Improvement Project of Science Construction CS

Abstract
Science Construction’s business is in planning, developing and building road projects. The major of its clients are municipalities, city governments, and other public sector entities. While the bankruptcy rates for these clients is very low, when economic downturns happen, their ability to pay in a timely fashion also suffers. This leads to businesses such as Science Construction needing to take on additional debt and to find creative methods in order to stay afloat during times of recession. Methods such as selling accounts receivables at discounted rates and taking larger lines of credit through banks and other lending institutions are some of the ways organizations can remain viable when their cash inflows have turned into a trickle. Science Construction is asking the Turkish Courts to postpone their bankruptcy proceedings for a year while they attempt to restructure. Through this, suggestions such as forcing shareholders to pay their debt to the organization, gaining credit lines with the public sector accounts receivables securing the loans, and looking into establishing a futures market for the purchasing of asphalt and other raw materials needed for their projects have been proposed and examined as ways to help Science Construction to remain a viable organization.
Keywords: Restructuring, Bankruptcy, Secure Loans, Futures Market
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Introduction
Science Construction PLC is a Turkish company that operates in project design, development and financing, contracting services, and providing the equipment to service highways, roads, tunnels, and viaducts (Erer, 2013). Its customers are mostly metropolitan, city, and local governments. Science Construction often must place bids for projects months prior to buying the materials needed and must absorb any increase in costs associated with the needed materials. Further, in 2008, a financial crisis severely hurt Science Construction’s customers from paying their outstanding debts within the contracted terms, and Science Construction is now facing bankruptcy. Science Construction has appeared before the court under the Turkish Execution and Bankruptcy code to postpone its bankruptcy proceedings for one year. This will allow Science Construction to restructure its accounts payables and other debts in order to remain a viable company (Erer, 2013).
Problem Identification and Diagnosis
Science Construction’s main problem is that the financial downturn of 2008 increased the costs of materials needed (asphalt), while decreasing Science Construction’s public sector customers’ ability to pay, thus leading Science Construction having to sell its debt for pennies on the dollar in order to meet the needs of new projects, as well as forcing Science Construction into financial ruin.
Financial Metrics Support
There are some financial metrics that support Science Construction’s problem, such as its accounts receivables turnover ratio, which shows how effective an organization is at collecting on its accounts receivables as well as “how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid,” (Kenton & Murphy, 2019).
Other metrics would be based on the cost of goods sold such as the gross margin (net sales minus cost of goods sold) (Bloomenthal, 2019), the profit margin (“profit per sale after all other expenses are deducted” (What are the Main Income Statement Ratios, 2019)), and the operating margin (“operating income divided by net sales” (What are the Main Income Statement Ratios, 2019)).
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Further, Science Construction should evaluate how much it is losing by selling its debt to factoring companies at discounted rates.
Causes of the Problem
The root cause of the problem is that due to a financial downturn, Science Construction’s public sector customers stopped paying their debts in a timely fashion. These public sector customers (municipalities, city governments and the like) cannot “go under”, and so the postponing of paying their debts greatly affects the organizations they do business with (Erer, 2013).
Another cause is the difference in the price paid for materials based on the prices of materials at the time projects are bid on and financed (Erer, 2013). Science Construction had been lucky for years in that there had been minimal cost differences between the price they bid out the materials, and the actual cost of buying the materials once the job was ready to begin.
Unfortunately, once the market turned, this led to a huge difference that lead to eating away at the project’s gross margin.
Finally, selling its debt at discounted rates to ensure cash on hand is a detrimental move if consistently done over a long period of time. While its accounts receivables are an asset for Science Construction, it only is useful debt if paid. Selling these accounts offers a “stead and substantial income stream” for Science Construction, except for the fact they are not being paid the full amount, thus they take a loss for every account sold (Song, 2017).
Possible Alternatives
Science Construction CS’s Approach
The case study highlights having the shareholders to have a capital funds influx. This will also include collecting money owed from shareholders. Collecting of the funds owed by a shareholder is vital; however, many other shareholders (or new investors) may be hesitant to increase their investments, as shareholders are the last to be paid out if an organization goes bankrupt (Rodeck, 2016).
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Science Construction is planning to cut its raw materials costs by providing its own transportation. Additional analysis should be complete before enacting this to identify the wages, insurance, gas, maintenance, and lost opportunity costs associated with these company assets not being used on projects while they are being used to transport the raw materials.
A third alternative given in the case study is to lay off the employees who are not actively working to save on salaries and subsidiary costs.
It is proposed that consumption caps set by the budget will be enforced, which could be detrimental to the ability of the organization completing projects on time. Things can happen on the worksite that force the need for additional supplies (accidents, materials used incorrectly, mistakes in engineering that need to be corrected, acts of nature), so to limit consumption and say that not additional amounts will be authorized is premature at best.
