Académique Documents
Professionnel Documents
Culture Documents
Executive Summary ........................................................................................................................................1 1.0 Introduction...............................................................................................................................................2 2.0 Main issue .................................................................................................................................................3 3.0 Analysis and Discussion ...........................................................................................................................4 3.1 Short-term borrowing ...........................................................................................................................8 3.2 Ethical Analysis ....................................................................................................................................9 3.3 Lack of internal control.......................................................................................................................10 4.0 Recommendation .................................................................................................................................... 11 4.1 Develop different types of chicken products ...................................................................................... 11 4.2 Change or mixed chicken feed ............................................................................................................ 11 4.3 Proper documentation and segregation of duties ................................................................................12 4.3 Establish new policies by management ..............................................................................................14
Figure 1 Process of Sales Order Entry ..........................................................................................................13 Figure 2 Process of Cash Collection .............................................................................................................13 Table 1 Performance analysis of EPM for the past 3 years from 2006 to 2008 ..............................................4 Table 2 Percentage of increase/decrease in the account balances ...................................................................4 Table 3 Increase of price of feed and production cost.....................................................................................5 Table 4 Financial ratio analysis of EPM .........................................................................................................6 Table 5 Types of chicken production ............................................................................................................ 11
Executive Summary
The purpose of this report is to evaluate and analyse the current position of EPM after the occurrence of the problems in the case study and recommend few suggestion to resolve these issues.
First, this report provides an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of EPM. Methods of analysis include horizontal and vertical analyses as well as ratios such as profit margin, inventory turnover ratio, account receivable turnover ratio and days to collect account receivable. Results of data analysed show that all ratios are below industry averages. In particular, comparative performance is poor in the areas of profit margins, credit control and inventory management.
Other than that, there are analysis on the issue of short term borrowings by performed the comparative analysis on short term borrowing to long term borrowing. An ethical analysis to the action that perform by En Selamat which show the intention not to fulfill his responsibily and duty of care which lead to the problem of conflict of interest. At the end, the analysis to the internal control of EPM and the results show that the EPMs internal control is really in a bad state which lead to credit control issue.
This report finds that the prospects of the company in its current position are not positive. The major areas of weakness require further investigation and remedial action by management.
Recommendations discussed include: Develop more types of chicken products Change or mixed chicken feed with other feed Proper documentation and segregation of duties Establish policies by management to prevent any irregularities actions
1.0 Introduction
Encik Selamat, the General Manager of Excel Poultry & Meat Sdn Bhd (EPM) had received a report which indicated that the operating cash flow of EPM was systematically running low. The company had to resort to significant increase in the short-term borrowing in order to meet its operating obligations thus increase the interest payments. The credit limit of its major customer, Cold Gold Sdn Bhd also had gone into its level and yet the marketing department continued to supply products to the company.
Another problem faced by this company is Mr Siva, its retail customer complaining that the figures on the statement of accounts sent to him were incorrect. He had no outstanding balance in his account as cash payments had been made to Encik Munir, a former staff at finance department. All of these problems interrelated to each other and became the main issue in this company which is low liquidity of cash flow.
This report is prepared to analyze the issues in EPM that put it in this kind of situation. It provides information obtained through ratio analysis, regarding the profitability, liquidity and financial stability of EPM. This report pay particular attention to the earning power, liquidity and credit management, inventory management and debt management, and will highlight major strengths and weaknesses while offering some explanation for observed changes. The report will comment on the prospects of the company and make recommendations that would improve companys current performance. These observations do have limitations which will be noted.
Since 2008, the company has been facing the problem of increased chicken feed cost which has risen to RM88 from RM54.50 (an increase in almost 61.5%). The increase in feeding cost has ultimately increased the companys production cost to about 56.5%. Even though EPM had growing in revenue, it still cannot improve its operating profit. It was mainly pertaining to less significant difference between cost of sales and revenue. In that event, the company resorted to borrowing short-term loans from the bank in order to meet these operating obligations. This in turn increased its financial obligations in terms of interest payments and caused more losses to the company.
