1 Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378) © Catherine Gowthorpe, 2011 published Cengage Learning EMEA Case study for Chapter 10 Eight years ago Paco set up a greetings card company, Calder Calloway Cards Ltd. The company buys in card designs from freelance designers and then prints, assembles and packs the cards for sale to retailers. Paco started out on a small scale; he and his brother Pedro bought up some card designs at low prices from struggling art students, printed them in runs of about 1 000 and then went round card shops selling them in small quantities. The business did very well, largely due to the brothers’ flair in spotting good, commercial, card designs, and their abilities as salesmen. Initially, Paco owned 60% of the company, Pedro owned 30%, and the remainder of the shares was held by other family members. However, the company gradually needed more capital to expand and the brothers sold off some of their shares to a couple of wealthy private investors, Walter and Jennifer. Pedro, although he still owns some shares and remains as a director of Calder Calloway, has moved on to start another business in selling advertising space. The private investors do not take an active part in the management of the company, but they are both very experienced and Paco quite frequently uses them as sounding boards for new ideas. Over the last two years they have both tried to persuade Paco to hire some expert managers. About a year ago, Walter and Jennifer had a meeting with Paco which proved to be a turning point. Although Paco lost his temper and accused them of trying to ruin his business, he was eventually brought round to accepting that the company had grown too big for him to manage alone. Jennifer: ‘Look, Paco, you’re the boss, and we’re not trying to dictate to you, but the company’s just too big and complex now to be run by just one person. You need some help if you’re going to be able to stay on top of things.’ Walter: ‘And it is getting out of hand. I’m concerned to see that the gross profit margin for 20X6 has fallen yet again – that’s the third year running. Just how are you planning to tackle that little problem?’ During 20X7 Paco accepts the inevitable, and uses the services of a recruitment consultancy to appoint a sales director, Tracey, and a production director, Karim, both of whom have a lot of relevant experience. The first formal meeting of the new board is on 1 February 20X8, exactly one week since the two new directors took up their appointments. Paco’s plan was that they would have a few days to settle into their new responsibilities and then the board would be in a position to have an effective formal meeting to discuss ideas about future plans for the company. Both new directors have submitted details of some new ideas for consideration at the meeting. Tracey’s list includes: 2 Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378) © Catherine Gowthorpe, 2011 published Cengage Learning EMEA • Introduce a commission scheme for the sales force [who are currently on fixed salaries] based on the extent to which their actual performance exceeds budget performance • Concentrate sales efforts on the more profitable ranges of cards Karim’s list includes: • Invest in some new printing equipment. The existing equipment is out-of-date; it keeps breaking down and staff report that the printing is often of such poor quality that a lot of work-in-progress has to be simply thrown away. • Employ some designers to work full-time for the company. This would help to ensure that the company had a constant stream of new designs, and would help to establish a corporate design approach which is lacking under the present haphazard system of buying in designs. The directors’ discussion of these points proceeds as follows: Paco: ‘Well, this idea about the commission could work, but I don’t quite see what you mean about actual performance as opposed to budget performance…’ Tracey: ‘I mean the sales budget in terms of the number of units you’re budgeting to sell in a given period. You could break the overall number down into an expected sales volume for each person in the sales force; if he or she exceeds that they get rewarded by a commission. You can make the scheme as complex as you like, really. In one company I worked for they had an ‘seller of the month’ scheme. If you won it three times the company paid for a luxury weekend break… that kind of thing’. Paco: ‘But we don’t have a sales budget…. People just sell what they can… it’s always worked that way in the past and we’ve done pretty well….’ Tracey: ‘Well, I was wondering why I got blank looks when I asked to see the sales budget…. Are you telling me you don’t set budgets?’ Paco: ‘This is a very successful company. We don’t need to bother with a lot of extra paperwork’. Karim: ‘Well, what about management information generally…? Don’t you have any management accounting systems at all?’ 3 Use with Business Accounting and Finance 3rd edn (ISBN 9781408018378) © Catherine Gowthorpe, 2011 published Cengage Learning EMEA Paco: ‘Well, no, why would we? It would just mean employing a load of expensive beancounters. I’ve got no time for accountants. The book-keeper does an excellent job and the accountant comes in to do the final accounts once a year, and keep us out of trouble with HMRC. That’s good enough for me’. Tracey: ‘But if that’s the case we really can’t consider either of my suggestions, can we? I want to concentrate on selling the more profitable ranges of cards, but how am I going to find out which ones are more profitable if we don’t have any information?’ Paco: ‘Er…’ Karim: ‘And what about production? I can’t make a decision about buying a new machine unless I can compare projected costs of using the new machine with the costs of the existing set up. Please tell me, at least, that you monitor the design costs. If we’re going to employ designers I need to compare the costs of employing them against the costs of buying in a lot of separate designs’. Paco: ‘Oh, well, the annual costs are all included in the income statement, you see. Here’s the draft income statement for 20X7 – the accountant’s just finished it. He’ll do a summary one to send to Companies House, but this one’s really quite detailed – look, there’s a figure for design costs – I’m not quite sure what’s in it, but I expect it includes all the costs of paying for the designs’. Tracey: ‘But what puzzles me is how you keep on top of what’s going on in the business. How do you know what your production costs are? How can you tell if they’re getting out of hand? Did you know, before Karim told you, that a lot of the production simply goes to waste?’ Paco: ‘Look, I know what you’re saying. You want me to fill the place up with overpaid accountants who’ll waste a lot of time and money telling me things I know already…. When you work in a business long enough you get a feel for what’s going on. I don’t need a lot of management reports to tell me that…’. The meeting degenerates into a prolonged argument. Tracey and Karim try to persuade Paco that a business of the size of Calder Calloway needs a sound system of management information. Paco, on the other hand, is opposed to spending (he uses the term ‘wasting’) money on gathering information that won’t tell him anything that he doesn’t already know. What are the arguments for and against the provision of management information for a company like Calder Calloway Cards Limited? What kind of management information is required? Why is it needed?