Case Studies

BY: ROMAR CAMBRI

Contents
I.

Inventory Analysis
A. Facts
B. Questions
C. Discussions & Conclusion
II. Financial Statement Analysis
A. Facts
B. Questions
C. Discussions & Conclusion
III. Sales AR Analysis
A. Introduction
B. Case
C. Question
D. Discussion & Conclusion

I. Inventory Analysis
A. Facts

Notes for Consideration:

1. 2012 Sales Forecast is based on last year's average sales set at the beginning of
the year.
2. Percentages of unserved orders for June are as follows:
Item A = 5% of Monthly Average Sales
Item B = 15% of Monthly Average Sales
Item C = 25% of Monthly Average Sales
3. The Principal of item A launched a sale in June 2012. The next sale is scheduled
in October 2012.
4. Item B resulted to a negative variance of 1000 pcs on the recently conducted wall
to wall inventory count. However, further reconciliation revealed that the variance
was due to double recording of inventory received by the receiving clerk.

I. Inventory Analysis
A. Facts

5. Item C is considered by the Principal as its no. 1 fast moving item.

6. An expansion in the warehouse is set to finished in the 3rd Quarter of 2012.
7. Purchasing Manager issued a Purchase Order (PO) on June 20, 2012 based
on Q3 Sales forecast Marketing Department, as follows:
Item A = 30,000
Item B = 22,500
Item C = 15,000
8. The SOH ending June is the usual stock EOM inventory level for the three
items.

I. Inventory Analysis
B. Questions applicable to each SKU:
1.

2.

3.

As the Controller, would you approve

the stock level requirements by
Marketing Department? Why yes or
why not?
Any thoughts on the current inventory
stocking level of the Company?
What would you retain or improve
based on the current set-up?

I. Inventory Analysis
C. Discussion & Conclusion
1. As the Controller, would you approve the stock level requirements by
Marketing Department? Why yes or why not?

The answer is Yes, but after considering the following

recommendations on the stock level requirements for
the following Items:
1. Item A = 17,000 pcs, the pike in June was due to the sale,
hence we cannot use the 10k sale as the ave for the coming
quarter. Thus we should stick to the 16k 3 rd Quarter Sales
Forecast and include the total unserved orders (~1k pcs).
2. Item B = 25,500 pcs, set the inventory level at inventory
level at the maximum (22k) plus a provision for the unserved
orders for 3 months (3.5k)
3. Item C = 22,000 pcs, this was derived by using the 3rd
Quarter Sales Forecast of 18k plus 4k total unserved orders.

I. Inventory Analysis
C. Discussion & Conclusion
2. Any thoughts on the current inventory stocking level of the Company?

Uneven distribution of inventory level per

SKU; this is the result of not considering the
important factors for inventory planning. This
includes the unserved orders, anomalies in Sales of
the previous months (sale held in June and double
recording of inventory), market demand for the
coming quarter, and sales behavior.
Depletion of inventory at the end of the
month; with no specific reorder point and not
considering the delivery lead time, it is expected
that the inventory will drop to zero and would result
to an unserved orders.

I. Inventory Analysis
C. Discussion & Conclusion
3. What would you retain or improve based on the current set-up?

What should be retained is the minimal SOH

at quarter end.
However, the following should be improved:

Implement a reorder point per SKU;

Evaluate the factors that affects the sales in
previous month;
Consider the anticipated demands or causes that
would tend to increase or decrease the inventory
level for the coming quarter.
Crunch the numbers in every Purchase Order for
the stock level requirement.

II. Financial Statement Analysis

A. Facts

II. Financial Statement Analysis

A. Facts

II. Financial Statement Analysis

A. Facts

II. Financial Statement Analysis

A. Facts

II. Financial Statement Analysis

B. Questions:
1.

2.

Based on the Financial Statements &

Ratios above, what areas would you
focus on as the Controller of ABC
Company?
What are specific initiatives you would
suggest to further improve the
Company's performance?

II. Financial Statement Analysis

C. Discussion & Conclusion
1. Based on the Financial Statements & Ratios above, what areas would you
focus on as the Controller of ABC Company?

To begin with, the Balance Sheet and

Income Statement are essential and used
as a starting point in relation with the
Financial Statements ratios to analyze the
success, failure, and progress of the
business.
Using the generated ratios, the areas to be
considered relevant to focus on the
foregoing.

II. Financial Statement Analysis

C. Discussion & Conclusion
1. Based on the Financial Statements & Ratios above, what areas would you
focus on as the Controller of ABC Company?
1.

Profit Margin - Profit margin which is near break even should indicate that operating expenses and
administration cost should be reviewed to identify any unnecessary expenses that can be reduced or
eliminated to increased profit margin.

2.

Return on Assets - This measures how efficiently profits are being generated from the assets employed in
the business when compared with the ratios of companies in a similar business. A 4.6% ratio on ROA may be
considered as low ratio and should be compared with market averages to identify if there is inefficient use of
the business assets.

3.

Return on Investment (ROI) - This ratio tells the owner whether or not all the effort put into the business
has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as
a bank savings account, the owner may be wiser to sell the company, put the money in such a savings
instrument, and avoid the daily struggles of small business management.

4.

Days Sales Outstanding - Since it is profitable to convert sales into cash quickly, which means that a lower
value of Days Sales Outstanding is favorable whereas a higher value is unfavorable.

5.

Inventory turnover - This ratio reveals how well inventory is being managed. The more times inventory
can be turned in a given operating cycle, the greater the profit. The 3.9 inventory turnover ratio means the
Company has 92.3 days or 3 months (formula: 360 days/3.9 inventory turnover) days sales of inventory.
Days sales of inventory shows how long it takesto turnthe inventory (including goods that arework in
progress, if applicable) into sales.

