RT Tanner & Co Ltd
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Contents
Management
Operations
Accounting Systems
Trading Performance
Review of Balance Sheet
Future Prospects
Appendix
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Bank Report
2. Conclusions
2.1 Introduction
In this section we discuss the principal conclusions arising from our review, incorporating specific comments on the Bank’s terms of reference,
which are set out at Para 1.2
2.2 General
Tanner has been trading as a paper merchant since 1859 and introduced the manufacture of envelopes and pockets earlier this century. The Company
has a small share of a substantial market although it has a well established reputation in the industry. During recent years, the paper industry
has been subject to radical changes and considerable realignment as a consequence of sharp competition and a desire to maximise earnings. Overcapacity
has led to keen pricing, particularly by major businesses, with substantial investment being made in new machinery to reduce unit costs. It is against
this background that management recognised that the Company was unable to respond to the challenge of the mass market. Accordingly, the strategy has been,
in the last decade, to secure a niche market supplying specialist, high quality envelopes and papers. Whilst there appears to be a degree of stagnation in
the mass produced market, management envisaged that there was still potential for growth in the sales of quality personalised products. Nevertheless,
we are of the opinion that it may only be a question of time before the large producers with substantial investment power look to increasing market
share through this sector.
Given the need for investment in new technology to retain price competitiveness, management has purchased two new machines during the last five years.
However, our review indicated that the majority of machines utilised in the production process are aged reflecting the lack of adequate retentions and
funds available to upgrade operations. The inability to secure any material reduction in unit costs has, therefore led to pressures on gross margins which
has, in our view, been compounded by an ill defined pricing policy.
Following modest growth of 10.48% and 6.48% in total sales, in the two years ended 31 March 1990, turnover has remained virtually static during 1990/91.
Growth in total sales over the period under review has not kept pace with inflation and turnover has declined in real terms. Gross margins have slipped
in the last four years, from 26.6% to 21.1%, reflecting the severe competition on prices. Whilst net profitability, after interest, of £160k and £126k
was seen in the two years ended 31 March 1989, the following year showed a loss of £277k after absorbing an exceptional item of £282k in respect of roofing
repairs. However, this was not reversed during the 1990/91 with an unaudited net loss, after interest, of £311k being incurred.
The impact of the recent loss making has been to weaken the balance sheet of the Company with net assets reducing form £1.8m at 31 March 1989 to £1.2m at
31 March 1991. Gearing, liquidity and interest cover have all deteriorated emphasising the need for urgent action to be taken to address the difficulties.
However, there may be a potential hidden reserve in the freehold property at Crayford.
Our review indicated that there were several operational shortcomings which do not appear to have been adequately addressed in the past. Management seem to
be aware of some of the weaknesses in operations but has yet to demonstrate that effective action has been taken to correct matters. There is substantial
experience within the business and a high degree of loyalty but, in our opinion, there is a lack of positive direction to management’s efforts. We formed
the impression that there is lack of cohesion amongst the management team which is poorly structured with overlapping areas of responsibility.
We consider that the directors and management are not devoid of constructive idea to resolve the current difficulties. However, it is our opinion that
the business would benefit from a freer exchange of views and the development of a cohesive corporate strategy particularly longer term strategic and
financial planning. Nevertheless, it must be emphasised that total commitment to implementation of such a plan must be achieved throughout the Company.
Given the longevity of service of many of the employees, the perceived changes may not be easy to introduce.
2.3 Specific terms of reference
a)The effectiveness of the Company’s Internal Controls
Due to the problems associated with the installation of the new computer system, the accounting system is currently inadequate for the Company’s operations.
We are unable to comment as to whether the new system, when fully operational, will be adequate or otherwise.
Internal controls have been developed in most areas and we consider these to be adequate for an operation of this size. Our principal concerns are the present
lack of stock records and information on product profitability and sales analysis. In our opinion, these deficiencies need to be redressed as a matter of urgency
to ensure that decisions taken by management receive that decisions taken by management receive full consideration.
Our review indicated a number of weaknesses in the costing system which could lead to inaccurate costing information on which to base pricing/sales decisions.
We suggest that a full review of costings is undertaken without delay.
b)The Reliability of Forecasts and Management Accounts and Information
Given the inadequacy of the new computer system, particularly accurate stock records, the management accounts and information produced by the Company is not,
in our opinion, entirely reliable at the present time. We do not envisage a material improvement until such time as the system is fully operational.
Formal trading and cashflow projections for the year ending 31 March 1992 have not been prepared. PT had prepared draft trading forecasts on the basis of future
scenarios, principally the closure of the Dartford warehouse and cost cutting exercises. These were prepared purely for illustrative purposes and have not been
discussed by the Board. In our opinion, some of the proposals were not realistic and therefore we consider that a detailed review would not severe any useful
purpose. Consequently, we believe that management should prepare a detailed plan to include trading budgets, cashflow forecasts and projected balance sheets
which carry the support of the operational directors.
c)The Company’s Immediate Borrowing Requirements
At our request, management has produced a short term cashflow forecast which indicates that the Company should be able to work virtually within the existing
facilities until the end of July 1991 when quarterly payments are due. In our opinion, this should be sufficient time for management to review its options and
to provide a more detailed appraisal of the Company’s requirements. However, it is noteworthy that the cashflow does not take into account any potential receipts
form the sale of Tanner’s interest in Krolle or any legal claims, the timing of which in both instances is uncertain.
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