consisted of 7 persons, which
included the two officers of the company, an attorney, a certified
public accountant and three business consultants/entrepreneurs.
GETTING FROM A TO B
HE Delivers obtained customers through word of mouth and contracts
with private schools and governmental agencies. The private schools they
serviced distributed fliers to all parents regarding the transportation
service. HE Delivers charged the parents $10 per one-way trip, or $20
round trip. If HE Delivers transported more than one child in a family,
the first child was charged the full rate and any additional children
were charged 50% of the full rate. The parents were required to sign a
contract with a 30-day cancellation requirement. They were billed
quarterly, and payment was due at the beginning of each calendar
quarter.
In her research of the transportation industry, Smith discovered
that transportation was a factor in where persons who did not have
personal transportation chose to work. To some extent, it even
determined whether some persons became gainfully employed or not. One of
HE Delivers' largest contracts was with a Welfare-to-Work Program.
This program assisted persons in finding employment in order to get off
welfare. As part of this program, the government agency subsidized the
cost of the employee's transportation cost. This contract required
persons to be transported from Baltimore city to Howard County and back
each day. The cost for this roundtrip service was $70 per day per
individual. The employee paid $6, and the government agency paid the
remaining $64 per day. In accordance with the contract, the employees
paid $30 for the week on Monday. The government agency, however, was
billed monthly and payment was due by the 15th day of the next month.
HE Delivers also contracted home-to-work services with individuals.
Due to the limited number of vans and drivers, HE Delivers only provided
this service if there were at least four employees going to the same job
destination. The individuals were picked up at their individual homes
and taken to work. The rates for this service were $50 per hour for
groups or $20 a day for individual roundtrip service.
The limited number of vans and drivers required HE Delivers to
establish a 48-hour notice policy. Clients had to contact He Delivers at
least 48-hours before the service was needed. Additional time was
required for large contracts with routine pickups. This additional time
was needed to schedule drivers and vans for the new routes. HE Delivers
rarely provided services for individuals with a one-time transportation
need. In order to obtain a contract for services, HE Delivers required
prospective clients to fax them information regarding their
transportation needs. Once this information was reviewed, Smith met with
the prospective client, discussed the fees and signed a contract for
services.
TIMING IS EVERYTHING
The company's largest contract was with Simmeons Healthcare
(hereafter referred to as Simmeons). This organization was located in
Howard County. However, many of its employees lived in Baltimore city,
and did not have personal transportation. Simmeons had contracted
transportation services with another company for years. After a conflict
occurred between the two organizations, Simmeons started looking for
another transportation company. During that time, HE Delivers had been
transporting persons from the welfare-to-work program to Simmeons for
training. At the end of HE Delivers' first year of operations,
Simmeons terminated its contract with the other transportation company
and signed a contract with HE Delivers.
The contract between Simmeons and HE Delivers called for 10 trips a
day, 7 days a week. HE Delivers picked up Simmeons employees at a
location in east Baltimore and two locations in downtown Baltimore. The
employees were taken to Simmeons and returned to the above locations at
the end of their workday. The roundtrip rates were either $35 or $40 per
day, per employee depending on their pickup and drop-off location.
Simmeons paid the transportation costs in full for its employees. HE
Delivers generated approximately $11,000 in revenue a month from
Simmeons. Simmeons was billed at the end of the month for the services
they received for the month. Per the contract, they were scheduled to
pay HE Delivers 15 days after the end of the month.
Simmeons was HE Delivers' largest client and HE Delivers
depended heavily on the money they received from Simmeons. Simmeons,
however, started having cash flow problems. Due to their financial woes,
they were unable to pay their bills on time. After discussions with
Simmeons' accounting manager, Smith graciously extended their
payment due date to 30 days after the end of the month. Initially,
Simmeons signed a 90-day transportation contract with HE Delivers.
Subsequent to this time period, the contract became month-to-month with
a 30-day termination notice. The new month-to-month contract also
included a $250 late payment penalty that was agreed upon by both
parties. The late payment penalty was assessed when the monthly bills
were not paid 35 days after the end of the billing month. Most of the
time, Simmeons paid after the 35-day period and included the late
penalty assessment with the monthly billed amount.
Simmeons' late payments began causing HE Delivers to also have
cash flow problems. HE Delivers' checks and charges bounced several
times because they had not received money from Simmeons and they did not
have enough money in their account to cover expenses. Once, a $304 check
bounced and caused four of their gas charges to also bounce. Each time a
check or charge bounced, the bank charged them $25. This situation alone
cost them $125, and there were several situations like it. At one point,
Smith obtained a second mortgage on her house so that they could pay
their creditors and employees on time. Based upon her conversations with
those in the transportation industry, late payments appeared to be the
norm in the industry.
MONEY MAKES THE WORLD GO ROUND
As quickly as HE Delivers received cash, they used it to pay bills.
Cash was also used to make major purchases. HE Delivers purchased 3 of
its 6 vans with cash. The costs of the vans were as follows:
Table 1: Schedule of Vans Purchased
# 0f Method of
Vans Van Description Seats Cost Purchase
1 Chevy Express 15 $2,200 Payroll
deductions
2 Chevy Astro 8 5,000 Cash
3 Chevy Express 12 8,000 Cash
4 Chevy Astro 8 29,000 Leased
5 Chevy Astro 8 16,000 Financed
6 Ford Aerostar 7 3,900 Cash
Source: Data obtained from company records.
