ACT 4197 INTEGRATED CASE STUDY

GROUP ASSIGNMENT (7.5%)

CASE 1: SHOW ME YOUR CASH FLOW PLEASE!

GROUP MEMBER MATRIC NUMBER

LAM GAR YEE 176013
MARIA SYAZLYDIA BINTI MOHD SANUSI 175657
WANG LELE 171688
NUR DAHNIAR BINTI T DASWIN 174855

GROUP : GROUP 1

LECTURER : DR. NOR AZIAH ABU KASIM

Table of Contents

1.0 Introduction ..............................................................................................................................1

2.0 Issues and Problems .................................................................................................................2
3.0 Case Analysis ............................................................................................................................3
3.1 McKinsey 7s Model ..............................................................................................................3
3.2 Ratio Analysis .......................................................................................................................5
4.0 Recommendations and Solutions ............................................................................................6
5.0 Conclusion ................................................................................................................................8
1.0 Introduction

The company involved in this case study is AFF Sdn. Bhd, a family based business that
sell and supply Halal frozen food. AFF was an abbreviation for Aminah Frozen Food. And now
the company was run by the 4th generation of the family. AFF Sdn Bhd was the first fully-
integrated local food supply chain management company in Malaysia. The company now
maintained their bank accounts at four main branches of a bank in Kuala Lumpur and Sham Alam.
The company mission was to act as the catalyst to the transformation of the nations Halal Frozen
food industry. AFF had 173 staffs including workers at fove branches. Meanwhile AFF had 5
levels of employees from higher level of managmement to the lower level of management.

The key person in AFF are En. Ameer, the new Executive Director of AFF Sdn Bhd, Cik
Aini, the new Accountant of the company and En. Riduwan, the Managing Director of AFF. En.
Ameer and Cik Aini were awared that there are some financial problem going on in the company
and En. Ameer is keen to investigate the real reason behind. Hence, a meeting was called with Cik
Aini preparing the current financial statement in order to come out with strategies to overcome the
financial problem. However, no one is able to answer what happened to the cash flow. The meeting
was then adjourned with the suggestion of En. Riduwan to set up a special team in order to
investigate the problem.

AFF Sdn Bhd has recently changed their strategic and approach, the new focus emphasized
on improving efficiency and performance in its entire branches instead of improving the profit.
The organizational structure has also been changed for better accounting responsibilities. New
system has also been introduced for better billing and accounting purpose. Not only that, monthly
reporting system was bring in for management meeting purpose and to evaluate performance.

Case studies is performed in order to investigate the problems faced by AFF Sdn. Bhd. and
analysis is carried out to provide recommendations for AFF to deal with the challenges currently
faced by them.

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2.0 Issues & Problems

2.1 Insufficient Cash Flows

According to the case, the main concern of AFF Sdn Bhd is insufficient cash flows. The budgeted
cash flow that they have prepared shows that they will be facing a difficulty in covering their
expenses in the coming month. Also, from the table of collection and expenses, it is found that
throughout 2014, the monthly expenses are higher than the monthly collection and nobody in the
company seem to know what causes the situation.

2.2 Ineffective Debt Collection

The main cause of the cash deficiency is their inability to collect debt from customers which is
becoming worse ever since the new CEO arrives. Their debt currently being collected biweekly
instead of on a weekly basis. The period of sales has also increased from 60 days in 2014 to 90
days in 2015. They have a significant debt overdue which amounts to almost RM2 million. It was
found that they have a problem dealing with their major customers regarding their unpaid invoices.
The ineffective debt collection might be caused by two factors which include ineffective cash
collection system and staff shortage.

2.2.1 Ineffective Cash Collection System

As stated in the case, AFF Sdn Bhd has a complicated cash collection system where the customers
need to prepare documents for payment purposes which takes time to complete thus increasing the
cash collection period.

2.2.2 Ineffective Human Resource Management

AFF Sdn Bhd has a shortage of staffs in the billing department as only two persons are in charge
at the head office for invoicing as well as responding to customer enquiries. This in consequence
will delay the issuance of bills which is managed by Cik Timah who is also responsible for
preparing reconciliation and debtor's aging report. The delay in each of the sections of the
department will eventually lead to an increase in the debt collection period.

2.3 Poor Leadership

The leadership style in AFF Sdn Bhd is poor especially after the arrival of En. Ameer. The
ineffective leadership style in the company has worsen the performance of the company. It can
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be seen when the debt collection process has become poorer. Also, when Puan Sophea, Head of
Account and Finance Department was asked about the high expenses incurred by Cik Aini, she
responded helplessly in a sigh and stated that no one could manage AFF like the former CEO
did, it shows that Puan Sophea is not confident about the current CEOs ability. Besides that,
Encik Riduwan, the managing director assigned task to Cik Aini without considering whether
there is sufficient time for her and it frustrated Cik Aini. Such action can demotivate employees
which result in poor performance by them.

