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Investment in the rubber and plastics industry requires a serious analysis of a number of key corporate behaviors. To evaluate Riordan’s Finance and Accounting Systems, knowledge of their industry and line of business is necessary. Economic influences affecting their operations and business strategy must be considered as well.
An examination of Riordan’s accounting system and modules is provided followed by calculations of their liquidity, profitability and activity ratios. The pecuniary data, along with historical information, is evidence to their financial status and health of the company. This analysis provides data to compare with other leaders in the same industry so an intelligent and informed investment decision can be reached. Riordan Manufacturing Overview and Business Environment Riordan Manufacturing, Inc. , located at One Riordan Plaza, San Jose, California is the global leader in the manufacturing of plastic injection molds and plastic designs.
Riordan products include plastic bottles, fans, heart valves, medical stents and customer plastic parts (Apollo Group, Inc. , 2008). A Fortune 1000 company dedicated to quality and extreme precision, Riordan has become a recognizable company in its industry. Riordan Manufacturing is wholly owned by Riordan Industries and provides its unique services worldwide in areas that include California, Georgia, Michigan and China. Riordan employs 550 people with revenues in excess of $1 billion and projected annual earnings of $46 million. In 1992, Dr.
Riordan gained venture capital to purchase a fan manufacturing plant in Pontiac Michigan where Riordan Manufacturing was originally incorporated. Today the Michigan plant is the main manufacturer of custom plastic parts. By 1993 the company became a producer of plastic beverage containers manufactured out of Albany, GA. Most recently the company has extended its venture to China as the primary manufacturer of its fans. Riordan’s success and growth looks good on a resume, but their financial ratios tell the absolute truth about their financial solvency, liquidity and profitability.
Riordan’s balance sheet and income statement are the artifacts considered, along with other corporate information in evaluation of Riordan’s financial health (Apollo Group, Inc. , 2008). Riordan Manufacturing’s Industry and Line of Business Riordan creates a variety of items including plastic bottles and beverage containers produced in its Albany, Georgia plant. The company also produces all sizes of fans and plastic fan parts, heart valves, medical stents and custom plastic parts with its world-wide plants. The company’s research and development is done at the corporate headquarters in California.
Major customers include automotive parts manufacturers, aircraft manufacturers, the Department of Defense, beverage makers, bottlers, and appliance manufacturers. Economic Influences Affecting Riordan’s Operations and Strategy Economic influences affecting Riordan’s operations and strategy include (a) Gross Domestic Product (GDP), (b) growth rate, (c) interest rates, (d) monetary policies, (e) inflation rate, (f) unemployment rate, (g) consumer confidence, (h) currency exchange rates and (i) trade balance. GDP, which is the total product output of a region, the United States in this case, experienced a growth rate of 4. 0% in 2004. Estimates for 2005 and 2006 are 3. 80% and 3. 70% respectively. The economy will continue to demonstrate growth, but more slowly. The Federal Reserve is expected to raise the Federal Funds and short-term interest rates through the balance of the year and provide them the flexibility needed to act if the economy weakens unexpectedly. This should restrain inflation with the continued economic growth and expected higher oil prices. High demands for long-term U. S. Treasury bonds by foreign central banks and investors which may lower long-term interest rates will become evident.
This suggests that financing to expand operations, replace equipment, or other purposes, should be secured soon. The present monetary policy of the Federal Reserve is contracting and decreasing the total money supply to stave off inflation. High oil prices, the weaker dollar and decelerating labor productivity are contributing to rising inflation. The inflation rate forecast is estimated at a rate less than 3. 00%; however, the Federal Reserve will work to limit inflation in combination with a strong retail market. The unemployment rate was only 5. 0% last year and will improve slightly to 5. 20% in both 2005 and 2006. A large trade deficit in the U. S. trade balance will lead to the dollar/euro currency exchange rate of 1. 25 dollar to the Euro. This data indicates positive economic conditions for Riordan. Opportunities to leverage relatively low interest rates into new investments will allow Riordan to enter new markets and increase productivity. This forecast provides the basis to meet the firm’s sales goals. Riordan Manufacturing’s Accounting System and Modules
Each Riordan location has separate, customized financial and accounting systems to accommodate each location. However, the current systems are expensive and time consuming to code, test and patch. These systems have integration and compatibility problems and were not developed to function together. Current financial software has become extremely sophisticated. Enterprise Resource Planning (ERP) packages are made up of disparate finance and accounting applications which allow organizations to tailor all accounting aspects of their system to meet specific needs.
