California Choppers Critical Issues

California Choppers

Critical Issues

1. Poor Company Liquidity

2. Poor Asset Management

3. Challenging Longterm Debt Paying Ability

4. Low Profitability

5. Disfunctional Management Structure

Background

California Choppers (the company) is a private corporation owned 100% by Arlen Doakes with an advisory board chaired by Doakes and a CEO, Jane Heathcliff, hired in 2001 by Doakes. The company has been attempting expansion both nationally and internationally (Canada and Europe) while contending with Net Profit Margins of only 2.13% in 2005 compared with an industry average of 8.5% and a 2005 Return on Assets of 4.26% vs. industry average of 14%.

Consultant's Role

Our company was brought in to determine opportunities to get the company "back on track" and were asked specifically to address; 1. Liquidity, 2. Asset Management, 3. Longterm Debt Paying Ability and 4. Profitability. Additionally we reviewed 5. Management Structure.

Key Issue

After reviewing the company financial information and history, the primary issue is the management structure of the organization. This area must be immediately addressed in order to allow the company to operate successfully. The current management includes two CEOs. Jane Heathcliff has the title however the company owner, Arlen Doakes acts as the functional CEO. Specifically Mr. Doakes control over the advisory board which then provides guidance to the CEO completely undermines the effectiveness of the board and prevents the CEO from focusing on financial rejuvenation of the company.

Supporting Facts

Regarding Mr. Doakes management actions, his insistence on significant wage and benefit increases for manufacturing staff in 2003, although laudable, was a significant cause of a similarly significant reduction of Operating Profit margin from 11% in 2003 to 7.54% in 2004 and 4.65% in 2005. His insistence to be included as supervisor of the product development facility prevents new ideas from flowing directly to Jane Heathcliff from the product development manager Amber Doakes. Additionally, Mr. Doakes insistence that the advisory board direct the CEO to proceed with expansion into Canada and Europe had a negative effect on the company's resources to pay its debt as shown by a drop in Current Ratio in 2003 of 1.64 to 1.33 in 2004 and 1.04 in 2005. With an industry average of 1.25 this will cause the company to have difficulty continuing to receive financing. Although Mr. Doakes decision to not outsource parts supplies to other countries has also