Cash Flow Problems of the Car Company SAAB - Case Study Example

Cash flow problems are one of the most common reasons for business failure. Discuss why this was the case using the car company SAAB. Provide recommendations as to how they could have improved their cash flow problems. Table of Contents Table of Contents 2 Introduction 3 Business Failure 3 Cash Flow Definition 3 Current SAAB Situation 3 Cash Flow Problems as One of the Reasons for SAAB’s Failure 4 Reasons for Cash Flow Problem of SAAB 5 Positive and Negative Aspects of SAAB’s Actions 6 Evaluation 8 Conclusion 9 References 11 Introduction Business Failure The failure of any business can be because of numerous reasons. Recession and political distress among others can be some of the crucial reasons. In a wider sense, this situation generally arises when the operating cost of the business is more than the revenue earned. Therefore, a company unable to cope up with its expenses may have to shut down its manoeuvre and file for bankruptcy. Cash Flow Definition The cash that is flowing into a business in forms of selling its product is called cash inflow and the cash that is going out of the business in forms of expenses is called cash outflow. This cycle can be term as Cash Flow. Current SAAB Situation SAAB Automobiles is a Swedish car manufacturer that has been affected by the financial downturn that the company had experienced during its performances in 2009-2010. The financial downturn was witnessed by the company majorly due to its rising expenses which were notably more than its revenue, thus indicating a meagre cash flow that can be observed with reference to the Income Statement as shown below: Figure 1: Income Statement of SAAB Automobile 2010-2012 Particulars 2010-12 Net Sales (TKR) 6.301 Million Other Sales (TKR) 487 000 Operating Profit, EBIT (TKR) -3.126 Million Profit after financial items (TKR) -3.216 Million Net income (TKR) -3.009 Million (Source: Allabolag.se, 2012) In this paper it will be analysed and discussed that whether cash flow was the only reason for SAAB’s downfall or there were any other major drawbacks that brought the company to discontinue its operations. It will also be discussed that if cash flow was the major reason for the company’s downfall, then how it affected the company. Cash Flow Problems as One of the Reasons for SAAB’s Failure It has been noted that cash flow into SAAB was one of the major reasons which forced it to shut down ultimately through liquidation. Owned for 20 years by General Motors (GM), the firm was operating its business well. It could afford funding and sustain losses, but with the virtues of GM’s financial stability to a large extent. After GM sold SAAB, the organisation was running so low on cash that it could hardly pay the staffs. The organisation also had to suspend production, failing to pay the suppliers. The company sales dipped so much that it could hardly reach the ‘break even point’ that have been set by the management. For instance, it sold only 30,000 units in 2010, whereas the planned break-even point was set to sell at least 120,000 units. Therefore, SAAB’s production cost for manufacturing the targeted units were huge but the revenue generated were comparably low due to less sales over the year. In addition, the company had to pay huge cost for holding the stocks that influenced the organisation’s cash to outflow rather than inflow into the business (White, 2011). Reasons for Cash Flow Problem of SAAB One of the main reasons for the cash flow problems that SAAB suffered was due to its weak product portfolio designing. In this competitive world of car market giants, where the lifecycle of any product is rapidly changing, SAAB failed to bring innovations to its products. Thus, the sales dipped very low and the company was piling on its debts. Its operational cost also increased and revenue had dried up during the year 2011. Paying interest against the loans had also added to SAAB’s misery (Kinnander, 2011). The CEO of SAAB, Victor Muller, had proposed Chinese financers including Zhejiang Youngman Lotus Automobile to fund the company in order to avoid shutdown. However the planning failed not only because the legal rules of China were restricting funds from being transferred to the company internationally, but also because GM took its hands-off from assisting the company further. Therefore, the funding problem continued and SAAB constantly failed its targets for selling the cars which resulted to a loss in revenue. In order to attain the required fund, Victor Muller tried to sell a stake of the company to the Jinhua-based car maker and auto dealer Pang Da Automobile Trade Co which was again a failure. Moreover, the company’s stock fell by 62% to 8 cents at the close of share market in Amsterdam. Therefore, SAAB constantly lost the shareholders that could be a source for additional funding which resulted in increasingly weakening cash flow that in turn influenced the business failure of the company (Kinnander, 2011). The company also had to witness various other difficulties owing to its failure in improving the cash flow. For instance, the company was witnessing significant challenges in terms of repaying its loans and also in exhibiting a fair business relationship with its suppliers in the market. It was in this context that due to payment difficulties, SAAB had to stop its production in frequent intervals. Finally, the company halted its production on April 6, 2011. Later on 27th May 2011, it started the production after supplementary funding. However, the production continued to stop every now and then due to supply shortages as a result of inadequate funding (Saab Automobile AB, 2011). Positive and Negative Aspects of SAAB’s Actions The restart of SAAB after being separated from GM was delayed by six months due to the liquidation process. Its initial plan was to raise the production order by 20% every quarter starting from 3,500 units in the initial month. However, the quarterly figures sold till March 2011 was 4,700 units, much less than the targeted figure. The initial six months delay in production in the year 2010 also resulted in gross sales failure by 50% from its target. Thus, the company failed to achieve the target until its discontinuation in April 2011 (Saab Automobile AB, 2011). The continuation of failing targets due to the delay in restarting the production, SAAB had to witness several funding issues. SAAB also introduced new vehicles to survive in the competition, but the lack of fund disrupted its promotional activities. Hence, its advertising costs were below the industry standards. Large amount of payments were payable to the suppliers, disrupting in shortages of supply for production in frequent instances. SAAB’s