The best solution may be to replace the existing software with a single vendor solution in a tiered approach so that risks to the company are made mitigated. Riordan would benefit from purchasing Elite 3E, a fully integrated finance and accounting ERP package that allows for full client customizations (Elite, a Thomson Reuters Company, 2008). Existing Financial and Accounting System Every Riordan operation has its own finance and accounting system where consolidated input is provided to the corporate headquarters in San Jose.
The basic components of each system follow: General Ledger; Accounts Payable; Accounts Receivable; Order Entry; Sales and Purchasing History; Procurement; Invoice and Shipping; Payroll; Financial Reporting; EDI (San Jose); Bar Code Reading (San Jose); and EDDS (San Jose) (Apollo Group, Inc. , 2008). Riordan’s San Jose location has a license for a fully integrated Windows based manufacturing, distribution and financial management application specifically designed for their industry.
The license does not include application source code. The Michigan location purchased a vendor developed software application with source code for their finance and accounting and process application. The vendor is no longer in business. The application runs on a pair of DEC Alpha’s, using the VMS operating system, VAX4000 work stations and is programmed in C. Georgia purchased their software from a different vendor. This system runs on a pair of AS400 mainframes running UNIX, programmed in RPG400 with Windows work stations.
During the due diligence phase in which Riordan acquired the operating entities in Michigan and Georgia, the incompatibility of the systems was not addressed (Apollo Group, Inc. , 2008). Riordan’s corporate finance and accounting department has many challenges with the data received. Of significance is the goal for the department to achieve “seamless compatibility. ” Data is provided to corporate via electronic data files and is in the form of hardcopy reports that must be re-entered into the system. Some of Riordan’s electronic data needs to be converted to the proper account codes.
The list of challenges for the finance and accounting department will not be easily overcome. Creation of the Income Statement and Balance sheet as well as the monthly audits is labor and time intensive. As a result, the financial statements are almost three weeks late on average. Riordan’s difficulties in meeting some of the new government reporting compliance requirements, at the consolidated level, compound this problem. This induces internal and external auditors on a monthly basis adding more costs.
Riordan is currently seeking solutions, alternatives and recommendations to improve their inadequate finance and accounting data processing (Apollo Group, Inc. , 2008). Useful Accounting Software Modules to Replace Riordan’s Existing System Finance and accounting software has become extremely sophisticated. A vanilla version of any of the top vendor’s ERP packages is made up of many disparate financial and accounting applications. The better designs offer customization of any module and workflow which would enable organizations to tailor all aspects of the ERP system to their needs.
Furthermore, all viable financial and accounting software vendors offer international solutions for their client’s multinational commerce needs. Riordan management has pointed out labor costs are much higher than necessary. Varying types of output from differing software vendors is to blame. To mitigate this problem, an analysis of the workflows of the various offices is recommended. An analysis of the data outputs being sent to San Jose, California is also necessary. Once the specific issues are understood, research may begin on what type of solution if any exists that may help integrate Riordan’s existing financial and accounting system.
The solution may be a software consultant. They could write software to convert multiple file types into a standardized input file, thereby eliminating much of the latency problems for the close of the General Ledger. The consultant may be able to correct most of the issues Riordan is experiencing through custom coding. Another solution with greater benefit in the long-term may be to replace the existing software with a single vendor solution in a tiered approach so that risks to the company are diminished. Each of the above modules could be swapped out individually over the course of two years at each office location.
Slowly, the effect of total integration will start to be felt at Riordan. At the end of two years, the company will be without the many financial and accounting challenges issued by management. Recommended Software Packages to Integrate Riordan’s Financial and Accounting System Riordan Manufacturing would be advised to purchase Elite 3E software. This enterprise level software solution (Elite, a Thomson Reuters Company, 2008) can produce the accounting and financial reports that Riordan needs for individual profit centers, groups of profit centers and a central cost center. E integrates well with third party accounting packages, thereby using Riordan’s existing systems. With Elite 3E, all accounting and finance statements could be generated for any period. Trends could be identified and budgets for the succeeding year could be well planned (Elite, a Thomson Reuters Company, 2008). This applies to all accounts including liabilities, current assets, fixed assets revenues, expense, loss and gains. With this information readily available Riordan would improve their tactical and strategic financial decisions. Riordan Manufacturing Management Report – Financial Statements
Riordan Manufacturing’s Income Statement and Balance Sheet for fiscal years 2004 and 2005 reveal an increase in corporate strength. Riordan is a mainstream manufacturer with 55% of their assets in Property, Plant and Equipment. This percentage is typically 30-40% for similar corporations. A strong demand for a majority of Riordan’s product lines and a modification to the financial and accounting software are the best opportunities to improve performance. How well is Riordan performing and why? Liquidity ratios measure a company’s ability to turn assets into cash to pay its short term debts.
