Haefren Baum Case
Last four digits of student ID #: 8964 Name of business: Haefren Baum Nature of business: Haefren Baum is an independent home furnishings retailer that sells high-end furniture. The company began as a partnership in 1965. Haefren Baum became a retailer for Wiegandt in 1968. Two years later, it officially became a corporate entity. Haefren Baum is located in Cologne, one of the most populated and prosperous cities in Germany. The company retails home furnishing from one location in downtown Cologne, and from three recently constructed outlet stores in the suburbs of Rhineland. Marketing Analysis:
Haefren Baum’s business to business, distribution network with Wiegandt includes a 2% 10, net 30-credit term, which is consistent with competitors in the industry. Haefren Baum’s business to customer relation started to dwindle when consumer confidence and demand slipped due to negative percentage growth of real GDP in 1993. Consumer demand dropped, leading to slower furniture sales. Haefren Baum felt pressure to decrease prices in order to maintain sales volume. The on-set of this event forced Wiegandt to extend a more flexible credit term to Haefren Baum while attempting to maintain its own volume.
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However, the presence of high interest rates still threatens Wiegandt current business strategy. During the early months of 1995, the German furniture market continued to display weaknesses even though the overall economy began to recover. Competition intensified as other European furniture retailers entered the German market and several larger domestic retailers announced heavy losses. The retail industry also began introducing outlet stores in suburban areas, hoping to entice consumers back with low prices and wide selections.
Although the number of outlets has grown to five times its size within a 2-year span, growth in sale volume remained stagnant. Wiegandt had to make a decision on whether to look out for the best interest of Haefren Baum, or for itself. The credit term that Haefren Baum received allowed them to maintain their desired level of personal sales volume while the weak market demand for furniture threatened to over-extend Wiegandt retail credit position. Operations Analysis: Haefren Baum has a steady sales record that consists of 75% cash, and 25% installment terms.
The annual installment term requires a 25% down payment, along with equal monthly payments over the remaining 6 months period. Haefren Baum buys its furniture products from its whole-seller Wiegandt under favorable credit terms, and re-sells them for a profit. Haefren Baum solvency rate has been steady throughout the economy downtrend during the 1993-1995 times span, staying above the 2% threshold, year to year. The account payable ratio that ranges from 48. 87- 65. 49 between 1993 and 1995, displays that Haefren Baum is taking increasingly longer to make its 2% 10, net 30 term payments to Wiegandt.
Haefren Baum has a good short-term operational outlook, but its long-term projection is negative because of its consistently negative sales growth output from 1993-1995. Negative cash flow and an increase in the company’s debt to equity ratio are two factors that will prevent Haefren Baum from expanding even further. Financial Analysis: The income statement clearly demonstrates that Haefren Baum has a cash flow problem as its period ending cash balances were -32 in 1994 and -24 in 1995.
The percentage of Germany’s real gross domestic product growth was positive until the economic boom turned into a bust in 1993. The company operates within a cash-base tax accounting method because 75% of Haefren Baum sales record consisted of cash. The company also has a satisfactory account payable history, occasionally taking advantage of the 2% discount extended to them by their manufacturer. The company’s debt balance eventually reached the upper limits of its total- outstanding balance of 40,000 deutsche mark.
A year after the economic downturn, in December of ‘94, Haefren Baum’s account payable amount grew to 27,817deutsche mark, its highest one year debt increase to date since the company come into existence. Since then, Haefren Baum has continued to struggle with sales as its debt figures have continued to rise. The results of Haefren Baum’s common-size balance sheet from 1993-1995 states that the company has a short-term outlook on its assets because it ranges from 65% to 85%; compared to its 67% total long-term liability holdings.
Haefren Baum’s account receivable payments from its customers have also slowed down due to the slower economy. The slow down also forced Haefren Baum to extend more favorable credit terms to its customers because they wanted to keep their sale volume up as well. This decision added to the slowing down of their income and to the extension of their account receivable days. Haefren Baum’s cash flow from operating activities became negative in 1994 due to the Germany’s economic downturn that occurred the year prior. However, it then made a 100% recover from its previous showing in 1995, while remaining negative.
Time interest earned took a noticeable drop of 4. 3 in 1993 to 0. 96 in 1994. This indicated that the company was unable to meet the requirement of its fixed interest from its operating earnings. The DuPont analysis stated that net profit margin was the primary contributor of the firm’s return. From 1993-1995, the net profit margin fell from 101. 35% to -5. 73%, indicating that the company’s financial problems were worsening. Summary: As the economy improves, so will Haefren Baum’s sales figures. Nevertheless, the timing of a legitimate recovery is unpredictable.
In addition, the fact that 75% of its business came from cash, its financial recovery may take even longer than is anticipated because consumers tend to save their cash during tough economic times. Therefore, Haefren Baum will eventually run out of capital from the lack of sales, while simultaneously prolonging days on their account payable payments, bringing about the likelihood of bankruptcy in the distant future if this cycle were to spiral out of control. All of these factors contribute to Haefren Baum’s overdue accounts payable balance status.