Financial Problems of Cyclermate Ltd - Essay Example

Cyclermate Ltd. Table of Contents Cyclermate Ltd Table of Contents 2 Introduction 3 Financial problems 3 Manufacturing problems 6 HR problems 9 S.W.O.T analysis 10 P.E.S.T analysis 11 Conclusions 12 Recommendations 12 References 13 Appendices 16 Introduction This report gives an insight to the problems faced by Cyclermate Ltd. Cyclermate Ltd was once the leading player in the retail bicycle manufacturing sector. It was established in the year 1988 by Lewis Llewellyn and Dai Armstrong at South Wales. On its onset Cyclermate became an instant hit. It almost enjoyed a monopoly and had large market shares but in the recent years there has been a change in fortune and the company is gripped by financial, operational and manufacturing problems. The report tries to provide solutions to the various problems and includes PEST and SWOT analyses to identify the areas that need rectifications. The report also includes a proposed budget for the year 2010-11 which will help to give an idea about the decisions taken by the management to improve the situation. Financial problems Hard cash or liquid cash is required by any business organization to survive or to run successfully. Normally, most of the companies keep a lump sum amount of cash at their disposal for the daily expenses of the business. It ensures the smooth running of daily business operations. But, the financials of Cyclermate Ltd gives a shocking picture. There is only 675 pounds of hard cash left in the bank. With such a meager amount as its savings the company cannot even run a single day’s operation. The company is on the verge of close down. Mismanaged budget, uncontrolled cost and lack of proper supervision have lead to such a dismal situation. It is clear from the income statements of the last five years that selling price and total sales of the articles have gone down while total costs have shown a steady rise. The financial ratios also bring out the same poor condition of the company. The company’s Acid Ratio which is the relationship between the current assets (stocks not included) and current liabilities is 0.76:1. The Acid Ratio of 0.76:1 shows that the company will not be able to any financial problems nor needs that may rise in the near future (Netmba, 2010). The relationship between revenues and total assets is known as Asset Turnover Ratio. This company has an Asset Turnover Ratio of 2.06:1. The main reason for this ratio to be so high is the poor profit margin. There is also a possibility that the company is following a faulty a pricing strategy for its products. From the income statement of the past five years the return on capital employed is calculated as low as 0.11. The company is getting only a return of 11% on the capital it is employing which is not at all satisfactory. The debtors to the company generally take an average of 115 days to pay their debts while the company itself takes only 24days to pay back its creditors (Beginnersinvest, 2013). With only 675 pound of hard cash in bank it is nearly impossible for the company to repay its creditors within time. The daily business operations will also be hampered due to lack of funds. So the immediate need for the management is that of generation of funds. (Appendix 1) The management should undertake the following actions in order to raise short term capital and keep a check on the expenses: According to the Draft Statement of Financial Position as on 30 September 2010 the company has a land which is free hold in nature amounting to 160,000 pounds. The company can sell this land to raise some short term cash. It can also approach the banks in order to mortgage this land to them for a specific span of time and money. The company can still get 150,000 pounds after revaluation and calculation of charges by the bank (Medina, R.G. 2007). Cyclermate Ltd enjoys a rich history. Few years back it was one of the leaders in the bicycle manufacturing sector. By the virtue of its glorious past it is bound to have good relationship and understandings with its debtors. The company is expecting to get a payment of 200.571 pounds from its debtors. So, the company can try to have a word with its debtors explaining them the present situation and ask them to make some early payments. The company can also present some bills to the bank and ask for some cash in return. The debtors’ credit history would be check by the bank and it can deduct its standard charges. Still then the company can get an approximate 185,000 pounds from the bills of the debtors. The company has a debt of 87,500 pounds to its creditors. With almost no hard cash in its hands it is impossible for Cyclermate to pay off its debt in time. The creditors might take legal action in case of default or the company can lose it’s goodwill to its creditors. It has to prey to its creditors for some more time and need to explain them the present crisis that the company is going through. From the Draft Statement of Financial Position as on 30 September 2010, the Stock of finished machines is worth 185,790 pounds. This is as same as the direct production costs (University of Canberra, 2012). The direct cost per unit of 1 machine is 376 pounds. In the warehouse the number of unsold machines is 495. If the company is able to sell one machine for 550 pounds by the virtue of online promotion, it will be able to generate a total cash of 272,250 pounds. Rapidly increasing costs over the years has been a great headache for the company. Over the last five years, costs have increased by 500k pounds. The management has to take some drastic steps to cut down on variable costs which include indirect and direct costs. The management needs to reduce the administrative costs as well (Gitman,L.J & McDaniel, C. 2008).