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Bigger is not always better because developing something one should be ready that with the growth of size the expenses and demands also grow and not always in equal proportions. Thus, if the growth becomes uncontrollable because of the lack of means to control it, the development of an enterprise stops and is reduced to looking for financial and personnel means of controlling the work and finding out the places where mistakes were made and how they can be corrected.
This was the case with the Quickfix Auto Parts owned by Andre Pires. Andre was a successful auto parts manager and had lots of established contacts with influential people in the sphere of auto servicing before he decided to launch his own enterprise. At the beginning everything went good and the firm doubled its assets but then Andre noticed that compared to the growth of sales his company’s income rates started decreasing over the past two years. If the sales amounted to the sums of $300, 000 and $400, 000, the incomes rates in the respective years fell accordingly to the figures of $ 25, 184 and $25, 082 compared to the income level of the year when recession did not start – $41, 619.
Andre hired an intern Juan Plexo as an intern to examine the financial conditions of the firm. To do this, Juan will have to study the figures connected with the loans taken by the company, their terms and interest rates in order to detect any possible causes of the falling of incomes. Also, the figures of costs for purchase and transport of parts for the firm should be considered. Funding of the company should be examined as well in order to see the possible lack of finding and necessity to loan money from banks.
This will allow making a fair financial conditions’ assessment as all the important factors will be considered. Juan should calculate how the firm’s expenses connected with the supply of auto parts, with the maintenance of premises and paying bank loans relate to the income levels and sales levels. If the sales are growing and incomes decrease, then the company spends much in other fields, like for example the above mentioned ones that should be considered by Juan.
In order to compare the firm’s conditions with the normal benchmark, Juan should look for data of the Quickfix as well as some other companies in order to see that normal benchmark. To get those data Juan should use the contacts of Andre Pires to communicate with some other companies and obtain their data for comparison. Another valuable step will be to monitor the market conditions and see which improvements can be made to increase the income in accordance with the growth of sales. If the data of other firms are not available then Juan can study the figures of subsequent years of the firm’s work and compare them.
For instance, if the net fixed assets stayed at the level of $300, 000 and the total assets decreased respectively to $976, 480 and $968, 503 in 2003 and 2004 then there was probably the decrease in demand for the auto parts as well as the falling of income rates of the customers.. Quickfix has good liquidity as cash and marketable securities stay at the level of $560, 000 which allow banks to be secure about their loans.
Assets utilization is at a high level – $968, 503 of total assets are used for premises building and equipment buying plans ($500, 000) and for securing the accumulated depreciation rates ($200, 000). Serious problems are present in long-term loan solvency as from $447, 000 of loans the long0term debt is $5, 447, 000.
Among recommendations to improve the situations such as more attentive treatment of assets and timely payments of loans can be listed. The management staff should control the financial flows of the firm and also monitor market conditions in order to act according to them, namely to the current customers’ profits rates, levels of demand for their production and interests rates for loans from banks.
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