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Case Study of Bowden Brake Service

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Case Study of Bowden Brake Service
HRM 505-OL
Marygroove College
By: Victoria Flanders

Thursday September 25, 2014
Case Study #1

Bowden Brake Service

Problem/Issue Statement
Should local finance institutions lend the money to Jim to expand his business? The owner, Jim Bowden, has been denied by the local finance institutions for loan in order to expand his business.
Executive Summary
*Assumptions were made and are presented in Appendix A*
The owner, Jim Bowden owns a brake service shop. His business specialized in fixing car brakes and possible other repairs. Jim is seeking to expand his business, the owner had fill out financial form in the local finance institutions. Jim appeared to be very furious at the local finance institutions. As it turns out, all the finance institutions turned down his request for loan. Since his requests were turned down, Jim is unable to expand his business. The local finance institutions had recommended for the owner to look into ratio analysis. The problem is, both the bookkeeper and accountant are on vacation during the time of need. Jim is clueless about ratio analysis and is frustrated. There is a Human Resource Manager who was hired several months ago. This HR Manager had some training in managerial finance. The HR Manager offered to help the owner figure out the finance. At first, the owner felt skeptical because he did not think HR would know anything about finance. When the HR Manger discovered Jim needed a ratio analysis, both the owner and HR discussed agreements. An agreement was made for the HR Manager to be part of management team meeting. Since the agreement had been made, HR Manger will develop ratio analysis for Jim Bowden. The owner went ahead and provided his financial statement to the HR Manager. The HR Manager went ahead and calculated the ratio analysis for Jim Bowden to resolve the situation and why his loan request had been denied.
Business Case Issues
In this situation, Jim Bowden may have over seen his finance case since he does not completely understand how to read ratio analysis. Both of his Accountant and Bookkeeper are out on vacation. He is currently depending on HR Manager who offered him to do the ratio analysis with agreement. The issue of HR Manager who may have finance background experience could calculate the ratio incorrectly. * The owner needs to be able to understand and translate ratio analysis * Know what his Profitability Ratios are * Know what his Activity Ratios are * Know what his Solvency Ratios are * The owner needs to do Research on Ratio Analysis along with HR Manager * Ask the loan finance institutions why his loan are denied * Calculate where in the ratios needs to make some improvements or adjustments * Take class or educate himself about Finances * Need make priority in areas concerning * Quick Ratio * Debt Ratio * Profit Margin * Make Plans and goals in order to receive loans in order to expand business in the future * Increase in services and sales * Reduce expenses * Possible reduce on inventory * Improve on Cash and AR

Potential Solution/Resolutions The HR Manager had spotted some areas of concern which Jim needs to look into. There are several solutions, where Jim Bowden can do some tweaking on improving and/or make some changes in order to eventually expand his company down the road. In this case, the HR Manager will have to explain to Jim each of the area of the ratio which needs to be address. The following area needs to be looked at are: * Quick Ratio (poor) * Debt Ratio (very poor) * Profit Margin (very poor)
While the concerns are brought up in the following areas, there are solutions which Jim can come up with.
Solvency Ratio gives Jim an idea the risk of inability to pay debts. Under solvency ratio, there are two areas which show concern and how Jim can improve. What are the areas of concern and how can Jim improve his business?
Jim’s Quick Ratio is showing poor with 0.5:1 per to the industry standards of 0.7:1. In this area, it is showing Jim is highly dependent on his stock inventory even though his average of inventory turnover is 3.69 times. Unable to receive the industry standard of inventory turnover, Jim needs to reduce his inventory to the minimal possible or only keep up to 6 pieces per parts depending on his business. If he runs out of stock/inventory, then he can call to order parts and get it within a couple of hours or the next following day(s). This will help increase the quick ratio and prevent one of the potential bankruptcies.
The other ratio under Solvency Ratio is Debt Ratio. The Debt Ratio is very poor. It is showing 0.8:1 per the industry standards of 1.8:1. This is not good; it is less than half of the industry standards. This is a red alarm which Jim needs to get his business together or he will be out of business. His ratio needs to be at least $1.80 per dollar. Jim will need to increase his equity in either cash or account receivable. How can Jim increase his equity? * Increase the price on parts * Increase on the service cost * Usage of tools * Insurance * Use of building * Maintenance supplies

* Restructure debt * Pay down debt * Reduce Interest Rate * Sale Asset and Lease It Back
Lastly, other than Solvency Ratio- the Profitability Ratio in one area is showing concern. Jim’s Profit Margin is 4.8% which the industry standard is 9.0%. This is another red alarm. It is almost half of the loss in profit. How can Jim improve on his profit for his company? * Find out profit margin on each of products and services * Compare and analyze profit margin with other business * Increase on prices of the parts to 10%-15% * Review on all pricing and don’t give discount * Keep track of inventory to prevent overstock * Check with the supplier bills

Conclusion Jim received all the document information from the HR Manager and got the clear picture. He will look over it to make a lot of changes for his company. Making changes to improve profit to make money and prevent from heading to the direction of bankruptcy. He was glad the local finance institutions had denied his request. He had not realized the debt he could have been in if he had taken the loan; not only that, he would not have made much of a profit as well due to finance struggles. Jim will continue to learn and use ratio analysis to stay on top of his business. Jim will have to set management team meeting to update accountant and bookkeeper when they return from vacation. His bookkeeper and accountant will have to update Jim periodically on the progress of the ratio analysis. At the same time, Jim will have to make sure his Bookkeeper and Accountant will not go on vacation on the same week in case of emergency, thanks to his HR Manager. Within the following six months, Jim will review his ratio analysis to see if he is capable of expanding his business or need to wait until the timing is right. At the same time, he will also know what to look for when it comes to loan approvals from the local finance institutions. Now, Jim knows how to run successful a Bowden Brake Service. The best option for Jim is improve his business before expanding.

.

Appendix A: Assumptions * The owner wants to expand his business * Local finance has been applied to * All local finance institutions turn down the loan request * Suggest owner to look at ratio analysis before expanding * Owner has no knowledge about finance * Both bookkeeper and accountant are on vacation and owner needed help * HR Manager recently hired for only a few months ago * Offered owner to help with finances * HR Manager had some training experience in managerial finance * Owner feels skeptical but made agreement * Was not sure HR Manager knows anything about finance at first * HR Manager discusses and will develop a ratio analysis if agreement is made * Agreement has been made between owner and HR Manager * Agreement is to allow HR Manager to be part of management team meeting * HR Manager will develop ratio analysis for the owner * Owner provides financial statements to the HR Manager * The major factor is to figure out why loan is not approve…...

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