(appendix 2). . So, by the above mentioned measures the company is able to raise a sum total of 557,250 pounds for the use in the short term. The company can also stop its production processes for a short time as it has some complete and finished products in its warehouse. The company plans to save 110,000 pounds by stopping production for some time. The cost cutting initiatives should also generate some amount of cash. (Appendix 3) Manufacturing problems Cyclermate is the victim of its own faulty manufacturing process. From the financials it is clearly visible that the company has made huge expenses but the outcome is far below the standards. As a result, quality of the final product has deteriorate significantly below it’s before maintained high standards and the company is losing its goodwill to its stakeholders. Few of the manufacturing problems are highlighted below: There company has received numerous complaints regarding the front brakes of the bicycles from its customers. Due to faulty fittings of the brakes many customers have met with serious accidents. This has greatly jeopardized the goodwill of Cyclermate which it enjoyed for so long. Owing to poor financial condition the company has started using low quality paint which is also highly toxic. This low quality paint does not stick to cycle frame readily so extra labor has to be given. It results in wastage of money and time. The company follows an age old method of maintaining its stock levels. Inventory system of this company only shows the stock when it is at very low level or has finished completely. The system provides no information about present stock levels or about the daily productions. So, the management does not get the exact idea about the efficiency of the manufacturing processes and the daily outputs. The company has very high stock levels. It is a clear indication that the company lacks a definite operation method and there is no proper operating chain (Miller, A. 2007). Lack of supervision is also a factor as the orders issued are not properly supervised and most of the times the staffs are ordering materials more than what is required. Cyclermate is facing a problem which has risen due to lack of skilled labor. It has to order wheels and tires from outside as it lacks the personnel who are experts in making wheels and tires. This results in increase of costs. The company does not have any professionally trained personnel in the packaging department. Packaging plays a very important role in the positioning of the product as it helps to create the first impression on the customers. Lack of proper packaging has resulted in reduced sales. Solutions This report tries to provide some solutions to Cyclermate which will help it to solve these problems. To survive in the present competitive environment the company should focus on purchasing and using better quality raw materials from the market. Instead of using lower quality paints it should use paints of higher quality which will cut down on costs as the low quality does not stick properly to the frames and as a result many frames have to be repainted. Moreover, the superior quality paints are environmental friendly. The main problem in the manufacturing department is the lack of skilled and trained personnel. Accidents caused to the customers due to faulty brakes assembly have greatly harmed the company’s reputation. The company should immediately start recruiting skilled and specialized labors. It should conduct training programs for its existing employees to improve their efficiency and skills. The company urgently needs to recruit a few skilled wheelwrights as the cost incurred in ordering wheels from the company in Cardiff is much more than the cost when the wheels are made by the company itself. There is also the need to incorporate a modern system of managing the inventory. An ideal inventory system should show the quantity of stocks that is being purchased, daily production and amount of stock that is going out. The inventory system should give a clear picture to the management so that they can monitor the levels and can understand the efficiency of the existing manufacturing processes and what changes are required to make the process more fruitful. Cyclermate should install the inventory management program COMMERCE SERVER 2007. This software helps to keep manage the inventory better by ensuring accurate transactional updates. It also has the back ordering feature and informs the management the exact date when the stock is about to run out. It helps to develop coordination between various departments. It is eminent from the financial reports that there is a lack of coordination between the company’s sales and production department which results in high stock