case studies

Case Studies

BY: ROMAR CAMBRI

Contents

I. Inventory AnalysisA. FactsB. QuestionsC. Discussions & Conclusion

II. Financial Statement AnalysisA. FactsB. QuestionsC. Discussions & Conclusion

III. Sales AR AnalysisA. IntroductionB. CaseC. QuestionD. Discussion & Conclusion

I. Inventory AnalysisA. Facts

Notes for Consideration:1. 2012 Sales Forecast is based on last year's average sales set at the beginning of

the year.2. Percentages of unserved orders for June are as follows:

Item A = 5% of Monthly Average Sales Item B = 15% of Monthly Average Sales Item C = 25% of Monthly Average Sales

3. The Principal of item A launched a sale in June 2012. The next sale is scheduled in October 2012.

4. Item B resulted to a negative variance of 1000 pcs on the recently conducted wall to wall inventory count. However, further reconciliation revealed that the variance was due to double recording of inventory received by the receiving clerk.

I. Inventory AnalysisA. Facts

5. Item C is considered by the Principal as its no. 1 fast moving item.6. An expansion in the warehouse is set to finished in the 3rd Quarter of 2012.7. Purchasing Manager issued a Purchase Order (PO) on June 20, 2012 based

on Q3 Sales forecast Marketing Department, as follows: Item A = 30,000 Item B = 22,500 Item C = 15,000

8. The SOH ending June is the usual stock EOM inventory level for the three items.

1. As the Controller, would you approve the stock level requirements by Marketing Department? Why yes or why not?

2. Any thoughts on the current inventory stocking level of the Company?

3. What would you retain or improve based on the current set-up?

I. Inventory AnalysisB. Questions applicable to each SKU:

The answer is Yes, but after considering the following recommendations on the stock level requirements for the following Items:1. Item A = 17,000 pcs, the pike in June was due to the sale,

hence we cannot use the 10k sale as the ave for the coming quarter. Thus we should stick to the 16k 3rd Quarter Sales Forecast and include the total unserved orders (~1k pcs).

2. Item B = 25,500 pcs, set the inventory level at inventory level at the maximum (22k) plus a provision for the unserved orders for 3 months (3.5k)

3. Item C = 22,000 pcs, this was derived by using the 3rd Quarter Sales Forecast of 18k plus 4k total unserved orders.

I. Inventory AnalysisC. Discussion & Conclusion

1. As the Controller, would you approve the stock level requirements by Marketing Department? Why yes or why not?

Uneven distribution of inventory level per SKU; this is the result of not considering the important factors for inventory planning. This includes the unserved orders, anomalies in Sales of the previous months (sale held in June and double recording of inventory), market demand for the coming quarter, and sales behavior.

Depletion of inventory at the end of the month; with no specific reorder point and not considering the delivery lead time, it is expected that the inventory will drop to zero and would result to an unserved orders.


2. Any thoughts on the current inventory stocking level of the Company?

What should be retained is the minimal SOH at quarter end.

However, the following should be improved:◦ Implement a reorder point per SKU;◦ Evaluate the factors that affects the sales in

previous month;◦ Consider the anticipated demands or causes that

would tend to increase or decrease the inventory level for the coming quarter.

◦ Crunch the numbers in every Purchase Order for the stock level requirement.


3. What would you retain or improve based on the current set-up?

II. Financial Statement AnalysisA. Facts

1. Based on the Financial Statements & Ratios above, what areas would you focus on as the Controller of ABC Company?

2. What are specific initiatives you would suggest to further improve the Company's performance?

II. Financial Statement AnalysisB. Questions:

To begin with, the Balance Sheet and Income Statement are essential and used as a starting point in relation with the Financial Statements ratios to analyze the success, failure, and progress of the business.

Using the generated ratios, the areas to be considered relevant to focus on the foregoing.

II. Financial Statement AnalysisC. Discussion & Conclusion


1. Profit Margin - Profit margin which is near break even should indicate that operating expenses and administration cost should be reviewed to identify any unnecessary expenses that can be reduced or eliminated to increased profit margin.

2. Return on Assets - This measures how efficiently profits are being generated from the assets employed in the business when compared with the ratios of companies in a similar business. A 4.6% ratio on ROA may be considered as low ratio and should be compared with market averages to identify if there is inefficient use of the business assets.

3. Return on Investment (ROI) - This ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management.

4. Days Sales Outstanding - Since it is profitable to convert sales into cash quickly, which means that a lower value of Days Sales Outstanding is favorable whereas a higher value is unfavorable.

5. Inventory turnover - This ratio reveals how well inventory is being managed. The more times inventory can be turned in a given operating cycle, the greater the profit. The 3.9 inventory turnover ratio means the Company has 92.3 days or 3 months (formula: 360 days/3.9 inventory turnover) days sales of inventory. Days sales of inventory shows how long it takes to turn the inventory (including goods that are work in progress, if applicable) into sales.



