Chicken Run Analysis

1. INTRODUCTION 1. 1 Case Background This case is about the Small medium enterprises, Excel Poultry & Meat Sdn Bhd (EPM) that face management, production, financial and internal control problems. Besides that, In this case also show conflict of interest between General Manager of EPM, En Selamat with the main debtors. The lack of internal control causes bad financial performance since 2008. Other than that, this case also shows the external factors for the production process that cause “chicken run” crisis.
Our responsibility is to give the solutions to EPM for face their problems. SMEs is the most important for Malaysian economic growth, so for that purpose we need make sure our SMEs had the excellent management in their financial and internal control. 2. Company Background Excel Poultry & Meat Sdn Bhd (EPM) was establish in 1998 as Small and medium sized enterprise (SME). Their Core business is chicken farming and supplying to various outlets in Malaysia such as hypermarkets and restaurants. Currently, they have more than 200 employees.
EPM aso knowed as Top 5 chicken supplier in mid-tier producers in the country. 3. Definition of SMEs. Malaysia adopted a common definition of SMEs to facilitate identification of SMEs in the various sectors and subsectors. This has facilitated the Government to formulate effective development policies, support programmers’ as well as provision of technical and financial assistance. An enterprise is considered an SME in each of the respective sectors based on the Annual Sales Turnover or Number of Full- Time Employees.

SMEs were divided into two categories. First category is manufacturing, manufacturing-related services, and agro-based industries. Small and medium enterprises in this industries have full-time employees not exceeding 150 OR with annual sales turnover not exceeding RM 25 million. Second category is services, primary agriculture, and information & communication technology (ICT) sectors. Small and medium enterprise in this sectors have full-time employees not exceeding 50 OR with annual sales turnover not exceeding RM 5 million (SMEs. Corp, 2012).
Table 1: Definition of SMEs |Type/ Size |Micro-enterprises |Small enterprise |Medium enterprise | |Manufacturing, |Sale turnover of less than RM |Sales turnover between RM 250,000 and|Sales turnover between RM 10 million | |Manufacturing- |250,000 OR full time employees |less than RM 10 Million OR full time |and RM 25 million OR full time | |Related Services and |less than 5 |employees between 5 and 50 |employees between 51 and 150. |Agro-based industries | | | | |Services, Primary |Sales turnover of less than RM |Sales turnover between RM 200,000 and|Sales turnover between RM 1 million and| |Agriculture and |200,000 OR full time employees |less than RM 1 million OR full time |RM 5 million OR full time employees | |Information & Communication |less than 5 |employees between 5 and 19. |between 20 and 25. |Technology (ICT) | | | | (Sources: SME Corp. Malaysia) Table 1 above shows the summary of defining Malaysian SMEs. 2. 0 ISSUES AND PROBLEMS There are many problems that can be detected in Excel Poultry & Meat Sdn Bhd (EPM). The main issue is a lack of internal control. There is no segregation of duties among EPM staff. This situation can be seen when Munir, the former staff at the finance department, collects the payment from client but he does not disclosed the payment receipt to the account department.
Next, the issue is conflict of interest. The situation can be seen on the company’s General Manager, Encik Selamat has close relationship with one of the executive directors of Cold Gold Sdn. Bhd. , Encik Azman. This relationship has enabled Cold Gold to extend its credit limit with authorization from Encik Selamat and not the Credit Controller (Ms. Choy). Encik Selamat also has personal interest in the deal with Cold Gold Sdn. Bhd. The deal was if Encik Selamat extended the credit limit of Cold Gold Sdn. Bhd. , he will personally benefit from the deal.
Encik Selamat did not disclose this matter to the Board. Besides that, the issue is the increasing of production cost. Since 2008, the company has been facing the problem of increased chicken feed cost which has risen from RM54. 50 to RM88; the increase is more than 50%. The increase in feeding cost has ultimately increased the company’s production cost to about 56. 5% the increase of feeding cost has affected the whole industry. Thus, Federation of Livestock Farmers’ Associations of Malaysia (FLFAM) has called for higher chicken prices in order to protect producer’s earnings in the face of feed cost hike.
However, members of the FLFAM had seen a drop in demand of the chicken. On top of that, the event of the feed cost hike discovered that the company has systematically low operating cash. In the situation, the company resorted to borrow short-term loans from the bank in order to meet operating obligations. This in turn increased its financial obligations in terms of interest payments plus principal. Then, there is also issue on the shortage of chicken supply in market. Since the feed cost hike, the company has cut down the production of chicken in market.
