IN-BASKET EXERCISETHE CONFIDENTIAL FILE

Instructor’s Notes

General

The best impression will be given if the papers are different sizes and types and if the papers are handwritten where this is indicated. Other notes as to realistic presentation appear on individual papers.

Significance of the Papers

The papers consist of three groups:

- Those that cover purely personal matters;- The accounts of the business;- Other papers concerning the business which help to show its state of health.

The last group and the accounts are the most important for the state of the business.

These are:

The Accounts (Sheets 2 and 5)

Any trainee ought to be able to note that profit has been falling. The important point, however, is that gross profit have been falling over the period of the accounts while at the same time, sales have been going up. Probably this would be picked up only by accountants or students of accountancy. Therefore either the exercise should be confirmed to people with this interest, or the non-accountants should not be expected to see this point.

Suppose your group merely picks up the fall in the net profit, the question you ask is: Why is it falling? The obvious answer is that expenses are going up. Are they? Examination of the expenses after gross profit is determined (that is in the second part of each statement of account) will show that these costs are tending down, not up. Why then are profits falling? This leads to an examination of the gross profit. It is falling. Why? Sales are down? No, they are up. Purchases? Yes, they are going up. So what do we conclude?

Most likely that either the costs of individual items purchased have been creeping up – that is the firm has been paying rising prices for the same goods; or that sale prices have not been high enough. They may include too many items sacrificed at sales, allowed to become dirty or damaged so that they have to be sold at a discount. Somehow, volume has been sacrificed to profit. Turnover is up, gross profit on the turnover is down. Something is clearly wrong either with the buying policy or with the pricing policy, or both.

With an accounting group, a lively discussion can be provoked on this. With a non-accounting group, the accounts analysis gives the chance to talk about the folly of going for turnover only – a company can “go broke” even while its sales are buoyant.

The inked notes on accounts show Tran has been understanding profit by a stock undervaluation or reserve. This is common enough and of no importance in revealing conditions in the business.

The Other Business Papers (Sheets 3, 4, 6, 8, 9. 11)

Sheet 3 – a list of government department contacts. This is a perfectly legitimate list. Every business man needs this type of contact. Some trainees might want to suggest some corruption; not necessarily.

Sheet 4 – tells us little of importance, suggests that costs are not rising at the factory, but that there may be a bit of bother ahead. But how do we know Tran did not do something about the problem? Did he raise wages? What do the accounts reveal? On the other hand, the sheet suggests something about Boom, who signed it. He is the Managing Director. He ought at least to be making a recommendation, not making for advice. This could lead to a discussion of the need for strong managers willing to tackle problems or at least recommend action which will solve them.

Sheet 6 – a red herring, of no importance. It does confirm that Tran had some difficulties with the taxation people, but it is settled and, in any case, tells us nothing about the present state of the firm.

Sheet 8 – is this a way out for the widow? Should she get in touch with this company and re-open discussions. We do not know what happened from this letter. Would the company be willing to offer the same price now? (See continued fall in profit to a loss position after the letter was written). Incidentally, are the ideas about independent valuation of stock and the suggested contract to keep out of similar business in the locality good ideas?

Sheet 9 – Here is another possibility – expand the manufacturing side. If the gross profit fall is due to higher cost per unit buying, it might be good business to manufacture your own in greater quantity and so control buying price. But there is another trap here. Gross profits include profits from the sale of goods manufactured. It might be that they have been sold a too low a price and so have lifted turnover, but cut the profit. So the factory and the shops need separate solution to the firm’s difficulties.

By the way “A1” can be identified as the contact man at the Finance Dept. of the government so his advice should be reliable on that side.

Sheet 11 – The first item of the summary report supports the idea of expansion, and the second item writes off one possible cause of loss – bad locations.

Item 3 seems sound and sensible enough.

Item 4 is “up the creek” and should undermine confidence in this consulting firm. Expenses are down, not up – the cause of the losses lies somewhere else, as we have seen above. Then the consultants have just recommended increased costs – painting and so on. Finally, is cost-cutting the “best way to increase your profits”?

This reveals a negative attitude. The best way to profit is more turnover at profitable levels. If this consultant’s advice is followed and expenses are cut, this does not go to the root of the present problem because gross profit is down, and no cost cutting later will do much about that.

Item 5 suggests a bonus on results. What results? This is a question for discussion. Clearly, in the present result-of-business position, a bonus on increased sales might merely add to the loss – higher turnover in this company has been accompanied by falling profit. So we need a bonus on profit results. This is a good type of bonus for management at all times. A salesman may get a bonus on sales, since he is instructed on what his price is to be. A manager, though, must mange, not just sell.

On this sheet, the last question for discussion is: if the consultant’s advice were followed, would the firm’s difficulties be solved?

The Remaining Papers (Sheets 1, 7 and 10)

Sheet 1 – of no importance, it records an agreement which has no present effect on the situation. Boom may, of course, want his annual rise considered. Should he get it?

Sheet 7 – a red herring. Best destroyed.

Sheet 10 – This is something of a bombshell, but it ought not to divert attention from the main business in hand. The trainee has been asked to report on the apparent state of the business and what ought to be done about it. He should go ahead with this and carry out his instruction. It is not his affair whether the widow owns the business or not.

Of course, he cannot ignore it. Top treatment would be to report on it separately to his own boss, raising the question of whether he, the boss, should tell the widow about the “will” and advise her to get legal advice on whether it is valid and where she stands.

Final Observations

The best performance will be by those who quickly eliminate the unimportant items, dispose of the will by calling it to the attention of the boss, and them get down to analyzing the firm’s situation. Three possibilities are open: expand, try to sell or set the present business on its feet.

In any case, it will be necessary to get out separate accounts for the manufacturing side of the business and see what contribution it is making to the total position.

In view of the possible doubt about the widow’s legal position, the boss might be advised to suggest she tell Boom she cannot give him time as requested for discussion and make an appointment for a couple of days later. This will give a breathing space for a more leisurely examination of and report on the accounts, etc.... But, the trainee must not “trade” on this. He can recommend it, but he must still come up with his repot and analysis, even if an interim one.