The current ratio compares the quantities of current assets to current liabilities to gauge its solvency (Leichter, 2007). Riordan’s 2004/2005 solvency is listed in Table 1. Table 1: Current Ratio Current Ratio20052004 Current Assets$14,555,092$14,643,456 Current Liabilities$6,974,0942. 09 times$6,029,6962. 43 times Riordan’s current ratio decreased from 2. 43 in 2004 to 2. 09 in 2005. This drop resulted from a 15% increase in near term debt since current assets changed less than 1%. Riordan’s current ratio is still favorable at over 2:1 and has the resource ability to pay its debts over the next 12 months.
Profitability ratios measure how effectively a firm is using its resources to achieve profits. The return on equity ratio measures how much was earned for each dollar invested by owners (Nickels, W. G. , 2005). Riordan’s 2004/2005 ROE is listed in Table 2. Table 2: Return on Equity Ratio ROE Ratio20052004 Net Income after Tax$1,956,371$14,643,456 Total owner’s Equity$22,115,2558. 85%$6,029,6969. 17% Riordan’s ROE was fairly stable in the last year changing by only one-third of a penny for every dollar invested. More important, Riordan’s ROE compares favorably against the Rubber and Plastic Industry Average of 7. 0% according to Yahoo Finance (2008). Activity ratios are used to assess how active various assets are in the business (WSU, 2008). The accounts receivable (A/R) turnover ratio assesses operating performance, appraises a company’s credit policy and its cash flow. This ratio measures the number of times, turnover times on average, that receivables are collected during the period given in “days. ” Table 3 below provides a comparison of Riordan’s A/R turnover ratio for 2005 and 2004: Table 3: A/R Turnover Ratio A/R Turnover Ratio20052004 Net Sales$50,823,685$46,044,288 Average A/R$5,860,0278. 67 times$6,106,6887. 4 times Riordan Manufacturing’s A/R turnover ratio improved from 7. 54 times per year to 8. 67 times per year equating to turning over accounts receivables every 42 days. This ratio increase indicates that Riordan’s extension of credit and collection of accounts receivable is efficient. Riordan’s FY 2005 Balance Sheet reflects an increase of almost one-million dollars in fixed assets, their largest component of total assets, over FY 2004. Riordan is a mainstream plastics manufacturer with fixed assets of 55% of their total assets. This percentage is typically 35% in the rubber and plastics industry.
Riordan’s operating margin also compares favorably in the industry at 6% compared to the typical 2%. Riordan is solvent with a current ratio above 2:1 and their resources can cover their debts over the next year. Riordan’s profitability ratio of ROE was stable in the last year and compares favorably against the Rubber and Plastic Industry Average of 7. 30% according to Yahoo Finance (2008). Riordan’s A/R turnover ratio for 2004 and 2005 improved from 7. 54 times per year to 8. 67 times per year equating to turning over receivables every 42 days. This activity ratio ncrease indicates that Riordan’s extension of credit and collection of accounts receivable is efficient according to PrinciplesofAccounting. com (2008). What Operating Areas Have Contributed to Riordan’s Success and Which Have Not? Riordan’s financial information for the last two years reveal mixed results in terms of performance in certain operating areas. Balance sheet and income statement successes are reviewed in addition to areas of concern. The successful areas from the assets portion of the balance sheet are Accounts Receivable, Notes Receivables, Investment in Joint Venture, Property, and Plant and Equipment – net.
These sections all increased over the two year period, ending in a two percent increase of Total Assets. Under liabilities, the only decrease of debt occurred in the Deferred Income Taxes – net area. Total Stockholder Equity increased by two percent. The successful areas from the income statement are a three percent increase in gross profit and a 14% reduction in Total Non-Operating Expenses. An area for question on the balance sheet is a three percent increase in liabilities.
