Digital Perceptions Is a Four-Year-Old Company That

¶ … Digital Perceptions is a four-year-old company that manufactures digital cameras that are sold to retailers at a wholesale price of $150 each. It employs 100 workers that work 20 days per month and produces 6,000 units of output. The firm's total expenses per month exceed the total revenue. Retained Earnings has declined $100,000 as loses have been apparent every month for the last six months. Fair market value of the total assets is $350,000. Total long-term liabilities are $250,000. Last year's Annual Income Statement showed a profit of $50.

Because of the company not being able to pay the monthly bills, the credit rating has taken a decline in the rate. The major competitors are Panasonic, Sony, Nikon, Canon, Kodak, and Fuji. Environmental risk factors include a recession, rising interest rates, deterioration of the financial markets, rapid declines in product prices, and financial difficulty of customers (Annual Report 2010, 2010). The recession started two years ago. Supply costs have been on the rise for the last two years. Consumers are putting a halt to spending due to the rising unemployment.

Credit is harder to obtain because of the rise in bankruptcies. Retail prices are declining at a steady rate causing declines in wholesale prices as well. For the month, the company has had total revenue of $892,500, 5,950 units sold at $150. The fixed costs were $60,000, $2,000 per day for 30 days. Labor was $140,000, 100 workers were paid $70 per day for 20 days. Unit costs were $191,998, (5,999 x 32) + 30. Variable costs were $525,000, included are administrative, selling and distribution, advertising, rent, utilities, loan costs, and research and development. Total costs for the month was $916,998, leaving a loss of $24,498.

The financial position for the short-term looks very weak and the long-term does not show any promises. In order to improve the financial position, new promotions of products need to be implemented to generate more customers (Ways to improve profitability). Looking for alternative vendors with the same quality of products and cheaper prices could help improve the profitability of existing products. Control of working capital would include improved output per labor hour and offering discounts on invoices for early payment to collect accounts receivables.

Inventory management would include identifying the level of inventory that allows for growth without interruption of operations and excess inventory. Reducing any excess raw materials that takes a long time to move would increase inventory turnover. Searching out appropriate sources of financing that would meet the company's needs without building up unnecessary debt would help to have capital to implement promotions and pay bills at the same time.

A plan to implement these recommendations would be to first look for ways to cut any costs that is not needed, such as administrative costs, selling and distribution costs without disrupting operations, and maybe some of the research and development costs. There needs to be some promotions to attract more customers to increase sales and productivity. Reevaluation of the output per labor hour is also necessary to ensure that the company is getting the most output from a single labor hour.

Searching for alternative vendors that offer the same or better quality of products at cheaper prices would also cut unit costs of the products. A company is insolvent when it reaches the extent that all liabilities exceed the fair market value of all the assets (Cancelled Debt). Digital Perceptions is at the point that the liabilities are equal to the fair market value of the assets. If they cannot improve profitability and start generating profits, they will be considered insolvent with the next month of loss.

A business is in trouble when it starts experiencing cash flow difficulty, low morale of employees, receives threats from creditors for unpaid bills, is experiencing declining or flat sales, management is always problem solving, and it has no consistent strategy (Turnaround Step 2: How Do You Know That Your Business is in Trouble?). It is obvious that Digital Perceptions is having cash flow difficulty because of not being able to pay bills on time and receiving a decrease in their credit rating.

Sales have been on the decline for quite some time. The business strategies need an overhaul because they are not consistent to the extent of generating additional customers and increasing sales. The company is already heavy in debt with several long-term loans. The company has not shown any growth in sales for over 18 months, instead they have been steadily declining. Digital Perceptions needs to close operations.