In this case I play the role of Edward Cummings, a senior credit representative of Joyce Chemical Company. My task in this case is to look into Eliot Manufacturing and to see if we should continue or terminate our relationship with them. If we were to continue, the choices would be to either have them in a program to reduce their accounts payable or to tolerate gradual increases in credit. After doing an analysis on Mr. Pound and the Eliot Manufacturing Company, I would recommend that Joyce Chemical Company should terminate their relationship with Eliot Manufacturing, which would imply that the company would go out of business.
There are a few things that I noticed when looking into the company that cause concern for me. One reason that I believe this would be a wise choice is the management of the company. Currently, Mr. Pound is the only member of management with drive and experience in business and sales. He is also the sole owner of the company, this along with an investigation that emphasized that little confidence in the new management team, could cause issues if Mr. Pound’s health deteriorates more. I would also have issues with the controller being in charge, if something were to happen to Mr.
Pound, due to his lying about Mr. Pound being on a business trip. Joyce should not lend money to a company where the person in charge lies to the people who are giving them money. It raises the question about what else they could be lying about. The company’s accounts payable is also a concern. Its accounts payable has grown by 17. 94% per year on average, compared to its sales growth of 16. 96% per year on average. Their accounts payable turnover has increased from 67. 88 days and 70. 22 days from 2007 to 2011 respectively.
(Appendix B, E) This allows them to make it seem like they have more cash than they actually do, because they should be using it to repay their debts. This is also vulnerable to change even more, because of the cyclical pattern of the clothing industry. Eliot Manufacturing Company’s accounts receivable have grown on average of 28. 30% per year from 2007- 2011. This is growing concern, due to the possibility of slowing payments. This is shown in the increase of 54. 80 days for accounts receivable turnover in 2007 to the turnover of 73.
59 days in 2011. (Appendix A, E) This is leading to less cash available for the company to use. The company also has had to use provisions for doubtful accounts in 2010 and 2011, which leads to them even less cash available. Another cause of concern for me is the growth of inventories for Eliot Manufacturing. Their inventory has increased by 33. 30% on average over the last 4 years. This is expected to increase in 2012 as well, due to an expected purchase of 5. 0 million pounds of resin, and expected sales of 4. 3 million pounds.
Although their inventory turnover has decreased from 27. 77 days in 2007 to 23. 53 days in 2011, this is expected to increase for 2012, due to the greater increase of inventory than sales, 33. 30% vs. 16. 96% respectively. (Appendix A, B, E) This has played a part in their COGS increasing 80. 23% on average over the last 4 years. This can be a concern, especially if the garment business is in the slow part of the business cycle. When looking forward to try to predict the rest of the 2012 fiscal year, I created some projected income statement and balance sheet.
(Appendix C, D). Using these projections, as well as ratios calculated, there are issues that Eliot Manufacturing faces. They have run a negative net profit margin and return on assets in 2011, helping show that the company is in need of a change of management. Their debt ratio has also risen above 1, so they have more liabilities than assets, which means that this company has high leverage and is a risk. The company also has consistently had a current ratio under 1, which shows its inability to pay off short-term loans.
These factors, as well as the projections, help influence the decision to cut ties with this company. If the Eliot Manufacturing Company goes out of business, then Joyce Chemical Company can look to other manufacturers to continue their business in a more profitable way. If I were to consider continuing the relationship with Eliot Manufacturing, they must be willing to make some changes. They would need to hire more management that has experience in business and sales, is trustworthy and able to agree and maintain to firm understandings between the companies.
The company should also look into selling stock, allowing for more owners as well as more equity in the company. The company would need to have more in terms of collateral, having better guarantee of the payables. The company should also using the funds provided as trade credit and not relying on proceeds from accounts receivables to keep the business going. Eliot Manufacturing should also look into using the resin in a more profitable way, looking into making more high-density polyethylene, which could make the company more profit from the materials they purchase.