ACCOUNTING FOR MANAGERS

Background

It all started in 1968 when a young Dick Smith for the love of wires started with an investment of $610 into the brand that is Dick Smith today. His obsession with electronics led to the birth of Dick Smith Electronics. He first started with the installation and servicing of car radios and in the following year, due to the success of the brand, he was prompted to open more shops due to the high demand. His first company had an employee count of 2000 and was locate d in Sydney. By 1980, Dick Smith Electronics had increased to 20 stores whereas Dick had sold 60% worth of shares to Woolworths Limited and in 1982 he sold the rest of the shares and Woolworths took full ownership at $25 million. Within a few decades, hundreds of stores across Australia have been opened under Dick Smith network. As of 2014, it had a total of 381 stores. It specializes in a variety of electronic products such as computers, printers, televisions, mobile phones, tablets among others.

Financial Milestones and Achievements

Before Dick Smith was listed on the stock exchange in the late 2013, it had a steady sales growth rate with an expansion plan to explore new lines of businesses. In fact, it was the largest retailer in Australia dealing in electronics. The management at the time were focused and had a strategic direction to increase their revenue and profits. To this day, Dick Smith is still known and acknowledged all around the world for Dick Smith Electronics. During his time, the company was extremely successful that it had ventured into the United States market. Dick Smith distributed his catalogues free of charge throughout the country and using various advertisements. In the 197os, the company registered a profit with the help of CB radio which helped in the popularization of the brand. With the gained profits, outlets of Dick Smith electronics were opened all over the country and some parts in the United States. Dick Smith as a brand was not limited to only electronics as he soon ventured into the food industry with the introduction of Dick Smith foods. Its success prior to the declaration of receivership can be attributed to the impeccable management under Dick Smith himself. Having had a vision at hand and working through it was an advantage. He knew what his customers wanted and worked towards creating demand for his products. He also had a strategic direction. His promotion avenues expanded his market and enabled him to go outside his own country and explore the foreign markets. This is what attracted Woolworths to be an investor because they saw the future in the business. His expansion plan was created by necessity and not greed like in the case of Anchorage Capital who were after huge profits without conducting an analysis to discover the niche areas. The funding from Woolworths enabled him to explore his other interests while they managed the electronic company.

Major Changes in the Structure of Dick Smith Company

(Lui, 2016). It is meant to give the company in question a window period of restructuring and recovering without the pressure of dealing with the debt collectors.After Anchorage made an exit, Dick Smith was left with no capital that forced it to use its working capital to restock. To add salt to the injury, they stocked on the wrong items that were not on demand. The failure to manage its working capital which is usually the best indicator of a healthy business (Mitchell, 2016) catapulted to a lot of bad decisions that led to financial mismanagement. The company sunk into deep debts that made the financial institutions denied any issuance of credit and the company was forced to appoint administrators. The voluntary administration was given to McGrathNicol. This normally happens to those companies facing cash flow problems and have trouble paying off their debts. An external administrator is normally chosen to make an analysis of the company’s assets and make an evaluation so as to come up with the most suitable plan (Chung, 2016). . One year down the line, the company registered in the stock exchange a whole $520 million. Anchorage had gone in to the habit of writing down on the value of the inventory and liquidated as fast as possible. This created a boost to the cash flow which made the company appear as if it was financially stable on the outside (Beckford, 2016). Anchorage Capital was well aware that things in the company were not going well but did not reveal this fact to the investors (Murphy, 2016)In 2012, Dick Smith was bought out from Woolworths by Anchorage Capital; a private equity firm. A down payment of $20 million was paid which was to be followed by $80 million

Reasons for its fall

Dick Smith’s expansion plans might have been too ambitious as it drained all its surplus earnings and prompted the company to borrow externally. It was around the same time that the customers’ preferences started to change making the major brand lose its market share as well as its position as a top brand. The events leading to its fall can be traced back to 2012 when Anchorage Capital that happens to be a private equity firm acquired the firm from Woolworths. A down payment of $20 million was initially paid and an agreed $80 million to be paid later. Anchorage quickly made exorbitant profits especially in the period 2012-2013 of $140 million after tax. This was quite strange since it happened almost immediately after it was bought out. Inventories had fallen to $170 million and the profits rose to $300 million. They quickly opened over ten new stores and later sold it ten months later. Anchorage had written down the value of the plant, equipment and inventory. Liquidation of the inventory also happened quickly in a bid to make Dick Smith to buy itself (Ong, 2016). These write downs without restocking caused all the inflated profits. The opening of too many stores was one of the major problems (Hatch, 2015). The use of working capital so as to stock up on items that were not on demand. Their plan to cut down on prices while increasing their advertising avenues so as to advertise their heavily discounted prices (Clendinnen, 2016). This was a suicidal mission as it is a business rule to maximize on profits while minimizing on costs whereas Dick Smith was doing contrary to this rule. When Anchorage made its exit, Dick Smith barely had any stock. It had to start on restocking to continue with their business activities hence had to borrow. In addition, they started on expanding in a bid to add additional stores. Mismanagement of their working capital and diverting from their known market niche making them unable to compete with other competitors (Colangelo, 2016). This led to them having a surplus in stock resulting to weak sales. This was the reason that caused it to write down its stock value. Their plans however failed as their sales were way below the projected sales and the company fell into debts as it owed $140 million to National Australia Bank and HSBC. It also had over $200 million in debts owed to creditors. This made their creditors reluctant in offering more credit to Dick Smith.