While at the same time, the demand of chicken from hypermarket, flea market and individual become high. The ceiling price that control by government also contributed to this problem. Another problem discovered is that in EPM’s books, a retailer, Mr. Siva’s account had outstanding balance. This was contrast with the books of Mr. Siva, where he claimed to have paid all outstanding balance and the cash payments had been made to Encik Munir. This can show that the company has lack of management on account receivables.
Last but not least, Encik Selamat has influence in the company make the small and medium enterprise look alike a sole proprietor to him. Every decision making by Encik Selamat is totally agree by the other staff. The leadership style of Encik Selamat also need to consideration in the company operation. FINANCIAL RATIO ANALYSIS | |2006 |2007 |2008 | |Current ratio |0. 85 |0. 59 |0. 4 | |Net profit margin |4. 02% |(0. 35)% |(1. 05)% | |Return on asset |14% |(1. 07)% |(2. 76)% | GRAPH [pic] [pic] Based on the graph above, the company faced a decreased in net profit within three years of its operation in year 2006 to 2008. The decrease of net profit is mainly because of the feeding cost hike and also undiscovered irregularities in the accounts.
The company also faced a decreased in return on asset within three years of its operation in year 2006 to 2008. The decreased of asset is probably because of the bottom line of the company is also decreased due to the feeding cost hike. 3. 0 SOLUTIONS AND RECOMMENDATIONS Internal control system Internal control is main problem for this company. It plays an important role in preventing and detecting fraud of the organizations. For example this company has no segregation of duties that important for the company to observe and see the flow of the company functions such as En.
Munir (finance department) collects the payment from client and does not disclosure the receipt to accounting department. When these functions not be divided, a detailed supervisory review of related activities is required as a compensating control activity. Segregation of duties is a deterrent to fraud because it requires collusion with another person to perpetrate a fraudulent. So the company must have segregation of duties to reduce the critical problem of internal control. Such as, the approval function, the accounting or conciliating function, and the asset custody function should be separated among employees.
Excel Poultry& Meat Sdn Bhd (EPM) is one of the SME’s company and need to follow all the rules and regulation internal control for SME’s. Encik Selamat as a general manager need to emphasize the nature and importance of the internal control, organize and lead all staff to set up a whole, appropriate internal control system to make middle managers and ordinary employees see the importance of the internal control to enterprise develop and job descriptions respectively. At the same time, managers should teach others a good example for all staff and establish a scientific evaluation system to supervise the implementation of the internal control.
Besides that, SME’s internal control also need the company to have internal environment that refers to the basis of the internal control and when internal environment improve it can reduce the establishment of the inherent limitations of internal controls effectively, and improve the efficiency of internal control. According to the relevant laws and regulations, SMEs should establish a reasonable internal structure and give full play to the strength of the collective power to avoid excessive concentration of rights. Furthermore, the company also need to monitoring and reviewing the employees.
It is the one of the internal control system that reviewed by management. By performing a periodic assessment, management assures that internal control activities have not become obsolete or lost due to turnover or other factors. They should also be enhanced to remain sufficient for the current state of risks. The availability of information and a clear and evident plan for communicating responsibilities and expectations is paramount to a good internal control system. At last, the company must control the environment to be a good internal control.
A sound control environment is created by management through communication, attitude and example. This includes a focus on integrity, a commitment to investigating discrepancies, diligence in designing systems and assigning responsibilities. When the company follows all the framework of good internal control, the company can become better and can be successful in the future later. Management information system This company also lack of focus on the important considerations for proper running of business operations. It is because the general manager cannot proper running the business operations.
The company must have a mission and vision to be successful in the future. If company does not use the mission and vision, the company cannot run properly and become chaotic. So the solution is to use management information system that designed to help the organization accomplish specific goals or objective. Management information system (MIS) provides information to the organizations to manage themselves efficiently and effectively. Besides that, management information system are typically computer systems used for managing three components that are technology, people individuals, groups or organizations) and data (information for decision making). Furthermore, the management information system uses to analyze the operational activities in the company to become more effective and efficient. Lastly, when the Excel Poultry & Meat Sdn. Bhd uses the management information system, it can be better and more efficient to the company to manage and running their business properly and can achieve goal, mission and the vision successfully. Negotiate with suppliers
To solve the higher costs of chicken feeds in Excel Poultry & Meat Sdn Bhd, the company may try to negotiate with their suppliers in considering the price reductions or offering some cheaper alternatives. If the suppliers are unable to do so, the company has to explore the other suppliers who are able to provide a reasonable price. By continuously watching the sources from a few of suppliers, it may be effective way to keep the costs lower due to competition. Moreover, some government agencies and private sectors could play an important role in assisting SMEs to solve the problems which they are facing.
