Its’ competitor, Winter Sports, recorded a current ratio of 4. 20 and acid-test ratio of 3. 40 respectively (JET, 2013, p. Horizontal Analysis). The debt assets ratio had an improvement of 1. 9% in year 14 (51. %-53. 5%), over the year 13 figures. However, Winter Sports had a better debt assets ratio of 38% in the same fiscal period. In consideration for the bank loan, keen attention has to be placed on the working capital ratio of CSS. This ratio show the excess of current assets over current liabilities and is an indication of how much outside financing the company is using to run its’ business in relation to their own funds.
It also indicates how readily a company will be able to pay its short-term debt obligations as they fall due. The scholastic opinion over the years about working capital is that a ratio s good and means that a company will be able to cover its short-term debt obligations twice over (Investigated, 2013). Chi’s, working capital ratio was 5. 53%, in contrast to Winter Sports of 4. 20% in year 14. What this implies is that the company will be able to cover its debts and UN-expected bills easily more than its competitors.
The disadvantage of having a higher working capital ratio is that the company is tying down too much idle cash that can be used to grow the business further. However, this impressive working capital ratio of CSS is an indication that they are in an excellent position to take advantage of the growing popularity of snowboarding as a sport, and the growing market potentials of snowboards. Regardless of the above, there are some areas of concern for the company. For instance, the net profit margin decreased to 0. 2% in year 14, from 0. % recorded in year 13. This invariably, gives cause for much concern, more so, when Winter Sports recorded a net profit margin of 5. 1 % within the same review period (JET, 201 3, p. Horizontal Analysis). This low margin suggests that CSS need to do more in the areas of revenue generation in order to boost profits. When dealing with debts, the rent and acid-test ratios are the two most important ratios to consider by a lender as they show how liquid a company’s assets are. As a general rule, any values over large deemed to be good (Chambers, 2013).
Further, it is usually desirable for these figures to be high as it indicates that a company will be well disposed to meeting its’ debt obligations. Given Chi’s current ratio of 5. 53 and acid-test ratio of 3. 32 in year 14, they are more than capable of handling the debt involved with a million dollar bank facility with minimal hardship. It is also pertinent to consider the efficiency of the company, and he balance sheet analysis indicates that CSS is becoming more efficient in their business operations. To support this argument, Chi’s total liabilities were $990,420 in year 12, and decreased to $876,460 in year 14.
This is a 0. 13% decrease in liabilities. This further show that Chi’s overall cost is decreasing while the increasing revenues will give rise to higher profits. Within the same review period however, Chi’s total assets decreased slightly by approximately 0. 03%. This slight decrease in total assets will be more than compensated for by the decrease of 13% in total liabilities over the same period. Reviewing the restated trend analysis of CSS, with year 14 as the base year, the company will witness a modest but consistent growth between years 14 to 17.
The cumulative growth in net sales revenue will be 3. 7% by year 17. (JET, 2013, p. Trend Analysis). This supports the results from the analysis of the debt assets ratio of the company. Investor Words (201 2), explains that the lower the debt assets ratio, the more of the company’s funding is coming from equity instead of debts. The debt assets ratio for CSS was approximately 57% in year 12, and decreased to 51% by year 14, meaning that the company’s funding is coming ore from equity. This ratio tells the bank the percentage of total assets that were financed by creditors, liabilities, and debts.
The implications of these figures are that CSS has a low debt profile and will readily meet its creditor’s demands when the need arises. From these results, CSS can comfortably take the bank loan of 1 million dollars that is required to finance their European expansion project, and this will in turn, generate more revenues for the company. From the comparative pro formal income statement of the company, the incursion into Europe suggests considerable increases in the raring potentials of CSS. The company will see an increase of 42. % by year 19 from its year 15 position, and this translates to an increase of 76. 8% in earnings after depreciation and expenses within the same review period. Given these increases, the loan cost will be comfortably covered by the revenues from the European expansion, regardless of the fact that the company’s debt profile will increase by year 15 in their books. The European expansion is justified by the fact that it will result in higher revenues for CSS. The increase in revenues will increase cash and cash equivalent component f the assets in the balance sheet (L i, 2012).
