Abc Analysis

Asset Utilization

Overall asset turnover has improved as sales increased more rapidly than assets form 1989-1992

This masks the large build-up in current assets

Virtually all due to eastern expansion

While the build-up was due in part to increased sales; it was also the result of a dramatic change in terms

Liquidity

Liquidity improves from 1989-1992

Declines during the forecasted period

Overall

ROE has fallen from 1988 to 1992

Expected to rise during 1993 and 1994

Performance is due entirely to expansion and aggressive predictions

(Group C) What is Bayern's credit policy toward its distributors in the eastern Länder? Why is it different from the policy toward its other distributors? Is the company's credit policy appropriate? Is it profitable? If not, how would you change it? If so, what arguments would you offer to the board of directors in its defense?

Bayern's Distributors Compared to the Industry

Bayern is using its own borrowing power to finance the distributors and through them its retailers.

Bayern borrows at 11% relending the funds through receivables to distributors.

Distributors relends to retailers again through receivables.

Leiter expresses optimism that the banking business is profitable.

Exhibit 6

Profit Margins for four of the distributors is materially lower than the industry.

Competition? Poor cost control?

Distributors are aided by trade payables and relatively low inventory levels.

Their receivables are higher than normal suggesting slow payment on receivables.

Asset turnover is relatively close to norm suggesting that distributors are not building up assets.

Berlin is the strongest while Magdeburg or Gera is the weakest

May warrant more careful credit controls

Leiter's incentives

Strong incentives for growth with little incentive to manage risk.

Why do you think the bank is interested in talking to Bayern?

Concerns about eroding credit position?

How Not To Handle Your Receivables

Start with a unknown individual who has a minimum of capital and a great story about prospects in a far corner of the state.

Offer extended terms so he can finance the inventory needed to generate the fantastic business he has described.

When he is past due on payments rationalize tha this is tempory perhaps the result of seasonality.

Let the account's sales person verify that the inventory is in fact in place.

As you look at the financial statements, be sympathetic that his is a new operation having trouble getting a handle on operating results.

When you start to realize your customer is in trouble do not take your losses early. Stick with him, you ought to be able to double the amount you have to write off...

Source: Inc. Magazine May 1989

Profitability of Eastern Expansion

Are Leiter's estimates accurate? If so the returns appear large.

What about the cost of building up inventories

What about the fixed asset investment necessary to support growth?

Exhibit TN3 shows that returns net of capital expenditures is reduced to the 20% range.