Sanders Foods was started by the parents of the Sanders brothers, Peter and Anton shortly after they arrived from Europe. Peter and Anton were only three and two years old respectively at that time, however the parents were already planning for their future. As the Sanders grocery store, located on Deerbrook Avenue, began to thrive, the family expanded. Five more sisters followed to the parents making it a family with seven children. When their father unexpectedly died, Peter and Anton took over the family grocery store to support their mother and sisters. Peter and Anton had no intention of expanding beyond the retail grocery business. However, an employees mistake with a purchase order resulting in the warehouse being half full of dried figs forced Peter and Anton to think out of their area of expertise. They had to sell dried figs to other retailers or lose thousands of dollars. Peter and Anton used their knowledge of retailing to successfully sell dried figs and surprisingly made a profit. They realized that there were opportunities with importing and they also realized that the wholesale business suited their personalities and interests. Thus, they started to import additional products from the dried fig vendor and gradually sourced other products from various other vendors throughout Europe. The retail grocery store was soon sold to allow the brothers to focus on the wholesale/distribution business. Sanders Foods wholesale operation was located in a leased office with an attached warehouse on the northern edge of Toronto. The firm quickly became a successful wholesaler of quality European foods and related products, especially those sourced from Portugal. There were virtually no changes to the business until five years ago when Anton died. In the prior decades, Peter and Anton had managed the business together, each running about half the business and coordinating their activities in an informal fashion. The business is now being run by Peter, who has had difficulty keeping the business profitable. The result is that the family wholesale business appears to have lost its focus and is verging on being unprofitable. See the financial statements in Exhibits 1a and 1b. As noted, eventually one generation does not want to continue with the business. For Sanders Foods, the third generation comprising the nieces, nephews and, children of Peter and Anton does not want to continue with the business. The third generation known as the cousins is being represented by Peters second daughter, Sylvie, an environmental engineer. The cousins want to sell Sanders Foods but realize that the firm is unlikely to attract a favourable price at the current time. Profit improvement is essential to fend off bankruptcy and to ensure a higher price on the sale of the business, which the cousins desire. You a chartered professional accountant (CPA) have been hired to increase profits and to enhance the market value of the company. Your title is chief financial officer (CFO). After two months on the job, you determine that the company needs to use budgeting to re-focus the organization on necessary changes and coordination to ensure a turnaround in profits.Peter is the chief executive officer (CEO) to whom you report. You also report to the Board comprising Sylvie and some of the more vocal cousins. This group met with you and Peter one day a week for the past five weeks; the result was a strategy that must be implemented at Sanders Foods to achieve its objectives of improving profitability and therefore obtaining a more favourable sale price for the business. Subsequently, a five-year plan needs to be developed, and then a budget needs to be prepared for implementing the first year of that plan. Currently, based on after-tax net income the company is worth just over $12 million. You note, that this is only one way to value a firm. The industry standard for inventory turnover is seven times a year, i.e., sales at cost divided by inventory equals seven. Your review of the inventory list indicates that the number of non-food items available for sale grew by 29% in the last five years, which was due to the introduction of the Baileys brand. There has also appeared to be an increased propensity to stock non-food items rather than food items. The only new item offered last year in the food category was the Loanna Wafers. The food items represent approximately 80% of sales and tend to have lower profit margins (gross margin/sales, where gross margin equals sales less costs of goods sold) than non-food items. See Exhibit 2 for details on inventory turnover. Although, sales is expected to grow 5% in the current (20x1) year from $268 million to over $281 million, profits will decline as per Exhibit 1. The industry profit margin tends to be an after-tax return on sales of 10%, compared to 0.63% for Sanders Foods expected for the current year. There are three parts to Sanders Foods organizational structure: (1) the sales division which sells the food and non-food items to Canadian restaurants and retail stores, (2) the purchasing division, which buys food and non-food items from European vendors, and (3) the finance and administration division. The division of finance and administration is your responsibility, as the CFO. There is a vice president responsible for purchasing and another vice president responsible for sales. It is Monday morning in early October 20x1, and you have a meeting with the vice president of sales, Bella Versace and the controller, Candice Peppers, to discuss the companys operations. CFO: Good morning, Candice and Bella. Thank you for taking the time to meet with me today. I want to discuss several issues. I understand Sanders Foods has been subject to some deficiencies in recent years that have adversely affected profits. It is my responsibility to identify and address those deficiencies to improve the prospects for the firm, its shareholders and its employees. Let me explain what I have observed. - Many customer orders have not been filled properly, and relatedly there has been an increase in damaged goods and product shortages. You know that our balanced scorecard reports or last week showed we filled only 85% of the orders on time. There is an eight-week lead time for the products we order from Portugal and other parts of Europe. Food is our largest category and we are losing sales. - I am unclear if the inventory levels for our 900 plus stock keeping units (SKUs) are adequate for expected sales or if there are excessive inventories. My initial review of the inventory shows we store dead inventory, e.g., inventory products with zero sales. We need to remove dead or obsolete inventory to make room for incoming shipments. Items are deemed dead when they have had no sales for more than 18 months.You know that competition has been fierce over the last five years, and that our largest customer, Darts Incorporated notified us that its payments will be discounted by 1%, and the net will be paid in 60 days, i.e., 1% net 60. We cannot avoid this discounting as Darts contributes to about 15% of our total revenue. In the past, supply chain performance levels were not monitored, but Darts new supply chain system has that capability. BV: I believe your initial assessment is largely correct. By the way, I have the nine months sales commission reports that you requested. You should be aware that we erroneously calculated sales commissions for Joey Rapini, the sales rep for the Confectionary category. We paid him for commissions for 10,000 units of item 3117, the Sea Salt but he sold only 1,000. Sales commissions expenses need to be adjusted. Sales commissions were calculated manually rather than accessing the financial system, and consequently errors such as this have occurred in the past. As we are on the topic of sales, I noticed there is an increasing conflict between the sales department and finance department. The sales team argues that inventory levels are required to meet budgeted sales while finance wants inventory to strictly abide by the ordering lead times to minimize inventory holding costs. - The other day, Candice and I had a meeting to discuss the cash flow position for the next quarter. The cash projection, which is partially complete, indicates cash outflows exceeding cash inflows. There is indication that $600,000 will be obtained from the line of credit. You know that Darts wants to change its payment terms to 60 days from the current 15 days effective February 20x2. Furthermore, there are two Special Orders with payment due to the vendor in March and April which has not been budgeted. An analysis of the cash projection is needed to determine how improvements can be done now that this information is available. As you leave the meeting, you say that although the firm currently has no incentive or bonus system for accomplishing a budget, you will be discussing the use of incentives and bonuses with Peter and the Board. You are scheduled to meet with those family members next week. One week later, on Wednesday and then on Thursday, you met with the CEO (Peter) and numerous cousins including Sylvie. The purpose is to accept the strategy for the firm and then prepare a five-year plan. Peter and Sylvie were clear with their financial strategy. Improve the profitability and sell the business for a higher price. The strategic goals were solely financial: increase sales by 5% a year, and to improve after-tax return on sales from less than 1% to about 8%. Peter developed the long-term strategy which after much back and forth discussion was approved at the same time by the Board, consisting of himself and the cousins. Peter and you developed the long-term plan, which is shown in Exhibit 3 below. It is a financial plan only. He approved it and presented it to the Board. The Board approved the long-term plan. The plan depicted financially what needs to be done, not how. The how will be the responsibility of the budgeting process. It is expected by you, as well as Peter and the cousins, that the strategy and five-year plan may have some budget implementation challenges. This will place significant demands on the annual budgets for ensuring the accomplishment of the strategy and plan. In other words, the annual budget as developed prior to the beginning of the fiscal year (January 1) may not always be achievable as budgeted. Nevertheless, there is unwavering commitment to accomplish each annual budget.

