Greenfield Corporation Case Study

Word Count: 2000 (excluding title page, contents page, and reference list)

We are going forward. We are not going backwards. We have a strategy. We have a path. We have a future. And we can deliver great mobile products. And despite all of these changes, we remain true to our mission, that of Connecting People. (Chief Executive)

Contents

1. Quote...1 2. Contents...2 3. Introduction.3 4. Methodologies.....4 5. Findings...5 6. Recommendations.......7 7. Conclusion...9 8. Reference List........10

Introduction
Greenfield Corporation is a high technology organization with specialization in the design and manufacturing of mobile phones. Greenfield Corporation wants to sustain the reinstatement of its Series 77 platform in dual SIM, QWERTY, Blubed services, touch and type, embodying Money, Web apps, Life Tools, Maps, and Browser. Greenfield Corporation also wants to invest in the future; materializing assets (software, apps, platform), which will lead to a present mobile undergoing to mobile phone customers and allow business opportunities for developers. The long-term expenditures above will need a group of road transportation vehicles for service architects. It is Greenfields policy to amortize motor vehicles over a three-year period. A new breed of photocopiers and computers will also be needed to reinforce the intended projects. These components have already been procured, and depreciated over two years. The cash budget for fiscal 2012 is a sign of a potential transitory cash flow perplexity in April and May 2012. As a response to the cash budget of fiscal 2012, Greenfield has embarked on a new strategic direction. This new strategic direction embodies modifications in executive leadership and the companys operational structure to hasten the companys speed of execution in an energetic competitive environment. The purpose of this report is to analyze Greenfield Corporations accounts and the challenges facing the company. While investigating these two components it is important to deliberate on how best to approach these issues. The information used in this report was collected by evaluating the operating and working capital management performance of the company in fiscal 2011 and highlighting major areas of concern uncovered by this analysis.

Methodologies
To analyze Greenfield Corporations accounts and the challenges facing the company analysis of the following had to be undertaken: Net Working Capital Cash Conversion Cycle Inventory Management Accounts Receivable Management Management of Receipts and Disbursements

Net working capital is the difference between the firms current assets and its current liabilities; can be positive or negative. (Gitman, 2009) By calculating the net working capital of Greenfield, we can find the tradeoff between profitability and risk. The cash conversion cycle is the theoretical amount of time between company spending cash and receiving cash per each sale, output, unit of operation, etc. (Forbes, 2012) By calculating the cash conversion cycle there are multiple measures, we can find out, such as the measure of time required to sell inventory, collect receivables, and the amount of time Greenfield is provided to settle their obligations without acquiring penalties. Inventory management is the supervision of non-capitalized assets (inventory) and stock items. (Rouse, 2012) Accounts Receivable Management is where a firm manages the period of time of a sale on credit until the payment becomes usable funds for the firm. (Gitman, 2009) By calculating the accounts receivable, we can view the time from the sale until the payment is mailed by the customer and from the time mailed to when the company has collected the payment in their bank account. The management of receipts and disbursements primary focus is the receipt, processing, and collection time for the firm, both from its customers and to its suppliers. (Gitman, 2009) This calculation can either help the company decide whether to speed up its collections or slow down payments.

Findings
The findings indicate that there has been an increase in the following areas: Inventories (stock) Prepaid expenses and accrued income Other financial Liabilities Borrowings Other financial liabilities Accounts payable (trade creditors)

and a decrease in the following areas: Accounts receivable (trade debtors) Investments available for sale Cash and cash equivalent Accrued expenses and provisions

Greenfields fiscal 2011 results indicate that there has been a reduction in working capital from 2010 to 2011 an amount totaling $4,192. This shows that there may be customers, goodwill, sales, and loss of production but further analysis will have to be performed to confirm these allegations. The continuous reduction in working capital is a warning to Greenfield Corporation recognizing that most of the decrease was used for investment in fixed assets of about $4,180. This investment should be profitable to Greenfield through augmented income or a reduction in costs, but the income statement under other circumstances reveals a reduction in net profit over the two-year period, a drop of about $2,904. In addition to, the positive working capital embodies prepaid expenses and accrued income in the amount of $4,000 for fiscal 2011. These assets are not convertible to cash and thus cannot be used to pay obligations. Consequently, if prepaid expenses and accrued income are omitted, the working capital would tantamount to -$1,267. The meaning of this is that Greenfield is not competent of paying all of its present liabilities.

The companys inventory management is poor and the collection of accounts receivables takes around 42.64 days, which is higher by around 10 days from the mobile products industry average. Greenfields aging of receivables picture reveals a poor collection habit with 24% of the accounts are already past due and another 38% are approaching their due date. The days sale outstanding for Greenfield is 42.64, which is higher than the mobile product industry average of 32.04. This implies that Greenfield is less operationally efficient than its peers in the industry. The days payable outstanding for Greenfield is 98.14, which extremely higher than the mobile products industry average of 39.71. This is 58.43 days more than the mobile products industry average. This could mean one or two things Greenfield is stretching their accounts payable better than its industry peers or the company has an excellent credit reputation. Greenfield has to consider the consequences of long outstanding payables that can reflect negatively on the cash conversion cycle. The findings show that the days sale of inventory for Greenfield is 41.78, which is higher than the mobile product industry average of 30.32. This indicates that Greenfield has poor inventory management compared to its peers. Greenfields operating cycle is 81.74, which is higher than that of the mobile products industry at 62.36. This indicates that Greenfield takes longer than its industry peers from the beginning of the production process to collection of capital from the sale of the finished product. Greenfields 2011 cash conversion cycle indicates that the company is competent enough when it comes to meeting its liabilities when they become due even if there was a negative working capital. Greenfields cash conversion cycle is -13.72, which is extremely lower than that of the mobile products industry average of 22.65. This indicates that Greenfield is operating effectively and the companys resources are not tied up for long periods of time compared to their industry peers. Now analyzing the cash conversion cycle components has illustrated differently as seen above. On the basis of these ratios, the organization is operating poorly and cannot survive unless they decide to ameliorate their current operations set up.