1. Trade Liabilities – using the Current ratio (1.2) as well as the Days Sales Outstanding (75.3 days), it is seen that the ability of the company to pay its debt is within that days. The risk is seen on what the trade creditors may imposed upon the company due to delayed payment. Negotiation of credit line with creditors is warranted to catch up with the payment capabilities of the company.

2. Collection of Accounts Receivable – with the DSO at 75.3 days, this connotes that the company should boost its collection by implementing stricter credit policy, efficient collection methodology, review of billing process, and constant receivables ageing inquiry.

3. Inventory Management - 3.9 inventory turnover ratio means the Company has 92.3 days or 3 months (360 days/3.9 inventory turnover) days sales of inventory. Days sales of inventory shows how long it takes to turn the inventory (including goods that are work in progress, if applicable) into sales. The more times inventory can be turned in a given operating cycle, the greater the profit.



5. Evaluation of Pricing Model – With the Gross Profit at 17%, the Company should evaluate its pricing model to increase the gross profit rate by increasing selling prices and determine all the possible impacts of increasing the selling price. Also, improving the Gross Profit by recovering the true Cost of Sales or improving the gross profit by reducing the Cost of Sales.

6. Operating expenses and administration cost should be reviewed - this is to identify any unnecessary expenses that can be reduced or eliminated to increased profit margin.

7. Managing Cost Drivers – To increase the Return on Assets, the company needs to increase operating profit margin by efficiently managing costs like marketing expenses, general selling and administrative expenses. The Company may also choose to increase total asset turnover by selling inventories and collecting accounts receivables as quickly as possible.



III. Sales AR AnalysisA. Introduction

One of the main points that a product Principal considers important in selecting or maintaining a Distributor is the latter’s ability to reach, enter and maintain consistent (or increasing) stocks in big/ chain accounts nationwide.

III. Sales AR AnalysisB. Case

Company A is owned by a family of known businessmen in the country. It operates a top chain of Supermarket and Dept. Store accounts in the Mindanao region. They have 12 branches in North Mindanao alone and controls/comprises 60% of the consumer market in the area. It is crucial that a Distributor is able to sell to this Company to have his products felt in the Mindanao market.

As a big account, Company A deliberately delays payment to all suppliers. He is very notorious in this aspect yet, distributors continue to serve the account.

Distributor B is one of the suppliers of the account of consumer products. The credit term they extended to Company A is 30 days but they get paid on the average of 120 days from due date. They have tried the following actions but still, the problem is not resolved.

III. Sales AR AnalysisB. Case

a) Request for PDC upon delivery – Company A was not amenable to the arrangement being a big corporate account. All their other business interests are buying on credit and they are not being required to issue PDCs by other suppliers.

b) Hold new sales orders until settlement -Distributor B’s stock level in the various outlets became critically low and Customer A expressed intentions to replace the stocks with other brands and delisting Distributor B. In the event that Distributor B requests for re-enlistment, new set of fees and promotional support will be charged by Customer A.

c) Transferring the account to a Sub-D –due to the size of the transactions and payment behaviour of Customer A, the Sub-Ds cash position was affected. When this happened, the Sub-D stopped paying Distributor B as well. The arrangement could not be sustained.

d) Additional deals/ discounts – Distributor B’s management is not amenable to giving the account additional discount to pay within credit term because if the information leaks, other customers (paying on time or not) may request for the same accommodation.

III. Sales AR AnalysisC. Questions

1. Meetings between Company A and Distributor B have produced futile results. What is the best way to deal with a customer like Company A?

2. Company A has an order totaling P1,000,000 pending approval by the Credit & Collection Department of Distributor B. Only 15% of the current CL (5,000,000) is available. The Principal is pushing for the release of the order. Would you recommend releasing the order? Why yes or why not?

3. On Distributor B's annual assessment of the credit terms of its Customers, what would you recommend them to grant Customer A on the following areas:

a) Payment term (i.e. 30 days, 120 days, CHOD)

b) Credit Limit (average monthly purchase of 2,000,000)

The best way to deal is to give incentives in kind for Company A’s promotional items, instead of the company’s reoccurrence of cost of collection and opportunity loss in accounts receivable investment.

Habitual visitation by Marketing Personnel. Closely monitoring of receivables, e.g.

ensuring invoices are received on time; regular collection follow-up; etc.

III. Sales AR AnalysisD. Discussion & Conclusion

1. Meetings between Company A and Distributor B have produced futile results. What is the best way to deal with a customer like Company A?

At P250,000 above the credit line, I would recommend releasing the order after hearing Company A’s reason of not updating its account.

At this amount, the sales of the company should not be prejudiced.

After releasing, however, Credit and Collection should focus in collecting and updating the account within the Company A’s payment undertaking.


2. Would you recommend releasing the order? Why yes or why not?

Payment Term: 60 days Credit Lime: P2,000,000


3. What would you recommend them to grant Customer A on Payment term and Credit Limit ?

case studies

Documents

inventory analysisa

inventory analysisc

depletion of inventory

inventory planning

inventory analysisb

double recording of

quarter sales forecast

wall inventory count