Lecture 1C. Mini-Case Vega Precision Tracking, LLC. 2,101 Words

I expect the P&L statements and the written report to be done on an individual basis. The work is worth 10 points and will serve as mini-case #1. Do not procrastinate on getting to work on the financial statement—this is the basis for a lot of work during the semester.

In the Vega Mini-Case #1 you have been appointed as the new President of the division at the end of 1989, and you report to me, CEO of the parent corporation. You will find out pretty quickly why you have the new position. The purpose of the Mini-Case is to teach you how to interpret a financial statement and to use it as control tool in management. One of the five functions of a manager is control.

Just as important is learning how to write a report detailing what took place within the past time period, so that I, your boss, can understand what went on, and most importantly, what you are going to do to get the mess straightened out.

Now, to the P&L statement. You will notice that there is a five year span, 1986-1991, with some data for 1986-1989 and no data for 1990 and 1991. You are to fill in the data for 1990 and 1991.  1986 is the year the company was formed. There was no business transacted except for raising working capital ($9 m), obtaining a loan ($1m @ 10% annual interest), and purchasing $2.4 m of machinery with a 10 year depreciation rate. The transactions were concluded within the 2300 hour of 12/31/1986, and the balance sheet is the snapshot taken of the company at 23:59 hours 12/31/1986. Note that the depreciation for 1986 is included in the statement, even though the machinery was purchased in December. Just like purchasing a new car and driving it out of the showroom—it loses value/depreciation immediately.  For 1987-1988-1989. These are the base historical years.  For sales in units use the following units.

o Transponders: 1380/1200/1100 . Every aircraft has a transponder. The transponder sends out an identification number (each aircraft has a transponder ID # which is specific to that aircraft). VPT makes transponders which send back a signal for every missal that is test fired and for tracking unmanned aircraft (such as drones used for target practice). VPT does not manufacture transponders used for commercial aircraft or combat military aircraft.

o Radio Direction Finders: 70/55/40 . RDF’s are used to track radio signals. The RDF’s manufactured by VPT are used by the CIA and intelligence agencies to track and locate radio transmissions by the bad guys. Multiple RDF’s will take a bearing on a radio signal, and where the bearing lines intersect you will find the bad guy.

o Radar Tracking Systems: 68/55/47 . The VPT Radar Tracking Systems are used to track unmanned aircraft used for target practice and for unmanned drones. The radar signals used in the VPT systems are specific to the tracking systems and the transponders used by VPT. VPT also perfected the technique for transmitting specific signals on the outbound radar signal, which controls the flight of the unmanned aircraft, and uses the returning signal to bring back operating information from the missile or the unmanned aircraft.

 LORAN Systems: 95/96/78

o The LORAN (Long range navigation) systems were initially created to track ships at sea, and VPL used the existing towers to track land based vehicles, while using the existing LORAN towers along the seacoast, to track stolen automobiles or commercial vehicles on US highways. The LORAN tracking systems were outdated by GPS, which became available when platforms were launched in space for military tracking, and then opened for commercial use.

Note for students in MNGT 670: In MNGT 670 we will not use OH as an expense category. Thompson does not include OH as one of the items in Glo-Bus, so COGS for MNGT 670 will be labor and material. We will use the Vega case as a teaching tool, and then we will use Bravura Cameras for the Actual Case 1. Follow the instructions for preparing the reports. You will be given the Bravura Camera statement for Case 1.

Note the losses that start to occur in 1988 and continue in 1989.

Note the change in available cash from $7.6m at the end of 1986 to $513k in 1987 and then negative cash in 1988 and 1989. You have a negative cash flow from mid-1988 onward, and without the parent company Vega is bankrupt. How do you turn the company around???.

We need to glean as much information as we can from the P&L statement and from the balance sheet. We can look at the $$ changes from year to year and they tell us some of the story. We need to know more. What do we do?? We use %% changes in each category and from year to year to give us a better insight.

I have prepared a Financial Control Analysis for each year and comparing it to the following year. You will find the Financial Control 1987-1988 in the next sheet in this Vega document. At the bottom. Click.

What you see is a comparison for each year on the sales by product and expenses by item as compared to the sales dollar. That is very valuable information, since you can look at labor in 1987 and see that it is 15% of the sales $$, and then increases to 16.5% and 18% over the next three years. WHY?? You as a manager know have the information to go to the plant manager and start to ask questions. We also look at the %% change from one year to the next. We first calculate the %% change, Variance, and then we calculate the %% change from the base year, which is 1987 (always the previous year). That gives us more information. Then we can look at the GM $ change from 1987 to 1988 and then the %% of sales for each year and then calculate the %% change from the previous year. This is REALLY the information that you need, and you should start to think in %% change rather than $$ change. Why??