This would mean that the debt to equity ratio will remain significantly small, hence the increase in assets will more than off-set the increased debt that CSS is assuming. The summation of all this is that the European expansion is very sensible as it would strengthen the company’s revenues and profitability. AY: RISKS The most pressing and significant risk that the company is facing now is the current financial environment that is still reeling from the financial upheavals of 2008 (De Bonds, 2010). The financial crisis affected every business including
CSS negatively. This crisis led to a slight drop in their profitability and growth in year 13 and 14 from year 12 (JET 2, 2013, p. Trend Analysis). This decrease is however, temporary, as the trend projections show an overall growth in the preceding three years (years 15-17). The drop in earnings is attributable to the slight drop in sales revenue (5. 5% in year 14 from year 12), coupled with increasing total operating expenses in year 14. However, increases in other general and admit expenses and total general and admit expenses were 29. 1% and 12. 44% respectively in year 14. The company should review the seasons for these increases in these specific areas and try to address the causes in order to stem this tide and improve revenues further. Regardless however, the indications are that the fortunes of CSS are improving, as buttressed by the trend analysis; sales will increase over years 15 to 1 7 by 3. 6%. Other external factors seem to support the idea that Chi’s fortunes will improve and the growing popularity of snowboarding in the US gives credence this point (Cheroot, 201 1).
Breadbasket (20012) noted that this combined growth of snowboarding as a sport in Europe and US; means that CSS has two markets it can potentially expand into. By year 19, this European expansion will bring to the company annual sales revenue of $2,227,380 (JET 2, 201 3, p. Capita Budget). The indication of this is that Chi’s sales will increase significantly with the European expansion. It may be possible for CSS to realize the economies of scale with the European expansion, which would result to higher profits than the trend analysis will account for.
It should be noted that CSS would be faced with some risks by its forays into Europe. Firstly, the operating environment for the company will be different from what they are n US. They will be facing many major risks ranging from political, sovereign, economic, and financial to labor relations. These can potentially affect the operating results of CSS very negatively if not well addressed. The following specific financial risks and mitigation actions need to be taken by CSS: General and Admit Expenses increased over the period of the last 3 years.
These increases were driven mainly by increasing admit salaries, executive compensation, and other general and admit expenses and affected the operating income of CSS negatively. Given that employees pay accounted for a argue chunk of the cost/expense profile of the company, if the trend continues in the same fashion, CSS may not be able to meet its interest payments in future. Mitigating this risk, the company needs to evaluate these costs to determine the areas where cuts can be effected if they are still necessary all together. The review of this should lead to the immediate elimination of any unnecessary cost.
The high current ratios show that Chi’s management is not utilizing the company’s assets to its fullest advantage. With the relatively good working capital that CSS has, there is always room for improvement. Mitigating this risk requires a professional evaluation of the company’s assets by accounting professionals. This will help CSS to determine how the excess liquid cash can better be employed in the business. An operating income of $94,000 in year 14 possess some challenging constraints that suggests that CSS may find it difficult operating in Europe.
This low operating income was occasioned by increases in expenses between years 12 and 14 and the European expansion could strain the company’s budget and wipe-out what little income they have. This risk can be mitigated by CSS through making changes in the operating expenses. For example, through decreasing the transportation cost, other general admit expenses, or eliminating the huge executive compensations. Also, the company should maintain a stable level of inventory that is commensurate to the level of production requirements.
This will ensure that assets are higher than liabilities. Having excess inventory only erodes capital that should be used in other investments in the company. Accurate and strict inventory records must be maintained by CSS in order to ensure that it knows what is on hand, and what needs to be ordered. Matching billing cycles to production will optimize assets. They should also build a good working rapport with vendors by being loyal customers who pay their bills on time, which could afford the company certain vendor discounts to lower cost.
