Case Study No 2: Controlling/Managing Your Business

OVERVIEW

Jimmy Lee is the owner of a small retail business. He has run his business for about 2 years.

At certain times due to the nature of his cyclical business and the lack of knowledge of his customers’ buying behavior patterns, he had occasionally under or over bought stocks. He does not know when to launch promotions to attract customers. Ironically, when he wants to launch certain campaigns, he found himself short of cash to do so.

Besides, at certain months, his business also faced certain liquidity challenges. One of the major reasons for cash deficits is that he gives credit to his customers but had not been properly keeping track of them. Worst still, at times he does not know when the credit crunch will hit him. Sometimes, he resorted to borrowings from his friends and relatives.

Tommy, a CPA who is a friend of Jimmy Lee advises Jimmy to take control of his business. “You need to be a good driver to be able to control your car (business). If you can control your business well, then only you are able to improve your business performance”

Tommy also informed Jimmy Lee to learn to understand his business industry averages/standards and appreciate certain key concepts like profit and cash flows and perform financial analysis to see trends and compare with average industry standards to see whether he has done well.

[ Time required to answer this case study:#1 hour ]

Required:

1.0 Why do you think Jimmy needs to understand his business average industry standards?

2.0 With item 1.what should Jimmy do?

[Hint: use ratio analysis to see how good or bad his business fare against average business standards]

3.0 Explain to Jimmy about the “Profits versus Cash Concept and why is it so important to his business?

4.0 Help Jimmy to set up certain monitoring systems for his cash and cash control. Should the reporting be weekly, bi-weekly, monthly, quarterly,half year or yearly control- explain why it should be weekly or otherwise.

[ Hints: cash position charting – weekly cash flow forecast on major cash in and out, monthly cash flow projections to enable Jimmy to seek financing or utilize surplus fund more effectively ]

5.0 Jimmy seems not to appreciate his business sales trend whether for expansion or change What can you advise him?

[ Hints: use trend analysis – sales-quantity & mix to denote demand for company’s products, understand how to use cash and trade discount or rebates to maximize sales, learn how to price]

6.0 Do you encourage Jimmy to set up Target statements and keep track of them? If Yes, what sort of target statements would you encourage? Do you encourage certain set up of budget and variance analysis? Weight the pros and cons

7.0 Jimmy does not seems to appreciate proper Credit management nor Inventory management. Do you think this is extremely important to stay alive in a business? By efficiently controlling his working capital, would you think that this is another way to properly control his business.

Discuss certain essential reports required to manage working capital like Accounts Receivable Ageing list, Stock/inventory ageing list, etc. This should be in conjunction with ratio analysis as in item 2.

[ The above case study is useful also for classroom discussion amongst the students. The students are strongly encourage to search the internet on similar topics on how smart entrepreneurs first “ control their business” so as to improve their business financial performance

Check out the links to resource ]