If the parent company has divisions with sales ranging from $25m pr year to $300m per year, then the real story is not being told, nor can we evaluate one division against another with $$ comparisons. However, if we look at the %% change then we can make a fair evaluation.

A word about percentage. Most of us think in terms of percentage points. Let me give you an example—for those of you who live in Maryland. When our glorious governor took office 8 years ago there was a 5% sales tax. O’Malley, the glorious governor, announced that he was going to institute an increase in the sales tax, but only 1%-- from 5% to 6%.

Do the calculations on a $100 sales. 5% = $5 tax. 6% = $6 tax. Ok so far. What is the difference?? $1. $1 is 20% of $5. 1/5 = 20%. So the tax increase from 5% to 6% was really a 20% tax increase. There was a 1% point change from 5% to 6%. Fooled and gullible.

Do not make that mistake when writing a report comparing the cost increase in labor from 1987 (15% of sales $$) to 1988 (18% of the sales $$). Three percentage points change, but A 20% INCREASE IN THE COST OF LABOR OVER THE THREE YEARS.

A pop quiz worth 1% point. If you read this before the Webex session and send me an e-mail with the correct answer, then you get 1% added to whatever your final grade is. Believe me, you will need the 1%.

Question. We see the 20% increase in labor cost over the three year period. Plant management is not controlling the labor cost. Bad. There is another issue that has taken place over the three year time frame which is much worse, and this falls on your shoulders, the president of the division. What has happened over the three years when the labor costs/material cost/oh costs have been increasing annually???

So, you have a control analysis report for each two years, and that tells you a lot about what has been taking place at Vega with the previous management. You can use these reports to identify the problems, and start to structure a turnaround.

Your assignment is:

Your assignment is to structure a reasonable turnaround in years 1990 and 1991 so that you have improved the profitability and improved the cash flow.

Think through the changes you make in the operations, because you have to document them in the operating reports. This may include a change in strategy or tactics. Make the changes in the 1990 financial statement, see the results, and then in the 1990 written report explain how the improvements on an item to item basis. Do the same for 1991.

You have the historical data for 1986-1989. Do not change the historical data. The next step is to create a pro-forma statement for 1990 and 1991 which will show an improvement in the profits and the cash flow. So, we play “what if” with the financial statements. The ‘what if’ is the action you will take as a manager. • What will be the result if I increase sales? An interesting question. Change the annual sales in 1990 (by changing the units sold) and see what change has been made in the GM and the various expense categories. Look at the ending cash flow. • Since COGS is the category in which you have the largest expenses (65- 75%), you may want to change the labor, material or overhead %, and see the result. Do the same with the Operating Expenses, and bring the P&L to profitability. Look at the cash flow. Make a note of what the cash flow is and then work with the balance sheet. • Change a/r days. Look at the result. • Change inventory turns. Look at the result. • Change a/p days. Look at the result. • You will note how the cash flow changes.

Since you are playing ‘what if’, you can implement whatever strategies you wish. Just explain them in the report and show the changes in the financial statement for the next year.

Now, let’s discuss the %% changes that are referred to above. As a manager you need to know as much about the changes that are taking place in the company as you can. You obviously can look

Prepare an operating report for 1987 vs budget. Develop a ‘make believe’ budget for sales, gm, etc for your comparison.

Prepare an operating report for 1988 vs 1987, 1989 vs 1988. There is a max of two pages for each report, and you do not have to use all of the pages.

In 1989 prepare an Action Plan section with 3-5 action plans that you will implement to improve the net income and the cash flow for 1990. Prepare an Action Plan Section for 1990.

In 1990 add a ‘’look back’ section that looks at the action plan for the previous year and discusses whether the plan was successful or not. Do the same for 1991. Do not forget to have an action plan in 1991 for 1992, even though you will not be preparing a pro-forma for that year.

Compare $ and/or % for each item. Discuss variance and give one example of the action plan that you will implement in the following year. Do not say, ‘I will cut expenses’---make a suggestion on how you will reduce the expense.

Remember that the %% change is much more descriptive than the $$ change.

Make comparisons on sales, COGS, GM, GM %, any significant operating expense, operating income, and any significant change in cash position, listing reason why.

The report for each year should not exceed two pages. You do not have to fill up two pages. Report facts/plans/strategies and be concise.

Submit one Spread Sheet for the five years and show the budgets for 1990 and 1991. As you make changes to the spread sheet, the Financial Control sheets for each year will calculate the $$ variance and the %% change. So you only have to provide the information for the ‘Other Financial Data at the bottom of each Financial Analysis. Make up the Backlog $$.

I am available for assistance at any time.

Do not wait until the last week-end to work on this assignment. Submit the assignment on time of penalties will apply.