Further, to mitigate the country risks, CSS should engage the services of a legal counsel before embarking on the European expansion. The company would also be advised to engage the services of a human resource/labor relations expert with extensive international labor relations experience to advise the company in these areas. The domestication of the loan from the bank in Euro will help to taiga the risk of exchange rate fluctuations. The bank is further assured about the health of the loan they intend to give to CSS due to the special efforts they made to comply with the Serbians-Solely (SOX) Act of 2002.
The employment of the services of an external auditor to prepare their financial results and review their books will further help to mitigate their risks and bring them in full compliance with the recommendations of SOX Act and COOS. CSS also need to review and improve their credit policy. Currently, the policy of sending multiple invoices to retailers with the last notice being sent if at the 30th day, and payments only considered late at the 40th day should be dispensed with immediately, as it results in long periods between payments.
It may also engender inaccurate records keeping and the possibility of the company defaulting in payments to creditors and receipt from debtors. To mitigate this risk, it would be necessary to reduce the time frames. Instead of using a 2 day, 1 Today, and goody invoice reminder system, and only counting orders as late after a days waiting period, it would be advisable to send an invoice immediately, on day 10 and day 20. By day 30, he payment can be regarded as late.
This would mean that the company’s debtors will make payments more expeditiously, thereby, making funds more readily available for them. To: The CEO Custom Snowboard Inc. Re: Recommendations on how to proceed with the European Expansion Plans Expansion into Europe: With the growing popularity of snowboarding in Europe, CSS wants to take advantage of this growing snowboarding market in that continent hence; their intension to source a loan from the bank to finance the European operations. The company is also interested in acquiring Europe Snowman Inc. D they are seeking the loan for the purposes of paying for Europe Snowman Inc. ‘s stocks at $2. 40 per share (Handout, 2013, p. 8). The good thing about this plan is that it will allow the company to seamlessly enter into the European market. The company will also avail themselves of the existing retail network of Europe Snowman Inc. Chi’s product line will also deepen through the selling of Europe Snowman products and its own too. This is the most efficient and least risky way for CSS to expand into Europe.
Other expansion options open to CSS to consider are the merger, purchasing, and leasing options. Leasing the business would cost CSS $975,000 + $50,000 in annual lease payments and cash buy-out at the end of the leasing period. This option therefore, is more expensive than any of the others by year 19 (JET, 201 3, p. Lease vs.. Purchase). The leasing option definitely cost CSS more than the outright purchase option as only $720,000 is required to pay for the outstanding 300, 000 shares of European Snowman quoted at $2. 40 per share.
The outright purchase option has the added advantage of already having a building and sales network which can be employed into immediate SE by CSS once they expand into the European market. The lease or buy option does not offer this same advantages to CSS as they would have to develop their own sales network from the scratch and that could be a very daunting task. Pertinent Financial Ratios to Consider: In order to aid the bank in reaching a decision about the loan, we present here in a simple chat the most important financial ratios: (JET 2, 201 3, Income Statement and Balance Sheets).
These financial ratios indicate that CSS can take on more debts and still be able to meet the interest and principal repayments as they fall due. Additionally, these calculations show that the company is highly liquid with a current and quick ratio of 5. 5% and 4. 2% in year 14. The debt ratio of 50% is indicative that CSS is financing at least 50% of its operations from equity and retained earnings hence; it has the capacity to assume more debts for expansion purposes without jeopardizing their debt servicing ability. Finally, with an inventory turnover of 33. % and CAP of 1 1 days, it is further proof that CSS has the ability and potential to generate more revenues that can be directed towards the repayment of any debt obligations it may incur as a exult of the expansion into Europe. 82: IMPROVEMENTS CSS as a going concern is expected to always improve in their business operations if they must remain competitive and profitable both in the short and long haul. Chi’s financial data show that they lack in operational expenses. They are using the TAB accounting model to lump all its expenses together.
