California Choppers Harvard Case Solution & Analysis

Manager in the audit firm has been contracted to perform the second financial performance analysis and provide recommendations to improve California Choppers. It must analyze several financial indicators, including its liquidity, asset management, long-term debt solvency and profitability. Poor performance and interpersonal problems between the owner and CEO of doing their job very difficult. "Hide
by Dan Thompson Source: Richard Ivey School of Business Foundation 9 pages. Publication Date: September 23, 2009. Prod. #: 906N22-PDF-ENG



California Choppers is in the business of manufacturing of large, high-end motorcycles targeting the high income society segments. Customer base of California Choppers primarily includes those old age motorcycle enthusiasts with enthusiasm of youth. Company’s products are mainly advertised because of a motor show on television which is very popular among the younger population.

Licensing of logo and T-shirts and posters is another source of revenue for the company but size from this segment is meager. Until 2000 major markets where company’s products are being sold includes California, Arizona, Nevada, New Mexico, Oregon and Washington. In 2001 company expanded its operations to seek into those areas where company has not been able to mark its presence. Currently company is generating revenue of $856 Million with Net Income of $18.22 Million.

Critical Issues

Company is facing lot of critical issues which are both tactical and strategic. Financial analysis of the company reveals that operating profit of the company is showing continuous downward trend, which currently stands at $39.80 Million. If this downward trend continues company might face a situation where it would find itself in losses which might affect the going concern of the company as well.

Cost of manufacturing of the company’s products has shown significant increase which currently stands at $ 629.43 Million. This increase in manufacturing costs shows that at both tactical and operational level company needs strong and smart decision making. Particularly when other automobile manufacturers have become quite cost conscious and have placed strict cost control mechanisms. Chinese and Japanese products which are available in the market at much cheaper rates are already posing serious threat to US automobile manufacturers and many companies are under tremendous financial pressure.

Cheap products which are entering into markets at very competitive rates are posing great threat to the business. Company certainly needs to place certain cost control mechanisms which may not suit the idealism of the owner but would bring the cost down of the product significantly.

Selling and Administrative expenses have jumped to $160 Million which is severely affecting the profitability of the company and has made critical impact on the future of the company. If selling and administrative expenses are not being controlled company might see itself in a position where it could not invest in future of the business. And the sector in which company is operating needs continuous investments particularly in research and development.

Long term Debts of the company is another major critical factor which needs attention and it seems that company is financing its major operations through debt financing.  Company rather generating enough undistributed profit to finance its future investments need in on a borrowing spree which could lead the company into a financial strangle.

To avoid financial stifle in the future company must establish strict cost control mechanism which is very critical for the success of any business.

Situational Analysis

Situational analysis of the company suggests that company is perfectly poised with respect to its liquidity. Current ratio is well within the industry norms which have remained between 1.29 and 1.64. Cash ratio of the company suggests that company is not maintaining healthy ratio in 2005 accept for one year in 2003. This shows that company must improve its cash ratio to manage its current liabilities.

Asset Management ratios of the company suggests that Inventory Turnover in days is not satisfactory and needs improvement. Accounts receivable and Accounts payable turnover is not satisfactory and company must work to improve these ratios. Cash conversion cycle is satisfactory and has significantly improved in 2005 but in the past it has not remained satisfactory. Fixed Asset and total asset turnover is bit unsatisfactory against industry standards but may improve if company focus itself on increasing the customer base.

Debt ratio in 2005 improved substantially but recent history does not depict the satisfactory report of the company against managing its debts. Interest expense potential of the company is not satisfactory and company must increase its earnings to meet the industry standards.

Profitability of the company is the most worrying factor and company must work diligently on profitability of the company. If the company does not work on profitability of the company may land into difficult financial situation. Gross Profit margin, Operating profit margin, Net profit margin, return on asset and return on equity is substantially below the industry standards which shows that certain decisions of the company are hurting the profitability.

Main reason which is the most critical factor that has affected the profitability of the company is the decision making process. Most critical decisions which could improve the profitability of the company are being taken by the Owners of the company rather than the Chief Executive Officer. The most interest part is the decisions which are being taken by the company are more based on sentimental and emotional feelings of the owner rather than the facts on actual grounds. Company must take pragmatic decisions on the suggestions of the management and must avoid emotional and sentimental feelings in running of the business. To increase profitability, company must use all those tactics which are currently in practice and in vogue...

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