IN-BASKET EXERCISE THE CONFIDENTIAL FILE Instructors Notes

General The best impression will be given if the papers are different sizes and types and if the papers are handwritten where this is indicated. Other notes as to realistic presentation appear on individual papers. Si ni!icance o! t"e #a$ers The papers consist of three groups: Those that cover purely personal matters; The accounts of the business; Other papers concerning the business which help to show its state of health.

The last group and the accounts are the most important for the state of the business. These are: T"e Accounts %S"eets & an' () Any trainee ought to be able to note that profit has been falling. The important point, however, is that gross profit have been falling over the period of the accounts while at the same time, sales have been going up. robably this would be pic!ed up only by accountants or students of accountancy. Therefore either the e"ercise should be confirmed to people with this interest, or the non-accountants should not be e"pected to see this point. #uppose your group merely pic!s up the fall in the net profit, the $uestion you as! is: %hy is it falling& The obvious answer is that e"penses are going up. Are they& '"amination of the e"penses after gross profit is determined (that is in the second part of each statement of account) will show that these costs are tending down, not up. %hy then are profits falling& This leads to an e"amination of the gross profit. *t is falling. %hy& #ales are down& +o, they are up. urchases& ,es, they are going up. #o what do we conclude& -ost li!ely that either the costs of individual items purchased have been creeping up . that is the firm has been paying rising prices for the same goods; or that sale prices have not been high enough. They may include too many items sacrificed at sales, allowed to become dirty or damaged so that they have to be sold at a discount. #omehow, volume has been sacrificed to profit. Turnover is up, gross profit on the turnover is down. #omething is clearly wrong either with the buying policy or with the pricing policy, or both.

%ith an accounting group, a lively discussion can be provo!ed on this. %ith a non-accounting group, the accounts analysis gives the chance to tal! about the folly of going for turnover only . a company can /go bro!e0 even while its sales are buoyant. The in!ed notes on accounts show Tran has been understanding profit by a stoc! undervaluation or reserve. This is common enough and of no importance in revealing conditions in the business. T"e Ot"er Business #a$ers %S"eets *+ ,+ -+ .+ /0 11) S"eet * . a list of government department contacts. This is a perfectly legitimate list. 'very business man needs this type of contact. #ome trainees might want to suggest some corruption; not necessarily. S"eet , . tells us little of importance, suggests that costs are not rising at the factory, but that there may be a bit of bother ahead. 1ut how do we !now Tran did not do something about the problem& 2id he raise wages& %hat do the accounts reveal& On the other hand, the sheet suggests something about 1oom, who signed it. 3e is the -anaging 2irector. 3e ought at least to be ma!ing a recommendation, not ma!ing for advice. This could lead to a discussion of the need for strong managers willing to tac!le problems or at least recommend action which will solve them. S"eet - . a red herring, of no importance. *t does confirm that Tran had some difficulties with the ta"ation people, but it is settled and, in any case, tells us nothing about the present state of the firm. S"eet . . is this a way out for the widow& #hould she get in touch with this company and re-open discussions. %e do not !now what happened from this letter. %ould the company be willing to offer the same price now& (#ee continued fall in profit to a loss position after the letter was written). *ncidentally, are the ideas about independent valuation of stoc! and the suggested contract to !eep out of similar business in the locality good ideas& S"eet / . 3ere is another possibility . e"pand the manufacturing side. *f the gross profit fall is due to higher cost per unit buying, it might be good business to manufacture your own in greater $uantity and so control buying price. 1ut there is another trap here. 4ross profits include profits from the sale of goods manufactured. *t might be that they have been sold a too low a price and so have lifted turnover, but cut the profit. #o the factory and the shops need separate solution to the firm5s difficulties. 1y the way /A60 can be identified as the contact man at the 7inance 2ept. of the government so his advice should be reliable on that side. S"eet 11 . The first item of the summary report supports the idea of e"pansion, and the second item writes off one possible cause of loss . bad locations. *tem 8 seems sound and sensible enough. *tem 9 is /up the cree!0 and should undermine confidence in this consulting firm. '"penses are down, not up . the cause of the losses lies somewhere else, as we have seen above. Then the consultants have :ust recommended increased costs . painting and so on. 7inally, is cost-cutting the /best way to increase your profits0&

This reveals a negative attitude. The best way to profit is more turnover at profitable levels. *f this consultant5s advice is followed and e"penses are cut, this does not go to the root of the present problem because ross profit is down, and no cost cutting later will do much about that. *tem ; suggests a bonus on results. %hat results& This is a $uestion for discussion. <learly, in the present result-of-business position, a bonus on increased sales might merely add to the loss . higher turnover in this company has been accompanied by falling profit. #o we need a bonus on $ro!it results. This is a good type of bonus for management at all times. A salesman may get a bonus on sales, since he is instructed on what his price is to be. A manager, though, must mange, not :ust sell. On this sheet, the last $uestion for discussion is: if the consultant5s advice were followed, would the firm5s difficulties be solved& T"e Re2ainin #a$ers %S"eets 1+ 3 an' 14) S"eet 1 . of no importance, it records an agreement which has no present effect on the situation. 1oom may, of course, want his annual rise considered. #hould he get it& S"eet 3 . a red herring. 1est destroyed. S"eet 14 . This is something of a bombshell, but it ought not to divert attention from the main business in hand. The trainee has been as!ed to report on the apparent state of the business and what ought to be done about it. 3e should go ahead with this and carry out his instruction. *t is not his affair whether the widow owns the business or not. Of course, he cannot ignore it. Top treatment would be to report on it separately to his own boss, raising the $uestion of whether he, the boss, should tell the widow about the /will0 and advise her to get legal advice on whether it is valid and where she stands. Final O5ser6ations The best performance will be by those who $uic!ly eliminate the unimportant items, dispose of the will by calling it to the attention of the boss, and them get down to analyzing the firm5s situation. Three possibilities are open: e"pand, try to sell or set the present business on its feet. *n any case, it will be necessary to get out separate accounts for the manufacturing side of the business and see what contribution it is ma!ing to the total position. *n view of the possible doubt about the widow5s legal position, the boss might be advised to suggest she tell 1oom she cannot give him time as re$uested for discussion and ma!e an appointment for a couple of days later. This will give a breathing space for a more leisurely e"amination of and report on the accounts, etc.... But, the trainee must not /trade0 on this. 3e can recommend it, but he must still come up with his repot and analysis, even if an interim one.