Abc Analysis
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Asset Utilization
Overall asset turnover has improved as sales increased more rapidly than assets form 1989-1992
This masks the large build-up in current assets
Virtually all due to eastern expansion
While the build-up was due in part to increased sales; it was also the result of a dramatic change in terms
Liquidity
Liquidity improves from 1989-1992
Declines during the forecasted period
Overall
ROE has fallen from 1988 to 1992
Expected to rise during 1993 and 1994
Performance is due entirely to expansion and aggressive predictions
(Group C) What is Bayerns credit policy toward its distributors in the eastern Länder? Why is it different from the policy toward its other distributors? Is the companys credit policy appropriate? Is it profitable? If not, how would you change it? If so, what arguments would you offer to the board of directors in its defense?
Bayerns Distributors Compared to the Industry
Bayern is using its own borrowing power to finance the distributors and through them its retailers.
Bayern borrows at 11% relending the funds through receivables to distributors.
Distributors relends to retailers again through receivables.
Leiter expresses optimism that the banking business is profitable.
Exhibit 6
Profit Margins for four of the distributors is materially lower than the industry.
Competition? Poor cost control?
Distributors are aided by trade payables and relatively low inventory levels.
Their receivables are higher than normal suggesting slow payment on receivables.
Asset turnover is relatively close to norm suggesting that distributors are not building up assets.
Berlin is the strongest while Magdeburg or Gera is the weakest
May warrant more careful credit controls
Leiters incentives
Strong incentives for growth with little incentive to manage risk.
Why do you think the bank is interested in talking to Bayern?
Concerns about eroding credit position?
How Not To Handle Your Receivables
Start with a unknown individual who has a minimum of capital and a great story about prospects in a far corner of the state.
Offer extended terms so he can finance the inventory needed to generate the fantastic business he has described.
When he is past due on payments rationalize tha this is tempory perhaps the result of seasonality.
Let the accounts sales person verify that the inventory is in fact in place.
As you look at the financial statements, be sympathetic that his is a new operation having trouble getting a handle on operating results.
When you start to realize your customer is in trouble do not take your losses early. Stick with him, you ought to be able to double the amount you have to write off
Source: Inc. Magazine May 1989
Profitability of Eastern Expansion
Are Leiters estimates accurate? If so the returns appear large.
What about the cost of building up inventories
What about the fixed asset investment necessary to support growth?
Exhibit TN3 shows that returns net of capital expenditures is reduced to the 20% range.