Turnaround Strategies - Company in Financial Distress

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Turnaround Strategies

Below are the balance sheet and income statement for 2005 and 2006 of a company that is in financial distress.

Balance Sheet for 2005 and 2006

	2005 ($)	2006 ($)
Cash	20,000	5,000
Accounts receivables	150,000	395,000
Inventories	300,000	200,000
Total current assets	470,000	600,000
Fixed assets, net	350,000	350,000
Total assets	820,000	950,000
Accounts payable	85,000	170,000
Accruals	40,000	50,000
Bank loan	150,000	150,000
Total current liabilities	275,000	270,000
Long-term debt	325,000	500,000
Common stock ($5 par)	100,000	100,000
Capital Surplus	70,000	70,000
Retained Earnings	50,000	10,000
Total liabilities and equity	820,000	950,000

Income Statement for 2005 and 2006

	2005 ($)	2006 ($)
Net sales	800,000	600,000
Cost of goods sold	500,000	400,000
Gross profit	300,000	200,000
Marketing	50,000	70,000
General and administrative	60,000	80,000
Depreciation	20,000	30,000
EBIT	170,000	20,000
Interest	50,000	60,000
Earnings before taxes	120,000	–40,000
Income taxes (35%)	42,000	0
Net income	78,000	–40,000

Your tasks:

1. Calculate the firm’s total operating cycle for 2005 and 2006.
2. What type of working capital restructuring can the firm do to turn around its performance? What other types of asset restructuring might the firm consider?
3. What type of operations restructuring should the firm consider?
4. What type of financial restructuring should the firm consider?

Answers

Question 1

Components	2005	2006
Days in inventory outstanding	219.00	182.50
Days sales outstanding	68.44	240.29
Days payable outstanding	62.05	63.88
Operating cycle	225.39	358.92

Question 2

The company might consider selling its accounts receivables. The company needs to reevaluate its optimal inventory level to decrease the cash tied to inventory and hence decrease days in inventory outstanding.

Question 3

The company can revise its credit terms in favor of a shorter collection period, and negotiate for a longer credit terms with suppliers to improve its operating cycle.

Question 4

The company can consider stopping or decreasing its normal cash dividends – according to an analysis of its balance sheet and income statement, the company paid a cash dividends of about $78,000 to its shareholders.