Arkin, Inc. Finance Overview

Arkin, Inc. Finance Overview

Company Overview and History

Arkin, Inc. is a car manufacturing company located in a small town in Illinois that is suffering from financial difficulties. These difficulties stem from mismanagement from the CFO of the company. The manufacturing facilities consist of ten buildings owned outright by Arkin, Inc and ten buildings that the company is leasing. The lease expense of the building totals $900,000 per year. The company has a month-to-month list and either party can get out of the lease with just one month’s notice. The lease expense is the only fixed expense the company has at the moment.

The company employs a staff of 200. This consists of 150 manufacturing employees, 40 non-sales office employees and five sales persons. The manufacturing employees are union employees and therefore earn union scale. The sales persons earn a commission of 30%, which is significantly higher than the industry standard of 5%.

The company has a customer base of about 200 car dealers in the Midwest. While the industry standard is for the dealers to for the cars at the time of purchase, Arkin, Inc. has extended credit to its customers.

Another issue that needs attention is the inventory. Approximately two thirds of the inventory has been deemed worthless. Although the company has an abundance of inventory, the inventory turnover is only two times per year. The industry standard is twelve times per year.

The President of the company has an idea for an expansion plan, which includes the following:

• Increase sales by 400% with a Gross Profit Margin of 20%

• Purchase the 10 leased buildings for $15,000,000

• Purchase robots for manufacturing for $20,000,000 and downsize union employees

• Issue Corporate Bonds to raise capital.

In order to make a recommendation to Arkin, Inc regarding the proposed expansion plan or any other alternatives to turn the company around we must review the prior year financial statements, complete projected statement for 2005, apply financial ratios and complete a trend analysis.

Industry and SWOT

Part of Arkin, Inc.’s problems stem from incurring expenses that are far greater than the industry standard. Their variable expenses for the past two years were at 15% of sales, while the industry standard is closer to 5%. Sales commission were 30% of sales, while the industry standard was 5%. Arkin, Inc. is currently operating under two shifts. The plant would run more efficiently if the plant operated under 3 shifts and have the equipment run 24 hours rather than wasting time starting up and shutting down. Arkin, Inc. is currently purchasing its steel for production from the former CFO’s sister in Ohio. They are paying too much for the cost of steel. They need to begin to find other sources of raw materials. Looking at the world markets may bring lower steel prices.

Arkin, Inc. must also be aware of threats such as foreign competition and government regulation. In these times of moving overseas for lower labor costs, Arkin,