Wiegandt GmbH Cologne In early April 1995, Karl Neuhaus, an assistant credit analyst for the German furniture manufacturer Wiegandt, looked over the company's accounts receivable ledger to review customers with overdue account receivable balances. Neuhaus was particularly concerned about changes in the accounts of Haefren Baum GmbH and Backhaus KG, two well-established home furnishings retailers that were typical of many of Wiegandt's customers. Cologne-based Wiegandt manufactured high-quality home furniture. During the last several years, the company had aggressively advertised its lines nationally to build a brand image and had developed an effective distribution network among dealer cooperatives, independent home furnishings retailers, and regional furniture chains. In order to support its growing retail network, Wiegandt provided its retail distributor's credit on 2% 10, net 30 terms, consistent with competitors in the industry. Upper limits on outstanding balances for each customer were established according to the historical furniture orders of the particular retailer. Haefner Baum and Backhaus had limits of DM 40,000 and DM 60,000, respectively. During the post-re-unification boom, Wiegandt provided fairly liberal credit to its retailers even though the company had to pay high-interest rates on the money it borrowed. Wiegandt's credit department followed the financial performance of its distributors carefully in order to ensure its own financial position. This arrangement worked well as furniture sales grew rapidly and retailers keep their accounts current. Both Haefren Baum and Backhaus had been paying their invoices satisfactorily, although only obtaining discounts on occasion. Haefner Baum was established as a partnership in 1965 and was incorporated in 1970. The company had been a Wiegandt customer since 1968. In June 1994, two of the four original partners sold their shares in the company to the two remaining owners. The company retailed home furnishings from one location in downtown Cologne and three recently constructed outlet stores in nearby Rhineland suburban areas. Haefner Baum's sales were fairly steady throughout the year. Typically, 75% of sales were for cash and 25% by installment. Installment terms called for 25% down and the balance in equal monthly payments over the following six-month period. Backhaus was a relatively new Wiegandt customer. The company had carried Wiegandt furniture since 1991, a year after it began operations. Backhaus offered extensive lines of high-quality home furnishings from a medium-sized store in a recently built central Frankfurt building. As boom turned to bust in 1993, consumer confidence slipped. See Exhibit 1 for German economic statistics. As consumer demand began to fall, sales of furniture slowed and many retailers felt pressure to decrease prices in order to maintain sales volume. The "price squeeze" hit small retailers, such as Wiegandt's distributors, especially hard as large retailers cut their prices in order to maintain their sales volume. Wiegandt faced increasing pressure to maintain its own sales volume by extending more flexible credit to its distributors. However, interest rates remained high, increasing the risk of this strategy. In the early months of 1995, the "softness" in the German furniture market continued even though the overall economy had begun its recovery. Competition intensified as other European furniture retailers entered the German market and several large 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 a wide selection. The number of outlets had grown five-fold within the last two years, even though growth in sales volume was stagnant. Neuhaus knew that Wiegandt was in the position of having to placate sales managers who wanted to maintain sales volume, but that weakness in retail demand for furniture could dangerously overextend their retail customers' credit positions. See Exhibit 2 for account receivable ledgers for Haefren Baum and Backhaus. After examining the financial statements of the companies (Exhibits 3 through 6), he decided he should bring the Haefren Baum and Backhaus accounts to the attention of Wiegandt's credit manager, Richard Schreier.

Wiegandt GmgH Cologne

1. Although the case is titled Weigandt, it is really about two companies. Your analysis should be about Haefren Baum. Confine your work to Haefren Baum only-do not do Backhaus or Weigandt GmbH Cologne itself.

1. Analyze intensively the balance sheet and income statements of Haefren Baum using cash flow statements, common-size income statements (use net sales for all years), and ratio analysis. Also, use net sales when deals are called for in a ratio. Land should be included as part of NFA in any ratio calculation. Identify the strengths and weaknesses of the company

1. There are a few unusual accounts. Due from stockholders is a loan by the business to stockholders. The earned surplus is the same thing as retained earnings. Exhibit 2 is aging for Wiegandt's accounts receivable to Haefren Baum and Backhaus.

1. How strong is the company's balance sheet? How about its income statement? Why?

1. What action should be taken by the credit department of Wiegandt GmbH Cologne?

 

Answer rating: 100% (QA)

Haefren Baum Analysis Financial Statements Balance Sheet Strengths Current ratio is 1 in all years indicating shortterm solvency Inventory turnover is ... View the full answer