In addition, the financial position becomes worse as EPM continues to supply products to Cold Gold Sdn Bhd even though their credit limit had already exceeded. This leads to the increasing of trade receivables and trade creditors because EPM did not collect its customers debt. It also cannot pay its own debt. The receivable collection in this company is out of control. As example, Mr. Siva (a retailer) complained that the figures on the statement of accounts sent to him were incorrect. He had no outstanding balance in his accounts as cash payments had been made to Encik Munir (one of the former personnel in finance department). This proves that the companys accounts are not in proper order and there is possibility of misstatements in their accounts. Lack of internal control in EPM leave a loop hole for Encik Munir and Encik Selamat to cause these problems.
Other than that, EPMs credit controller (Ms Choy) discovered that Encik Selamat (General Manager) has close relationship with one of the executive directors of Cold Gold Sdn. Bhd., Encik Azman. This relationship has enabled Cold Gold to extend its credit limit with authorisation from Encik Selamat. This situation may create conflict of interest as Encik Selamat did not disclose it to the Board.
3
Revenue Cost of Sales Operating Profit/ (Loss) Expenses Net Profit/ (Loss) Trade Receivables Stock Trade Creditor
Table 1 Performance analysis of EPM for the past 3 years from 2006 to 2008
Particular/ Year
2007
2008
Revenue Cost of Sales Operating Profit/ (Loss) Expenses Net Profit/ (Loss) Trade Receivables Stock Trade Creditor
Particular/ Year
2006
2008
Increment
RM 54.50
RM 88.00
RM 33.50
RM 3.22
RM 5.04
RM 1.82
In late 2008, the operating cash was running low because of the problems in cash liquidity. From the abstract of account above, we found that the cost of sales was increasing from 2006 to 2008 and it is too close to the revenue amount. However, in 2007, the cost of sales increased while the revenue did not increase much and operating loss was recorded in 2008 as the retail price of chicken was increased from RM 3.22 to RM 5.04 per kilo from 2006 to 2008. Thus, the increment of revenue in 2008 by 36.16% was almost same with the increment in cost, 36.95% in that year.
On the other hand, in 2008, the cost of feeding was increased by RM 33.50 from RM 54.50 to RM 88.00 per bag which is an increased of almost 61.5%. Hence, the production cost was also increase from RM 3.22 to RM 5.04 per kilo from 2006 to 2008 by RM 1.82 which is 56.5%. In short, the exorbitant cost of chicken feed resulting the operating loss faced by the company.
2006 5.48%
2007 1.65%
2008 1.08%
16.68
36.07
28.50
Receivable 4.31
3.40
2.88
107days
126days
Profit margin is very useful to assess the current financial position and financial performance. The higher the profit margin indicates more profitable company that has better control over the costs compared the years. In this case, EPM have the highest profit margin which is 5.48% in 2006 and decreases gradually in the following years to 1.08% in 2008. This is because the increment of cost of sales, EPM is profiting only 1.08% for every dollar of product sold in 2008.
Besides that, the inventory turnover ratio is used to measure the inventory management efficiency of a business. It is an activity/ efficiency ratio and it measures how many times per period, a business sells and replaces its inventory again. In general, a higher value indicates better performance and lower value means inefficiency in controlling inventory levels. For the year 2007 we can see that the value of inventory turnover is higher compare with 2008 may be an indication of overstocking which may pose risk of obsolescence and increased inventory holding costs. EPM was turning over its inventory on average, 3 times per month in 2007 while it reduces to twice per month in 2008.
The reason of the low running operating cash was also due to significant increase in the trade receivables, also cash collection. The credit controller, Ms Choy was discovered from the aging analysis of customers that one of the major customers, Cold Gold Sdn Bhd, was exceed
6
the credit limit and the marketing department of EPM still continued to supply products to that particular company. Encik Selamat has personal benefit from the deal with Cold Gold Sdn Bhd. Therefore although Cold Gold Sdn Bhd did not pay within the credit limit, Encik Selamat did not stop the marketing department to continued supply products to the company. EPM has weakeness in their cash collection because of customer selection and depends on the relationship rather than business matter. There is a supported evidence which between General Manager, Encik Selamat and one of the executive directors of Cold Gold Sdn Bhd, Encik Azman, who was the best friend during college days. Besides that, there is two possibilities that the statement of customer account is not tie up with the client records.
