Question

Exhibit 1: Table compares changes in key financial KPIs between 2008 and 2009, as follows:

Exhibit 1: Select Income Statement and Balance Sheet Values ($MM)
Income Statement Accounts	2008	2009
Net sales	65.0	86.3
Expenses
Cost of goods sold	29.0	38.9
Sales, general and administrative	10.1	14.0
Research and development	13.5	17.0
Depreciation	2.9	3.1
Other expenses	0.6	1.0
Operating expenses	56.1	74.0
Interest expense	2.4	3.0
Taxes	2.0	2.9
Net earnings	4.5	6.5
Balance Sheet Accounts	2008	2009
Assets
Cash	3.2	3.4
Receivables	3.0	4.0
Inventory	4.9	8.7
Prepaid expenses	4.8	6.1
Current assets	15.9	22.2
Plant property and equipment	28.5	32.9
Other long term assets	2.7	4.3
Total long term assets	31.2	37.2
Total assets	47.1	59.4
Liabilities & Equity
Short term debt	2.7	3.2
Accounts payable	2.3	3.0
Accrued liabilities	0.4	0.5
Current liabilities	5.4	6.7
Long term debt	17.2	21.7
Owners equity	24.5	31.0
Total capitalization	41.7	52.7
Total liabilities & equity	47.1	59.4
Months of inventory	2.028	2.690
Cost of goods sold / sales	0.446	0.451
Long term debt / total capital	0.412	0.412

Data gathered from table used to answer problem below:

1) Inventory growth rate = COGS/average inventory= 38.9/6.8= 5.72

average inventory = opening inventory + Closing inventory/2 = 4.9+8.7/2 = 6.8

2) Sales growth = CY sales - Py sales/py sales *100 = 38.9 - 29/29 * 100 = 34.1%

3) Net Working capital = Current liabilties - current assets = 6.7 - 22.2 = (15.5)

4) Days working capital = Avg working capital/sales revenue * 365 = 15.5/86.3*365 = 65.5 days

5) DIO= average inventory/COGS*365 = 6.8/38.9*365= 63.8 days

6) DSO= avg account recievable/sales*365 = 14.8 days

7) DPO= avg account payable/cogs * 365 = 2.075/38.9 * 365 = 19.4 days

8) CCC = DSO+DIO-DPO= 14.8+63.8-19.4= 59.2

Using the supporting data, provide an analysis of the current situation at SG. Identify the key symptoms and provide clear problem statements to identify the root causes that result in the symptoms and poor performance. Please use the course strategic framework tools, concepts, and Operations Rules for your analysis.

Answer 1

Analysis of Current Situation of SG:

1) Inventory growth rate - this ratio, defined as how may times the entire inventory of a company has been sold during an accounting period. It shows how well company manages its Inventory and how fast it replinsh its inventory.

In the given case, company is having Inventory growth rate of 5.72 which is ideally good. Thus, company is having good inventory growth ratio it is doing good.

2) Sales growth - this ratio measures the increase in sales between the two time periods. In the given Case sales growth is 34.1%. the sales in current year has increased comapre to last year. Which is the good sign for the growth of the company.

3) Net working Capital - Net working Capital measures the cash and operating liquiduty. It measures the short term liquidity of the company and also abiltiy to utilize assets effectively. Low working Capital indicates company cannot cover its debt with its current working capital.while, high working capital is not neccessary good it is sign that company is allowing excess cash to sit idle instead of reinvesting it.In the given net working Capital 0f comapny is 15.5 for the year and 1.29 (i.e., 15.5/12) for the month, which is ideal aand good. Also for better analysis company should comapre with the similar companys working capital.

4) days of Working Capital-it is the ratio which describes money available to a company for day to day operations.Generally decrease in working capital is a sign that company is becoming overleveraged is strugging to maintai sales growth, paying bill quickly or collecting receivables quickly. In the given case Days of working Capital is 65.5 which is good. Thus, comapny is operating its working Capital very effectively and efficently.

Activity ratios shows how effectively business converts assets into cash. High Ratio indicates that inventory is being sold and converted into cash at faster rate.

This Ratio Includes

Days Inventory outstanding(DIO)

Days Sales outstanding(DSO)

Days Payble Outstanding(DPO)

5) DIO - is the financial ratio that measures the average no of days your business holds into inventory before it is sold.The higher Inventory Ratio is good as it is considered company is selling its goods fast.Therefore, In Given case, comapny is having DIO of 63.8 days in a year which is 5.316 (i.e, 63.8/12) in a month which is good.

6) DSO - is the financial ratio that measure how fast business conerts recivables into cash, The higher ratio indicates that you are selling your goods faster on credit but taking long time to collect yor recivables from that sales.The lower ratio indicates you that you collect your recivables shorter period of time. In Given case, company is having DSO of 14.8 days in year which is ideally low thus company is having god DSO ratio.

7)DPO - is the financial ratio that measures is that measures time taken by the business to payback to their creditors. The high ratio indicates that your business is paying is paying suppliers at slow rate. In the given case company is having DPO of 19.4 which is generally, low therfore company is having good DPO.

8) CCC-(i.e., Cash Conversion Cycle ratio) this ratio measures the amount of days it takes a company to receive cash from customers from its inital outlay for inventory.In the given Case comapny is having CCC of 59.2 days it takes 59.2 days in a year to company for his inventory to receive cash from its sale. The given ratio is not so good as it take long time comparatively, as working Capital will be blocked.

Thus, the overall comapny is doing better and growing if company want analyse more its efficency it can compare its ratio with other company in the same industry.