Business Analysis - Case Study Example

1)(2)The of the global economy of today is one of the main reasons why today’s businesses are looking for an edge compared with the competition. In the case of John and Joyce Barton, of Barton’s Sales and Service, the business specializes in general installation and service of units such as York, General Electric and Carrier A/C and heating units. For owners John and Joyce of Little Rock, Arkansas. Although the competitive nature of their business has made it increasingly difficult to compete and stay profitable at the same time,they have managed to keep the company profitable since acquiring their business in 1996. John and Joyce have struggled to maintain adequate working capital for their business.As a matter of fact even though they have been able to retain the business profitability in accounting terms, they are still having cash flow issues which are causing them to have to constantly aquire debt,which proves to be one of the most costly options available to business owners in order to meet working capital needs. (3)(4)At a functional level the lack of a well though out plan,means the company is being very reactive,not proactive in their decision making.John and Joyce need to implement the necessary functional,management,and operating changes necesarry to best meet the needs and wants of their customer base and provide clear differentiation and added value between them and the competition,that is not currently being met by their current operational structure.These first concern must be first adressed in order to run efficient and profitable business enterprise.The company needs to undertake some serious operational changes in order to keep themselves viable as a business in the long term. At a business level, the companies lack of Strategic Plannning is the first problem that needs to be adressed.A question that remains is ,if either John or Joyce have the business and financial skill set needed to run an eficient,profitable and growing business, while at the same time devicing,implementing and following through the necesarry strategic,operational and functional changes needed to better serve the needs of the customers as well as the business itself. In order to deal with the operational,financial reporting,and efficiency issues,the first step is to establish realistic short ,medium and long term goals for the company.After establishing the milestones to be achieved, a plan of action can be deviced in order to best reach these individual business issues or goals.The firm Barton’s Sales and Service as a business unit lack of strategic planning and adequate accounting information system exposes the firm to unnecessary risks,subpar financial performance,increased expenses and unnecessary business and systematic risks. (5)Strenghts- Has remained profitable since 1996,2006 highest profitability so far Weaknesses- Strategic Planning,Management, Inventory ,A/R Aging Oppportunities- A/R Factoring,Cash discounts,Net 30 discounts Threats-Competition, Missing Business and Growth Opportunities,Cash Flow (6) a)The company is currently using a revolving bank loan as its main source of working capital funding.But this option is probably one of the most expensive options available to the firm to fund its cash flow requirements.At 12%,the firm incurred an interest expense of over just for that working capital loan of over $2,100 dollars.The company lacks regular financial reporting which prohibits the company from evaluating the firm’s financial performance on a reglar basis. b)management is not handling the A/R nor the inventory accounts in an eficient manner.The lack of an A/R aging schedule inhibits the ability of the company to focus its limited resources ion the accounts that deserve the most attention according to their dollar amounts and level of delinquency.A lack of financial incentives to the customer for early payment,means that most likely the customer is going to wait at a minimum until the very last few days of the time alloted for payment.The adittion of a 2-3% cash discount as well as similar net 30 discounts for commercial customers,will encourage early payment of A/R,and provide much needed cash flow for the firm.Account receivable factoring could be used to raise cash flow,especially for delinquent accounts which most likely would prove to be difficult to collect,or because of unreasonable collection costs. In layman terms it means that, an independent broker would discount a stated percentage of the related debt or A/R of the business in exchange of ownership rights of the specific business A/R .The firm’s is also very inneficient in the handling of inventory.Barton,s Sales to Inventory ratio is only 8.12,which compared with an industry median of 33.2,which is more than 75% less of the industry average,which points to serious inventory handling problems. The company is not exploring available alternatives such as Just-in-Time inventory system for their big ticket purchases which would eliminate probably over 80% of their inventory costs,which in term would most likely solve much of the firm’s working capital difficulties.Developing and mantaining long term business relationships with their suppliers ,would allow a mutually beneficial arrangement to develop and implement JIT,and general inventory streamlining in order to eliminate or minimize the need of regular bank financing. (c) Although the firm’s overall level of indebtness is not to high,with a current ratio is of 2.11 ,compared with an industry average of 1.5 they are in the upper range of their industry which is positive.But as previously discussed,that with