levels. The introduction of the new software will help the company to keep a control on the purchase of raw materials. The manufacturing department has to take into consideration the sales figures and accordingly should give an estimate to the management. It should be made clear to the employees that they need to strictly follow the company guidelines in the matter of ordering raw materials so that there is a check on the costs (Aluminium matter, 2010). The company can follow the batch manufacturing process which will ensure that the resources are used to their fullest and proper records are kept. The company needs to purchase the parts based on sales projections and it is better if it places the orders at regular time periods. The batch size should not be very large so that each batch does not take much time to produce. Ideally each batch should consist of 20 bicycles and the company must try to produce 3 batches weekly. The finished products should be minutely tested against standard quality and any product which is below the standard should be discarded. This will ensure better quality of the products and will help reestablish the goodwill of the company. Another aspect of the production system that the company needs to improve is the packaging. Packaging plays a vital role in positioning and marketing of the product. It creates the first impression on the minds of the customers and poor packed products indicate that the article is of poor quality. Cyclermate should immediately hire professionals who are expert in packaging. HR problems The company needs to create specific departments and delegate work to each departments. The management is too busy dealing with the problems of the production processes that it is not being able to give attention to the problems and issues of the employees. The company needs to develop a separate Human resource department and hire specialized professionals who will look after the demands and problems of the employees. In the present condition the staff is very much de-motivated as the company is going through a dismal phase. The HR department needs to reinstate faith and hope among the employees so that they again start to think about the company as their own. The management should encourage new business ideas from its employees and try to involve the employees in the decision making processes. It should try to re-motivate the employees by promising them bonuses and perks once the company is able to improve its position. (Wisegeek, 2013) How to reduce losses? To cut down on the unnecessary costs the company has to revise its budget. Cyclermate has to increase its sales. At present a total of 2250 bicycles are being sold annually by the company but on average 3 million bicycles are sold annually in United Kingdom. So the company should aim to sell 3000 bicycles to increase its market share. As mentioned earlier the production department needs to work in unison with the sales department especially in a company which is facing severe financial crisis. Based on the sales projections the production department needs to determine their output. The company also needs to reduce its variable costs. S.W.O.T analysis Strength Cyclermate sends its products directly to the shops its sales channels are direct in nature so third party costs are reduced as there is no middlemen. This kind of sales channel provides a better understanding between the company and its suppliers. The company also can have easy access to its customers and can understand their demands better and make changes. The direct channels will help the company to get a larger market share. Cyclermate has a pool of highly talented and innovative employees who are just de-motivated. If the management can use their human resources effectively the employees will play a leading role in reversing the fortunes of the company. The company has its own buildings and land. It can use these assets according to its needs and can generate revenue from these. Weaknesses Due to the poor performance of the company over the last few years the employees have become highly de-motivated. There has been a growing difference between the management and its employees. Owing to the dismal condition of the company Cyclermate has lost its credibility to its stakeholders. The investors are highly disappointed with the returns they have been getting and no dividend was paid in the last year. Due to lack of skilled and trained staff and poor quality of raw materials used the quality of the product has fallen alarmingly. Opportunities Cyclermate needs to innovate and introduce new products in the market. It can opt for outsourcing to reduce the cost of production Threats The reputation of Cyclermate has been harmed greatly due to the poor quality of the products. Customers are opting for other companies. Companies like Argos and Halfords are gradually increasing their market shares. Many of the foreign companies are entering the British market (Businessballs, 2013). P.E.S.T analysis Political The political factors that affect the company are the new government reforms regarding the labor laws and fiscal policies. The reformations of taxes and budget cuts also affect the company. Economic If the price of petrol goes up there is a chance that the sales