- Case Introduction Mid Year 2015 Danh Bach Owner Of The Bach Manufacturing Company Bach Sought A Local Bank For An A 1 (323.59 KiB) Viewed 52 times
- Case Introduction Mid Year 2015 Danh Bach Owner Of The Bach Manufacturing Company Bach Sought A Local Bank For An A 2 (173.53 KiB) Viewed 52 times
Case Introduction Mid-year 2015, Danh Bach, owner of the Bach Manufacturing Company (Bach), sought a local bank for an additional Ps 50 million in cash to meet his footwear manufacturing company's capital requirements. After quadrupling revenue from 2 million to 8 million in three years and quadrupling after tax profits (PAT) in the same time frame, Bach boldly acknowledged his company's financial needs. Bach highlighted the development of his company, as well as the dynamics and potential opportunities in Petoria's footwear and accessories markets, during a lengthy and fruitful discussion with the bank manager. Bach enthusiastically presented his company's results to the bank manager, which he considered was excellent in light of the industry's high level of competition. The bank manager gave over Bach's financial papers to his loan officer, including an income statement and balance sheet (see Figures 1 and 2), and assured Bach that he would contact him within a week once the materials were reviewed and analyzed. He directed the loan officer to expeditiously process Bach's loan application and inform him of the bank's decision. 1 Petorian Footwear Manufacturing Sector The nation of Petoria (pronounced pel-TOR-e-a), is the second largest footwear manufacturer in the world. Petoria's footwear industry contributed 2 percent of global spindle capacity and 8 percent of global rotor capacity. By 2021, this sector is expected to achieve a value of USD 223 billion. With abundant raw materials and a skilled labour, the country has established itself as a profitable hub for the worldwide footwear industry The Petorian footwear sector contributed 4 percent to the country's gross domestic product; accounted for 14 percent of Petoria's industrial output and accounted for 27 percent of the city's foreign exchange inflows. The apparel sector employs around 45 million people directly or indirectly. Demand for footwears in both the domestic and international markets has bolstered the sector's growth hopes. In 2014, cloth output increased by 6 percent in the Petorian mill industry, while man-made fibre production increased by 4 percent. The accessory and footwear manufacturing area was expected to experience strong, robust expansion, which was backed up by data. Additionally, the industry average of key ratios demonstrates that the financial performance of textile companies is consistent and reliable. The footwear and accessories market in Petoria has grown by around 14.58 percent during the last three years. In FY2013/14, the Petoria footwear sector garnered USD 11 billion in foreign direct investment, and a industry analyst predicted that footwear exports from Petoria will reach S60 billion within three years. This would be facilitated by rising labour costs in China, ya PS is the Petorian Dollar US$1 is approx P 65 from 10.364 million to l' 0.84 million Journal of International Speakers and Boots. A brief report on apparet in Petoria, 2 July 2012, accessed July 1, 2015 greater demand from the United States, and a boost in the quality of Petoria-manufactured items. In 2013-14, exports of footwear items in Petoria increased by almost 12 percent over 2012-13, reaching an encouraging USD 35.4 billion The United States had previously been Petoria's principal market for footwear exporters. With Phan's devotion, a staff of motivated, skilled labourers, and Bach's experience and expertise, the production unit unexpectedly began receiving orders in quantities far exceeding its estimates. Demand for the footwear increased as a result of the fresh and innovative designs, high-quality fabrics, and fine finishing elements. Bach's Financial Situation Financial liquidity and finance issues became more prevalent as the business expanded. Bach encountered funding difficulties as a result of • the working capital required to make regular purchases of raw materials • the lengthy credit periods offered to consumers • a lack of finances to purchase new manufacturing machines • insufficient industrial space а Bach launched the company as a private limited company in 2012, with him and his wife as the only stockholders, they had 1.2 million shares. During that year, he borrowed money in the form of a mortgage loan and used it to meet the company's short-term and long-term needs. During 2012, the company borrowed a total of 0.736 million (taken against the mortgage of his assets, which had a value of 1.9 million). He continued to borrow money from the bank as the business grew and the asset requirements increased. The loan from the mortgage was 1.236 million in the second year and 2.5 million in the third year. Bach obtained the mortgage loan with little trouble because the mortgaged value of his assets was fairly high, and he also offered collateral security (his residence house) to the bank. With positive cash flows from business, servicing interest on loans was also not a concern. Bach was unconcemed about the financial subtleties of long-term or short-term loans, so he just proceeded to withdraw money and use it wherever he saw fit. Bach's financial records were kept by a part-time accountant. The accountant maintained daily accounting records for the company, which included vouchering, cash management, receipts, and payments, and created monthly, quarterly, and annual financial statements in accordance with regulatory standards. A certified public accountant independently audited his financial statements. Bach was happy and always felt like a successful entrepreneur because the business was profitable after all expenses and interest payments were made. With Phan's devotion, a staff of motivated, skilled labourers, and Bach's experience and expertise, the production unit unexpectedly began receiving orders in quantities far exceeding its estimates, Demand for the footwear increased as a result of the fresh and innovative designs, high-quality fabrics, and fine finishing elements. Bach's Financial Situation Financial liquidity and finance issues became more prevalent as the business expanded. Bach encountered funding difficulties as a result of • the working capital required to make regular purchases of raw materials • the lengthy credit periods offered to consumers • a lack of finances to purchase new manufacturing machines • insufficient industrial space Bach launched the company as a private limited company 2012, with him and his wife as the