Victoria’s Milling Case
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Point of View:Assumed in this case is the perspective of VICMICO’s Finance OfficerProblem:What are the possible causes of VICMICO’s cash flow problem and how can they be addressed?Case Context:This case requires an analysis of Victoria Milling Co.’s financial statements in order to present a comprehensible explanation regarding the company’s debt position. This paper utilizes the concept of Ratio Analysis to solve the afore-mentioned problem. The case also examines issues of cash flow problem for VICMICO in light of a formation of a working committee consisting of VICMICO’s stakeholders.
Areas for Consideration:
•VICMICO and its subsidiaries were given a moratorium of 90 days to dispose its debts.
•A statement released by VICMICO’s Board Chairman reported that 70- 80% of VICMICO’s problem was due to the crisis of the whole industry.
•Massive importation and dwindling prices of sugar were observed.
•Data on milling industry or other related industries were not given.
•Given the extent of VICMICO’s operations and industries, jobs of a big number of employees are at stake. Management must also take into account their disposition.
Methodology1.Conduct trend analysis in the company’s financial statements. The company needs to assess its performance over time to come up with an explanation about its current status.
2.Consider factors that may significantly affect the company’s performance.
3.Analyze the data gathered. Using Ratio Analysis, the company’s management must be able to point out specific problems and issues to be handled.
Analysis•The company is highly-leveraged due to high levels of liabilities.
•Income from operations decreased greatly from Php603, 000,000 to Php234, 000,000 in 1996. This can be attributed to raised cost and expenses across the period.
•The company’s performance is declining over time. This is suggested by decreases in most of the profitability, efficiency, and liquidity ratios computed. Current as well as long-term debt obligation have also been observed to increase therefore suggesting that the company failed to meet its obligations. Most of the parameters presented in the case earned their worst values in the most recent year.
Alternative Courses of Action:1.Sell financially-unstable subsidiaries to pay for debts.
Pros: The Company can let go of its unprofitable ventures and be able to mitigate its debts.
2.Decrease leverage ratios.
Pros: Creditors will be paid; lower interest payments will be due in the futureCons: Assets will decrease.
3.Concentrate operation on low-cost, highly-efficient production.
Pros: VICMICO may utilize its resources in the most efficient operations.
Cons: Other subsidiary companies will be under-utilized. Jobs may be lost.
4.Replace management team.
Pros: Its rationale is to give a fresh start to the business and provide a new outlook about the firm.
Cons: Due to changes, it may take a long time before the company can get back
to its full operation.
5. Ask the authorities for assistance.
Pros: The government would take the company’s situation seriously because at stake is a huge number of employees whose jobs would be in trouble if the company would make the wrong move.
Recommendation:In order to address the most pressing problem, VICMICO may choose to let go of its unprofitable, inefficient subsidiaries. This is to save the company from further bankruptcy. Proceeds may be spent to pay for its debts. This way, leverage ratios may also be brought down. In the type of industry VICMICO was in, it is truly risky to incur huge debts because of its unsteady, fluctuating nature. In order to get back on track, VICMICO should lessen its borrowings and find ways to lessen operation costs as well as expenses on its raw materials and inventory. In the meantime, while waiting for investors, the company may focus on providing quality goods and services. Most importantly, the company should seek assistance from authorities such as the Securities and Exchange Commission in order to help the company in making critical decisions.
Implementation Plan:1. Collect receivables from debtors. Give premiums or discounts to those who would pay early.
2.Study and analyze investments and other assets. Find buyers for those which seem inefficient.
3.Concentrate efforts on the sugar business. A better focus on a single industry, if possible, is better than operating at various, unrelated ones.
4.Coordinate with the authorities while considering moves regarding operations.