The concerning areas from the income statement are an 11% increase in Direct Cost of Goods Sold, an 8% increase in Total Operating Expenses, a 6% decrease in Profit before Interest and Taxes and a 1. 7% decrease in Net Profit after Taxes. What are the strengths and weaknesses of the company’s financial position? Riordan’s income statement reveals increased profits by 6. 2% in 2005 with Sales, Operating, and Non Operating Expenses being the leading drivers and strengths for this positive increase. Riordan’s balance sheet indicates a negative decline of approximately 0. % in growth of Total Assets due primarily to a large decline in Current Portion of Notes Receivable. The company did not have any deferred income taxes in 2005. 2005 data indicates positive economic conditions for Riordan Manufacturing and opportunities to leverage relatively low interest rates into new investments to enter new markets and increase productivity (Apollo Group, Inc. , 2008). Some external factors that contribute to the strengths of Riordan’s current financial position include relatively high fuel prices which will continue to encourage the purchasing of new aircraft o promote fuel efficiency and reduce costs. This indicates continued strong demand for Riordan Manufacturing’s products by aircraft manufacturers. The demand for appliances continues to be strong due to an increase in housing sales, thereby establishing demand in the production of parts used to make appliances. Consumer automotive spending is a potential weakness. As a result, Riordan should closely monitor a decrease in domestic automobile production due to weak sales. A stabilizing factor for consumer spending will be the large increase in the net worth of households due to the strong housing market.
Posing as external weaknesses and offsetting these positive trends will be the sizeable trade deficit, slightly higher interest rates, and high levels of household debt (Apollo Group, Inc. , 2008). What changes should be implemented in order to improve future performance? If a compatible financial and accounting software package cannot be found to replace their inefficient legacy system, then a program that can import and export different file types should be used to make the system more compatible. Another option to lower costs would be a data sharing system that would allow the different offices to share their data more seamlessly.
Many programs allow for . csv export which is often compatible as input into other software. Taking away some of the labor intensive and time consuming financial processes will save money and allow for more net profit. Keeping profits high will also allow the company to pay off liabilities sooner. Another approach would be to invest more in research and development and less in marketing. Conclusion An examination of Riordan Manufacturing’s current operational efficiency and financial status has revealed many strengths and challenges.
Riordan’s purchase of Elite 3E would produce the accounting and financial solution that Riordan needs. The company continues to show growth along with substantial success within the business. The financial data presented in 2005 indicates positive economic conditions and opportunities to leverage relatively low interest rates into new investments to enter new markets and increase productivity (Apollo Group, Inc. , 2008). The data also indicates continued success for the company as opportunities to improve the business are attained. Investing in Riordan Manufacturing is a sound decision.
References Apollo Group, Inc. (2008). Riordan Manufacturing. Internet – Overview. Retrieved October 10, 2008, from BSA/500 – Business Systems I. https://ecampus. phoenix. edu/secure/aapd/CIST/VOP/Business/Riordan/IndexPort. htm Elite, a Thomson Reuters Company (2008). Elite 3E. Retrieved November 15,2008 from http://www. elite. com/3E/ Leichter, J (2007, March). Benchmarking Your Business with Financial Ratio Analysis. Contracting Business, Vol. 64, Iss. 3; Pg. 82-84. Retrieved November 4, 2008, from ProQuest database. Nickels, W. G. (2005). Understanding Financial Information and Accounting.
Available from the University of Phoenix eBook Collection database. Yahoo Finance. (2008). Rubber and Plastics Industry. Retrieved November 12, 2008 from http://biz. yahoo. com/p/industries. html Washington State University (WSU) (2008). Financial Analysis Course, Chapter 8, Ratio Analysis Techniques. Retrieved November 14, 2008. From http://cbdd. wsu. edu/kewlcontent/cdoutput/TR505r/page38. htm PrinciplesofAccounting. com (2008). Chapter 16, Total Asset Turnover Ratio. Retrieved November 13, 2008. From http://www. principlesofaccounting. com/chapter%2016. htm Appendix A Riordan Manufacturing, Inc.
Consolidated Balance Sheet Fiscal Year Ending September 30th 20052004 Assets Current Assets Cash $305,563 $357,216 Accounts Receivable $6,062,838 $5,657,216 Current Portion of Notes Receivable $70,825 $117,888 Inventories $7,850,970 $7,854,112 Deferred Income Taxes – net $328,832 Prepaid Expenses and Other Items $264,896 $328,192 Total Current Assets $14,555,092 $14,643,456 Notes Receivable, less current portion $256,583 $177,408 Investment in Joint Venture $283,504 $133,504 Property, Plant and Equipment – net $19,114,830 $18,511,360 Intangible Assets – net $329,405 $336,128
Other Assets $52,768 $54,400 Total Assets $34,592,182 $33,856,256 Liabilities and Stockholders’ Equity Current Liabilities Current Portion of Long-Term Debt $1,219,258 $1,106,304 Accounts Payable $3,650,073 $3,573,248 Accrued Liabilities $1,350,144 $1,350,144 Income Taxes Payable $754,619 Total Current Liabilities $6,974,094 $6,029,696 Bank Line of Credit $253,727 $487,936 Long-Term Debt – less current portion $2,763,752 $2,535,552 Deferred Income Taxes – net $2,485,354 $3,107,072 Total Liabilities $12,476,927 $12,160,256 Common Stock Stated par value is $. 01. 20,000,000 shares authorized.
