California Choppers Case
Memo
To: California Choppers Advisory Board
From:
Date:
Re: Operations Review
The California Chopper’s financial position is in fairly good standing. Although, there are some concerns in certain areas, which will be discussed below. Attached to the memo is an excel spreadsheet that can be used for referencing.
Liquidity
California Choppers (CC) appears to be acceptable in terms of their liquidity. Their current ratio seems to be right around the industry average for the past five years. On the other hand, the cash ratio could improve a little bit. Although the cash ratio numbers are similar to the industry average, companies want to see this number improve. By looking at the attached selected ratios spreadsheet, it can be seen that from year 2004 to year 2005, the cash ratio dropped significantly. This could be due to the inconsistent credit terms for both CC’s customers and also for themselves. When looking back at the balance sheet, the amounts of account receivables and account payables increased significantly from year 2000 to year 2005, which could mean that credit terms are not being paid within reasonable time.
Asset Management
Asset Management can be looked at through various directions.
• First, asset management can be looked at through inventory. CC’s inventory was very unpredictable throughout the years 2000-2005. The inventory levels went from a low of $17.12 million in 2000 to a high of $82.69 million in 2002. In the year 2001 the inventory turnover was 2.64 and then in 2001 the inventory turnover was 6.13. Two assumptions can be possibly made, one that there were a lot of sales made, the other that there is ineffective buying. Considering that sales have increased throughout the years, we can assume that this is due to strong sales. Also, the inventory turnover in days was very high compared to the industry average in 2001, which makes sense because the sales were so low in that year compared to now.
• Next,
To: California Choppers Advisory Board
From:
Date:
Re: Operations Review
The California Chopper’s financial position is in fairly good standing. Although, there are some concerns in certain areas, which will be discussed below. Attached to the memo is an excel spreadsheet that can be used for referencing.
Liquidity
California Choppers (CC) appears to be acceptable in terms of their liquidity. Their current ratio seems to be right around the industry average for the past five years. On the other hand, the cash ratio could improve a little bit. Although the cash ratio numbers are similar to the industry average, companies want to see this number improve. By looking at the attached selected ratios spreadsheet, it can be seen that from year 2004 to year 2005, the cash ratio dropped significantly. This could be due to the inconsistent credit terms for both CC’s customers and also for themselves. When looking back at the balance sheet, the amounts of account receivables and account payables increased significantly from year 2000 to year 2005, which could mean that credit terms are not being paid within reasonable time.
Asset Management
Asset Management can be looked at through various directions.
• First, asset management can be looked at through inventory. CC’s inventory was very unpredictable throughout the years 2000-2005. The inventory levels went from a low of $17.12 million in 2000 to a high of $82.69 million in 2002. In the year 2001 the inventory turnover was 2.64 and then in 2001 the inventory turnover was 6.13. Two assumptions can be possibly made, one that there were a lot of sales made, the other that there is ineffective buying. Considering that sales have increased throughout the years, we can assume that this is due to strong sales. Also, the inventory turnover in days was very high compared to the industry average in 2001, which makes sense because the sales were so low in that year compared to now.
• Next,