Deutsche Brauerei Case

SITUATION ANALYSIS

According to Lukas, as the volume above break-even volume increases, the profits rise disproportionately faster. The analysis in Exhibit 6A identifies the break-even volume, where revenues just equal total costs and Deutsche Brauerei recovers all its fixed cost at the break-even volume sale. Sales above break-even point will bring profits for the company. The analysis of a break-even chart shows that Deutsche Brauerei has to sell more than 940,259 hectoliters of beer to start making profits; its current capacity is 1,173,000 hectoliters. A sale above the breakeven point indicates a continued and profitable growth, profit of €6.08 millions.

In analyzing the financial forecast it is suggested that Mr. Pinchuk has formulated a very aggressive plan for Ukraine expansion. According to the income statement Ukraine sales are far more aggressive, 41% average during 2000-2002, than Germany’s 3% average in the same period. Consequently accounts receivable for Ukraine grew approximately at the same average sales growth rate for 2000-2002 (44%). This is due to the higher relaxed credit policy that Mr. Pinchuk desires to implement with Ukranian distributors, which is to extend the credit policy from 80 to 90 days. This flexible policy, although a good strategy to construct the beer distribution pipeline, is no longer optimal for the company. Having money tied up in accounts receivables is not as profitable as having the money in cash.

The current and quick ratio improves between 1998-2000 but then liquidity reduces in 2001 and 2002.

One of the main concerns for Deutsche Brauerei’s financial budget for 2001 is its heavy reliance on short-term debt financing. This is mainly due to operating strategies, policies, large sales growth, dividends and capital expenditure being financed through working capital. These have all attributed in draining the company’s cash and causing the business to finance the investment through working capital using short-term...