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Order Processing Case Study
Herbert Engineering
The board of Herbert Engineering were reviewing the future development of the company
in order to create an integrated strategic and financial plan for the company.
The company
Herbert Engineering was a small manufacturer of generating equipment. Manufacturing
generators involves the integration of a number of separate components: an engine -
normally a diesel, with an alternator and control systems. The entire unit is then placed
within an overall frame which includes cooling systems, fuel supply and electrical supply
panel. The prices for such systems ranged from around £12,000 for a 40KV (kilovolt) unit,
to £50,000 for a 250KV unit which was the top of the range unit that the company could
supply. The company had also started to gain a reputation in the design and construction
of sophisticated control systems. Over the past 5 years the company had seen sales grow
rapidly, though profitability had been erratic as Table 12A indicates.
Table 11A. Five years progress of Herbert Engineering with year 5 most recent (all in
£000).
Year
1
2
3
4
5
Sales
1550
1757
1950
2605
3340
Cost of sales
1540
1700
1870
2610
3000
Profit (loss)
10
57
80
(5)
340
The company was privately owned - all the 100,000 £1 shares were held equally by the
managing director and his family and the other partner in the business who worked as the
research and development director. The company had not paid any dividends since its
formation, 12 years previously.
Fluctuations in the cash flow and other operating factors had meant that the company
needed to look at future operations very closely so that it did not run into liquidity problems
over the planning cycle. Company directors considered that an effective financial planning
horizon would be 4 years - 2 years for the decision cycle, and a proposed payback period
double the decision period. Generator companies were a relatively high risk stock sector
because of the exposure to international operations, with a risk premium of 1.5. Returns on
government stock in the current planning cycle was 7.0 per cent. Inflation was low and
likely to remain low over the planning cycle. The progression of the balance sheet over the
past 4 years is in Table 11B.
Table 11B. Balance sheet movements, last 5 years with year 5 latest - all in £000.
1
2
3
4
5
Assets
fixed
120
115
130
135
155
equipment
55
67
60
55
50
debtors
200
250
300
700
450
inventory
110
140
150
170
280
cash
50
25
70
85
135
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