Strategy of Sweetco Inc - Case Study Example

 Table of Contents Case 1 3 Objectives to Consider 3 Actions to Take 3 Options 4 Decision 5 Case 2 5 Objectives to Consider 5 Actions to Take 6 Options 6 Decision 7 Works Cited 8 Case 1 Objectives to Consider Sweetco Inc. was a subsidiary of 5A1, but the parent company decided to sell off its subsidiaries as the company was not fitting into their strategic framework. Sweetco has been a customer of the company for the last 10 years on credit terms. The accumulated credit balance of Sweetco is now $356,877. The credit period of 10 days is now expanding to 30 days. Since Sweetco Inc. had an excellent payment record, the financial payment records of Sweetco Inc. were never taken care of. Now it has been heard that Sweetco Inc is being sold off by its holding company to its senior management and a leading firm. Apart from this, another fact was also revealed that Sweetco received money from its holding company for its operational functions on the basis of loans. This is the reason why the CFO has asked for an extension in the credit terms to 60 days. The objective is now to analyze the financial credibility of Sweetco at present and make a future projection so that we can decide whether to maintain the business relationship or not. Actions to Take The best option in such a case is to ascertain credit scores of the company Sweetco Inc. Assigning credit scores means defining certain factors for making decisions and allotting weight age on each factor. For example, 30 percent weight age for the payment history of the customer, 30 percent weight age to the amount of money outstanding, 15 percent weight on the length of the credit history, 10 percent weight on the newly generated credits, and 10 percent on the different types of loans being offered to the customer, i.e. Sweetco Inc. For this purpose the marketing contacts would be utilized; the investigation of credit shall be done through reliable sources; the customer of Sweetco Inc. can be contacted for information on the company’s status; the documents and financial statements can be filled based on the information acquired from different sources; the credit file for Sweetco. Inc. should be prepared; and finally a wholesome financial analysis is untaken (Bass 88–89). Options The options as to what decision needs to be taken are mentioned here in this section. All the three dimensions have been judged and, accordingly, the options are stated below: Hardline Position: The hardline position involves an extreme decision. In this case the decision would be that the company should not continue the business with Sweetco Inc and increasing the credit terms does not comes into play in this case. If the credit scores and the financial analysis show that Sweetco Inc. neither has the ability to pay back the money nor would be able to attain sustainability without the help of its holding company or any other financial support, then it is better to discontinue further business relationships. Moderate Position: In this case the credit term can be extended to 60 days but only after developing appropriate credit standards, analyzing the credit standards applied on the customers, gathering the necessary information and analyzing the overall risk associated with it. So Sweetco would be allowed a credit extension, but credit terms would be based on the operating cycle, type of the goods being supplied, pricing, cost, profit margin of the products, etc. Passive Position: In this case the company would agree to what the CFO of Sweetco. Inc suggests, and would extend the credit term to 60 days. There would be no added obligation on Sweetco. And the company would be continuing business with Sweetco. Inc in the similar manner as it used to do business on the basis of past goodwill of the company and a long term relationship. Decision In my opinion, the company should be taking a hardline position because firstly, Sweetco Inc.’s financial position was never stable. This is because the company ran on the loans from its holding company. This is the reason why it could give its payments on time. Secondly, 5A1 is spinning off Sweetco Inc., so the financial stability of Sweetco Inc. cannot be predicted. Moreover, an extension in credit term of 60 days might be granted further in future. So the decision is “no” (Bucky 137). Case 2 Objectives to Consider This case deals with the credit management issues of a Californian fabricator who is a two year old customer of the company. The average order that the fabricator placed amounted to $15,000. However, the fabricator soon started discounting the payments. The current credit balance of the fabricator is $25,000, with the other credit balances such as $20,000 for 30 days and $15,000 for 60 days respectively. The company has also levied a service charge of 1.5 percent on the credit payments, but the company pays the service charges and not the principle amounts which are due. The fabricator likes the quality of the products of the company and wants to do business with the company in future, too, since the fabricator has a sustainable financial position and is developing in terms of financial and non-financial aspects. So the president of the company also wants to continue the business relationship with the fabricator. The objective is to analyze the financial position and credibility of the fabricator in details and develop an appropriate credit framework for the fabricator so that the business can be continued and the payments are also received regularly. Actions to Take The financial credibility of the fabricator needs to be assessed on three different bases such as financial, non-financial and credit scoring models, so as to make projections regarding maintaining business relations. The information that needs to be gathered is the credit reports from the agencies regarding the fabricator, bank letters, references from the suppliers, the financial statements of the fabricator, and the field data that can be gathered from the sales representatives. The credit standards of the fabricator can be assessed based on 5 Cs such as capital, collateral, capacity, conditions, and character. Secondly, the risk needs to be classified and link the evaluations of the customers to the credit standards. A specific framework for discounts on payment should be formulated, e.g., late payment, default payments, etc (Bullivant 63). Options All the three options in this case are stated so as to focus on all the aspects of credit management and extended credit term with the example of the fabricator. All the three dimensions would give a clear picture as to what the consequences would be if these approaches are taken. Hardline Position: This is an extreme position in which the company would not be continuing the relation with the fabricator because of payment defaults. Though the fabricators’ business is growing fast, still no criteria would be considered for choosing the fabricator other than faulty payment issues. The fabricator would be issued legal notice of paying off the credit balances within the given time, and the contract with the fabricator would be discontinued. Moderate Position: In this case the company would be continuing the relation with the fabricator as the president of the company and the fabricator wants so, but specific credit terms and conditions would be made and documented so that the fabricator pays the money within the credit period offered by the company. Passive Position: This decision simply means agreeing to the fabricator without any new obligation. It just signifies continuing business without any new regulation or obligation. Decision In my opinion, the decision should be moderate, which means the business relationship with the fabricator would be continued, but the payment made by him should be in form of EMI so that the principal amount of the credit is also paid along with the service charge. Moreover, the loan amount allowed to the fabricator should be less than the amount of its previous loans (Edwards 64–66). Works Cited Bass, Richard M. V. Credit Management: How to Manage Credit Effectively and Make a Real Contribution to Profits. 3rd ed. Cheltenham, Gloss: Nelson Thorns, 1991. Print. Bucky, Stephen R. Credit Management Kit for Dummies. 3rd ed. New Jersey: John Wiley & Sons, 2011. Print. Bullivant, Glen. Credit Management. 6th ed. Surrey: Gower Publishing, Ltd., 2010. Print. Edwards, Burt. Credit Management Handbook. 5th ed. Surrey: Gower Publishing, Ltd., 2004. Print. Read More