Financial Management (YP50B)Syndicate 3Rizki Oeshya Lubis29113343Muhammad Avisenna29113350Nanda Ravenska29113358Derina Adriani29113493Murni Fitri Fatimah29113539

The O.M. Scott & Sons CompanyIn 1955-1961, Management of O.M. Scott & Sons Company tried to maintain and increase companys growth with few programs with forcing sales and expanding product line but it ended in failure. The failure programs included tapping the potential market without supported by good distribution system, supply the demand but often postponed and lost sales from competitors, lack of ability to finance companys inventories, had not security interest in goods, spending a lot for R&D and increase of receivable value because the dealers payment were late. From the case, O.M. Scott and Sons Company should find the way to keep up with its goal 25% annual growth rate in sales and profit considering the current policies and compile the current policies of combination seasonal dating and trust receipt plan. Decision failures of company resulted in the buildup of long-term debt the company as much as $ 16.2 million in 1961. The requirement to a trust receipt dealer by Scott company such as immediate transfer to the dealer of title to any Scott products shipped in response to a dealer order, retention of a security interest by Scott in merchandise so shipped until sold by the dealer acting as a retailer, and segregation of sufficient proportion of the funds receive from such sales to provide for payment to Scott as billed. To understand the main issues of Scott company, we should reassess companys financial statement with measuring debt capital. Total leverage consist of operating leverage and financial leverage to manage company debt and prevent bankruptcy. First, measuring operation breakeven point to know exact figures of sales result using EBIT formula :

For The Years Ending 19601961

EBIT $ 5.126 $ 4.958

EBIT indicated companys profitability was decline in 1960 to 1961. It means company did not used proper decision to growth but caused decreasing of revenues based on EBIT calculation. EBIT result will impact to degree of operating leverage. Second, measuring the degree of operating leverage (DOL) with the formula :

12/31/60 9/30/61

Finished goods $ 7.390 $ 4.040 3350

Sales-54,668

EBIT-3,2833

DOL0,06006

DOL value showed 0,06 < 1 means operarting leverage did not exists. Companys sales did not impact to operating leverage. Company only gained a little profit because their fixed cost was too low although sales were increased. Third, measuring degree of financial leverage to with the formula :

Earnings per share (EPS) indicated that companys ability to pay preferred stock dividen. Scott company showed negative EPS because they cannot shared the dividens. The value result more than > 1 indicated that company have a potential to produce higher return but it have comparable with impact of risks and cannot increasing debt. But the DFL function is manage company receivable that already spent and reduced risks therefore reduced of unpayed receivable. Last, measuring degree of total leverage (DTL) with formula :

DTL impacted to companys expantion. The companys expantion should prepare properly and change of dealer segment to collaboration with Scott company. Implied the requirement of a trust receipt dealer which have a commitment to dispose with te contract. Relation between DOL and DFL was top line and bottom line in company. Top line represent the sales or revenues and bottom line represent net income. For example, if the income increase 1% so the sales will receive strong affect of leverage as much as 5% (lever function). Ratios of financial statement form Scott company leds possitive growth in early 1959 but become negative in after 1959 because the cost increase rapidly than the revenue as the impact of new programs. Scott company needs to control the 25% growth rate before plan to keep the companys sustainability. SuggestionScott & Sons Company should reduce growth planning temporary to sustainable until their fixed cost increase and imply new strategy properly. Company can reduce the production to increase the dividen and rather than spent a lot of money to hire sales person, company prefered make a payment strategy to attract their customer pay on time such as higher discount for early payments. Issue preferred equity to help finance retailers in holding higher Inventory levels. Company also can sell amout of receivables to third party in order to reduce the cash cycle and free up some cash to meet our short term liabilities and attract new investor to start operating activities.To prevent to second loss, company should be more selective to assess new business partner and make sure they disposed and agreed with the collaboration with Scott & Sons company.