Teleford and Ivey James Are the Second-Generation

Teleford and Ivey James are the second-generation owners of a family-owned manufacturer of premium chocolates started by Teleford's father in 1964. James Confectioners has grown during its 50 years into a large and modern factory with sophisticated equipment and annual sales of almost $4 million. They are above the industry standard in pricing, but not at the top range for the quality they produce. The James' are quite concerned of late about rising costs of base chocolate because it is grown in South America and Africa. Additionally, there are escalating costs from milk and sugar which, in combination, are squeezing the company's margins.

Ratios for Jame's Confectioners:

Ratio

Current Year

Last Year

Industry Median

Liquidity Ratios

Current Ratio

Quick Ratio

.8

Leverage Ratios

Debt Ratio

.62

.64

.7

Debt-to-Net-Worth

Times Interest Earned Ratio

Operating Ratios

Average Inventory Turnover

4.62

4.75

4.9

Average Collection Period

47.8

34.6

Average Payable Period

33.63

31.1

33.5

Net Sales to Total Assets

1.93

2.17

2.1

Profitability Ratios

Net Profit on Sales

4.4%

7.4%

7.1%

Net Profit to Assets

8.2%

9.2%

5.6%

Net Profit to Equity

21.3%

29.21%

16.5%

Q2 -- The ratios calculated for James most definitely show that the company has had a considerable increase in COG while not passing on costs to consumers at the same level as the company absorbed. The most likely scenario is twofold: supplies and materials are costing more and expenses are rising for operations, payroll, insurance, and other uncontrollable. We can observe the following:

Current and Quick Ratios show the company is healthy and able to pay its bills, and above average for the industry.

Payables and collections are up in terms of time, signaling a rougher economic time for suppliers and customers

Profitability ratios are down, but still above industry averages

Q3- The company appears to be considerably more healthy than the industry averages (typical company). The only red flag that appears is the average collection period, which is almost double the national average. This could conceivably hinder the company's ability to meet financial goals if prices continue to rise since there is outstanding money that the company cannot use until collected.

Q4- James is a successful, respected company. However, in a down economy, sometimes perceived luxury goods are some of the things consumers cut back on. Clearly, as painful as it might be, prices need to increase -- perhaps not at the same ratio as expenses, but enough that the ratios improve for the current year. Additionally, the accounts receivable department may need to be a bit more aggressive in collecting money; while stretching accounts payable, perhaps up to 45 days.

Q5- The company is now in a position that it must decide its future direction -- does it want to be a high-quality organization with mid-range pricing, move quality of ingredients down to match pricing, or increase pricing to keep up marginally with costs. Perhaps investigating new sources for materials is in order; or, to take on the trend of sustainable products, perhaps contract with organic growers, move the pricing up to match expenses, and robustly market a higher-quality, organic or eco-friendly company, production, and processing -- with a portion of every sale going to sustainable and eco-friendly causes.

Case 7 -- Forecasting Cash Flow -- James Confectioners -- Part 2 -- As seen above, James Confectioners is facing increased pressures from higher costs for products and operating that are not in pace or line with their pricing strategies. They expect to increase sales for next year by about 6.2 per cent, but credit sales account for 96 per cent of total sales and the collection pattern has increased from roughly 35 to 48 days while their payable ratios have remained about the same. The company data shows that it collects credit sales thus:

This may not seem serious, but when looked at on a monthly basis, the trends can be a bit alarming. If sales grow at the rate expected, and we average sales out per month, we see that sales would average out to be about $345,000/month. Then, roughly, if we look at month 1, again, on average, only $28,000 would be collected.

Q1 -- Monthly Cash Budget for James

These are averages, not taking into account seasonal fluctuations, previous A/R, etc.

Q2- Recommendations to improve cash flow. Based on the above budget, we can note the following:

Cash flow is impeded on certain months because of excess time on receivables; move receivables to stronger percentage of Net 10, even with discount, certainly Net 30

Spread insurance payments out so they do not hit quarterly

Potentially reduce repairs and maintenance by 40-50%

Relook at purchases and supplies in months 1 and 12; are there warehousing possibilities that could spread this out a bit?

Consider lines of credit to balance out shortage months