The majority of HE Delivers' vans were used vans purchased at
auctions before the company began having cash problems.
"At the time, we had approximately $40,000 of cash in the
bank. We didn't think that it would dwindle down so fast. We used
the cash because we didn't want to incur a lot of debt,"
stated Smith.
The only loan that HE Delivers had was for the financing of a van.
That van was purchased for $16,000. After the down payment, the loan
agreement called for 36 payments of $421 per month. The company,
however, made additional payments monthly to expedite the repayment of
the loan. The loan balance was $1,300 at the end of year 2. Another van
was leased through a three-year lease-to-own agreement. The lease
payments were $500 per month. High mileage became a problem and Smith
figured she could have purchased several vans for the price of that one
van. She ultimately paid a $1,200 termination fee and returned the van
the same year. Smith was proud that she had been able to operate the
business this long without having incurred substantial debt.
FINANCIAL CONDITION
During the first year of operation, the company generated revenues
of $51,500. Revenues increased to $188,000, in the second year of
operation. While the growth in revenues was encouraging to the owners of
the new company, the increase in expenses eradicated company profits.
Expenses increased from $72,339 in year 1 to $196,803 in year 2. The
company's only debt at the end of the second year was a $1,300
vehicle loan balance. However, accounts receivable almost tripled,
increasing from $6,578 in year 1 to $18,950 in year 2.
Like many new companies, HE Delivers did not have the funds to hire
a full-time accountant. Smith used QuickBooks software to record the
company's business transactions and managed the company based on
the available cash balance. For the first two years, the company did not
have formal financial statements. She, however, paid an accountant to
prepare the company's annual tax returns. As the company grew,
Smith realized that she needed someone with more time and knowledge to
handle this task. She had not been able to prepare monthly financial
statements due to the time she spent operating the company. During the
beginning of year 3, Smith hired a bookkeeper to record the
company's financial transactions.
FEMALE ENTREPRENEURS
In the U.S., there are approximately 6.2 million female-owned
companies employing 9.2 million people and generating sales of $1.15
trillion (About Women-21.gov). Women are starting businesses at twice
the rate of men. Female-owned businesses, however, only represent a
little more than 25% of all businesses and 4.2% of the gross receipts of
the U.S. economy (Preston, 2008). While women are starting to shape and
change the workforce, women continue to face challenges and obstacles.
Only 43 women have climbed the ladder to become CEOs of Fortune 1000
companies in the last 35 years. Of the 43, only 3 were founders of the
company; and all 3 companies were co-founded by men (Jones, 2008). To
overcome challenges facing female entrepreneurs, Congress established a
target that 5% of all federal contracts should go to women-owned small
businesses (WOSBs). Also, the Small Business Administration and other
various organizations have developed programs to help level the playing
field for female entrepreneurs.
THE FUTURE
As Smith continued to reflect over the position of the company, she
knew that she had to make some important decisions. The company had
survived over the last 2 years, but in year 3 its cash flow problem had
started to severely impact the company. Smith had envisioned expanding
the company to include courier service and transportation for after
school programs in the inner city. With the company's cash flow
problem, however, she wondered if her vision would come to fruition.
Smith had been advertising the company at schools and businesses
she already serviced. She wanted to increase her customer base but she
needed to do it on her current routes. Obtaining customers on new routes
meant possibly having to hire more drivers and purchase more vans.
Currently she was not prepared to take that step. Therefore, she had not
performed any large-scale advertising.
The company needed capital. Obtaining loans were always an option
but it was one that she only wanted to pursue as a last resort.
Smith's below par credit rating would also impact the
company's ability to get loans (Smith did not reveal her actual
credit score. However, for purpose of analysis, assume it is 624). She
had problems with her credit in the past, and the thought of acquiring
debt and not being able to repay it frightened her. She knew that
another option would be to increase the rates she charged her customers.
Other transportation companies were charging higher rates than HE
Delivers. She wanted, however, to always keep her focus on meeting the
needs of disabled and underprivileged persons.
Smith was having serious thoughts about whether to continue
operation of the business. She knew that the first couple of years would
be challenging but now she wasn't sure how much longer she could
remain in business. Should she continue to struggle, just using cash
from the operations of the company to stay afloat or should she try to
get loans and risk not being able to repay them? Should she increase her
transportation rates even though it would make it difficult for disabled
and underprivileged persons to afford her services? Where did things go
wrong and now that they had, what should she do?
REFERENCES
About Women-21.gov. (n.d.) Retrieved September 11, 2008, from
http://www.women-21.gov.
Jones, D. (2008, April 23). Women business founders are on the
rise, but not in 'Fortune' 1000. USA Today, p. B1.
Preston, S. (2008, January 15). How to help women-owned small
businesses. Retrieved September 11, 2008 from
www.sba.gov/idc/groups/public/documents/
sba_homepage/serv_news_from_the_hill.pdf
NOTE
All names in the case have been disguised.
Jan L. Williams, University of Baltimore