Issued and Outstanding 15,801,332 net of treasury shares. $29,055,488 $29,055,488 Other Accumulated Comprehensive Losses ($202,496) Accumulated Deficit ($6,940,233)($7,156,992) Total Stockholders’ Equity $22,115,255 $21,696,000 Total Liabilities and Stockholders’ Equity $34,592,182 $33,856,256 Appendix B Riordan Manufacturing, Inc. Income Statement For the 12 months ending September 30, 2005 20052004 Sales $50,823,685 $46,044,288 Direct Cost of Goods Sold $42,037,624 $37,480,050 Gross Margin $8,786,061 $8,564,238 Operating Expenses Sales, Marketing & Other $1,012,974 $920,886
Depreciation $343,445 $349,937 Quality Assurance $1,139,688 $1,095,854 Research & Development $911,676 $828,797 General & Administrative $1,706,953 $1,524,066 Machining & Systems $628,505 $598,576 Total Operating Expenses $5,743,241 $5,318,115 Profit Before Interest & Taxes $3,042,820 $3,246,122 Non-Operating Expenses Interest Expense $143,175 $230,221 Taxes $943,274 $1,025,406 Total Non-Operating Expenses $1,086,449 $1,255,628 Net Profit After Taxes $1,956,371 $1,990,495 Appendix C Riordan Manufacturing, Inc. Consolidated Balance Sheet Fiscal Year Ending September 30th20042003
Assets Current Assets Cash$357,216 $85,632 Accounts Receivable$5,657,216 $6,556,160 Current Portion of Notes Receivable$117,888 $13,184 Inventories$7,854,112 $8,074,880 Deferred Income Taxes – net$328,832 $349,184 Pre-paid Expenses and Other Items$328,192 $336,128 Total Current Assets$14,643,456 $15,415,168 Notes Receivable, less current portion$177,408 $431,104 Investment in Joint Venture$133,504 $139,136 Property, Plant & Equipment – net$18,511,360 $19,205,120 Intangible Assets – net$336,128 $395,136 Other Assets$54,400 $51,840 Total Assets$33,856,256 $35,637,504
Liabilities and Stockholders’ Equity Current Liabilities Current Portion of Long-Term Debt$1,106,304 $1,737,728 Accounts Payable$3,573,248 $2,676,096 Accrued Liabilities$1,350,144 $1,257,344 Income Taxes Payable$164,864 Total Current Liabilities$6,029,696 $5,836,032 Bank Line of Credit$487,936 $245,760 Long-Term Debt – less current portion$2,535,552 $4,793,856 Deferred Income Taxes – net$3,107,072 $3,283,328 Total Liabilities$12,160,256 $14,158,976 Common Stock (Stated par value is $. 01. 20, 000,000 shares authorized. Issued and Outstanding 15,801,332 net of treasury shares. $29,055,488 $29,491,328 Other Accumulated Comprehensive Losses($202,496)($163,840) Accumulated Deficit($7,156,992)($7,848,960) Total Stockholders’ Equity$21,696,000 $21,478,528 Total Liabilities and Stockholders’ Equity$33,856,256 $35,637,504 Appendix D Riordan Manufacturing, Inc. Income Statement For the 12 months ending September 30th Fiscal Year Ending September 30th 200420032002 Sales$46,044,288 $43,418,370 $39,481,276 Direct Cost of Goods Sold$37,480,050 $34,517,604 $30,953,320 Gross Margin$8,564,238 $8,900,766 $8,527,956 Operating Expenses Sales, Marketing & Other$920,886 $1,085,459 $1,105,476
Depreciation$349,937 $329,980 $312,612 Quality Assurance$1,095,854 $1,033,357 $1,085,459 Research & Development$828,797 $868,367 $1,065,994 General & Administrative$1,524,066 $1,085,459 $829,107 Machining & Systems$598,576 $477,602 $434,294 Total Operating Expenses$5,318,116 $4,880,224 $4,832,942 Profit Before Interest & Taxes$3,246,122 $4,020,542 $3,695,014 Non-Operating Expenses Interest Expense$230,221 $217,092 $197,406 Taxes$1,025,406 $1,293,173 $1,189,186 Total Non-Operating Expenses$1,255,627 $1,510,265 $1,386,592 Net Profit After Taxes$1,990,495 $2,510,277 $2,308,422