The Improvement Project of Science Construction PLC Case Study Review

Introduction: the Science Construction PLC

The case study that is written by Erer (2013) observes Science Construction PLC which struggled to meet its short-term obligations. The issue puts the company on the brink of bankruptcy. The company has a long experience in the industry but low receivables turnover and an extended financial crisis have depleted its current assets. Fortunately, the company the Turkish regulation allowed the company to submit an application to the commercial court with a plan for reorganizing its debts and enhancing its financial position. The bankruptcy will be delayed for a year if the court expert determines that the project is important and realizable.

This article will examine the company’s effort to improve its financial status and avoid bankruptcy. It will pinpoint the primary issue and determine its root causes. A recommendation on the course of action will be made after the proposed solution and other potential alternatives have been evaluated. The paper will also discuss the significance and applicability of the case study to the field of business studies as a whole, as well as its limitations.

Problem Identification and the Causes of the Problem

The main problem in the case study is the company’s insolvency, which means that Science Construction PLC did not have enough liquid assets to pay its short-term obligations. The problem can be observed by looking at the company’s poor liquidity ratio. The most common liquidity ratio is the current ratio, which measures the proportion of current assets compared to current liabilities (Brigham & Houston, 2017). Between 2008 and 2010, the current ratios fell from 0.95 to 0.82, while the industry average is at 1.20 during the same period. The company’s working capital has been negative for these periods as well. To fill this shortfall, more short-term debt has been taken on and it increases the company’s leverage to 5.65. As a result of the high-risk premium and excessive leverage, bank credit interest rates are higher. It creates an unfavorable circle of debt that is harmful to the company.

The main causes of the problem can be categorized as two main aspects: internal and external. From the external aspect, the company was severely hit by the extended financial crisis that started in 2008. Local demand substantially decreased during the period, and it became increasingly difficult to get financial resources. Additionally, the cost of credit and credit guarantees increased. This made it difficult for the business to retain its profitability and cash flow. Due to insufficient funding, public investments, as well as the metropolitan authorities’ budget, were also reduced.

The crisis also results in an increase in production due to the asphalt price increase. The rise could not be matched by the increase in its contract prices. Thus, the overall margin is significantly diminished. It results in the company’s low profitability which significantly complicates the issue.

From the internal aspect, the company has been troubled by its low receivable turnover ratio, which measures how quickly a firm can collect its sales that were made on credit (Collins, 2012). The firm had a difficult time collecting its receivables from its customers, which mainly are city authorities. After billing, the receivables might only be collected seven to nine months later. Due to the delay, it became necessary to acquire additional funding to pay off short-term commitments. By either selling the receivables to factoring companies, discounting the progress bills, or accepting bank credits, more financial resources were made available. The financing cost of selling receivables was 15%, the cost of discounting progress bills was 13%, and the cost of bank credits ranged from 11% to 16%. Prices increase when payment terms are extended while purchasing supplies and machinery in an effort to postpone financial withdrawals. As a result, profitability declines, and long-term cash flow is harmed.

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Evaluating the Proposed Solution and Other Possible Alternatives

The most urgent issue was to recover the company’s financial ability to meet its short-term liabilities. The company’s systematic approach to increasing capital, actively collecting receivables, cutting costs, and aggressively improving its revenue is necessary to get it back on track. Increasing capital through equity is essential to improve the company’s financial position. It will increase the cash necessary to relieve some of the short-term burdens and enhance the company’s ability to collect receivables. Cutting costs is also necessary to improve the company’s efficiency and profitability.

Aside from the proposed solution in the case study, there are several other possible alternatives that can be taken by the Science Construction PLC as follows.

1. The company has a lot of intangible strengths that can be capitalized. It has a long experience as well as trust and a good relationship with the city authorities. It has relevant business certificates and licenses that are difficult to obtain. This strength can be capitalized to invite new investors to inject more equity into the company. The company should provide a clear business plan and strategic planning that can attract new investors.
2. Improve the company’s current ratio to be higher than the industry standard. Since the average collection of receivables is seven to nine months, it is crucial to have sufficient cash reserves and liquid assets all the time. The company should maintain its current ratio higher than at least 1.50 to ensure that enough cash can cover the low receivable turnover.
3. Look for new contract opportunities outside the current area of service. The company can expand its operation to Turkish cities that have not been served or even cities outside Turkey. It can improve the company’s profitability and provide the necessary diversification of its customer pool.
4. Create a discount policy for customers to pay their bills earlier. It will improve the company’s receivable turnover ratio. The company should ensure that the discount is attractive enough but it does not considerably decrease the overall profitability.
5. Employ a finance expert that can help the company navigate through the difficult situation and ultimately get out of it. The expert can also help in budget control for each department in the company.

Recommendation on the Plan of Action

The first action should be focused on improving the company’s cash reserves. The company can inject cash from new equity and dedicate it as a cash reserve to meet its short-term debt. The company should have a target in the current ratio to meet the industry standard at the very least. In the meanwhile, the company should improve its ability to collect its receivables faster. The company can set a discount policy for customers to pay their bills earlier. The company should also improve operational efficiency by cutting non-essential costs. All of the effort in the first year should be to avoid bankruptcy by improving the financial performance.

After the cash reserves and the current ratio can be stabilized, the company should start improving its profitability and continue managing its receivable turnover ratio. The company can start looking for contract opportunities outside the current service area to diversify its customer pool. It is important to have diverse clients so that if one group of clients is affected by one issue (e.g. financial crisis), the company may have other clients that are not as affected by the issue.

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The Importance, Relevance, and Limitation of the Science Construction PLC Case Study

To be on a brink of bankruptcy is not a situation that people would like to deal with. However, it is necessary for a manager to have the proper skills to address these issues. Companies that mainly serve as business-to-business (B2B) are commonly affected by the situations in the case study, such as low receivable turnover, low current ratio, and being vulnerable to a financial crisis. These are important and relevant issues for general business studies.

The limitation of the case study is that it does not address the case from the managerial perspective. It did not mention how effective and efficient was the management. It is important because there may be a deeply related human resource issue that enables the low profitability and low turnover problem in the company. The case study should have shown the aspect as well to ensure that the main causes of the problem can be better identified.

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References

Brigham, E. F., & Houston, J. F. (2017). Fundamentals of Financial Management (15th ed.). Cengage Learning.

Collins, K. (2012). An introduction to business v.2. Lardbucket. https://2012books.lardbucket.org/books/an-introduction-to-business-v2.0/ Licensed under Creative Commons by-nc-sa 3.0

Erer, M. (2013). The improvement project of science construction PLC. Journal of Business Case Studies, 9(1), 227-234. https://drive.google.com/file/d/1OItq6G79PzFbdUniEB9BuQ02h1W5GXZS/view?usp=share_link

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