Firstly, the account receivable is not being maintained properly. There is an assumption that Encik Selamat might use the companys fund illegally and he instructed the Account Executive, Puan Azura to prepare the accounts in a ways to conceal his acts. It is an illegal transferring of a particular debtors balances to another debtor. Secondly, there is theft on cash collections. This might be one of the former staff in finance department; Encik Munir did not record properly and committed fraud on cash skimming. Cash skimming is an illegal practice of taking the money for personal used. And the person skimming is not reporting the cash as the payment of Mr Siva, one of the retail customers with small account. By calculating the financial ratio analysis, account receivable turnover ratio is indicates how quickly a company is having difficulties collecting sales made on credit. It is an important indicator of a companys financial and operational performance also. However, the receivables turnover ratio is convert it into days to collect account receivable. The days to collect account receivables is also called Average collection period is the number of days , on average, that it takes a company to collect its account receivables. In 2006 we can see that the company collects its trade receivables in 84 days (around 3 months) compare with the year 2007 and 2008 when their collect the money in 107days and 126 days (around 4 months), where there is the differences about 1 month. It means that a higher value of average collection period is unfavorable whereas a lower value is favorable. So, it is means that EPM takes around 3 months to collect its debt in 2006, while it takes more than 4 months in 2008.
7
Short-term borrowing
Long-term borrowing
-The borrowing time usually not more than -EPM can take longer period of time to one year. -Unsecured. -High interest rate with additional fees. start paying of their loans. -Lent over a longer lending term. -Long-term borrowing is good for
-Short-term borrowing is good non-regular equipment and other depreciable assets. expenses that come up.
Moreover, there is another ethical part which is when Ms. Choy realizes this issues was happened, she approached one of the company directors and highlighted the fiasco, only to discover about the deal between Encik Selamat with one of the Cold Gold Sdn Bhds directors. The director was reluctant to take any action against Encik Selamat, since he was very well-connected and had good reputation at the previous company. Encik Selamats connections with parent company will results that he can secure his position in EPM and settled the problem that he created without facing any penalize. Encik Selamat will continue make this fraud because he know that nobody will caught him or get any penalize just because of his relationship and well-connected with all the related person, he know that they will cover up his fraud.
10
4.0 Recommendation
4.1 Develop different types of chicken products
In order to resolve the main issue of the low liquidity of cash, we recommend that EPM can expand or develop more chicken products to sale. Since the main activity of EPM is supplying the whole chicken to customers, it is advisable to develop more products to increase the sales as below.
Types Eggs
Purpose EPM can raise the chicken eggs either for consumption or to breed more chicken to sell.
Feathers
The chicken feathers also can be use to sell to the handicraft makers.
Livestock
EPM can sell the chickens not only for consumption but also to customers who would like to buy chicken as pet.
Table 5 Types of chicken production
Another problem that causes the low liquidity of cash flow is the increase in the cost of chicken feed. It is recommended that EPM mix the chicken feed with other cheap ingredients to reduce the chicken feed cost.
11
Corn a very desirable grain that can feed as whole, cracked or ground. Shell corn may be used with other grains as scratch feed and corn chop can be included in any of the dry mash rations.
In order for EPM to avoid having risk with customers purchase in credits, EPM can find their customers that afford to pay in term of cash. They can be the small-medium sized company or small groceries stores. This will increase directly the income of the company thus higher operating cash flow. Somehow, they can also export their products to other countries.
Besides that, EPM can apply for banking facilities and financial assistance in order to meet their financial obligations. For example, Skim Pembiayaan Perniagaan MARA or TEKUN. With the money they received, EPM can use them for improving the cash flow of the company. They also can purchase additional raw materials in order to supply their products to their customers.
In term of maintaining their resources, EPM can find other supplier for their product. They can implement the backward integration as one of the way to control their supplier. From the supplier, they can ask to buy in bulk so that EPM can get discount for every purchase. This will reduce their cost and increase the sales.
12
Other than that, since marketing department continued to supply their product even the credit limit of Cold Gold Sdn Bhd had gone into its limit, EPM should take alert on their revenue cycle especially sales order entry.
In order to solve the problem on cash collection, EPM should maintain their account receivables. Errors in maintaining customer accounts can lead to loss of future sales and may indicate possible theft of cash. EPM can implement the closed-loop verification to ensure that proper account is being credited. A field check onto the numeric values must be done frequently for the payment amounts. It is also important to reconcile the subsidiary account receivables in general which should be done by another person.
13
14