FI 4020

1 February 2015

Shanna Payne

Name of business: Haefren Baum

Nature of business: Haefren Baum was a well-established retailer in the home furnishing industry. The company became established in 1965 as a partnership and became incorporated in 1970. It became a customer of furniture manufacturer, Wiegandt, in 1968. They had one retail location in downtown Cologne and three outlet stores in Rhineland.

Market Analysis: As far as market analysis, Haefren Baum’s product is home furniture. This would include things such as beds, dressers, and armoires. The demand for this product directly coincides with the German economy. After the reunification of Germany, the economy began to boom and furniture sales increased. But the boom soon turned into a bust in 1993 and demand began to fall. What differentiates the furniture Haefren Baum sold is the increase in quality compared to other stores. Haefren Baum had competition from not only other German furniture retailers but also other European furniture retailers.

They had four total locations. One retail location in downtown Cologne. Being downtown, in a heavily populated area, it should have attracted a lot of customers. There were also three other outlet stores located in the nearby suburban area of Rhineland. Because these were outlet stores, they were designed to attract customers based on price reductions and an increase in selection. Although Haefren Baum is a high-end furniture retailer that caters to upper class consumers, they had to lower their prices in order to maintain their sales volume. And even though they added the three outlet stores, growth in sales volume remained the same.

Operations Analysis: Haefren Baum is a retail firm that sells from a regular retail location and three outlet locations. From 1993 to 1995 both the fixed asset turnover and total asset turnover ratio has declined, fixed asset from 10 to 7.6 and total asset from 2.1 to 1.5. The fixed asset turnover rate decreased at a greater rate than the total asset turnover. This decline in efficiency is due to the twenty-three percent decrease in net sales from 1993 to 1995.

The average collection period however, increased, from 1993 to 1995. It went from 211 to 309. The credit policy is a twenty-five percent down payment and the rest is financed for six-months, but the average collection period increased by forty-seven percent, from around six-months to almost an entire year. This decrease in efficiency of collecting from customers is most likely due to the economic downturn and the relaxing of credit policies to increase sales and maintain customers. However this huge increase indicates the company’s policies are too relaxed and that the accounts receivable is not liquid. Inventory turnover days has also increased by twenty-five percent, moving from 103 days to 129. That is due to a decrease in cost of goods sold by twenty percent while inventory remains constant

Financial analysis: Past funding for this company has been provided by bank loans and credit sales from its supplier, Wiegandt. Possible future funding might be needed to satisfy the supplier because their accounts payable days is 163 in 1995 which is way over the 30 days the supplier provides. Haefren Baum is also above its upper credit limit of 40,000 DM at 54,017.28 DM.

The cash flow statements show that there is a lack of cash coming in from operations because from 1994 to 1995 the cash from operations was an outflow of 103. That was due to trying to maintain the same volume of inventory although sales had decreased and miscellaneous accruals decreasing.

The liquidity of the company is very low. Although the current ratio increased by 20 percent between 1994 and 1995, the accounts payables days is way over the allowed days from the supplier. The company cannot pay its supplier back because its customers have almost doubled their credit time.

The company also does not have much leverage. Although the debt to equity ratio decreased from 1994 to 1995 from 9.37 to 8.22, it is still high from a 41 percent increase compared to 5.84 in 1993.

The company has also not been very profitable from 1994 to 1995. Although the gross profit margin only decreased by 3.6 percent, the net profit and net profit margin are at a loss. The decrease in profitability is due to the net profit decreasing by 104 percent.

Cash distributions seem to be stuck in the inventory account in order to maintain sales volume even at the decreased level of sales. Cash also seems to be tied up by the customers not paying within the credit limits and almost doubling payback time.

Summary: In conclusion I believe there is nothing Wiegandt can possibly do because it is a matter of the market and the industry they are in as luxury furniture retailers. Sales have decreased and to maintain customers stores have to relax the credit policy, which in turn increases the debt owed to Wiegandt because they do not have the cash to pay them back. Even if they were to be stricter about the credit policy, Haefren Baum would probably still not be able to pay them the money owed because they are not liquid enough and are not generating a profit.