Violet Accommodations Limited $($VAL$)$

ACCT $621-$ Group Case

Winter $2024$

Established in $1980,$ Violet Accommodations Limited $($VAL$)$ is a professional housing company that provide high level of accommodations for its clients.

VAL is located in Toronto and operates $340$ houses and apartments across Ontario. VAL is known for continually developing new processes and testing new accommodations services to better serve their customers. VAL is a private corporation owned by Li Chun and her family and has a September $30$ year$-$end. The company prepares its financial statements in accordance with accounting standards for private enterprises $($ASPE$).$

During fiscal year $2023,$ Li made the decision to hire a CEO, Fang Jing, to oversee VAL. After more than $40$ years, Li felt fatigued by the daily operational demands and sought to shift her focus towards strategic planning, long$-$term growth, and navigating the challenges posed by ongoing market and economic conditions. Additionally, she had plans to retire in $2-3$ years and intended to transfer all responsibilities accordingly.

New CEO, Fang, approached you as a financial advisor to assist her with some challenges that she confronted as her first year of experience. Today is February $10,2024,$ and you have a meeting with Fang, Li and the controller of the company. The following notes outline the most important discussion between you;

Li: Thank you for accepting to assist our new CEO as a financial consultant. The company has confronted game$-$changing market and economic issues over the years since the pandemic hit in $2020$ resulting in increased costs, changes to seasonal fluctuations, reduced revenues, and less predictable outcomes. In order to responding to the changing market and economic conditions, we decided to establish a strategic planning committee and develop new processes and innovative strategic to better serve our customers and navigate through the challenges brought about by the pandemic.

You: That is my pleasure. Please let me know what your priorities are, and we can start with them.

Fang: Our financial statements show a constant decrease in profitability from $2020$ until now. $($Appendix $1)$ I believe that we need to revise both our pricing strategy and cost structure. The numbers indicate that while the cost per room night has increased significantly over the last three years, our current prices cannot achieve the desired return rate.

You: Did you implement any cost$-$saving initiatives during last $3$ years such as renegotiating contracts with your owner$-$vendors or optimizing resource allocation, and evaluate their impact on the company's bottom line?

Controller: The housing market in Canada is highly competitive and regulated. Our current contract allocates $65\%$ to us and $35\%$ to the owner$/$vendors of company. We've attempted to negotiate with the owner$/$vendors to adjust the split to $40\%$ for us and $60\%$ for them.

Li: I had been in contact with several of our owners to renegotiate our deals. However, they have shown no willingness to accept this proposal, as our competitors are already offering them a $70\%$ and $30\%$ deal.

You: I see. Any other initiative for managing the operating cost?

Controller: We implemented several cost$-$saving plans to manage our operating expenses. For instance, we reduced the overtime hours for housekeepers. With the increase in minimum wages over the past three years, the $150\%$ overtime rate has placed a significant financial burden on the company. During the pandemic, we faced staffing shortages, resulting in increased overtime hours for housekeepers. However, with the employment market returning to normalcy, we have hired additional housekeepers, allowing us to reduce overtime hours.

Fang: Still, payroll remains a critical component of our operating expenses. While our sales team performs exceptionally and collaboratively to maximize sales revenues, I believe it's necessary to reassess our monthly sales bonus system. Currently, a significant portion of their payroll is fixed, with a smaller portion being variable based on a percentage of closed deals. This structure adds pressure to the company during low seasons, as we're obligated to pay them a fixed amount regardless of sales performance.

Controller: I concur that we should revise our bonus system for the sales staff. Do you have any idea how we can adjust our sales bonus system to encourage the sales staff for closing more deals and also put less pressure on the company during the low season?

You: Sure. I will prepare a sample sales bonus system along with an explanation of its benefits.

Li: We should reconsider our collection policy and review our customer base. Currently, we have three types of customers:

$60\%$ are insurance companies that rent our units