SAABs Cash Flow Problems - Coursework Example

SAAB’s Cash Flow Problems of the of the SAAB’s Cash Flow Problems Q. “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.” Introduction When we say that cash is king we mean that ultimately it is the cash flow of a business that is the most important factor in sustaining it and giving it life. While people often talk of accrual accounting or matching the revenues and expenses of a period to work out the actual profit or loss incurred, it is the cash in the bank and on hand that are very much the most important indicators of business health. Even so called liquid assets as marketable securities, accounts receivable or merchandise inventory are known to provide much less than their book values in the event of an emergency or business failure. This is where the concept of fair market value and forced sale value becomes important (Curtis, 2011, 1). Discussion Business failure can occur for various reasons ranging from legal, political and economic factors that are beyond an individual firm’s control, to internal factors like cash flow problems, manufacturing and selling difficulties and lack of firm orders on which to base production capacity. If a business finds it difficult to even break even and pay its own operating, selling and distribution costs, it can either look for a partnership, being rescued through a Government or private bailout, being acquired by a more stable entity or file for bankruptcy. Sadly this is what happened with SAAB, after its struggling Automobile Division was taken over by General Motors in 1990. But in the aftermath of the 2008 recession and subsequent bailout of General Motors itself by the American Government, SAAB Automobile Division was sold off to Spyker Cars N.V. with the aid of a Russian sponsor in 2010. Spyker had subsequently been renamed Swedish Automobiles. However, the purchase and operation of SAAB Automobiles proved too heavy for Spyker to manage because Spyker was a small firm and taking over SAAB had drained their cash position as well as tested their managerial capabilities to the maximum. After a purchase offer by a Chinese firm was thwarted by former owner General Motors (they were against the technology being available to Chinese manufacturers) the company filed a bankruptcy petition and started looking for a buyer. Various offers and counter offers were made from China Youngman, Tata Motors, Mahindra & Mahindra, Koenisegg etc. The company could only produce between 20,000 and 40,000 vehicles at its manufacturing plants in Mexico and Sweden. The financial meltdown did not allow it to take advantage of the Chinese demand because it cancelled its plans to expand into new markets due to low cash position, paucity of credit and economic uncertainties. Various episodes of being unable to pay worker salaries and even to pay suppliers for materials repeated themselves in 2011. For example, July salaries were paid at the last minute on July 26; August salaries were paid through equity insurance as Gemini Fund purchased 5 million shares in SAAB. September salary payments also seemed to be in jeopardy. The Swedish Enforcement Administration has been monitoring SAAB in case of failure to meet creditor’s claims. The company Union has also threatened to go on strike because of salary payment difficulties that occurred three times in 2011. So we see that even financing from potential buyers had to be resorted to so that the company could be kept afloat (www.swedecar.com). It must be admitted that the lack of cash flow emerged from an apparent lack of attention to the production and marketing mix as well. Everyone knows that when you are trying to put a company or a brand name back on its feet, a sizeable amount of money must be spent on advertising and press relations, creating hype and curiosity so that buyers are attracted to the upcoming offerings (Kotler & Keller, 2012). Nothing to this effect appears to have been done for SAAB. Even the cars that General Motors produced while owning SAAB like the 9-2X and the 9-7X were less than glamorous and not as well respected or regarded for quality control and customer satisfaction as SAAB’s previous models. True, there is immense competition in the automobile market, but SAAB had already created its name and reputation in the world much before the GM takeover- in fact it could very well have been one of the reasons for the takeover as GM was convinced that SAAB had a good reputation in Europe and would be able to make inroads where GM cars had failed before. If anything, even the new designs seemed out of sync with the previous models and less visually and ergonomically appealing. It was no match for the earlier groundbreaking work as done by Sixten Sason on its models. Another difficulty was the length of the operating cycle- the length of time taken from production to sales to conversion into cash. Auto analysts estimated that the automaker needed to produce and sell at least 120,000 cars a year in order to break-even, compared to the current production of 30,000 vehicles. Sadly, this was not possible because as the company cash position worsened, it became all that more difficult to obtain credit. The company production was as follows: Country/ Location Cars Produced-2010 Cars Produced- 2009 Cars Produced- 2008 Sweden 32,000 20,900 75,000 Mexico & Others 0 100 14,000 TOTAL 32,000 21,000 89,000 When we compare this with 125,000 cars produced in 2007, we can clearly see how the production has fallen. The company could not raise cash or credit efficiently any more. Looking at SAAB-Spyker’s balance sheet for 2010, we can see that the firm has current maturities of interest bearing loans and borrowings of the value of € 9.026 million (SAAB-Spyker Annual Report, 2010, 108) and non-interest bearing loans of the value of €495 million. As compared to this, the cash on hand was just €70 million. The extent