Exh 2-Inventory Levels & turnover in terms of item

Food items-turns per daily

Ave inventory level

# of items

10-plus turns

73

7 to 8 turns

163

5 to 6 turns

24

4 or fewer turns

49

Sub-Total

309

Non-Food items-turns per daily

Ave inventory level

# of items

10-plus turns

-

7 to 8 turns

31

5 to 6 turns

197

4 or fewer turns

368

Sub-Total

596

Total

905

Inventory turnover =COGS/ inventory

Exh 1a-Income St YE Dec 31, 2001 & comparison 2000 ( $000's)

Current-Estimated

Actual PY

2001

2000

Sales

281,400

268,000

COGS

215,000

201,300

G margin

66,400

66,700

Selling & maketing exp

25,200

24,000

Admin exp

38,850

37,000

IB Tax

2,350

5,700

Income tax

588

1,425

NI

1,763

4,275

Dividends

-

-

Exh 1B-Balance sheet- Dec 31, 2001 ( $000's)
		2001	2002	2003	2004	2005	2006
Assets:		Estimated	Planned	Planned	Planned	Planned	Planned
Current assets
	Cash	3,000	3,000	3,000	3,000	3,000	3,000
	AR	17,000	17,850	18,743	19,680	20,664	21,697
	Prepaid Exp	11,000	11,000	11,000	11,000	11,000	11,000
	Inventory	50,000	37,000	38,850	40,793	42,832	44,974
		81,000	68,850	71,593	74,473	77,496	80,671
	Eq & furniture (net)	55,000	54,000	53,000	49,000	51,000	52,000
Total Assets		136,000	122,850	124,593	123,473	128,496	132,671
Liabilites & Equity
Current liabilityes
	Bank Loans	17,000	4,193	7,409	3,875	2,602	1,417
	Ap	49,000	48,356	40,500	36,000	35,000	33,000
	Accruals	15,000	10,000	10,100	11,000	11,300	11,800
		81,000	62,549	58,009	50,875	48,902	46,217
	Shareholders capital	6,000	6,000	6,000	6,000	6,000	6,000
	RE	49,000	54,301	60,583	66,597	73,594	80,454
		55,000	60,301	66,583	72,597	79,594	86,454
		136,000	122,850	124,592	123,472	128,496	132,671
Exh 3a-Income St YE Dec 31 -long-term Plan ( $000's)
		Expected	Planned	Planned	Planned	Planned	Planned
		2001	2002	2003	2004	2005	2006
Sales		281,400	295,470	310,244	325,756	342,043	359,146
COGS		215,000	211,050	220,125	226,478	237,802	249,692
G margin		66,400	84,420	90,119	99,278	104,241	109,454
Selling & maketing exp		25,200	25,185	25,854	27,146	28,504	29,929
Admin exp		38,850	38,833	39,888	38,780	39,742	41,045
IB Tax		2,350	20,402	24,377	33,352	35,995	38,480
Income tax		588	5,101	6,094	8,338	8,999	9,620
NI		1,763	15,302	18,283	25,014	26,996	28,860
Dividends		-	10,000	12,000	19,000	20,000	22,000
RE		1,763	5,302	6,283	6,014	6,996	6,860

1,763

4,275