3.0 Case Analysis

3.1 McKinsey 7s Model
Strategy
AFF Sdn Bhd runs the business with the philosophy of love for the family and taste of quality
which indicate that they business focus is towards family market and they also put quality as their
priority. AFF Sdn Bhd is keen in providing healthy premium halal frozen food. They also
concerned about the sustainability of the business as they ensure sustainable food processing
practices at every level in their food supply chain. The strategy of AFF focuses is improving
efficiency and performance instead of stressing on profit.

Structure

AFF Sdn Bhd had 5 levels of employees which rank from the highest level of organization which
is CEO and the lowest level which is general worker. The reporting relationships in AFF is weak
as the CEO, En Ameer was unaware about the problems in the company. It can be seen when En
Ameer is unclear about the reason why the expenses of the company are increasing months by
months and none of his subordinates are able to answer this question. A poor communication
system can be seen in this scenario as well.

System

AFF Sdn Bhd was the first company to use a fully-integrated local food supply chain management
system in Malaysia. It could help them to produce frozen halal food with premium quality which
is aligned with their companys strategy. The system was support by their Halal frozen food
industry expert with diverse background in order to manage the companys supply chain in an

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effective manner. The company also adopt cutting edge technologies to ensure efficiency across
the companys supply chain. A monthly reporting system is used for management meeting purpose
as well as to evaluate the performance of the company and each cost center. Furthermore, a
complicated system is used by AFF to bill their customer which makes the billing process difficult.

Shared Values
AFF Sdn Bhds mission is to act as the catalyst to the transformation of the nations Halal Frozen
Food industry. To achieve this, they make sure their supply chain system in line with global
standards of safety, quality and sustainability.

Style
The leadership style in AFF Sdn Bhd is rather week. The performance of the company is getting
poorer after the new CEO, En. Ameer came in. The debt collection has worsened which put AFF
in big trouble. Besides, the leadership style is centralized when it comes to making decision, it can
be seen when En. Ameer and En. Riduwan decides to set up a business team without asking for
opinion prior to it. En. Riduwan give order to Cik Aini directly without considering that there
might be insufficient time for Cik Aini. Other than that, the employees do not respond positively
to the management. This can be seen when En. Ameer questioned about the rising expenses but no
one is able to respond. Other than that, Cik Aini, the accountant is unsatisfied with the short notice
period given by his superior, En. Riduwan, when he asked her to prepare the report needed for the
issue.

Staff
AFF Sdn Bhd is a medium size company containing 173 staffs. The company is currently
encountering problem on staff shortage. Invoicing of the company are only in charge by two
persons in-charged and it has causes delayal in preparing the invoice which also impair the debt
collection process. Inability of staff does also happen in the company as most of them do not aware
the reason behind the elevation of expenses.

Skills
AFF Sdn Bhd is known for their integrated supply chain management which makes them one of
the company with the best quality of frozen food produce. They also own some special ingredients

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which makes their food production unique. However, AFFs employees do not have the necessary
skills to deal with debt collection which causes them to face financial difficulties.

3.2 Ratio Analysis

Receivables Turnover Ratio

2011 2012
13,741,629 17,184,058
= . = 4.16 times
(3,300,151 + 6,800,781)/2 (6,800,781 + 1,462,331)/2
2013 2014
23,367,622 31,542,264
= . = 5.99 times
(1,462,331 + 3,352,326)/2 (3,352,326 + 7,185,679)/2

According to the receivables turnover ratio calculated above, the ratio has improved between year
2011 until 2013 from collecting receivables 2.72 times per year to 9.70 times per year. However,
in year 2014, after the new CEO, En. Ammer stepped in, the receivables turnover ratio dropped to
5.99 times per year which means it takes 61 days for AFF to collect the debt from that sale. It
shown that the company is in trouble with collecting their receivables

Cash Ratio
2011 2012
87,614 + 14,752 242.296
= 1.208% = 4.513%
8,474,070 5,369,145
2013 2014
108.454 + 206,931 408,454 + 558,960
= 4.689% = 11.63%
6,725,802 8,319,347

Although the cash ratio of AFF Sdn Bhd is improving year by year but it is still considered as
extremely low as the company only have 1.208% of cash and cash equivalents to pay of their
current liabilities in year 2011, 4.513% of cash and cash equivalents to pay of their current
liabilities in year 2012, 4.689% of cash and cash equivalents to pay of their current liabilities in
year 2013 and 11.63% of cash and cash equivalents to pay of their current liabilities in year 2014.
The shows that AFF is highly insolvent as their cash flow is only sufficient to cover less than 12%
of their current liabilities.