For example, the company may obtain some advisory services and consultancy from the Malaysian Agricultural Research and Development Institute (MARDI) in order to get some ideas on the chicken feeds problem. They may ask for the new alternatives to replace the old chicken feeds which are higher in costs. The SMEs like Excel Poultry & Meat Sdn Bhd also may apply the financial tools to help them in cost management such as breakeven point, budgeting and cost analysis. For example, if the company uses budgeting, it will able to prepare a forecast of revenues and expenses, so that it may perform better in the financial aspect.
It also enables to find out the cost constraints on its operation. The company must gain the raw materials at the possible lowest price and use them as effectively as possible while maintaining the quality of output. Marketing mix Besides that, Excel Poultry & Meat Sdn Bhd also faces the pricing problem. When a company is in a highly competitive industry, it must be able to provide high quality products at low cost. If they do not, they may be perished. In order to compete with other companies in the similar industry, the marketing mix is always crucial which it encompasses price, product, promotion and place.
The SMEs like Excel Poultry & Meat Sdn Bhd needs to improve their marketing strategy on promoting their products in terms of branding, packaging and promotion to increase their revenue. With the greater turnover, the company may get the fund to improve the growth of their business. Furthermore, it may consult the SIRIM Berhad and it may help them in standardization and certification of their products according to their point of views. With the government support, it may satisfy the needs of consumers on the quality of their products.
If the products have been recognized by the government, the consumers will be more reliable on them and the price may be marked up to overcome the problem of increase in cost of chicken feeds. The company also enables to explore the other potential markets in the foreign countries. As the demand in local country may not be satisfied, the company may choose other foreign markets which they have higher demands on the chicken supplies. Code of ethics The solution for the conflict of interest between Encik Selamat and Encik Azman is establishes the five fundamental principles according to the code of ethics.
Encik Selamat should follow the code of ethics of the five fundamental principles such as integrity, objectivity, competence and due care, confidentiality and professional behavior. Some of the fundamental principles can be applied by Encik Selamat as the guidance to comply with the ethical behavior. For example, Encik Selamat should apply the integrity principle in which Encik Selamat should be honest in all professional and business relationship between his and the customers. In this case, Encik Selamat should be honest in the business although Encik Azman is his best friend.
Besides that, Encik Selamat should comply with the principle of objectivity in which Encik Selamat should not allow conflict of interest to override professional or business judgments. In terms of professional competence and due care, Encik Selamat should maintain professionalism which cannot allow customers supplied without concerning the outstanding balances. Last but not least, Encik Selamat should apply the professional behavior which should comply with the relevant laws and regulations. Effective cash collections process
The solution for the poor collection of debtors’ outstanding leads to cash flow problems is designed an effective cash collection process which shown as below. [pic] Excel Poultry & Meat Sdn. Bhd. (EPM) should design the effective cash collection process to avoid the cash collection problems. The effective cash collection process is when the customers paid the payments to the company, the payment should passed to the accounting departments to verify the payments and the accounting department will send the cash receipts back to the customers.
Besides that, the accounting departments in the company will put the deposits in the Bank after received the payments from the customers. Then, the Bank will send the statement of deposit back to the accounting department of the company. In this case, the weakness in the cash collection problems leads to the cash flow problems. For example, the net profit of the company is decreased from year 2006 to 2008. This means the company is facing the cash flow problems which can show by the financial performance of the company which is getting worst compare with previous year.
SWOT Matrix |Strengths |Weakness | |One of the top chicken suppliers |Poor in internal control | |Has qualified accountant (En. Kassim) |Financial problems | |Good in development of marketing plan |Lack of leadership | | Lack of control in making decision | | |Imbalance of cash flow | |Opportunities |Threats | |Government support |Potential chicken disease | |Strong chicken consumption in domestic market |Government policies (ceiling price) | | |Increase in cost of raw materials | 4. 0 CONCLUSION As a conclusion, those have several main problems that cause the financial problem in EPM. Those problems are arise because lack of control in management and production within the company.
In the business, those who have relationships between several factors will affect the financial performances. Economics, production and management are the factors that cause the financial crisis in EPM. The relationships are show bellow: 1. 2. EPM need to make sure their internal control is in the good position to make sure their cash flow can be controlled to run the business. The integrated systematic management on financial, internal control and production will give the EPM a better financial position in the future. ———————– Increase of Production cost Decrease of demand Decrease of sales Decrease of company profit Lack of internal control Increase the possibility fraud Bad financial performances

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