Dynashears Inc Case Solution

This stability in the production process coupled with the declining sales resulted in a build-up of finished inventories (March 1991: $1,236,000). The final blow was made by the falling profits and retained earnings. Meanwhile, apart from the financial aspects, the fixed asset spending of the company also paved its way to withhold the loan repayment ($224,000). However, the inability to repay loan is largely credited to the declining sales, profits and lack of proper planning to curb WIP and other inventory charges.

2. What can be done to correct the situation?

At this point, it is crucial to discuss the ramifications of the build-up of finished goods inventory. The company offers a non-perishable item as its core products. Hence, the build-up of inventory does not essentially guarantees a long term crises (either liquidity or capital budgeting). A comparison of the actual and proforma ratios shows that the absolute position of the company is quite attractive. Not only is the current ratio high, the collection period and the inventory turnover are also quite close to the projected values. Hence, it is evident that the seasonal fluctuations in sales are the only issue that requires proper attention. The cyclical adjustment can easily be carried out via the inventory readjustment. In the period of readjustment, the existing inventory should be utilized in order to relinquish the sales demands. Hence, the production process will not essentially input large WIP inflows. The need of the hour is to make such a strategy that the sales and production are in line with each other so that the seasonal demands for debt can be tackled effectively. The company just needs to readjust its production in accordance with the revised demands forecasts (after the recession). As the core financials are intact, therefore, they should not be influenced.