1 CrlLlcal lssues

1o malnLaln Lhelr flnanclal sLablllLy Callfornla Choppers (referred as CC ln Lhe documenL laLer)
musL resolve Lhe followlng
a) noL managlng lLs asseL efflclenLly Lhus creaLlng a cash flow problem
b) Covernance problem/ llkellhood of ManagemenL Lurnover
c) noL LargeLlng youLh markeL (explolLlng Lhls facLor wlll llkely lead Lo slgnlflcanL galns ln
proflLs and/or markeL share) (presenLlng annual moLorcycle show)

2 Analysls CpLlons ueclslon CrlLerla
21 Causes of Lhe lssues
a) lssue noL managlng lLs asseL efflclenLly Lhus creaLlng a cash flow problem because
* lnvesLed heavlly ln facLory equlpmenL
* Lxpand operaLlons ln uS markeL
* Lxpand operaLlons ln lnLernaLlonal markeL wlLhouL compleLlng lLs expanslon ln uS
b) lssue Covernance problem/ llkellhood of ManagemenL Lurnover because
* uoakes aggresslon and conLrolllng naLure lf lL perslsLenL lL wlll llkely lead Lo have lssues
wlLh senlor managemenL ln Lhe near fuLure
c) noL LargeLlng youLh markeL (explolLlng Lhls facLor wlll llkely lead Lo slgnlflcanL galns ln
proflLs and/or markeL share) (presenLlng annual moLorcycle show)
22 CrlLerla used Lo declde
CurrenLly Lhe company ls ln a blL of flnanclal mess Cne of Lhe blg problems ls noL managlng lLs
currenL asseLs Lo Lhelr maxlmum efflclency 1he quanLlLaLlve analysls follows
A/8
(lL ls assumed LhaL all sales were credlL sales slnce Lhere was no slngle llne lLem for credlL sales)
Callfornla Choppers' balance sheeL shows LhaL A/8 and lnvenLory comprlses upLo 83 of LoLal
currenL asseLs 1he days ln sales raLlo of 163 days ln 2003 ls way above Lhe lndusLry average of
32 days showlng LhaL CC ls havlng Lrouble collecLlng on sales lL provlded cusLomers on credlL
and lL ls lndlrecLly exLendlng lnLeresLfree loans Lo Lhelr cllenLs Callfornla Choppers should re
assess lLs credlL pollcles ln order Lo ensure Lhe Llmely collecLlon of lmparLed credlL LhaL ls noL
earnlng lnLeresL for Lhe flrm
lnvenLory
CC's balance sheeL carrles huge lnvenLory whlch means LhaL lL lncurs addlLlonal cosL for lLs
sLorage and Lhe opporLunlLy cosL of Lhe Llme and space used Lo hold onLo unsold lnvenLory
1hls cosL could have been used lnsLead Lo buy producLs LhaL would sell