Social impact

When a company goes under receivership, the public are the last people to find out. In the case of Dick Smith, its loyal customers were treated to the harsh reality of not acquiring their products given that they had already stocked for non-demanded items. They lost their faith in the brand hence in future, it would be difficult to attract the once loyal customers and any new ones since their reputation had already been tainted. The customers also spread by word of mouth to the general society on how Dick Smith had fallen worse still on how their gift cards that they were previously offered were now deemed worthless as they were dishonored once the company went under receivership. The society in general started a silent boycott of Dick Smith’s outlets across the country making them register low sales and low profit margins. The staff on the other hand who lost their jobs became wearier of the Dick Smith outlets and were reluctant to work for such a company. They were subjected to psychological torture of not knowing whether they would lose their jobs, whether they would be paid their dues and how they would acquire their new means of livelihood. In a broader view, the loss of jobs could lead to the rise of many social evils such as theft. In order to make a living, an income generating activity is required and since the workers at Dick Smith no longer had this avenue, many would resort to stealing so as to make ends meet. In turn this would lead to insecurity in the area. The receivership however created a market niche for other companies who saw an opportunity to introduce new products in the market.

Lessons learnt

In summary, a number of lessons can be learnt from Dick Smith’s failure. For instance, their first business mistake was using their working capital. It lacked a strategic direction and acted on impulses with the buyouts and quick expansion measures. The lack of direction caused a confusion especially to its consumers as they could not understand its products hence moved to their competitors. The confusion was not only to the consumers but also to the management team. If the internal body has no idea what they are pitching outside, it would be harder for a prospective customer to grasp it. It therefore follows that an organization must have clearly defined objectives and be able to understand the needs of their target market. This knowledge needs to be constantly and consistently refreshed due to the dynamic nature of the economy as well as the consumers who change their tastes with time, age and even seasons. Dick Smith made a big mistake by stocking on the wrong items that the customers did not identify with hence they opted for their competitors who produced goods similar to them. It is also advisable to keep the communication with the customers going and find out what they need and whether they are satisfied with the products. This will aid aligning of the company’s objectives with the consumers’ needs to avoid being irrelevant. Investors can also learn a thing or two from the collapse of Dick Smith. Given Anchorage’s background in acquiring firms, they should have made a second thought as it had a list of firms that had failed once they took charge of them. A company that was worth $20 million and shot up to $500 million in a short period of time must have hidden financial woes or probably a trap to secure investors. Before putting in money, an investor would have to think twice before putting money into a company without thorough background check ups and asking the necessary questions. The same goes for the financial institutions as well as the creditors who will now go into losses since the company is in debts and cannot be able to pay. Consumers can also learn to shy away from impulse buying and the old saying ‘when the deal is too good…’ when the prices were lowered so as to attract ,ore customers backed up by heavy advertising, something not have been going correctly. As it is in business, the advertising expenses should have been catered for by an increase in prices since all businesses aim to make profits while minimizing costs which Dick Smith was doing the exact opposite. It can only be hoped that all the parties involved can learn from this failure and avoid the pitfalls should a similar situation appear.

References

Beckford, G. (2016). How Did Dick Smith Get Into Trouble? Radio New Zealand.

Clendinnen, G. (2016). The Greed and Christmas ‘Knock Out’ Sale that finally KO-ed Dick Smith. Newmatilda.com

Colangelo, A. (2016). Dick Smith Placed in Voluntary Administration. The New Daily.

Chung, F. (2016). Australian Entrepreneur Dick Smith says He will Consider Funding a Class Action against Anchorage Capital Partners, the Private Equity Form Which Floated his Former Company on the Stock Market in 2012. News.com.au

Hatch, P. (2015). Dick Smith not Surprised Dick Smith Shares Have Bombed. The Sydney Morning Herald.

Lui, S. (2016). Dick Smith Enters Voluntary Administration. How Will This Affect You? Life Hacker.

Mitchell, S. (2016). Dick Smith’s Crisis a Lesson in Why Cash is King. The Sydney Morning Herald.

Murphy, J. (2016). Dick Smith has Entered Administration and that is a Big Joke for Some People.

Ong, T. (2016). Dick Smith Collapse: Kogan Buys Struggling Online Business. ABC News.