Assume that New Venture Fitness Drinks wants to hire a new CEO and is interviewing the CEOs of three small restaurant chains for this position. To get a sense of how savvy each candidate is when it comes to managing a firm’s finances, New Venture Fitness Drinks’ board of directors asked each person to submit the 2024 income statement for their current firm. The statements the candidates provided to the board in response to its request appear below. By glancing at these statements, it seems that the CEO of New Venture Seafood is the shrewdest financial manager of the three. The company’s net income is more than double that of the other two firms. In addition, New Venture Seafood’s cost of sales was 35.9 percent of net sales in 2024, compared to 46.1 percent for New Venture Soup and Salad and 51 percent for New Venture Beef. Similarly, New Venture Seafood’s expenses were 30.9 percent of sales, compared to 35.0 percent for New Venture Soup and Salad and 40 percent for New Venture Beef. Fortunately, one of the board members asked a series of questions during each of the three interviews and uncovered some revealing information. As it turns out, New Venture Seafood was in the hottest segment of the restaurant industry in 2024. Seafood restaurants of comparable size produced about 1.5 times as much net income as New Venture Seafood did. So, if candidate 3 completed their work at a high-performance level, the company’s net income would have been in the neighborhood of \($240,000\) instead of \($162,000.\) New Venture Soup and Salad was in a slow-growth area and at midyear feared that it might not meet its financial targets. Because of this, the CEO pulled several of his best people off projects to reassign them to marketing to develop new menu items. In other words, the company borrowed from its future to make its numbers work today. As for New Venture Beef, the CEO was leading a firm located in a market that was losing appeal. Several outlets published reports early in the year warning consumers about the risks of eating red meat. These reports gained traction on a national level. To compensate, the CEO implemented a productivity improvement program quickly and partnered with a local beef promotion board to counter the bad press with more objective research results about beef’s nutritional value. The company also chose to participate in several volunteer efforts in its local community to raise the visibility of its restaurants in a positive manner. Had the CEO of New Venture Beef failed to move quickly to take these actions, the firm’s 2024 performance would have been much worse. Ultimately, New Venture Fitness Drinks decided that candidate 2, the CEO of New Venture Beef, was the best candidate for its CEO position. This example illustrates the need to look at multiple years of an income statement rather than a single year to assess the quality of a firm’s financial performance. It also illustrates the need to look beyond the numbers and understand the circumstances that surround a firm’s financial results.....

Discussion Questions:

1. Show the income statements for the three candidates to two or three friends who are business majors.
Using the quality of the income statements as the decision criterion, ask your friends to select the most successful CEO from among the three candidates.
In addition, ask your friends to explain their choices to you. Did your friends choose the same candidate?
If not, what do you think caused the differences in their choices?
2. Based on material presented in this chapter, earlier chapters in this text, and your general business knowledge, where would you go to find information about growth in different segments of the restaurant industry? Where would you go to find information about the profitability of the restaurant industry in general?
3. What would have been the appropriate financial information to request from the three candidates for the job?
4. What are the three most important insights you gained from studying this feature? Which of these insights surprised you, and why?