8y dlvldlng cosL of sales by Lhe average lnvenLory we see LhaL on average CC ls selllng
everyLhlng lL has nearly ln 149 days compared Lo Lhe lndusLry average of 4412 days Lhls low
Lurnover lmplles poor sales and Lherefore excess lnvenLory whlch ls unhealLhy because lL
represenLs an lnvesLmenL wlLh a raLe of reLurn of zero lf prlces begln Lo fall lL also opens Lhe
company up Lo Lrouble
A/
ln 2003 Callfornla Choppers has AccounLs ayable 1urnover of 369 days whlch ls more Lhan a
year and way above Lhe lndusLry average of 60 days 1hls shows LhaL CC ls really sLreLchlng lLs
payables Lo overcome of cash shorLages
Cash Cycle
CC ls noL managlng lLs cash flow efflclenLly because Lhe raLlo calculaLlons shows a negaLlve
cash cycle 14986 + 16391 36983 3406 days ln 2003 means LhaL CC ls havlng hard
Llme Lo managlng lLs need Lo flnance lLs purchases or Lhe lengLh of Llme beLween when lL
spends money and Lhe Llme lL recelves Lhe money from selllng Lhe producL
llxed AsseL 1oLal AsseL Lurnover
ln 2003 CC raLlos of 109 033 ls way below Lhe lndusLry average of 372 203 respecLlvely
whlch represenLlng LhaL CC ls noL efflclenLly puLs lLs longLerm asseLs Lo use
uebL raLlo
ln 2003 Lhe debL raLlo of CC was 064 hlgher Lhan Lhe lndusLry average of 034 lndlcaLes a hlgh
proporLlon of debL lL has relaLlve Lo lLs asseLs 1hls poses hlgh rlsks ln Lerms of lLs debLload
1lmes lnLeresL earned
ln 2003 Lhe lnLeresL earned raLlo of CC was only 206 as compared Lo Lhe lndusLry average of
933 whlch ls slgnlflcanLly low and lndlcaLes a hlgh poLenLlal rlsk ln CCs ablllLy Lo meeL lLs debL
obllgaLlons lalllng Lo meeL Lhese obllgaLlons could force CC lnLo bankrupLcy CC may yleld
greaLer reLurns by lnvesLlng lLs earnlngs lnLo oLher pro[ecLs and borrowlng aL a lower cosL of
caplLal Lhan whaL lL ls currenLly paylng Lo meeL lLs debL obllgaLlons
Cross Margln
Compared wlLh lndusLry average of 32 ln 2003 CC's lower margln of 26 may be an
lndlcaLlon LhaL CC's merchandlzes are underprlced AnoLher posslble facLor ls LhaL lL has Lo
keep lLs overhead cosLs ln conLrol
CperaLlng proflL margln
ln 2003 CC has a very low operaLlng margln of 3 ln comparlson wlLh Lhe lndusLry average of
14 whlch shows LhaL only 3 of CC's revenue ls lefL over afLer paylng for varlable cosLs of
producLlon such as wages raw maLerlals eLc Cver Lhe course of flve years CC's proflL margln
has been conLlnuously decllnlng showlng LhaL CC ls earnlng less and less per dollar of sales
every year
8CL
ln 2003 CC's 8CL was only 3 as compared Lo lndusLry average of 3823 whlch shows LhaL
CC generaLed only 3 proflL on every dollar lnvesLed by shareholders whlle many lnvesLors
look for a 8CL of aL leasL 13 lrom LhaL polnL alone CC's ablllLy Lo squeeze proflLs from
lnvesLors' money appears very dlsLresslng and clearly shows LhaL managemenL ls falllng Lo
grow CC's value aL an accepLable raLe
8CA
ln 2003 CC's LoLal asseLs amounLed Lo $42744 mllllon lLs neL lncome of $1822 mllllon dlvlded
by LoLal asseLs glves a reLurn on asseLs of 1 1hls Lells us LhaL ln 200 CC earned only 1 proflL
on Lhe asseLs lL owned 1hls ls an exLremely low number lnvesLors wlll noL conslder sLocks
wlLh an 8CA of less Lhan 3 whlch could be a poLenLlal problem ln securlng credlLors
3 8ecommendaLlons AcLlon lan
1) Manage lLs asseL efflclenLly by
* Callfornla Choppers should reassess lLs credlL pollcles ln order Lo ensure Lhe Llmely
collecLlon of lmparLed credlL LhaL ls noL earnlng lnLeresL for Lhe flrm
* Carry low lnvenLory volume Lo avold addlLlonal cosL for lLs sLorage as well as Lhe
opporLunlLy cosL of Lhe Llme and space used Lo hold onLo unsold lnvenLory
* use Lhe cosL Lo buy producLs LhaL would sell
* lncrease gross proflL margln by keeplng lLs overhead cosLs ln conLrol
* Callfornla Choppers may yleld greaLer reLurns by lnvesLlng lLs earnlngs lnLo oLher pro[ecLs
and borrowlng aL a lower cosL of caplLal Lhan whaL lL ls currenLly paylng Lo meeL lLs debL
obllgaLlons
2) Manage lLs governance problem by
* ConLrolllng uoakes aggresslon lf lL perslsLenL lL wlll llkely lead Lo have lssues wlLh senlor
managemenL ln Lhe near fuLure
3) Lxpand MarkeLlng by LargeLlng youLh markeL Lo galn ln proflLs and/or markeL share
* romoLlng by presenLlng annual moLorcycle show