Smackey Dog Foods Audit: Key Issues and Solutions

Introduction and Overview of Smackey Dog Foods

This report assesses the case study relating to the company known as Smackey Dog Foods. The company is currently being audited, and a range of minor to major issues will be identified, analyzed, and resolved with proposed solutions. For each problem and proposed solution, support is drawn from scholarly and professional sources. While Smackey is doing a number of things right, it is clearly disorganized in some respects and, in other cases, has outright incompetent and unethical practices that must be addressed.

The analysis proceeds in the order in which issues appear in the case study. First, it is evident that this is a family-run operation, having been started by three sisters in the greater Chicago area. This alone can be cause for concern because family-run operations are often loyal only to family members, which can lead to the wrong people being placed in key roles, or to family members engaging in ill-advised, reckless, or even illegal conduct (Lucas, 2015).

Despite these concerns, things started off well — neighborhood dogs loving the food served as a springboard for the sisters to create their own business. Local pet stores and small grocery stores became distributors for the product, and demand grew to the point that the family operation had to expand and hire additional employees. Bringing in employees beyond close family and friends opens the door to workforce management challenges, employment taxes, and a greater risk of litigation — for example, wrongful termination claims. Even so, sales continued to grow, and the product line was expanded to include the new "Best Boy Gourmet" line, which requires that no more than three days pass between the time a product is made and the time a dog consumes it. That window is narrow, but the profit margin is high — the price point is three times the cost of production. However, supply of the raw inputs has been problematic, and overall waste for that product line has been fairly high. It should be carefully assessed just how much waste is actually occurring and whether it justifies continuing to produce the item in its current form (NCSU, 2015).

Operational Issues: Waste, Supply Chain, and Production

Kim manages operations and overall production. She oversees inventory, production, and the shipment of dog food products. However, her attention has shifted away from the standard product line that originally built the business and increasingly toward the Best Boy Gourmet line. As a result, there is also waste accumulating in the general product line. A further problem is that raw ingredients are difficult to source and maintain during the winter months, contributing to the waste described above. At times, production comes to a complete stop because one or more raw components are unavailable. If this business were being run properly, this should never happen. There should always be a contingency plan — whether that means a backup supplier or a primary supplier with a reliable delivery record. Negative events will occur from time to time; that is part of doing business. However, supply failures should not be a recurring pattern (McKinsey, 2015).

The case study then turns to Henry, Kim's assistant, who has only one person to help him but is apparently the driving force behind the sales and movement of Smackey's regular product line. One significant weakness is that a large volume of returns has accumulated on the dock and is left to rot. Given that dog food is a perishable product, this represents both a financial liability and a potential source of loss. It is later noted that one employee places "returned" dog food in the dumpster, after which Henry retrieves bags one at a time and puts them in his car.

This raises serious concerns. The returned food may or may not be saleable — it could have been returned while still fresh and subsequently expired while sitting on the dock. Either way, the returned product is not being managed correctly. If the food is truly expired and unsellable, Henry might be excused for taking it, except for the risk he is imposing on his own dog. If the food is not expired, however, he is committing theft. The fact that he is doing this with the premium Best Boy Gourmet product makes the situation especially concerning, as that line has a very short shelf life. Henry's response to questions about this behavior was glib and unprofessional, and Kim's acceptance of that response is itself a management failure. Returned product needs a formal handling procedure — inspection upon return, re-stocking if appropriate, or documented disposal if not (Downs, 2015).

Financial Management and Accounts Receivable Concerns

The case study describes a $150,000 loan secured for the business using production equipment as collateral. When a second loan is discussed, the bank demands a full audit of financial documents before releasing the funds. To secure that second loan, Sarah pledges the accounts receivable as collateral. She reviews the sales projections from Jill's sales team and concludes that the loan will likely be repaid quickly. This assumption becomes problematic when it becomes apparent that the accounts receivable are effectively a liability rather than an asset (Evans, 2015).

The percentage of accounts receivable relative to total corporate assets is approximately 29% — close to one-third. This is a significant proportion, especially given that the production equipment is already pledged against the first loan and the receivables themselves secure the second. One especially serious problem is that a single company, Pup Stores, accounts for nearly one-third of Smackey's total business, and Pup Stores is now experiencing financial difficulties due to a lawsuit from an animal rights group. Smackey must address this concentration risk immediately. No single customer should represent one-third of revenue unless that customer is an extremely stable, large-scale retailer. The case study notes that Pup Stores is facing store closures, which means accounts receivable will deteriorate further and overall sales volume will slow.

Looking at the broader accounts receivable picture: nearly 40% of the pool is less than 30 days old, which is fairly healthy. Another roughly 20% falls in the 30-to-60-day range. However, 10% of the receivables are over four months old, and another 10% are between three and four months old. This aging pattern should be cause for alarm. Regarding the company's expansion plans, a 16% growth target is not meaningful if equivalent amounts are being lost through waste, commission overpayments, and uncollected receivables. The company needs to enforce its credit terms and, where necessary, cut ties with non-paying customers (Carmichael, 2015).

Conclusion and Recommendations

Smackey Dog Foods clearly has the foundational ingredients for a successful business, but it has accumulated a significant number of internal problems that must be resolved before expansion is attempted. The company needs to hire a qualified, experienced accountant who is dedicated solely to that function. It needs to reduce product waste systematically across both product lines. It must diversify its customer base so that no single client represents such a large share of revenue. Credit terms must be enforced, and relationships with consistently non-paying customers should be reconsidered. The supply chain must be stabilized with backup suppliers so that production stoppages cease to occur. Commission and payroll processes must be rebuilt around verified revenue data. And the returned-product handling process must be formalized to prevent both financial loss and potential theft.

If these reforms are implemented, Smackey will be in a far stronger position to pursue growth and secure additional financing. However, pursuing expansion in the company's current state would be a difficult sell — and a thorough audit of its financial records would, with good reason, undermine any financing application submitted today.

References

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Downs, J. (2015). Demand grows for expired food. The Courier-Journal. Retrieved 4 June 2015, from http://www.courier-journal.com/story/news/local/2014/09/03/demand-grows-expired-food/15016971/

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Evans, M. (2015). Tips on managing accounts receivable. Exinfm.com. Retrieved 4 June 2015, from http://www.exinfm.com/board/accounts_receivable_mgmt.htm

IFAC. (2015). Roles and importance of professional accountants in business. Ifac.org. Retrieved 4 June 2015, from http://www.ifac.org/news-events/2013-10/roles-and-importance-professional-accountants-business

Lucas, S. (2015). The perils of working for a family owned business. Cbsnews.com. Retrieved 4 June 2015, from http://www.cbsnews.com/news/the-perils-of-working-for-a-family-owned-business/

McKinsey. (2015). Managing when vendor and supplier risk becomes your own. Mckinsey.com. Retrieved 4 June 2015, from http://www.mckinsey.com/insights/risk_management/managing_when_vendor_and_supplier_risk_becomes_your_own

NCSU. (2015). How your business can cut costs by reducing waste. Bae.ncsu.edu. Retrieved 4 June 2015, from https://www.bae.ncsu.edu/topic/vermicomposting/pubs/ag473-10-bus-cut-costs.html

Romano, J. (2015). Challenging residency as job requirement. Nytimes.com. Retrieved 4 June 2015, from http://www.nytimes.com/1991/08/25/nyregion/challenging-residency-as-job-requirement.html