Chicken Run Case Study

GROUP: AC220 8E
Group Members :
Nur Fariesya Binti Zambry

2012410308

Nurul Farhana Binti Jasni

2012858436

Rawiah Abu Naim

2013886334

Siti Nurhalidah Bt Sulaiman

2012254938

Challenges
Low liquidity of cash flow in Excel Poultry &
Meat (EPM)

The development of the company in late 2008 had puzzled Encik Selamat. He was especially
concerned to note a report, which indicated that the operating cash was systematically
running low.

He was also especially worried on the severity of the matter, in which the company had to resort
to significant increase in the short term borrowing in order to meet operating obligations.
This may in turn increase its financial obligation in terms of interest payments.

In the meantime, Credit Controller, Ms Choy discovered from the aging analysis of
customers that the credit limit of Cold Gold Sdn Bhd one of its major customers had gone
into its level and yet the marketing department continued to supply products to the
company.

Recommendations

Recommendations

Establish new marketing strategy to

increase operating cash
1. Develop more
chicken products

2. Offer incentive
to customers/
buyers

3. Export chicken
products to
another
countries

1. Develop more chicken products.

EPM can expand or develop more chicken products to sale. Since the

main activity of EPM is supplying the whole chicken to customers, it is

advisable to develop more products to increase the sales.
For example : Ayamas Food Corporation

For
example;
Types

Purpose

Eggs

EPM can raise the chicken eggs either for

consumption or to breed more chicken to sell.

Feathers

The chicken feathers also can be use to sell to

the handicraft makers.

Livestock

EPM can sell the chickens not only for

consumption but also to customers who would
like to buy chicken as pet.

2. Offer incentive to customers/ buyers

Customer incentive programs offer benefits to loyal buyers. Some businesses offer
frequent-shopper discounts or points-based reward systems that allow customers
to accumulate benefits with every purchase.
To help EPM:
Offer discount benefit
Early payment incentives
Offer more
cheaper price.

Offer discounts
Offer discount if for the early
payment of
buy in bulk.
borrowing.

Pay in different
schedules
Establish
business
agreement to
pay in agreed
intervals.
Buy now, pay
later.

Reduc
e cost
Increas
e sale

3. Export chicken products to another

countries
Singapore
Consumption of all types of meat has dropped down in Singapore, except for
chicken. Chicken continues to be the dominant choice for meat even with the
new trends for food in the country. There have been many switching and
choosing healthier options for meals such as vegetarian alternatives. Only
chicken remains unchanged.
Hong Kong
Meat continued to be popular as consumption is still on the rise for all types
of meat in Asia. For Hong Kong, chicken is the primary choice over other
types of meat. The main reason chicken is used is due to its affordability as
compared to other meats. The country also sports a high amount of recipes
using chicken as a side or as a main course.
http://www.thepoultrysite.com/articles/2929/global-poultry-trends-2013asia-consumes-40-per-cent-of-worlds-chicken/

Issue Significant increase in the trade

2
receivables, also cash collection

Operating cash running

low

EPM still continued to supply the chicken to Cold Gold Sdn Bhd even
though the customer credit limit has exceeded

The marketing department didnt follow the procedure on credit sales

term

Procedure on credit sales term to ensure the customer didnt

exceed the credit limit

Recommendation
s

Well-designed policies governing its

Average
Collection
Period

Credit Policy
and Credit
Term

Sales Order
Entry

Collection
Procedures

1. Average Collection Period

Particular/Year
Revenue
Trade
Receivables
Days to Collect
Account
Receivable

2006 (RM
million)
54.70

2007 (RM
million)
55.01

2008 (RM
million)
74.90

12.70

16.20

26.00

84 days
(< 3 months)

107 days
( > 3 months)

126 days
( > 4 months)

Comparing the time

allocation for the
company to collect its trade
receivable

Average collection period

> Credit term
Credit policy too lenient

Higher value of average

collection period is
unfavorable, whereas
lower value is
favorable

Average collection period

< Credit term
Credit policy too
restrictive

Formula:
Trade Receivables
Revenue / 365
days

Therefore, possessing a
lower average collection
period is seen as optimal to
turn its receivables into cash
quickly
EPM should:
1) Keep customer information up
to date
2) Send out reminders during the
week prior to a contractually due
payment date

2. Setting Credit Policy

EPM allows their

customers to
purchase their
products by
credit

1. Find
customers
that afford
to pay in
timely
manner

Before applying
Credit Policy, EPM
should set Credit
Department
Guidelines

2. Conduct a
background
check on
their
customers
credit
account

To screen out
their potential
and existing
customer

3. Prepare a
specific
contract
that includes
the credit
term

To protects
EPM from the
fraudulent
applicant

4. Send
reminders
to customers
with
outstanding
balances

Credit Terms
The credit terms offered to customers for early payment need to be sufficiently
lucrative for them to want to pay early

Conditions included
within credit terms

EPM should use credit

terms such as 30 days
such as stated in the
contract

The amount of credit extended to

the customer
The time period within which payments
must be made by the customer
Early payment discount terms
The penalty to be charged if payments are
late

the customer must pay

within 10 days to obtain a
2% discount, or can make a
normal payment in 30
days, then the terms are
stated as "2/10 net 30"

3. Sales Order Entry

Order
Customer

1. Take
Order

Rejected
Orders

Approve
Orders
2. Approve
Credit

Acknowledgement

3. Check
Inventory
Availability

Marketing department continued to

supply their product even the credit
limit of Cold Gold Sdn Bhd had gone into
its limit

EPM should take alert on

their revenue cycle especially
sales order entry.

