TechGen

It is now early February 2015 and you have just taken up your new role as Financial
Controller with TechGen Limited(TG), your first role outside of practice.

TG operates a chain of 25 technology stores across Ireland. The company was

founded 3 years ago by Noel McKenna who owns 50% of TG with the other 50% of
the business owned by Noel’s brother-in-law, Jonny McClintock. Noel is the driving
force behind the business and views himself as a successful entrepreneur. Jonny
invested some funds to get TG started but has no day-to-day involvement in the
running of the business. Jonny sees his investment in TG as part of his long-term
savings and pension strategy but has no desire to become involved in the business
and relies solely on Noel to manage the business and look after his investment. Both
Noel and Jonny have provided the bank with substantial personal guarantees,
including the deeds to their family homes, for all monies owed by the business. Noel
and Jonny are the only two directors of the business. Currently Jonny does not take
any remuneration from TG and is happy to let Noel take whatever he thinks is
appropriate for himself given the performance of the business.

MEETING WITH NOEL McKENNA, MANAGING DIRECTOR

“Welcome on board - it’s good to have you here. The bank seems to be concerned
about the financial position of the business; I don’t understand why they should be. I
get a report every week looking at the sales we have made and so long as these are
going in the right direction I’m happy enough. I need you to get them off my back and
sort out whatever they need. They were torturing me so much that I knocked
together some numbers for next year (reproduced in Appendix 2) and sent them
through to them and haven’t heard anything since. I got the distinct impression that
they didn’t believe what I was telling them!”

“TG is my baby and I stay on top of everything and like to know what is going on
throughout the company on a daily basis. I split my time between visiting the existing
stores and planning and opening new stores; no better way to gauge the
performance of the company than by seeing it first-hand. 2015 is going to be great,
and I plan to have 50 stores and 200 staff on board, what do you think about that?
Impressive, isn’t it?”

Within a couple of days of settling into your new position you are contacted by Susan
Crawford, a manager from Black & White Chartered Accountants, to arrange a
meeting to carry out a business review on behalf of the company’s bankers. Susan
goes on to explain that the company’s banking facilities expired at the end of 2014
but the bank have allowed the company to continue to avail of their previously
agreed facilities until such time as this business review is completed. Further, Susan
explains that given the current market environment they have been engaged by the
bank to review its portfolio of business clients and make recommendations as to
what clients the bank should be retaining or letting go to protect itself in these tough
times. Susan has reviewed the last 3 years financial accounts (summarised in
Appendix 1) of TG and is currently reviewing the projected figures for 2015 that Noel
sent to the bank a week ago (Appendix 2). She goes on to say:
“I have to say I’m not too sure if Noel’s projections stack up given the past 3 years
accounts. Over the next couple of weeks I need to get to the bottom of this and
submit a funding requirement report to the bank detailing my recommendations as to
whether the bank should continue to finance TG. I must be frank and say that they
are quite worried about the company’s current level of borrowing. From my
conversations with Noel I think that he is focusing solely on the growth of the
business and has lost touch with the actual performance.”
“I have tried to get through to Noel how serious this is but I don’t think he quite
understood.”

Having taken on board what Susan has said and what you have been asked to do
you set about your task of reviewing the financial projections and historic results.
Before presenting any information to Susan or the bank, you determine that is it first
necessary to inform Noel of the seriousness of the situation and decide to prepare a
comprehensive memo for him outlining the financial issues facing the company. You
have decided that the memo should include revised high level budgeted figures for
2015 (but still based on doubling the number of stores in 2015) and the actions that
need to be taken as a result of your analysis. Before you begin drafting your memo,
you meet with Kevin Campbell (TG Retail Operations Manager) to get his views on
operational matters (Appendix 3).

Just as you are about to start, Noel sticks his head around the door to say ‘Three
things I wanted to mention to you; firstly, how is Jonny fixed? I do not want the bank
to be ringing him directly; it is nothing to do with him, and what about the auditors? I
picked a newly- setup local firm of public accountants and auditors because they
were accessible and cheap, and I vaguely knew one of the guys there, but shouldn’t
they have been keeping the bank at bay before you got involved, as well as alerting
me as to what was going on before I heard it from you.? I will also need a list of a
dozen or so of the positive points about the business that I should make to the bank
manager as I want to call him before those accountants start their review.
Notes:
 At incorporation both Noel and Jonny invested €/£500k each in TG, split between
share capital and loans to the business.
 There are no provisions made for obsolete stock.
 The 2014 accounts were “signed off” by the auditors at the end of January 2015
2
Appendix 3 – Notes from Meeting with Kevin Campbell, TG Retail Operations
Manager

“Hi, it’s great to have someone else on board who knows what they’re doing! I’m just
here 3 months myself and can’t believe the state of the place. Noel brought me in to
take control of all the retail operations from monitoring sales to managing stock and
procurement and I just can’t get how out of control the operations are.”

“Noel seems to focus on sales above all else; has nobody told him about the concept
of profit? He has been filling the shops with staff and stock to try and catch every
possible sale that is going. He has been giving the staff huge pay rises as the top
line grows. I don’t see how this can continue.”

“I do have to say that it has been an impressive growth in terms of shops, staff and
turnover but I think somewhere along the way we have focused on the wrong metrics
and lost sight of the profit element of the equation!”

Year to 31 December
2012 2013 2014
Retail Units 5 12 25
Total Staff 20 60 150

“I initially tried to pull together some financial information but all we seem to have by
way of information is the daily and weekly shop takings; I know the auditors have
prepared and signed off our accounts for the bank but surely we should have our
own reporting systems given how big we are now. I did check and at least our taxes
are up to date. I was here when they were doing their audit and I really don’t think
they understood the business. About 50% of our stock is older technology that we
are going to find it harder to sell now and they didn’t even ask a thing about it. I think
the guy in charge of the audit is an old school friend of Noel’s.”

“Noel seems to be of the opinion that if the auditors say everything is fine then there
are no problems but if they don’t understand the business and get to the bottom of
the real issues where does that leave us?”