Deutune Braunei
...esses. Secondly, net income is projected to be 40% higher than in 1997; therefore the projected dividend is 40% higher too. It is very doubtful that inflation has risen as quickly as projected net income. Some level of reduction in the dividend therefore does not reduce the family members’ standard of living. The dividend I suggest is an 11.5% increase over the 1997 dividend; which should be much closer to the compounded inflation rate for the past five years, therefore not hurting the family’s standard of living. The 2001 quarterly dividend should be reduced to €465,500 or a dividend of €1,862,000 for the year – 50% of net income, instead of 75%. This reduction frees €1,862,000, eliminating the need for that amount short term debt in 2001, saving €121,000 in interest payments at 6.5%. We all must make sacrifices and move away from being reliant on debt financing because right now our Ukrainian aggression is paying more dividends than profits. Weak cash flows are also attributable to DB’s significant and growing accounts receivable liabilities in the Ukraine. DB is extending credit to these distributors relaxed from 2% 10 net 40 to 2% 10 net 80 because of their inability to meet payment deadlines. According to Mr. Pinchuk; the Ukrainian distributors delay in payment is “understandable” and he plans to relax the payment deadline to 90 days and forecasts bad debt at only 2%. His reasoning asserts that these distributors are unable to obtain big bank financing, their “bootstrap” financing is admirable, and because he knows these distributors better than any bank he sees great opportunity where the banks only see no collateral. He further expects a high return on short term investment in debt and predicts the funds to finance the receivables of non-paying Ukranian distributors will produce approximately a 130 % return. Mt. Pinchuk’s gamble is not worth the risk. The balance sheet, in Exhibit 1, shows that the year of to DB’s expansion into the Ukraine had increases on €7000 in bad debt over the previous year; in 1999, the increase went to €38,000 and forecasted increase for 2001 is an unacceptable €201,000. While his spirit is noble to help these unfortunate distributors, his expectations are unfounded and his “I know something everyone else missed” attitude is blinding fueling the over-aggressive drive into the Ukraine and reliance on debt financing. Furthermore, I cannot see any immediate need for the proposed new plant and warehouse facilities, considering both accounts receivable as well as inventory are higher than ever before and projected to increase in 2001. The current plant is producing almost near capacity. Inventory is increasing and the Ukrainian distributors have not shown much ability to provide timely payment. The historical figures during our Ukrainian expansion combined with a questionable economic tomorrow are two large “Caution” signs to suggest our best available economic strategies. Our past relationships with distributors, present reliance on financing debt, and a future of uncertainty and potential downturn clearly suggest a less aggressive expansion strategy. Mr. Pinchuk and his past expansion efforts should be applauded and commended; however his compensation package should reflect DB’s need to strengthen its cash flows, and eliminate its reliance on financing debt. Currently, his base salary is €40,000 and he is paid with incentives 0.5% of the annual Ukrainian sales increase. His compensation follows the lines of the aggressive company strategy and creates a basis for him to increase sales. Unfortunately the company is forced to mold its strategy to the situation and away from all out aggression. DB cannot simply be focused just on sales to increase retained earnings and Mr. Pinchuk’s compensation package should be adjusted according to this new company strategy. DB’s current focus should be to eliminate its reliance on financing debt to increase retained earnings because thus far in the Ukraine increasing sales is only increasing liabilities. Therefore, the raise in base salary seems adequate however the proposed incentive payment of 0.6% of annual sales increased should be changed to 0.3% of annual sales increase plus 0.3% of payment received. This new incentive structure allows for incentives based on annual sales increase but also expects some emphasis to ensure payment is received on accounts receivable. The 2001 number proposals should be altered to mirror the 2000 numbers. Sales projections can be altered slightly from the 2000 numbers to account for inflation. Production levels, costs, and expenses should not vary much from the 2000 figures since the plant was running near capacity. Operating under that same assumption accounts payable should mimic 2000 figures. Mr. Pinchuk’s new compensation package focused partly on distributors paying will help pay down accounts receivable and bad debt allowances and no short term debt will be added in 2001 to aid in decreasing interest expense. Our tighter credit policy on accounts receivable and awareness of inventory levels in the Ukraine will prevent these figures from exceeding the 2000 numbers. Current liabilities should not rise under this new restrained policy and the numbers suggest that this restraint could potentially result in a cash surplus. In conclusion, adoption of the budget for 2001 is questionable at present. Oleg Pinchuk calls for an investment of €7 million in 2001 for a new plant and equipment to meet growth, and a €6.8 million in 2002 for a new warehouse and distribution center in the Ukraine. The company is currently paying approximately 75% of their retained earnings in dividends, and borrowing at 6.5% interest to fund Ukrainian expansion. The company is highly profitable, and shows significant growth. If they were to reduce their dividend percentage significantly, they would be able to contribute to expansion with their retained earnings. Their current dividends are excessively high, and prohibit growth without outside fundi...