The Management of AirTex Aviation Company - Case Study Example

INTRODUCTION The business AirTex Aviation reflects high mismanagement of the company's operations, both financial and non-financial by the previousowner of the company. The two friends, Ted Richards and Frank Edwards acquired the business with a view to turn its failure into a success by applying their knowledge and skills to it attained during their education. Ted and Frank though acquired the business at a very critical point when it was nearly about to file for bankruptcy in a period of a few months, yet they had that determination and passion needed to run and manage a business effectively. The chief possible causes for such a condition of the company apparently were the mismanagement of company's assets, sales, revenues, employees, expenses and operational activities etc. This company is rather a challenge for its new owners to put it on the right track of profitable business activities. ANALYSIS OF CASE STUDY An analysis of the case study on AirTex Aviation reveals the following important facts about the company: The two owners initially managed to infuse $500,000 into the business as working capital employed to meet the company's short term debts, obligations and even the expenses that are to be paid in the current year The initial amount injected into the business as working capital was found to be insufficient to run the business for a few months The company was severely unable to pay its short terms debts and expenses due to poor liquidity position The owner established relationship and trust of the suppliers in the company's payment behavior so that they might not call for the repayment of loan soon The management of cash and accounts receivable are the most important assets of the company, but the company lacked proper recording, calculating and collecting the accounts receivable and turn them into cash efficiently Ted gave the collection of accounts receivable a new direction. It delegated the responsibility of dealing with the debtors, credit grant and collection of accounts receivable to the departmental managers themselves The company owed the bank $300,000 against the notes payable and the company would have gone for bankruptcy if the bank had called for the payment of liabilities, indicating poor liquidity position of the company. Ted met this challenge by strengthening relationship and building trust of the bank manager in the company's new management and their abilities. This made the company became eligible to get more loans and borrowings from the bank and meet any credit uncertainty. AirTex Aviation was on the brink of bankruptcy due to poor management caliber shown by its ex-owner that had lead the company to such a position Previously, all the management power and influence were rested on the single person who was an accountant for the company The company was very weak in terms of its Organisational structure and the dispersion of power and authority remained confined to a single accounting manager that hindered the free and direct flow of communication between the manager and the workers The company lacked educated and trained employees, furthermore, most of the workers in the company are reluctant to change, of any kind especially, education, training and application of new technology etc that could serve to be the greatest hindrance in its course of success Most of departmental managers were old-aged people who were supposedly less willing to adopt the new trends and technologies The two new owners of the company lacked the industry-related skills and knowledge of the business that may affect the growth of their business There had been a severe lack of communication and coordination among the managers and the workers, also the managers confront with the lack of decision-making powers and rights. After the acquisition, the revised structure of organization and decentralization of power resulted in enhanced decision making skills of the managers and an improvement of departmental education and learning The departmental level of accounting was required to be done by the managers of respective departments in order to enhance their understanding and learning of the major steps involved in the accounting process The analysis would be more detailed if the company's ratios are evaluated based on the financial statements given in the case study: Current Ratio: The current ratio for AirTex Aviation for the year ended 1989 was 0.89:1, whereas it turned out to be 1.38: 1 at the year-end 1990. It shows that the company's liquidity position has improved significantly as compared to the last year. It has mainly become possible due to considerable increase in cash and accounts receivable and decrease in accounts payable over the year. Therefore, the company's new management has succeeded in enhancing the liquidity position of the company. Debt to Assets Ratio: AirTex Aviation's debt to assets ratio for the year ended 1989 was 102%, which turned out to be 86.49% in the year 1990. It shows that previously, more of the company's assets were financed with debt capital, which reduced to 86.49% under the new management. This shows decreasing reliance on debt finance to fund the assets of the company. Asset Turnover Ratio: AirTex Aviation's assets turnover ratio for the year ended 1989 was 2.56%, which turned out to be 34.20% in the year 1990. This shows a significant increase in the ratio mainly due to increase in sales and a decrease in the total assets over the year. Therefore, it means that the company's management is utilizing the assets efficiently to generate more sales. The company's cash and marketable securities balance has increased by 11 times during the year, showing that the new management has been successful in making collections to the receivables and converting into cash. The balance in Accounts Receivable has almost doubled over the year showing a significant increase in sales. The company's total current liabilities have declined 17.7% at the end of the year, showing that the company has been paying off its current liabilities subsequently. The long-term debt of the company has decreased sharply over the year 1990, which might also show that the creditors and suppliers are not willing to provide loans due to change in management or the company itself wants to reduce its long-term liability. In the beginning of the year 1990, the company was incurring net losses on parts and services and avionics, which was significantly worked down by the company and finally at the end of August 1990, the profitability replaced losses significantly. The company's Income Summary Statements reflect that the company's sales of aircraft have gradually declined to a high level. In January, the total aircraft sales were $439.5, which decreased to $111.5 in the month of August. CONCLUSION The new management as revealed by the above evaluation and ratio analysis, has been running and managing the business efficiently towards increased generation of productivity and profitability in the business of AirTex Aviation. The company although has been acquired at a very critical stage when it was going towards bankruptcy, yet the new management has proved that with enough determination, will and integrity in any business makes it successful. Therefore, once the true sense of management is explored in the company and the management becomes able to train and educate its employees and workers in the pursuit of development of a better team to face the challenges that may come in the way of business. RECOMMENDATIONS After analyzing the business and operations of AirTex Aviation and illuminating all weaknesses underlying the business condition and activities, the following recommendations would be made: The management of AirTex Aviation should consider the possible causes for the decline in the sales of the company's aircraft and once they are identified, the steps should be taken to rectify them. The company currently hires most of the old-age workers as managers who are less likely to work with passion and accept and welcome the changes to the business environment especially technological environment. The company needs to focus on a complete accounting system starting from the voucher system to the profit and loss account and balance sheet. This will ensure better recording and accounting of all the revenues, sales, expenses and purchases in the organization. A complete accounting system allows the company to rely on the information provided by the accounts department at the time of need. The trend of putting the responsibilities, as collection of accounts receivable by the managers should be strengthened and these activities of managers should be crosschecked so as to avoid any misunderstanding and misinterpretation of information. The company should also focus on the working capital management issue. The company should keep sufficient current assets excluding stock and keep matching it with the amount of liabilities owed by the company so as to ensure the short-term payments on time. The company should also evaluate and research the industrial environment and competitive advantage of itself as well as of other companies so as to become competitive in the industry and to boost sales. The management should also continue its endeavor to train and educate the employees working in the company, because, only skilled and efficient workforce can lead the business on the path of success. Read More