Write a memorandum addressed to Irving Backbreaker, the CEO of Delorean Inc., a local carmaker, that addresses the issues you face with turning around Delorean Inc., which is on the brink of bankruptcy. Limit your discussion to identifying issues you see, your next step(s) and your recommended solutions. The hypothetical is at the end of this homework document.
Other Notes to Consider:
• Use the memo template listed in doc sharing as your guide
• This memo is to the CEO (Write in a business like manner)
• Keep your memo to LESS than 3 pages, and preferably 2 pages
• Be concise and don’t merely provide theory or background
• Use single spacing
• Reread (Proof) your memo to ensure grammar and spelling is correct
Hypothetical
You have just been hired as the new Chief Financial Officer (CFO) of Delorean, Inc. (“Delorean”) and you are in your first week of work (January 2008). Delorean is a local carmaker that produces sports cars at one manufacturing facility and sells these vehicles through numerous car dealerships around the United States. As part of your first week, you have met with the CEO (your boss), the leader of the employee union, the company general counsel, the director of internal audit, the controller and the director of the treasury department.
Upon speaking with the CEO, he mentioned that investors are anxious about the financial situation of the company and worried that the company will fail. The CEO is also concerned that the company has not made a profit in the last two years and investors expect at least an 8% return. The CEO has spoken with investors and they will be happy if the company is returned to profitability within two years and breaks even this year and the next. The CEO wants to know the issues you face in order to help fulfill the investor expectations and wants to meet in two weeks to determine what courses of action should be pursued. Further, the CEO is a hardworking, “old-school” type of person, who believes in pay for performance and will reward his employees for bringing the company back to profitability. The company is a private company and no stock has ever been issued.
While you were speaking with the Union leader, she mentioned that the plant employees have received 5% raises for the last 5 years under the existing labor agreement and when this agreement expires early next year, the union will demand at least a 6% raise per year in the new agreement or they will consider a strike. Other car companies provide between 3% and 7% annual raises, depending on the car company.
When you spoke with the company general counsel, he mentioned to you that the government is beginning to investigate various car companies for price fixing, monopolistic activities and unfair labor practices. Additionally, the general counsel stated that the prior CFO, who was terminated for embezzling company funds, may sue Delorean for wrongful termination based on his sex, age and religious preferences. The general counsel could not provide a dollar value liability for the company or whether the company will face an investigation by government agencies.
Upon speaking with the director of internal audit, you learn that previous memos discussing internal control issues sent from the internal audit director to the CFO had been ignored repeatedly. Further, the director of internal audit did not know if the memos had been forwarded to the CEO or audit committee of the Board of Directors.
Finally, you spoke with the controller and director of treasury and they mentioned that they had hoped to be promoted to CFO (your position), the company also needed a new computer system and their departments need to receive training for current accounting developments and issues facing the automotive industry.
The director of internal audit, the controller and treasury department all report directly to you. The director of internal audit also reports via a dotted line reporting relationship to the audit committee of the board of directors.
MEMORANDUM
To: Irving Backbreaker, CEO of Delorean Inc.
From: [Your Name], CFO
Date: [Date]
Subject: Issues and Recommended Solutions for Turning Around Delorean Inc.
Dear Mr. Backbreaker,
I would like to address the issues that Delorean Inc. currently faces and present recommendations for moving forward in order to fulfill investor expectations and return the company to profitability.
1. Financial Situation:
One of the main concerns of investors is the financial situation of the company. Delorean has not made a profit in the last two years, and investors expect at least an 8% return. To address this issue, we need to focus on the following next steps:
a. Conduct a comprehensive financial analysis to identify cost inefficiencies, revenue leakage, and areas of improvement.
b. Implement a cost-cutting strategy by reducing unnecessary expenses and optimizing production processes.
c. Develop a realistic and actionable financial plan aimed at achieving profitability within the next two years.
2. Labor Agreement:
The existing labor agreement with the employee union presents a challenge. The union leaders are demanding a 6% annual raise in the new agreement, and failure to meet their demands might lead to a strike. To handle this issue, we should consider the following actions:
a. Initiate negotiations with the union early to ensure a mutually agreeable solution that balances employee expectations with the financial constraints of the company.
b. Explore alternative compensation structures, such as performance-based incentives, to align employee rewards with the company's profitability goals.
c. Benchmark the compensation practices of other car companies and consider providing competitive raises within an acceptable range (between 3% and 7%).
3. Legal Risks:
The government's investigations into various car companies for price fixing, unfair labor practices, and monopolistic activities pose a potential threat. Additionally, there is a possibility of a wrongful termination lawsuit by the former CFO. To mitigate these legal risks, we should undertake the following steps:
a. Conduct an internal audit to identify any potential non-compliance issues and take remedial actions as necessary.
b. Cooperate fully with government agencies and provide the required information and documentation to demonstrate compliance with regulations.
c. Consult with legal counsel to assess the potential liability of the company in the wrongful termination lawsuit and prepare a robust defense strategy.
4. Internal Control Issues:
The director of internal audit has expressed concerns that previous memos addressing internal control issues were ignored by the prior CFO. To address this, we should focus on the following recommendations:
a. Review the ignored memos and determine their significance in terms of potential risks to the company.
b. Implement an effective communication process between the internal audit department, CFO, and CEO to ensure that important issues are addressed in a timely manner.
c. Ensure that the director of internal audit has a direct reporting line to the audit committee of the Board of Directors to enhance independence and effectiveness.
5. Talent Development and Technology:
The controller and director of treasury hope to be promoted to the CFO position. Additionally, the company requires a new computer system, and training is needed for the accounting departments to stay updated with current developments and issues in the automotive industry. To address these needs, we should consider the following actions:
a. Develop a talent development program to identify and nurture potential future leaders within the company, including the controller and director of treasury.
b. Conduct a cost-benefit analysis to evaluate the implementation of a new computer system, considering the potential efficiency gains and long-term benefits.
c. Invest in training programs and resources to ensure that accounting departments are equipped with the latest knowledge and skills relevant to the automotive industry.
I recommend that we schedule a meeting in two weeks to discuss these issues in more detail and determine the specific courses of action to be pursued. I appreciate your commitment to pay for performance and believe that by addressing these challenges effectively, we can bring Delorean Inc. back to profitability.
Thank you for your attention to these matters.
Sincerely,
[Your Name]
CFO, Delorean Inc.