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4.0 Recommendations and Solutions

From our analysis, the biggest problem faced by AFF is the insufficient cash flow due to
poor operations of the company. It can be seen from the ineffective debt collection system,
complicated cash collection system and also human resource management. So, in order to solve
this issue, AFF should look into the root reasons behind the problem of insufficient cash flow.

First, we would like to suggest AFF to establish good internal control for accounts
receivable to improve their debt collection policy. Prevention of bad debt should be the first
priority for AFF in order to manage their accounts receivable, therefore AFF must be able to
establish credit sales approval policy. Prior to approving credit sales, AFF should perform a
thorough background check on a business and set safe customer credit limits. AFF should also set
up a policy that requires credit approval prior to shipment. Collecting credit would be difficult
from a customer with a bad credit rating. Therefore, the new policy must require the signed
approval of the credit department on all sales orders over a certain dollar amount which acts as a
threshold. For subsequent sales to debtors, goods should only be released if the customers credit
is still within safe customer credit limits. AFF could also set a deposit payment, for example, 10%
of the sales, and wait for direct deposit payment to clear before shipping any goods.

Next, we would like to suggest AFF to improve their cash collection cycle by establishing
a good credit collecting procedures. Late and non-payments can be eliminated by having efficient
and complete billing process. In order to achieve this, AFF should be able to send invoices out as
soon as a job is complete, or on a regular date. AFF should also clearly state all payment options
and information on their invoices or contracts to make it easier for customers to pay them. When
mailing invoices, AFF should consider indicating the individuals name on the envelope along
with the company name. Addressing the invoices to the individuals name instead of Accounts
Payable will ensure it is received by the right person and accelerate the process.

In collecting credits from clients, AFF should also keep regular contact with their
customers. As to make sure the clients pay their credits, AFF first should confirm the amount of
credit owed by the clients. After that, AFF could give reminders to the clients from time to time
starting with a friendly payment reminder, followed by overdue payment reminder and lastly a
final notice in case they do not pay within the designated time. The company should also make
direct contact with their customer by sending a formal letter of demand. AFF should also consider

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offering early settlement discounts in order to give incentive for the accounts receivables to pay
faster, thus improving the cash collection cycle of the company.

Other than that, AFF should provide training for their staff, especially on the new policies
established. The new policies that are established by the company should be communicated to the
staff. The policies on AFFs business's payment terms, customer invoicing and debt recovery
procedures should be stressed on every staff and it should be included in financial policies and
procedures manual which every staff member goes through as part of their induction.
Communication is one of the most important elements in effective leadership style, hence it must
be taken into consideration by the management. In order to improve cash collection by the
employees, AFF should establish performance based incentive for their sales staff. They should be
rewarded once the money has been collected instead of when the sale is made. Often sales staff
are rewarded for the amount of sales they make and so they may 'bend the rules' to book another
sale, therefore incentives like this could help increase cash flow of AFF as well as motivate
employees to improve their performance.

Besides that, AFF should hire more staff for better management of the human resources.
Since there is high workload but low staff available, the procedures of cash collection cycle could
not be implemented effectively. There should be separation of duties, as internal control so that
the operations in the company could be done smoothly. AFF could revamp and redistribute the
tasks in the billing department. A person who reviews and approves billing data included on bills
should not be the same as the person who deals with billing adjustment issuance, including account
credit issuance and bad debt balance write-off authorization. Also, AFF could opt to hire more
staff, so that the company could utilize different people for different tasks such as billing,
reconciliation reporting, monitoring debtors aging, and also answering customer enquiries
regarding payments.

As for the problem where the monthly expenses are higher than the monthly collection and
how the staff could not pinpoint why it happens, AFF should establish a performance measurement
system to closely monitor the performance of the company. AFF should obtain industry averages
especially on the expenses incurred and from this later on, AFF would be able to work closely with
their suppliers to reduce cost and expenses to counter the overspending.

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 Through the recommendations, we believe AFF would be able to counter their problem of
insufficient cash flow by working on the small factors that would lead to the bigger problem of the
insufficient cash flow, or even the business being unsustainable in the future due to lack of funds.

5.0 Conclusion

To sum up, there are some significant problem and issues within the company management,
for example the insufficient cash flows, ineffective debt collection, ineffective cash collection
system, and ineffective human resource management. The main problem faced by AFF is the
problem of the insufficient cash flow, the cannot will be in big trouble if it cannot be solved.

McKinsey 7s Model and ratios analysis are used to analyse the problems of the company,
by analyzing the case, we have come out with relative recommendations and solutions for the
company including implementation of proper internal control which will leads to more effective
debt collection. Debt collections policy should also be revised. Besides that, the establishment of
good communication and rewards system will also help to motivate the employees in order for
them to perform better.