To mitigate potential risks

4. Collection Procedure
Payments

Customer

Cash
Collection

Cash Receipts

Implementation
of closed-loop
verification to
ensure that
proper account
is being credited

Documenting
collection of
payment made
by customers

Deposits

Bank
Statements

Field check
onto the
numeric
values must be
done frequently
for the payment
amounts

Reconcile the
subsidiary
account
receivables in
general which
should be done
by another
person

Closed-loop Verification
An input validation method that uses data entered into the system to retrieve and display
other related information so the accuracy of the input data can be verified

Recommendations

EPM improving the operating cash:

Apply
banking
facilities &
financial
assistance

Improve
financial
position and
financial
performance

Change or
mixed
chicken feed

Integrate the
production
planning
and control
system

1. Apply other financial assistances

Issue:

Increase in
short term
borrowing
Increase
interest
payment
Operating
cash
running
low

Long term
loans

consists of loans and financial obligations lasting

over one year (longer payback period).
i.e.: MARA, PUNB

Cash
flow

Interest
rate

Stabilit
y

minimize time
spent saving
for investment

fixed interest
rates
(consistent
monthly
payments and
high
predictability)

no need to
search for
financing often

uses funds for

capital
improvements,
acquire
equipment or
purchase
supplies

easy to budget
the operational
income

easier project
earnings and
cash flows as
what interest
expenses will
be each month

2. Improve financial position and financial

performance

Inventory
Turnover Ratio=
Cost of Good Sold
Inventory

showing how many times a

company's inventory is sold and
replaced over a period.

Particular/ Year

2006
(RM million)

2007
(RM million)

2008
(RM million)

Cost of Sales

51.70

54.10

74.09

Stock

3.10

1.50

2.60

Inventory Turnover
Ratio (times)

16.68

36.07

28.50

Better turnover ratio

Turnover Ratio

High
turnover
ratio

Low turnover
ratio

shows strong sales performance

means not selling through products

efficiently

ability to keep up with near-term

debt obligations

buying too much inventory for

demand

result by buy too little inventory to

keep up with customer demands
buying smaller inventory amounts
regularly
need to review the inventory buying
practices

throwing out expired or perished

products
cause to sell products at discounts
to clear them out
result from inventory build up
intended to meet pending spikes in
demand

3. Change or mixed chicken feed

Issue:

Increased
chicken feed
cost which has
risen to RM88
from RM54.50 (an
increase in almost
61.5%).

The increase in
feeding cost has
ultimately
increased the
companys
production cost
to about 56.5%.

Conclusion:
The low
liquidity of cash
flow in EPM is
the increase in the
cost of chicken
feed.

Chicken Feed:
Wheat
one of the best grains for poultry feeding should be ground and fed in mashes and less in
the scratch feed

Oats
vary considerably in feeding value, due to difference in hull, can be fed whole as part of a
scratch feed or in mashes in the crushed, rolled or finely ground form

Barley
work well as part of the scratch feed and in mashes in crushed, rolled or finely ground form

Corn
a very desirable grain that can feed as whole, cracked or ground. Shell corn may be used
with other grains as scratch feed and corn chop can be included in any of the dry mash
rations

4. Integrate production planning & control system

Production
planning

Production
control

is required for:
-scheduling,
-dispatch,
-inspection,
-quality management,
-inventory management,
-supply management
-and equipment management

ensures that production team

can:
-achieve required production
target,
-optimum utilization of
resources,
-quality management,
-and cost savings

Ways to integrate:
ensures that optimum utilization of
production capacity is achieved, by
proper scheduling of the machine items which
reduces the idle time as well as over use

overlooks all
aspects of
production, quality
of final product is
always maintained

Integrate the
production
planning &
control
system

ensures that inventory

level are maintained
at optimum levels at all
time, i.e. there is no
over-stocking or understocking

ensures that production time is

kept at optimum level and thereby
increasing the turnover time

Recommendations

Establish Policies For Clear Ethical Conducts, Job

Scopes & Management Of EPM:

Conflict of
interest

Whistle blower

Established
internal
procedures

Good
communication
across level of
management

1. Conflict of interest
Issue: En. Azman was Encik Selamats best friend during college days .

En. Selamat

En. Azman

Objectivity: Accountants reliance on verifiable evidence

(such as delivery
notes, invoices, orders, physical counts, paper or electronic trail) in
the measurement of financial results.

Reference: The Code of Ethics and Conduct, Section 3 of the ACCA Rulebook

2. Whistle blower
Whistle Blower (Pn. Azura)
a person who informs on a person or organization engaged in an
illicit activity

should develop
whistle
blowing policy

for clear ethical

conducts, job
scopes and
management of
EPM to solve the
ethical problems

ensure and
encourage the
members of EPM
to disclose any
conflict of
interest issues or
irregularities

Reference: J. Lister (2016). Ethical Issues Facing the Accounting Profession.

3. Established internal procedures

Issue: En.Selamat had a meeting with one of the executive directors of Cold Gold Sdn Bhd,
En. Azman to possibly pay part of the paymnet, if not full settlement of the overdue account.

Internal control:
is a process for assuring achievement of an organization's objectives in operational
effectiveness and efficiency, reliable financial reporting, and compliance with laws,
regulations and policies.

Internal procedures:
policies provide a framework within which an organisation makes choices about how it
operates and so can either help or hinder the implementation of the strategic plan
En Selamat deals with Gold Cold Sdn Bhd
Account executive deals to collect payment

Reference: Code Of Ethics For Professional Accountants

4. Good communication across level of management

Communication protocols
Avoid miscommunication
Absorb them into EPMs corporate culture to be
shared within the organization.
Reference: D., Draz. (2011, March 28). Fraud prevention: Improving internal
controls. Retrieved March 20, 2016.