Hope this helps!
Pace Leisurewear (2)
(Contributed by John Boston)
"Why is it that the money men undo all our good work?" asked Jill Dempsey, despairingly. Mike Greaves, the Production Director of Pace Leisurewear, decided it was best not to reply to her question: Jill had a lot of reason to be unhappy following the appointment of Peter Drake as a "company doctor" one month earlier.
Peter had been approached by Pace Leisurewear at the end of February in order to suggest a plan of action to improve the company's financial position, and events had then moved quickly. Peter was the senior consultant in Drake Management Consultants, who specialise in helping businesses with financial problems, and had been approached following some very difficult discussions with the company's bankers and the largest shareholders, the Keeble brothers. The bank had insisted that the company reduce its overdraft, which was £4.25 million at the end of December, and had written to the company in February requesting that the overdraft be halved by the end of June. At a board meeting at the end of February Jill wanted to continue to wrangle with the bank over its demands, which she felt to be unreasonable because the company was growing fast and producing large profits (£2.926 million after tax for the year to 31st December, up from £1.248 million the year before). However, David and John Keeble had decided that the company needed to introduce some outside expertise in order to turn the company round, and had looked to Drake Management Consultants firstly for advice and then, following their report, to Peter Drake himself to take an executive role. The Keeble brothers knew that Pace Leisurewear, whilst having a very talented designer of fashion clothes (Jane Barker, the Design Director) and experienced Marketing and Production directors (Jill Dempsey and Mike Greaves respectively), did not have the level of financial expertise that it required. They saw that Peter Drake was an expert who would be supported by both the company's bankers and the auditors, and they told the board that the company needed to sort itself out financially, and it could not continue to test the patience of the bankers, who had already been faced with broken promises from Pace Leisurewear, and had granted a loan to the company of £6.6 million, in addition to the overdraft.
Peter Drake made some big changes within the first month. He had a close look at both stock and debtors, with the intention of freeing up as much cash as possible, and started to implement policies to reduce working capital. He found it necessary to make provisions against some of the old stock items (mainly items from last year's fashions) which totalled £1.3 million, and he wrote off £600,000 of debtors when it was realised that two large customers were in liquidation. He stated an intention that Pace Leisurewear should work towards an ideal position where production would be undertaken only on receipt of an order (with deposit) and where deliveries would be made on receipt of cash, citing the transient nature of the "rag trade" for these tough policy aims.
Jill Dempsey did not like the appointment of Peter Drake, especially as she was the most visible casualty of his reorganisation. She had been the Managing Director as well as Marketing Director, but was now only Marketing Director. Peter took over the Managing Director's responsibilities, along with overseeing financial matters, which were previously looked at by Mike Greaves, who had been advised by the auditors when they did their annual audit. Jill didn't trust Peter Drake when he said that all of the team should keep their areas of expertise, and felt he was out to sack her. She was also very angry by his insistence that the £800,000 dividends that were proposed but not paid at the February meeting should be cancelled: she would have received nearly £39,000 if these had been paid, and was now having to abandon her plans to move into the lovely big house that she had been wanting to buy for several years because she could no longer afford it - thanks to him. He didn't even know the fashion industry: she knew that customers demanded credit, and would purchase elsewhere if the company would stop giving any credit. But the worst of his decisions were the two write offs, which took the company to a loss of £1.404 million for the quarter. "He's only been here a month, but we're now making our first ever loss - and he's charging us £25,000 a month to screw it up", she fumed to anyone who would listen.
Not that many did listen to her any more. Mike seemed almost relieved to concentrate only on production. Jane Barker, the only other executive director, was really only interested in her designs, and the Keeble brothers, who between them held 1 million shares in the company, were too busy with their other business interests to do any more than agree to whatever Peter suggested in his frequent telephone briefings, it seemed to Jill. She felt let down by the brothers, too: she had known them for years and they had encouraged herself and Mike to risk all their life savings and start up the company, but they had said in February that they wanted to sell their shareholding as soon as the company's prospects improved. Where was their loyalty?
Jill decided that she would demand the sacking of Peter drake when the Board met in a couple of days. On the agenda were two topics: the plans for the next three months and the figures for the three months to the end of March, which show the loss. She added a third - to debate the retention of Peter Drake.
Requirement:
1. You are to prepare the Profit and Loss Account for the quarter to March, along with the Balance Sheet at the end of March, a statement showing in simple terms the cash movements of the period, and an analysis of the results.
(Appendix 1 contains the opening Balance Sheet and last year's Profit and Loss Account, along with any other necessary information for the three months to March).
2. You are to prepare also the projected financial statements for the quarter to June, based on the assumptions in Appendix 2, and to provide an analysis of the expected performance of both the company and Peter Drake.
Appendix 1
Balance Sheet as at last 31 December
£000
£000
£000
Fixed assets
14,470
Current Assets
Stock
5,820
Debtors
3,744
Other debtors
402
Cash at bank
0
Cash in hand
8
9,974
Creditors: amounts falling due within 1 year
Trade creditors
2,612
Other creditors
402
Taxation
780
Dividends
800
Bank overdraft
4,250
8,844
Net Current Assets
1,130
1,130
15,600
Creditors:
amounts falling due after 1 year
Loan capital
6,600
9,000
Capital and Reserves
Ordinary shares of £0.50 each
3,600
Retained profit
5,400
9,000
(i) Profit and Loss Account for the year ended last 31st December
£000
Turnover
22,410
Cost of Sales
11,618
Gross Profit
10,792
Operating expenses
6,174
Operating profit (before interest and taxation)
4,618
Interest payable
912
Profit before taxation
3,706
Taxation
780
Profit after taxation
2,926
Proposed dividend
800
Retained profit for the year
2,126
Retained profit brought forward from previous year
3,274
Retained profit carried forward
5,400
Further information relevant to the three months to 31st March
(All numbers are in £000s)
Sales for the quarter were £6,300, and all were on credit
Cash receipts from debtors totalled £5,804
Debtor write-offs totalled £600
Purchases of stock totalled £2,800 (all on credit), and £2,790 was paid to creditors
Stock write-offs totalled £1,300
Cost of Goods Sold totalled £3,600
Operating expenses (excluding depreciation) were £900, all of which were paid immediately as incurred. This figure includes £25 for Peter Drake's salary for March.
The depreciation expense was £904. There were no purchases of fixed assets, nor any disposals.
Interest expenses for the period were £400
Other debtors, other creditors and cash in hand remained constant. The taxation was not due to be paid until September.
The Board decided in February that no dividends regarding the previous year would be paid The net loss for the quarter was £1,404
11-17-2010, 05:50 PM
Report on Financial Position and Performance