It is suggested to cut the number of vehicles used by management; however, in many cases, it can be less costly for the employee to provide a fleet of vehicles vs. reimbursing for personal use of one’s automobile. A total cost of ownership should be conducted, calculating the breakeven point, against the mileage, as well as looking at the job functions where a vehicle is a necessity (Company vehicle or reimbursement? Tips on setting fleet policy, 2014).
The suggestion of issuing credit cards for the purchase of consumables should be revisited as well, as often it is less expensive to buy consumables in bulk through one account, than to allow many individuals to order what they and their team needs. Investments in new lighting should wait until after Science Construction has fully emerged out of the possibility of going bankrupt. While this will save money in the future, it is not addressed how much it will actually cost the organization upfront.
Other Options
Other suggested options are to make it a policy never to allow shareholders to owe money to the organization. It is not explained why this happened in the first place, yet, the shareholder in question has been allowed full rights to voting, etc., yet has not fully paid for these rights.
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Additionally, Science Construction should look into stopping the reduced sale of its receivables for quick cash flows, and instead look at securing a line of credit, backed by the receivables of the public sector accounts. It is sited that “historically, the annual default rates for municipal debt are miniscule,” with only “one of every 1,668 eligible general-purpose local governments (0.06 percent) filed for bankruptcy protection from 2008 through 2012,” (Cities 101-- municipal bankruptcy, 2016). While collecting these accounts might require a longer timeframe, they are more secure accounts.
The final option is to look into buying the raw materials and asphalt in a futures type contract. This is done in the oil and gas industry often. Through Crude Oil futures, “the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil at a predetermined price on a future delivery date,” (Crude oil futures trading basics, n.d.). This will allow Science Construction to have a much firmer grasp on its raw materials costs when it is in the planning phase of the project.
Recommended Plan of Actions
The recommended plan of action is to ensure the shareholder with the outstanding debt pays on time, and do not allow this practice to happen again. From here, it is suggested analysis to be completed to see if it is better to pay for raw material delivery, or to use company vehicles, as well as looking into whether it is better to keep a fleet of vehicles or to require employees to use their own, and be reimbursed. The organization is paying for meals and other services as stated “the employees that does not work… Thus, the salaries and the subsidiary costs (e.g. meals, services) will decrease,” (Erer, 2013), the meals and services for all employees should be suspended at this time, to be reevaluated in the future if the organization finds itself in a better financial position to offer these perks again. Securing bank loans with the receivables as collateral and investing in raw materials futures are also recommended actions.
How to Measure Success
Success can be measured through tracking the accounts receivable turnover rates, profit margins, operating margins and the costs associated in selling debt vs. securing loans. These are the prime metrics that will show Science Construction if its plan of action is working.
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Relevance to The Study of Business
The relevance to the study of business of this case is that most organizations do business using credit. Either they are taking out loans, or they are essentially doing work on the promise to pay in the future. This is the typical business scenario, and not a unique situation for Science Construction. With this said, when the economy turns, organizations feel the squeeze in multiple ways. The direct costs associated with doing business such as the costs of raw materials and such can skyrocket, but it can also hurt these organizations from being able to collect on their receivables. These scenarios require the ability to digest the situation, to find the path of least financial destruction. Taking out loans will cost an organization fees such as interest and administrative costs; however, selling debt at reduced rates can be a much costlier option. Analysis needs to be completed to identify the best way to gain the needed cash.
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References
Cities 101 -- municipal bankruptcy. (2016, December 16). Retrieved December 17, 2019, from https://www.nlc.org/resource/cities-101-municipal-bankruptcy
Crude oil futures trading basics. (n.d.). Retrieved December 17, 2019, from https://www.theoptionsguide.com/crude-oil-futures.aspx
Erer, M. (2013). The improvement project of SCIENCE Construction Plc. Journal of Business Case Studies (JBCS), 9(3), 227-234.
Kenton, W., & Murphy, C. (2019, June 30). Why the Receivables Turnover Ratio Matters. Retrieved December 17, 2019, from https://www.investopedia.com/terms/r/receivableturnoverratio.asp
Rodeck, D. (2016, November 09). Who gets paid first when a company goes bankrupt? Retrieved December 17, 2019, from https://work.chron.com/gets-paid-first-company-goesbankrupt-7496.html
Song, J. (2017, April 20). What Happens When Credit Card Companies Sell Your Debt. Retrieved December 17, 2019, from https://www.valuepenguin.com/2017/04/whathappens-when-credit-card-companies-sell-your-debt
What are the Main Income Statement Ratios? (2019, July 15). Retrieved December 17, 2019, from https://www.investopedia.com/ask/answers/102714/what-are-main-incomestatement-ratios.asp