only stockholders, they had 1.2 million shares. During that year, he borrowed money in the form of a mortgage loan and used it to meet the company's short-term and long-term needs. During 2012, the company borrowed a total of 0.736 million (taken against the mortgage of his assets, which had a value of 1.9 million). He continued to borrow money from the bank as the business grew and the asset requirements increased. The loan from the mortgage was 1.236 million in the second year and 2.5 million in the third year Bach obtained the mortgage loan with little trouble because the mortgaged value of his assets was fairly high, and he also offered collateral security (his residence house) to the bank. With positive cash flows from business, servicing interest on loans was also not a concem. Bach was unconcemned about the financial subtleties of long-term or short-term loans, so he just proceeded to withdraw money and use it wherever he saw fit. Bach's financial records were kept by a part-time accountant. The accountant maintained daily accounting records for the company, which included vouchering, cash management, receipts, and payments, and created monthly, quarterly, and annual financial statements in accordance with regulatory standards. A certified public accountant independently audited his financial statements. Bach was happy and always felt like a successful entrepreneur because the business was profitable after all expenses and interest payments were made Future Prospects Domestic and foreign demand, analysts predicted, would propel the Petorian footwear and accessorises sector beyond the USD 220 billion level by 2020. The retail sector was seeing fast growth as a result of rising consumption and disposable income. Numerous national and international businesses entered the footwear sector in Petoria. Over the next decade, the apparel segment was predicted to grow at a compound annual rate of more than 13 percent. The following factors contributed to the textile sector's rise in the Petorian market: • Increases in per capita income and distribution of the population shift in the youth's preference for branded products and changes in the broader population's lifestyle • Products of exceptional quality • Favourable trade policies. • Increased export opportunities • Increases in fabric manufacturing in response to domestic demand • Increases in the retail sector in response to rising consumerism and disposable income in the population • The Petoria government is committed to providing training for approximately 2.7 million residents through their integrated skill development scheme. According to the 2012- 17 five-year plan, this project would span ten garment sub-sectors, including footwear, accessories, Knit apparel, silk farming and artisanal handicrafts. As his business grew and his clientele grew, his financial difficulties grew as well. Bach's market credibility was strong and he had little difficulty obtaining the necessary raw materials, but he ran into trouble when attempting to collect money from his consumers, as he lacked an organised method for tracking credit period extensions. Bach also noticed stock stacking up in his factory as orders were either not fulfilled or were delayed by clients. His machines were likewise becoming obsolete, and he believed the time had come to replace them with more contemporary and efficient models. The factory space was insufficient, and an expansion was necessary. Additionally, he needs new skilled labourers and some additional staff members to assist his expansion goals. In sum, Bach needs an extra PS 50 million to maintain smooth operations and expand his business, and so, he waits in his office, eagerly expecting the bank's decision. Bach anticipates the decision would be favourable. Financial Reports 2012- 2013 2013 - 2014 Years 2014 - 2015 200 1800 2000 1240 760 480 4320 4800 2832 1968 800 7200 8000 4800 3200 Sales Cash Credit Total sales Cost of goods sold Gross profit Operating expenses: General, admim, selling expenses Depreciation Interest expenses (on borrowings) Profit before tax (PBT) Tax @ 30% Profit after tax (PAT) 450 80 100 60 520 156 364 400 158 960 288 672 1000 660 340 1200 360 840 Figure 1: Income Statements, April 1 to March 31 (in PS) 2012 2013 -2014 2014 -2015 2013 1900 2500 4700 Years Assets Fixed Assets (net of depreciation) Current Assets Cash and cash equivalents Accounts receivable Inventories Total 40 300 320 2560 100 1500 1500 5600 106 2100 2250 9156 Equity & Liabilities Equity share capital (shares of P$ 10 each Reserve & surplus Long-term borrowings Current liabilities Total 1200 364 736 260 2560 1600 1036 1236 1728 5600 2000 1876 2500 2780 9156 Figure 2: Balance Sheet, April 1 to March 31 (in PS) Sector Average 2.30:1 1.20:1 7 times 52 days 4.85 times 75 days Ratio Current ratio Acid test ratio (quick ratio) Receivable turnover ratio Receivable days Inventory turnover ratio Inventory days Long-term debt to total debt Debt-to-equity ratio Gross profit ratio Net profit ratio Return on equity Return on total assets Total asset turnover ratio Fixed asset turnover ratio Current asset turnover ratio Interest coverage ratio (times int, earned) Working capital turnover ratio Return on fixed assets 24% 35% 40% 18% 22% 10% 1.1 2 3 10 8 24% Figure 3: Industry average of key ratios - End of Case Study
Required items to be addressed in your video: 1. Calculate ratios for Bach Manufacturing for all shaded cells in Figure 1. Use formulas provided in the case study. 2. From ratios calculated in Part 1, analyse the profitability' and 'efficiency' of Bach for the relevant years. Consider sector industry) averages when formulating your analysis. 3. Assume the position as an expert in financial analysis, suggest four areas Bach can focus on (financially) to best position himself for future prospects. 4. Assume the position of the bank, and decide on Bach's proposal for funding. Start your answer by stating that the proposal should be accepted or rejected. Thereafter, justify your decision with four arguments. Ratio Year 1 Year 2 Year 3 Industry Ratio (given) 3.03 1.54 1.79 3 0.61 0.77 0.35 1.25 1.7 0.4 9.67 117 Acid test ratio Current assets turnover ratio Current ratio Debt-to-equity ratio Fixed assets turnover ratio Gross margin ratio Interest coverage ratio Inventory days Inventory turnover ratio Long-term debt to total capital Net margin ratio Receivable days Receivable turnover ratio (times) Return on equity Return on fixed assets Return on total assets Total assets tumover ratio Working capital turnover ratio 0.29 0.182 0.22 0.14 0.27 0.105 91 0.24 0.18 6 23% 0.196 0.27 0.24 0.1787 9% 5 3.5 4.77 8 Figure 1: Complete ratios of shaded cells (Task 1)