Nobel Fittings Limited

NOBEL FITTINGS LIMITED (B)

Preparation Question

Analyze the financial performance of the company. How well has the company’s resources been managed? Is the financial condition in 2004 better than 2003? What are the areas of strengths and weaknesses as shown by the financial statements?

NOBEL FITTINGS LIMITED (B)

It was 6p.m. on Friday 30 March 2005. David Banjo was finalizing the assessment report on the performance of Nobel Fittings, a report which he was going to present the following day at a meeting with King & Co., Chartered Accountants. The discussion with Mr King would focus on the company’s progress and David’s proposal for how, and if the company’s accounting policies and financial structure should be changed. Decisions had to be made on areas such as whether external funding would be required to finance future sales.

At their first meeting two weeks earlier, Mr King presented the draft financial report they had prepared (Exhibits 1 & 2). After a quick review of the documents, David said to his Father, the CEO of Nobel Fittings Ltd;

“After all the effort we made in 2003 to ensure that we put in place an accounting system that would produce complete and accurate accounting records, I can confidently say that the 2004 Accounts reflect a fair view of the position and performance of the business.”

Being a business school graduate (an M.B.A. and a Masters in Finance), and having five years working experience at a local bank. David had insisted from the beginning that all transactions be documented with a view to preparing annual accounts and financial statements. He felt strongly that financial statements were very useful in planning and decision-making. He intended to use the basic financial and analytical skills he had acquired to generate information from the company’s accounts as to the current position and performance of the business.

David expected that the meeting scheduled for the following day would help him confirm his interpretation of the health of the company and the areas of strengths and weaknesses as shown by his analysis of the financial statements.

The Business to Date

2004 was Nobel Fittings first year of full operations. The company had started in January 2003 as an outlet for the retail distribution of locks, door handles, bolts, switches and similar home accessories, to the construction and interior decor markets. They had the exclusive right to sell the products of Pronto Limited, a leading international Italian manufacturer, in the Nigerian market.

The market had changed significantly since November 2002 when Mr Banky Banjo made the decision to start the business with his son David. Banky was the CEO, David was in charge of marketing and client service while Angela, Mr. Banjo’s niece, was the shop manager. The market which was highly fragmented with several small businesses and only one major marketer, Prime Handles & Locks, had in the past year, witnessed new entrants of comparable size to Nobel Fittings. Also, one of the earliest industry players which had the exclusive dealership of the household brand, Union Locks, but had for some years been relying on the brand loyalty to sell the products, underwent a change of management and restructuring of the business; they now were poised to fight their way back to become the market leaders.

With this new development, it was even more important for David to have a firm understanding of the financial implication of all transactions and policies. He was concerned about the possibility of price competition. Because of the business high cost of the Pronto Ltd products, Nobel Fittings could not afford to substantially discount the prices of their goods. Banky and David decided that the company would play in the high end premium market, reinforcing the marketing strategy of focusing on direct marketing, the target market being wealthy individuals and large established firms in the construction industry, who valued quality material, durability and unique design. Discounts were offered only for volume orders. From his assessment of demand for their products, David was able to ascertain that 80% of Nobel Fittings’ business was from new construction and the remaining 20% from repair and replacement jobs.

David’s summarized his view on how to deal with the changes in the industry structure in one of the weekly staff meetings, “With this increase in competition we need to be able to have better control of the business. To do so effectively, we must understand what has happened in the business, set goals and plan for the future”.

Accounting and Financial Situation

The company closed the year with a sales figure of =N=10m (see Exhibit 1). An increase in net income had been achieved largely on the basis of a healthy margin on cost, quantity purchases at substantial discounts and careful control of operating expenses

Sales were on both a cash and credit basis. For large sales volumes, a 30day credit limit was applied.

Nobel Fittings had a 30day credit facility from Pronto Limited. Orders were made by email to Pronto Limited and goods were air freighted once a month; customs clearing and delivery to the shop premises were handled by a clearing agent. In accordance with company policy, purchases were recorded in Euros and then converted to the Naira equivalent.

The agenda of matters to be discussed that was sent by the auditors, and listed two issues that David had also been planning to address in his report: First, the business used his personal car and driver with estimated savings in transportation expenses of =N=480,000 (=N=360,000, Yr 2003); Secondly, it had been agreed during the year that the amount that had been taken from Mr Femi (David’s Uncle) and recorded as a deposit for shares, was to be converted to a loan.

With regard to the funding of the business, David was confident that the Company had sufficient capital to cover its requirements. It did not need to borrow any money from the bank. Sales were expected to reach =N=25m in 2005 and may exceed this if the trend of increasing demand for of fully serviced housing estates continued, rather than the building of individual homes.

The Current Situation

It was against this background that David began his review and evaluation of the company’s financial position (see Exhibits 1, 2 &3). He was certain that by analyzing the company’s performance and identifying the strengths and weaknesses of the company as shown by its financial statements, he would be better able to formulate plans and policies that would ensure that the company remained one of the major industry players.

EXHIBIT 1

NOBEL FITTINGS LIMITED (B)

PROFIT AND LOSS ACCOUNT

EXHIBIT 2

NOBEL FITTINGS LIMITED (B)

BALANCE SHEET

EXHIBIT 3

NOBEL FITTINGS LIMITED (B)