of the company’s reliance on borrowings can be estimated from the fact that the figures of borrowings reported in 2010 above compare to interest and non-interest borrowing of just €39 million and €15 million respectively in 2009. A comparison of current financial assets to current financial liabilities shows assets of €4 million and €259 million in years 2009 and 2010 respectively being reported against liabilities of €61 million and €725 million in those years. This highlights the extent of financial trouble that the firm was in at that time (SAAB-Spyker Annual Report, 2010, 110). The company reported a net loss of €22 million after taxation in 2009 which had increased to €103 million in 2010. Due to the small size of the firm, it was neither possible to reap economies of scale in production nor more favourable credit and advance sale terms to improve the cash flow status. Undoubtedly the research and development that were hallmarks of SAABs earlier innovations was not possible to be carried on as against the larger automobile manufacturers such as the Americans and the Japanese firms, so it had to admit defeat. As of 2012, it has had offers from Tata Motors for $350 million and from Youngman and Mahindra and Mahindra for between $300 million and $400 million. Moreover according to Swedish bankruptcy law, SAAB can yet be rescued by the Government or another firm- so the saga is far from over. It has recently been determined that SAAB’s total dues amount to €1.3 billion while its assets stand at €360 million. Evaluation In this part of the paper, we will give solutions for the cash flow problems being faced by SAAB as well as the other problems that the firm is facing regarding its loss of image, advertising and marketing mix. (1) It is not far-fetched to imagine that given the right incentives and support, some nationalistic Swede could take over this floundering car manufacturer and help set it back on the road to progress and profitability. It would need a lot of financial discipline and first class turnaround management to do it, but it is not impossible (Rao, 1992, 157).It would be even better if that person has a passion for cars or for reinvigorating failing businesses like Lee Iacocca of Chrysler or Sergio Marchionne of Fiat. (2) SAAB has a reputation for making cars that have very high quality and safety standards. A lot of people would want to capitalize on this characteristic of the company. (3) SAAB automobile division’s partnership and ownership with Scania and General Motors show that it is not averse to sharing the rewards. However it has a history of being used by the other firms for their own benefit and then being thrown away like yesterday’s newspaper. Clearly the management has to take a stricter controlling approach to mergers, acquisitions or joint ventures (Williams et al, 2010, 373). Agreements of secrecy regarding R&D and sharing of technology, transfer of knowledge and giving SAAB the skills and money it needs to revive could be made part of a merger or acquisition deal. (4) Another way they could solve the cash flow problem is to get the backing of angel investors or venture capitalists who would be willing to invest their money in this venture. The hiring of specialists for the marketing campaign or the image rebuilding and overall turnaround of the firm could be a welcome step in achieving this change. Business gurus such as Steve Jobs and Bill Gates have been known to work for a token salary of $1, where the chance and joy to lead and effect change in today’s challenging marketplace is regarded a reward in itself. (5) Practising the value added approach to manufacturing, automation, end to end supply chain management and even EOQ or JIT inventories could help control costs. By keeping minimal level of inventories, cash spent on these items are minimized, freeing funds for other uses. Proper investment decisions could match the level and timing of liability payments. In time, SAAB could re-emerge as another master car maker, booking orders in advance like Ferrari, Lamborghini or Rolls Royce does. This is because of the premium price, quality and prestige that these models command in the world. The history, innovation and past successes of SAAB could be a good topic on which to base its marketing campaign. In fact, I would recommend taking steps (1), (2), (4) and (5) in that order as the best combination to following solving problems for SAAB. A merger or acquisition does not always work, as seen GM did not take proper care of the SAAB range or image while it had purchased the Automobile Division of the company. Conclusion We have thus noted that despite its cash flow problems and the interference of former owners like General Motors in its bid to get sold because of political reasons, SAAB still stands a good chance of getting a worthy buyer. One hopes that the new owners would concentrate on reinvigorating things at SAAB rather than use its image and expertise to further their own ends. With a shrunken balance sheet and liabilities many times the assets, SAAB definitely deserves buyers who would serve its best interests rather than their own. References Curtis, Glenn (05 October 2011). Warning signs of a company in trouble. Accessed on 10 April 2012 at http://www.investopedia.com/articles/financialcareers/07/warning_signs.asp#axzz1recsqAvL History of SAAB automobiles. Accessed on 10 April 2012 at http://www.swedecar.com/saab_history.htm Kotler. P. & Keller, K. (2012). Marketing Management, 14th ed. Pearson High Education. Rao, R.K.S.(1992). Financial Management-Concepts & Applications. New York: Macmillan. The Spyker-SAAB Annual Report 2010. Accessed on 10 April 2012 at http://www.saabgroup.com/About-Saab/Investor-relations/SaabAnnualReports/Annual-report-2010/ Williams, J.; Haka, F.; Bettner, M. & Meigs, R. (2010). Financial and Managerial Accounting, 12th ed. McGraw Hill/ Irwin. Read More