What TAB does is to sum up all cost together and lump them under one cost overhead item in order to derive the Cost for the product. While it is an effective costing method for some companies, it is not ideal for CSS. It may e necessary for CSS to adopt the BBC costing method to determine the pricing/costing of their snowboards, if they wish to improve. The merit of this is that the company would more correctly determine and forecast production and profits. In using BBC, the manufacturing overheads are itemized to give a more accurate figure or production cost.
This also ensures that the company sees where adjustments are needed in the entire production process in order to be more profitable and efficient. For the TAB and BBC methods, the regular and customized snowboards have the same cost for materials and labor. The costs were $3,375,143 and $1,177,344 for regular and personalized snowboards respectively. With TAB method, the company lumped all manufacturing overhead cost together and charging a large amount of $1 ,068,982 for regular model for a total production cost of $4,444,125. For the Personalized model, the manufacturing overhead is $334,048 for a total production cost of $1 1 ,392.
However, the BBC method broke down the manufacturing costs into different cost overheads: Factory setups- $2,442 Quality Control- $14,862 Engineering Services- 537,867 product Movements- $1 0 Packages & Shipping- $266,072 Overhead cost unallocated to activity cost pools- $86,61 0 these break downs show that the company has a total manufacturing overhead cost Of $546,863 for regular and $856, 1 67 for personalized. Total Production Costs under the BBC model for the company is $3,992,006 for regular and $2,033,51 1 for personalized.
These analysis buttresses the fact that Chi’s costing is flawed as the company is not taking advantage of the cost savings it could have from the production of the regular and customized snowboards. For example, factory set up are more than $1 81 6 for personalized models than the regular ones. This is sensible because it is easier and cheaper to mass produce than to personalize just an item which requires more effort and key adaptations to the production process. Whereas engineering and quality control will be more for customized models, the packaging & Shipping for the regular models will exceed that of the custom models.
Over $200,000 is spent in this area and it is affecting Chi’s ability for a strong ROI. The personalized snowboards accounts for 80% of the sales output and only costs $ 66,516 to package and ship. To build a vibrant company with a bright future, CSS should adopt BBC as their accounting costing method. Finally, the KIT Oust-in-Time) method is another cost saving measure that can be implemented by the company in order to reduce excess materials, save money, time, and labor. The idea behind KIT method is that materials or products are not requisitioned unless the Company needs them immediately.
This has the merit Of ensuring that the company keeps their funds in the bank instead of sitting in warehouses as unused inventory, ensure more accurate forecast of sales numbers and materials needed for production. As can be seen from the company’s balance sheet, it had an excess of $1 33,392 in unsold inventory at he end of year 14 and their trend analysis show that it has no plans for improving this number. CSS doesn’t need extra materials and products listed under company assets. Instead, they need more figures that will produce better net income.
The scheduling and cost control technique is another method that the company should consider in other to further reduce their cost of operations. This method is designed for use in project management and employed mainly to increase efficiency of task scheduling and resource use decisions. This technique uses the triple constant triangle-cost, scope, ND schedule, and as Taylor (2007) noted, any change in say cost, will affect either scope or schedule or both, and vice versa. This technique though originally designed for project management, it has been successfully applied to manufacturing processes over the years.
The company can apply this technique firstly to lowering cost. At the present, they use $30 in materials to manufacture a snowboard (JET 2, 2013, p. 6), if any of these components can be found at a cheaper costs, then CSS can produce each snow board at a significantly lower cost. For example, using fiber or reinforced plastics to place the metal materials component of their snowboards would significantly reduce the cost, while not sacrificing the quality of the product. This scheduling and cost technique can also be applied to reduce the labor time by CSS.
