Case Study

Memorandum

To: The board of directors of Deutsche Brauerei

Subject: Financial Projections for Deutsche Brauerei 2001-2002

I have double-checked the financial information and financial forecasts which I gathered from the Deutsche Brauerei. My analysis implies that assumption for next two years’ profit was not that optimistic just like the Pinchuk forecasted. Moreover, The extremely relaxed accounts receivable strategy in Ukraine encouraged by Pinchuk as well as high dividend payout strategy, which should considered being harmful for the company’s financial health. I made some reasonable changes to the assumption figures and recalculated the projections of return on investment. There are some different results due the following reasons:

1. Extremely relaxed accounts receivable.

In late 1998, Deutsche expanded its beer business into the Ukraine which was an emerging market with large population of 52 million since the dissolution of the U.S.S.R, a wave of privatizations as well as market reforms promoted by Ukraine government. Since then, Sales in Ukraine grew dramatically; further, the Ukraine had contributed the most of the unit growth in Deutsche’s sales. In 2000, sales of Ukraine customers unbelievably grew by 47%. In order to maintain and boosted much more market sales in Ukraine, Pinchuk extended accounts receivable credit to distributors in Ukraine from 2%10, net 40, the original credit policy in western Germany to 2%10, net 80, even worse to 2%10 , net 90 which adopted since 2001. The new credit policy had negative impact on Deutsche’s future profit.

Also, When I looked at the Pinchuk’s projections for 2001 and 2002 of the Return on Investment from investment in Accounts Receivable in Ukraine, Pinchuk forecasted Return on investment for 2001 and 2002 ignore the investment in inventories and in fixed assets. Actually, Pinchuk relaxed the inventory policy, storing the large amount inventories from 1999...