Chicken Run Essay
The implications if a major customers had gone into is level, it will affect the company cash flow because every payment received the company may have to use it to cover its operating expenses apart from getting profit. Accumulated debtors will show the collection department performance. Low cash flow will affect many areas in an organization. The company may have to make another loan to run it business. Other than that it may have problem to run the business if the cash flow is low. For example, if the company unable to pay the suppliers on time. The supplier may stop to supply product to the company. If the suppliers really stop supplying product, the company may face problem to produce product. This will directly affect the company sales because its fail to produce product to its customers. If the company do not work hard to reduce this important area they may be looking at legal remedies, or even write off debts and that means spending money to get money.
The other implication is that, the company will have a very unhealthy debtor’s aging. Where it is supposed to be a guidelines to the company. For example when a debtor reach it limit, the company should be alerted to chase payment based on the debtors aging. But in this case, Encik Selamat has been giving authority to the marketing department to continue supply products to Cold Gold Sdn Bhd because of the closed relationship. Indirectly, it shows
that Encik Selamat does not performing his duty rationally. Which effect his image as a manager. He is supposed to show his leadership by having a very good judgement. For example to stop supply products to Cold Gold Sdn Bhd until they settle their debts.
Refer to the case Chicken Run;
i) How would you assess the financial health of the company?
I would assess the financial health of the company based on the gross profit of the company. The higher the gross profit the healthier it is. Of course we have to consider the operating expenses of the company but operating expenses are still under the company control and discretion before we can get the net profit.
Other than that, I would assess the financial health of the company by obtaining a history of your company’s financial statements. Five years’ worth is usually a good base. Next, convert the financial statements to common size. Common size financial statements are simply a company’s financials expressed in the form of percentages rather than dollars. A common size format readily identifies trends and growth patterns. Additionally, since industry benchmark data is often produced in this format, it makes it easier to compare the results with the competition. Industry benchmark information can be obtained from a commercial vendor, accountant, or depending upon the industry, from trade associations.
Next, financial ratios are calculated. There are a number of ratios to choose from. Some of the more common measure liquidity, debt coverage, leverage, and operating and profit performance. Their relevance is dependent upon your company, its operating characteristics and the industry. Bankers and accountants can be especially useful in identifying the more pertinent ratios.
The information gathered thus far is analyzed and compiled on a trended, composite and industry basis. The results of this analysis, when performed regularly, help you to monitor and recognize the vital statistics necessary for the success and growth of your business. The benefits of this assessment include: Competitive Advantages & Disadvantages
An industry assessment enables you to identify your company’s strengths and weaknesses and acquire valuable information on the competition.
Budgeting & Forecasting
Studying trends and growth patterns is a very effective preliminary step in preparing internal budgets and forecasts.
Recognizing specific performance measurements (company and industry) will help to set goals and objectives for the future (e.g., increasing sales, gross profit margins, and net income).
Knowledge of key performance measurements assists in the evaluation of a proposed sale, merger or acquisition.
Greater awareness of the interrelationship of the financial statements and a complete understanding of financial operations allows you to focus on the areas important to the growth and success of your business.
ii) What would you suggest as appropriate course of actions?
As an appropriate course of actions, I would suggest the directors to refer the “Malaysian Code on Corporate Governance 2012” as a guidelines to take action against Encik Selamat which involves in unethical activities such as conflict of interest and lack of integrity.
Other than that, the internal control of the company should be revised. For example the debtor collection procedures. It has to follow proper standard operating procedures such as when invoices issue to a customers, the payment terms must follow the credit period. Any payment overdue must be chase every month. If it reach the 120 days amount overdue, warning letter should be issue to the debtors, then stop supplying product to the debtors until payment made.
Besides that, Internal Audit must be done regularly. This is to audit the operation run based on the standard operating procedures. Any discrepancy found must be rectify immediately to avoid any unwanted issue to happen. For example, Ms Choy has discovered that the credit limit of Cold Gold Sdn Bhd, one of its major customers had gone into its level and yet the marketing department continued to supply products to the company. If the company do internal audit regularly, this issue may not happen because the internal auditor will detect the problem while it is still under early stage. Other than that, this will avoid Encik Selamat from making unethical activities due to his awareness from the internal auditor.
Monthly meeting also can help in this case. Where, Encik Selamat required to report the company performance monthly. In this case, the company should have monthly credit meeting. The purpose of this meeting is to make sure all debtors are monitored closely. Any amount hanging in the debtors aging should have remarks or the status should have been identified. For example, if the debts is not paid within the 30 days period, it should state the reason why? At least we know that chasing of debts run actively by the collection department. If the debtors do not pay according to their credit period, the management at least can give suggestion and acknowledge about that issue.