Currently, it takes the company 4 hours Of labor time to manufacture a regular snowboard, and, additional 1 hour for a personalized snowboard (JET 2, 201 3, p. 7). Finding a way to streamline this process may possibly reduce labor costs; or even make extra boards in a standard our work shift. If we assume that the company can find a better sander, it can move 2 minutes off cost of board. The meaning of this is that it will take ours and minutes to manufacture a standard snow board, translating into a cost savings of minutes per week; and 1 hour, minutes of saved labor time in a month, meaning that the company can save $223. 9 on each worker per an mum. STOIC The CEO/BODE custom snowboarding Inc. RE: European Expansion Historical Analysis: For the company to make a decision about expansion to Europe, an analysis of past performance as an indicator about future performance would have to be made. It should be noted that the financial crisis of 2008 affected the references of CSS in year 14. In year 14, net earnings dropped to the tune Of 72. 11% while net sales increased marginally by 1 . 28% in the same fiscal period. Also, total operating expenses for CSS rose 4. 31%, and total general and admit expenses went up 6. 0% while gross profit margin remained at 30. 4% and a 35. 62% drop in operating income. The harsh financial and economic operating environment also impacted the investment of CSS shareholders resulting in a drop in PEPS to 0. 02%, ROE to 1. 8%, and net profit margins to 0. 2% and operating profit margin to 1. 5%. However, their price/ earnings ratio went up $197. 03, and retained earnings to 6. 9% DUET, 201 3, p. Horizontal Analysis). These historical analysis shows that the company still has enough room for expansion and growth in the future, especially if we take into context the performances of the competition.
We can buttress this fact by the current ratio of 5. 53%, inventory turnover Of 33. 3 times, and debt ratio of 51. 6% recorded by CSS in yearly 4. Winter Sports on the other hand, posted 4. 20% for current ratio, 30. 4 times for inventory turnover, and 38% for current ratio in the same period. With the positive retained earnings of CSS $222,826 in year 14), it may elect to reinvest a large chunk of it into the business, or use their low leverage advantage to acquire more debts, which translates to adding more investments into the business.
Both investment decisions have the potential effect of increasing the earnings of CSS in the future, while yielding a healthier return to shareholders. Chi’s Horizontal trend analysis show that net sales will increase by 3. 7%, 2%, and 3% respectively, in years 17, 16, and 15, this is an indication of future growth for the company. This growth potential can be maximized if CSS will be able to notation and curtail their costs of operations. The problem here is that the company only grew marginally by 3. 7% cumulatively between years 15-17.
See the excel extract below- This problem is even more glaring when we look at the income statement of the company, which show the slow growth to be the reason for the significant deep in income between years 13 and 14 ($52,000); and over years 12-14, Chi’s net income has shrunk by $202,500 cumulatively. (JET 2, 2013, p. Income Statement). This dwindling operating income trend needs to be changed quickly by the company as we cannot over emphasize the importance. The gross profit margins make these trends even more disturbing. The company did not improve too much in their gross profit earnings between years 12-14.
Yearly saw a decrease of $132,300 in gross profit and only increased slightly by $24,500 by year 14. (JET 2, 201 3, p. Income Statement). We can attribute these discrepancies between the gross and net income to the fact that Chi’s expenses over the years have been increasing at a very fast rate, and sales revenues have not attained the high of year 12. These trends if left to continue will expose the company to very difficult uncial upheavals in the near future. Internal and External Risks: There are a number Of internal risks that the historical analyses Of the Cab’s performances have exposed.
These risks include the following- decreasing net income, staff strikes or walk out, language or cultural barrier, stagnating growth, and communication issues. On the other hand, the external risks that the company faces are- market variability, natural disasters (earthquake, flood, or fire), and currency exchange risk, foreign economic risk, and international legal risk. Chi’s net income dipped from a high of $160,500 in earl 2, to $14,475 by year 14 (JET 2, 2013, p. Income Statement). To address this dip in net income, CSS has the option of increasing sales by expanding operations into Europe.