positive approach to launch new vehicles was over shadowed by the negative information, that the company is forced to discontinue its production repeatedly which again affected its funding and simultaneously the cash flow expected. Moreover, the dealers of the company were also not at all satisfied with the after sale services which certainly raise a few limitations in the distribution channel of the company (SAAB Automobile AB, 2011). The restarting of SAAB was initiated by two Chinese Automotive Giants, i.e. Pang Da Automobile and Youngman Automotive Group. They intend to own 100% shares of the company, SAAB Auto Group. The influence of these two automotive giants was expected to have a positive impact on the dealers and customers of SAAB as the new owners intended to establish two new entities in China that will manage the sales of SAAB vehicles in the country. SAAB’s return to the market was further planned to be revenue and product led. The interesting products that the allied companies had planned to offer were further expected to create positive impacts on the customers through enhanced rand reputation (Saab Automobile AB, 2011). Therefore, the funding of SAAB by Pang Da and Youngman had helped the company to organise promotional events. SAAB took initiatives to ramp up the production plant, Trollhattan, which is one of the most efficient plants in the car segment, with the help of efficiently trained staffs. The management of the company had also designed 140 hours of modern training modules which were to be undertaken by the employees (Saab Automobile AB, 2011). Hence, the positive aspects were that the company considered extensive funding. However, in doing so, it neglected the cultural and the ethical aspects of the corporate world that resulted to lots of failed attempts in relation to financial deals with corporate investors among others. Evaluation With reference to the above discussion, it can be inferred that cash flow was not the only reason for the business failure of SAAB. Rather, it was the outcome of various reasons that have resulted in SAAB’s weakening cash flow. The working capital was spent wholly in producing units that was anticipated to be sold within 2011. However, the sales did not improve and the revenue flow was also disrupted to a considerable extent. The additional fund which the company tried to raise by selling the stakes to the corporate investors did not turn up too. Thus, none of the sources could not make the cash flow cycle stable and the outflow of cash was comparatively higher than the inflow of revenue. Though, the additional funding issue has been resolved by the entry of two new automobile giants, namely Pang Da and Youngman, the company should adopt a few measures so that the cash outflow does not exceed the inflow. One of the unique manufacturing policies is the Just-In-Time (JIT) system that can be used by the company. The JIT concept is to work on demand-pull basis, i.e. manufacturing according to the actual orders so that exact quantity is produced at the exact time required. JIT concept is successful if the organisation has the latest technologies for manufacturing with production scheduling software and electronic data interchange which is however again subjected to additional funds (Lai & Cheng, n.d.). The primary objective of SAAB is to reduce the operational expenses so that extra cash inflow can be generated. Therefore, JIT policy will help SAAB to incur low costs in holding the stocks, while increasing its storage space. JIT manufacturing system ensures that essential stocks are only obtained so that the working capital requirement can be minimised. This will help SAAB to focus the finances to other important aspects of the organisation (Lai & Cheng, n.d.). Conclusion It can be apparently witnessed from the above discussion that cash flow was not the only reason for the business failure of SAAB. Rather, it can be regarded as the aftermath of continuous failures witnessed by the company owing to its ineffective and weak strategic initiatives with regards to promoting the products and also related to generating adequate funds. It is in this context that even though its sales were affected by production stoppages in the second quarter of 2011, its overall sales in the first half of the year was impressive (SAAB Automobile AB, 2011). For instance, it sold 12,871 cars (wholesale) in 2011 compared to 10,240 in the first half of 2010 resulting to an increase of 26% sales. Its retail car sales had also increased by 44%, selling 15,194 units in the first half of 2011 compared to 10,535 in the first half of 2010. SAAB production had also increased by 9% from 11,851 cars in 2010 to 12,877 cars in 2011(SAAB Automobile AB, 2011). Thus, the above accounting figures prove that SAAB is recovering from the problems of generating extra revenues. Conclusively, it can be stated that the new owners of the company should ensure retaining the trust that SAAB had in the minds of the customers. If the cash flow issue remains stable and the company can earn higher revenue over its expenses, the Swedish Company may emerge as an efficient competitor in its segment. References Allabolag.se, 2012. Income Statement. SAAB Automobile AB. [Online] Available at: http://www.allabolag.se/5562588912/bokslut [Accessed April 05, 2012]. Kinnander, 2011. Saab Automobile Breakup Looms on Chinese Cash Limit, GM’s Snub. Bloomberg L.P. [Online] Available at: http://www.businessweek.com/news/2011-12-28/saab-automobile-breakup-looms-on-chinese-cash-limit-gm-s-snub.html [Accessed April 05, 2012]. Lai, K. H. & Cheng, T. C. E., No Date. Introduction. Just-in-Time Logistics. [Online] Available at: http://www.iped-uk.com/Just-in-Time_Logistics_Intro.pdf [Accessed April 05, 2012]. SAAB Automobile AB, 2011. Development since the Last Reorganization and Consequences Thereof. SAAB Preliminary Reorganisation Plan. [Online] Available at: http://inside.saab.com/saab-preliminary-reorganisation-plan/ [Accessed April 05, 2012]. SAAB Automobile AB, 2011. Introduction and Background. SAAB Preliminary Reorganisation Plan. [Online] Available at: http://inside.saab.com/saab-preliminary-reorganisation-plan/ [Accessed April 05, 2012]. SAAB Automobile AB, 2011. Press Release: Swedish Automobile N.V. Including SAAB Automobile AB Reports Its Semi-Annual Results 2011. Home. [Online] Available at: http://inside.saab.com/press-release-swedish-automobile-n-v-including-saab-automobile-ab-reports-its-semi-annual-results-2011/ [Accessed April 05, 2012]. White, T., 2011. Cash Flow Crisis At Saab: What Went Wrong? Tutor2u. [Online] Available at: http://tutor2u.net/blog/index.php/business-studies/comments/cash-flow-crisis-at-saab-what-went-wrong [Accessed April 05, 2012]. Read More