the right changes,the firm can eliminate their need for revolving credit lines,an open up their lines of credit for furure expansion and business growth opportunities instead of working capital needs. (d)The firm’s lack of regular cash flow,further prohibits the business from taking advantage of trade discounts,therefore minimizing the probabilities of building long term cost cutting mmasures to help minimize thair inventory costs in general. (e) The cash conversion cycle of the firm is 26.45 days,which is much better thah the industry median of 40.9.The implementation of a net 30 discount could help improve the bottom line even further. (f) By taking advantage of inventory improvements(JIT),A/R factoring for delinquent accounts,and an adequate AIS,the companies working capital position as well as profitability will most likely significantly improve (7)(8)In the case of Baron Sales and Service, there are a lot of factors that are contributing to its lackluster performance. We can divide these as follows; 1 Not having an accounting information system 2 Lack of strategic planning 3 Deficiencies in operating cash flows of operating capital 4 Inventory excesses and deficiencies 5 Competitive position disadvantages After developing and implementing a strategic plan for the business,one of the first milestones that must be overcome is the lack of an adequate modern accounting information system. Most of the firm’s problems and operating deficiencies could be adequately and efficiently handled by a modern accounting information system suite. An accounting information system would allow the company to obtain real time data about their company as far as inventory, sales, purchases, trade accounts and as well as every other aspect of the firm’s financial performance. All this information can be relayed to management in real time, providing them with the adequate, correct and timely information necessary for business decision making and planning could be available in the palm of your hands. This would be the first and most important step the firm would take in order to increase their operating efficiency and increase profitability. This accounting information system needs to be implemented first before making any additional changes are made to their operating protocols. In order to be able to implement the additional operating changes concerning their inventory system, financial reporting and operating improvements needed to bring the firm up to speed regarding operating efficiency this first step is necessary.After implementing the accounting information system the company can immediately start working on improving their inventory system, Currently the company is only generating one income statement a year, therefore the company’s management is lacking the necessary operational nor financial data needed to efficiently manage the business as a whole. Therefore instead of investing in hiring an employee to manually take care of inventory and related tasks, the company should obviously invest in an accounting information system with a bar-coding module. The approximate cost of an adequate accounting package for this type of business can vary greatly, but in general, look to invest between $2,500-$3,500 for a complete software and hardware package that can provide all the performance and features needed to run an efficient and profitable small business. Although the company has remained profitable so far, it is facing an operational cash flow problem. The company in general needs to take advantage of less expensive options to obtain the necessary cash operational . Another option in order to fund their operating cash requirenets, would be to sell a percentage of their equity to a private investor(s).In times of high A/R activity ,this could become one of the firm’s main fund sources, since financing costs are usually slightly lower than conventional financing, albeit special circumstances. In order to remain profitable in such a competitive industry, the company needs to significantly improve and streamline their inventory system. Using their current methodology, the company is only doing a once a year income statement and inventory. Obviously, this provides the firm with no current information regarding the company’s operational status and performance. As a direct consequence, management is lacking the necessary operational and financial data necessary to analyze the business as a whole since they not adequately informed about their current business status. (10)The business world has become a competitive landscape due to the transformation of our economic system into a knowledge economy. The company studied in the case had a major systematic constraint which was the lack of efficient financial information system. Due to the lack of information the managerial staff could not implement changes since they did not have an information system in place with the capabilities of auditing the firm’s financial activities. An information system would allow the company to manufacturing streamlining techniques such as just in time inventory. A better control of inventory would increase the company’s cash flow position. Factoring account receivables is short term solution that can be used to increase the firm’s cash flow. The company has a bright future ahead, but in order to meets its goals the firm must invest in improving its ability to retrieved data and information needed to make informed decisions. Change management techniques must be applied to change the organizational culture towards one in which documentation of economic events are recorded in timely and recurrent manner. Read More