Financial Management (YP50B)

Syndicate 3
Rizki Oeshya Lubis

29113343

Muhammad Avisenna

29113350

Nanda Ravenska

29113358

Derina Adriani
Murni Fitri Fatimah

29113493
29113539

The O.M. Scott & Sons Company

In 1955-1961, Management of O.M. Scott & Sons Company tried to maintain and
increase companys growth with few programs with forcing sales and expanding product line
but it ended in failure. The failure programs included tapping the potential market without
supported by good distribution system, supply the demand but often postponed and lost sales
from competitors, lack of ability to finance companys inventories, had not security interest in
goods, spending a lot for R&D and increase of receivable value because the dealers payment
were late.
From the case, O.M. Scott and Sons Company should find the way to keep up with its
goal 25% annual growth rate in sales and profit considering the current policies and compile
the current policies of combination seasonal dating and trust receipt plan. Decision failures of
company resulted in the buildup of long-term debt the company as much as $ 16.2 million in
1961. The requirement to a trust receipt dealer by Scott company such as immediate transfer
to the dealer of title to any Scott products shipped in response to a dealer order, retention of a
security interest by Scott in merchandise so shipped until sold by the dealer acting as a
retailer, and segregation of sufficient proportion of the funds receive from such sales to
provide for payment to Scott as billed.
To understand the main issues of Scott company, we should reassess companys
financial statement with measuring debt capital. Total leverage consist of operating leverage
and financial leverage to manage company debt and prevent bankruptcy.

First, measuring operation breakeven point to know exact figures of sales result using
EBIT formula :
EBIT =Q ( PVC )FC
EBIT =RevenueCOGSOperating Expenses

For The Years Ending

EBIT

1960
$ 5.126

1961
$ 4.958

EBIT indicated companys profitability was decline in 1960 to 1961. It means company did
not used proper decision to growth but caused decreasing of revenues based on EBIT
calculation. EBIT result will impact to degree of operating leverage. Second, measuring the
degree of operating leverage (DOL) with the formula :
DOL=

Percentage change EBIT

Percentage changesales

DOL=

3,28
=0,06
54,66
12/31/60
$ 7.390

Finished goods
Sales
EBIT
DOL

9/30/61
$ 4.040

3350
-54,668
-3,2833
0,06006

DOL value showed 0,06 < 1 means operarting leverage did not exists. Companys sales did
not impact to operating leverage. Company only gained a little profit because their fixed cost
was too low although sales were increased. Third, measuring degree of financial leverage to
with the formula :
DFL=

Percentage changeEPS
Percentage change EBIT
DFL=

31,048
=9
3,2833

Earnings per share (EPS) indicated that companys ability to pay preferred stock
dividen. Scott company showed negative EPS because they cannot shared the dividens. The
value result more than > 1 indicated that company have a potential to produce higher return
but it have comparable with impact of risks and cannot increasing debt. But the DFL function
is manage company receivable that already spent and reduced risks therefore reduced of
unpayed receivable. Last, measuring degree of total leverage (DTL) with formula :
DTL=DOL DFL
DTL=0,06006 31,048=57

DTL impacted to companys expantion. The companys expantion should prepare

properly and change of dealer segment to collaboration with Scott company. Implied the
requirement of a trust receipt dealer which have a commitment to dispose with te contract.
Relation between DOL and DFL was top line and bottom line in company. Top line represent
the sales or revenues and bottom line represent net income. For example, if the income
increase 1% so the sales will receive strong affect of leverage as much as 5% (lever function).
Ratios of financial statement form Scott company leds possitive growth in early 1959
but become negative in after 1959 because the cost increase rapidly than the revenue as the
impact of new programs. Scott company needs to control the 25% growth rate before plan to
keep the companys sustainability.
Suggestion
Scott & Sons Company should reduce growth planning temporary to sustainable until their
fixed cost increase and imply new strategy properly. Company can reduce the production to
increase the dividen and rather than spent a lot of money to hire sales person, company
prefered make a payment strategy to attract their customer pay on time such as higher
discount for early payments. Issue preferred equity to help finance retailers in holding higher
Inventory levels. Company also can sell amout of receivables to third party in order to reduce
the cash cycle and free up some cash to meet our short term liabilities and attract new
investor to start operating activities.To prevent to second loss, company should be more
selective to assess new business partner and make sure they disposed and agreed with the
collaboration with Scott & Sons company.