Turnaround Strategies
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Turnaround Strategies
Below are the balance sheet and income statement for 2005 and 2006 of a company that is in financial distress.
Balance Sheet for 2005 and 2006
2005 ($) 2006 ($)
Cash 20,000 5,000
Accounts receivables 150,000 395,000
Inventories 300,000 200,000
Total current assets 470,000 600,000
Fixed assets, net 350,000 350,000
Total assets 820,000 950,000
Accounts payable 85,000 170,000
Accruals 40,000 50,000
Bank loan 150,000 150,000
Total current liabilities 275,000 270,000
Long-term debt 325,000 500,000
Common stock ($5 par) 100,000 100,000
Capital Surplus 70,000 70,000
Retained Earnings 50,000 10,000
Total liabilities and equity 820,000 950,000
Income Statement for 2005 and 2006
2005 ($) 2006 ($)
Net sales 800,000 600,000
Cost of goods sold 500,000 400,000
Gross profit 300,000 200,000
Marketing 50,000 70,000
General and administrative 60,000 80,000
Depreciation 20,000 30,000
EBIT 170,000 20,000
Interest 50,000 60,000
Earnings before taxes 120,000 -40,000
Income taxes (35%) 42,000 0
Net income 78,000 -40,000
Your tasks:
1. Calculate the firm's total operating cycle for 2005 and 2006.
2. What type of working capital restructuring can the firm do to turn around its performance? What other types of asset restructuring might the firm consider?
3. What type of operations restructuring should the firm consider?
4. What type of financial restructuring should the firm consider?
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Below are my answers.
Note that the 2006 Balance Sheet did not balance (when recalculated in Excel) - total stockholders and liabilities is bigger by $100,000. What I did is reduced accounts payable by the same ...
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