II. Financial Statement Analysis

C. Discussion & Conclusion
2. What are specific initiatives you would suggest to further improve the
Company's performance?
1.

2.

3.

Trade Liabilities using the Current ratio (1.2) as well as the Days
Sales Outstanding (75.3 days), it is seen that the ability of the company
to pay its debt is within that days. The risk is seen on what the trade
creditors may imposed upon the company due to delayed payment.
Negotiation of credit line with creditors is warranted to catch up with the
payment capabilities of the company.
Collection of Accounts Receivable with the DSO at 75.3 days, this
connotes that the company should boost its collection by implementing
stricter credit policy, efficient collection methodology, review of billing
process, and constant receivables ageing inquiry.
Inventory Management - 3.9 inventory turnover ratio means the
Company has 92.3 days or 3 months (360 days/3.9 inventory turnover)
days sales of inventory. Days sales of inventory shows how long it
takesto turnthe inventory (including goods that arework in progress, if
applicable) into sales. The more times inventory can be turned in a
given operating cycle, the greater the profit.

II. Financial Statement Analysis

C. Discussion & Conclusion
2. What are specific initiatives you would suggest to further improve the
Company's performance?
5.

6.

7.

Evaluation of Pricing Model With the Gross Profit at 17%, the

Company should evaluate its pricing model to increase the gross profit
rate by increasing selling prices and determine all the possible impacts of
increasing the selling price. Also, improving the Gross Profit by recovering
the true Cost of Sales or improving the gross profit by reducing the Cost of
Sales.
Operating expenses and administration cost should be reviewed this is to identify any unnecessary expenses that can be reduced or
eliminated to increased profit margin.
Managing Cost Drivers To increase the Return on Assets, the
company needs to increase operating profit margin by efficiently
managing costs like marketing expenses, general selling and
administrative expenses. The Company may also choose to increase total
asset turnover by selling inventories and collecting accounts receivables
as quickly as possible.

III. Sales AR Analysis

A. Introduction

One of the main points that a product

Principal considers important in
selecting or maintaining a
Distributor is the latters ability to
reach, enter and maintain consistent
(or increasing) stocks in big/ chain
accounts nationwide.

III. Sales AR Analysis

B. Case
Company A is owned by a family of known businessmen in the
country. It operates a top chain of Supermarket and Dept. Store
accounts in the Mindanao region. They have 12 branches in North
Mindanao alone and controls/comprises 60% of the consumer
market in the area. It is crucial that a Distributor is able to sell to
this Company to have his products felt in the Mindanao market.
As a big account, Company A deliberately delays payment to all
suppliers. He is very notorious in this aspect yet, distributors
continue to serve the account.
Distributor B is one of the suppliers of the account of consumer
products. The credit term they extended to Company A is 30
days but they get paid on the average of 120 days from due date.
They have tried the following actions but still, the problem is not
resolved.

III. Sales AR Analysis

B. Case
a) Request for PDC upon delivery Company A was not amenable to the
arrangement being a big corporate account. All their other business
interests are buying on credit and they are not being required to issue
PDCs by other suppliers.
b) Hold new sales orders until settlement -Distributor Bs stock level
in the various outlets became critically low and Customer A expressed
intentions to replace the stocks with other brands and delisting
Distributor B. In the event that Distributor B requests for reenlistment, new set of fees and promotional support will be charged by
Customer A.
c) Transferring the account to a Sub-D due to the size of the
transactions and payment behaviour of Customer A, the Sub-Ds cash
position was affected. When this happened, the Sub-D stopped paying
Distributor B as well. The arrangement could not be sustained.
d) Additional deals/ discounts Distributor Bs management is not
amenable to giving the account additional discount to pay within credit
term because if the information leaks, other customers (paying on time
or not) may request for the same accommodation.

III. Sales AR Analysis

C. Questions
1.

2.

3.

Meetings between Company A and Distributor B have

produced futile results. What is the best way to deal with a
customer like Company A?
Company A has an order totaling P1,000,000 pending
approval by the Credit & Collection Department of
Distributor B. Only 15% of the current CL (5,000,000) is
available. The Principal is pushing for the release of the
order. Would you recommend releasing the order? Why
yes or why not?
On Distributor B's annual assessment of the credit terms of
its Customers, what would you recommend them to grant
Customer A on the following areas:
a) Payment term (i.e. 30 days, 120 days, CHOD)
b) Credit Limit (average monthly purchase of
2,000,000)

III. Sales AR Analysis

D. Discussion & Conclusion
1. Meetings between Company A and Distributor B have produced futile results.
What is the best way to deal with a customer like Company A?

The best way to deal is to give incentives in

kind for Company As promotional items,
instead of the companys reoccurrence of
cost of collection and opportunity loss in
accounts receivable investment.
Habitual visitation by Marketing Personnel.
Closely monitoring of receivables, e.g.
ensuring invoices are received on time;
regular collection follow-up; etc.

III. Sales AR Analysis

D. Discussion & Conclusion
2. Would you recommend releasing the order? Why yes or why not?

At P250,000 above the credit line, I would

recommend releasing the order after
hearing Company As reason of not
updating its account.
At this amount, the sales of the company
should not be prejudiced.
After releasing, however, Credit and
Collection should focus in collecting and
updating the account within the Company
As payment undertaking.

III. Sales AR Analysis

D. Discussion & Conclusion
3.

What would you recommend them to grant Customer A on Payment term and Credit
Limit ?

Payment Term: 60 days

Credit Lime: P2,000,000