Flint Hills Company’s most recent financial statements showed dismal performance. There was a net loss of $10,000 and the Statement of Cash Flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter’s Statement of Cash Flows performance was better.
Ed Gray, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers.
Mike Cane, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures.
Required:
1. Discuss Ed Gray’s actions.
2. Discuss Mike Cane’s actions.
3. Discuss the company president’s actions.
ANSWER FOR DISCUSSION:
1) I believe Ed Gray’s actions will end up costing the company more money. On paper this strategy will save the Flint Hills money. Selling off old manufacturing equipment is a great idea. I think switching several employees to part time and hiring temporary workers is a bad idea. While temporary workers could be paid less, they will take time and money to train and find. With an increase in new workers, mistakes will follow. Work place accidents and damaged equipment are likely to come with an increase of temporary workers. Insurance costs for Flint Hills will rise. Suddenly switching several full time employees to part time will dramatically change the work place environment. Many employees will most likely leave the company, which will lead to an increase in even more temporary works. The sudden switch in work place environment will lead to lower morale and could lead to decreased productivity. There would also be a potential loss of an employee retention tax break. The part time employees leaving the company could be part of an employee retention tax break. Losing this tax break will mean that income taxes for the company will increase.
2) I believe that Mike Cane’s actions are a bit drastic and will lead to hurting Flint Hills’ reputation with vendors. When the bills become past due vendors will be calling in for payment. The vendors were expected to be paid in a certain amount of time. The vendors will not take a hold on payment very well. Many of the accounts will be put on hold which will slow productivity of Flint Hills. The company will also have a harder time gaining credit terms with new vendors. With the company’s bad reputation, they will most likely be forced on COD terms. This will severely limit the company’s ability operate and plan big purchases. I think a better move would be for Mike Cane to renegotiate the debt and try to get some leeway on payment terms with vendors.
3) I think the Flint Hill’s president also handled this situation incorrectly. There was no real direction in the president’s statement. The statement came down to do whatever you need to bring down costs. I think a better move would have been to have a follow up meeting in which the other managers had time to think of ideas to save money. The mangers went off on the their own and did what they could, without thinking in the long term and how their actions would affect other departments. The was no plan implemented. While the short terms problems may be resolved, the long term damage could potentially be extensive.
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