The performance indications reveal that the company has been failing enormously with a 42.83% decreased in net profit from 2010 ($6,780) to 2011 ($3,876). A 10% decrease in gross margin from 2010 ($21,032) to 2011 ($17,640) is the reason behind this decrease. A thorough analysis would reveal that one or the other of the vending price of the products has been reduced or the expense of stock has augmented over this one-year period. No matter what, each of these should have been factored in immediately within the year ordered to reconcile appropriately and elude sacrificing their performance. The customer profitability analysis reveals that four out of six of Greenfields customers are aiding in Greenfields operational efficiencies. The customer service costs for majority of Greenfields customers are exceeding the gross profits enormously. The largest proportion of resources is consumed by the second most profitable customer 3G Mobiles Ltd at $230 consumes $392 of Greenfields resources. The first most profitable at $272 consumes $213 of Greenfields resources. Greenfield cannot depend on three of their customers because of late payments on credit accounts.

Recommendations
From the analysis above, Greenfield has many challenges facing the company that has to be addressed before more decisions are made. In order to help with those decisions some recommendations have been made. Greenfield should employ an aggressive policy that will lower level of stock, debtors and cash for a given level of business or sales, this in turn will increase profit. The management team should establish credit policies in regards to processes and limits. To elude past due credit accounts the policy should not extend credit to customers that have outstanding balances, which will improve cash inflow and collection. Greenfield should integrate accounts receivable management into their management structure so they could speed up collections. The inventory management measure has many techniques available to manage inventory, just to name a few, there is the Just-in-Time System, Economic Order Quantity (EOQ) Model, ABC System, and Computerized Systems for Resource

Control. Greenfield should employ the Economic Order Quantity Model, which considers various costs of inventory and then determines what order size minimizes total inventory cost. (Gitman, 2009) Greenfield should implement risk management techniques to find issues before they occur. Companies face many risks but the right risk management techniques can defer these risk. The right risk management techniques can help financial planning, decrease fear of financial distress. Risk management comes in different forms such as business risks, insurable risks, currency risks, and interest rate risks. Insurable risks can give Greenfield opportunity to transfer risk to an insurance company who could manage the risk better. Interest rate risk has to be monitored because a floating-rate debt is susceptible to interest-rate increases, fixed-rate debt has a potential for penitence. Because Greenfield has a huge amount of retained earnings just sitting around the company should implement investing surplus funds as well. The short-term investment trade-off is maximizing returns versus liquidity risk, default risk, event risk, inflation, risk, and valuation risk. Greenfield should implement an investment policy, which includes but not limited to, defining the acceptable investments, limits on holdings, investable funds, and limited by cash and dividend debates. Among other things the investment options should factor in that marketability influences the interest paid, foreign exchange risk, the tax implications, consider the administrative intricacy and specialist skills required. Greenfield needs to implement effective dispute management procedures in relation to customers. This can help with availing cash under other circumstances tied up due to disputes. Effective dispute management can also ameliorate customer service and free up some time for valid functions like order entry, cash collection, and sales. Altogether, efficiency will augment due to decreased operational costs. Cooperating with customers rather than focusing primarily on Greenfields operations definitely will yield excellent results. If beneficial, helping customers to plot their inventory necessities efficaciously to resemble Greenfields production with the customers depletion can help decrease inventory levels. This is not just for customers Greenfield can implement this in with their suppliers as well. Greenfield can also consider selling directly to the public as do other companies to cut the middle men out of the process a

little, which may decrease operating costs. Greenfield may want to go with finding new customers to target and add to their roster for better profits and less operating costs.

Conclusion
Before any more decision are made in regards to the further investments Greenfield wants to make, Greenfield should address the following issues above in order to increase the working capital of the company. Any further investing without addressing these issues facing the company would decrease the companys assets and making the company illiquid. This report has found some interesting issues facing Greenfield such as poor inventory management, decrease in working capital, high customer service costs, and so on. Greenfield has been provided some recommendations that would allow them to have adequate working capital to operate effectively. These recommendations include implementing strategies to increase cash flow and working capital. Other recommendations that were included were investment of surplus funds and risk management techniques. If Greenfield Corporation wants to stay in business and compete with other mobile product industry peers than implementing some of these if not all of these recommendations will benefit them.

References

Gitman, L. (2009) Principles of Managerial Finance, Twelfth Edition, Prentice Hall: Pearson Education Inc. Forbes, (2012) The Cash Conversion Cycle, [Online] Available at: http://www.forbes.com/sites/ycharts/2012/03/10/the-cash-conversion-cycle/ (Accessed: 29 July 2012) Rouse, M. (2012) Inventory Management, [Online] Available at: http://searchmanufacturingerp.techtarget.com/definition/Inventory-management (Accessed: 29 July 2012)