of Cyclermate may increase. The interest rates and the borrowing costs also have a significant role to play in long time survival of the company. Sociological The income and the standard of living of the people will determine the standards for salaries and incentives. Cyclermate has to provide its employees’ salaries and benefits with accordance to the standard norms. Technological To survive in the long run cyclermate needs to improve its production process and improve the quality of its raw materials and products. New technologies in painting and production should be introduced (Businessballs, 2013). Conclusions The report clearly brings out the fact that the poor quality of the products along with increasing costs is two main factors behind Cyclermate’s downfall. Lack of coordination between the various departments and lack of adequate inventory management system have further worsened the situation. Lack of specialized professionals and absence of HR policies have further deepened the crisis. Recommendations The present financial difficulties faced by Cyclermate have to be resolved by selling lying stock and mortgaging assets. The management needs to introduce efficient quality management techniques and an adequate inventory management system. Products which are not up to the standard or shows high deviation should be discarded. The company should aim to get back the trust of the customers that it enjoyed once. It needs to manufacture cheap products but the quality should not be compromised. Proper allocation of costs is required and the management needs to keep a close eye on the various processes. New departments are required to set up so that there is delegation of work and all the operations are smoothly run. Adequate training programs are needed to be held in order to improve the efficiency of the present employees. Specialized staffs should be hired to increase productivity. A separate HR department is required to be opened which will deal with problems and demands of the employees and ensure that the employees are always motivated. To compete with the bigger players Cyclermate needs to introduce modern techniques and methods in its operations. Better quality raw materials like paints and tires should be introduced. It should modernize its production unit by implementing robotic machines which will increase the output and reduce the costs. It should expand its product line and launch new products like electric motor fitted bicycles. This will help in repositioning of the company and Cyclermate will be able to regain its lost ground. References Aluminium.matter. 2010. Manufacturing Issues [online]. Available at: http://aluminium.matter.org.uk/content/html/eng/default.asp?catid=89&pageid=2144417041. [Accessed on 08 January, 2013]. Beginnersinvest 2013 Financial Ratios. [online]. Available at: http://beginnersinvest.about.com/od/financialratio/Financial_Ratios.htm. [Accessed on 08 January, 2013] Businessballs 2013. PEST Analysis [online]. Available at : http://www.businessballs.com/pestanalysisfreetemplate.htm. [Accessed on 08 January, 2013]. Businessballs 2013. Swot Analysis [online]. Available at: http://www.businessballs.com/swotanalysisfreetemplate.htm. [Accessed on 08 January, 2013]. Gitman,L.J & McDaniel, C, 2008 The Future of Business. USA: Cengage Learning Medina, R. G, 2007. Business Finance 2007 Ed. Philippines: Rex Bookstore, Inc Miller, A. 2012. Are Bicycle Manufacturers Addressing Safety Issues? [online]. Available at: http://sustainablecitiescollective.com/andrew-miller/84381/are-bicycle-manufacturers-addressing-safety-issues. [Accessed on 08 January, 2013]. Netmba 2010. Financial Ratios. [online]. Available at: http://www.netmba.com/finance/financial/ratios/. [Accessed on 08 January, 2013]. University of Canberra, 2012. BUDGET, FORECASTING AND MANAGEMENT REPORTING . [online]. Available at http://www.canberra.edu.au/fbs/budget. [Accessed on 08 January, 2013] Wisegeek 2013. What Are the Most Common Human Resources Issues? [online]. Available at: http://www.wisegeek.com/what-are-the-most-common-human-resources-issues.htm. [Accessed on 08 January, 2013]. Appendices Appendix 1 Ratios ACID RATIO = (Current assets-stock)/ (current liabilities) = 0.76 ASSET TURNOVER RATIO = (Revenue)/(Total assets) = 2.06 RETURN ON CAPITAL EMPLOYED = (Earnings before interest and tax)/ (Total assets- current liabilities) = 0.11 Debtor days = (Debtors)/ (creditors Sales) *365 = 115 Creditor Days = (Creditors) / (Cost of sales) *365= 24 Appendix 2 Presently the company is selling 2500 units per year. But the cost it is incurring is huge. So Cyclermate should aim to increase the number of units sold annually. As the number of units sold will rise the indirect cost will not change. So there will be a profit. In the proposed budget the number of units annually sold is 2700. The profit earned by the company is 201,302 pounds. After the payment of dividends which is 80% of the total profit Cyclermate has a capital of 40,260.40 pounds which can be used further to improve and expand the company. Appendix 3 Sources of funds: Cash from mortgaging land = 150,000 pounds Bills to be received from debtors = 185,000 pounds Payments to creditors = (50,000 pounds) Stock = 272,250 pounds Total = 557,250 pounds. Read More