METRAVIB – SKYROCKETING EBITDA? Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

METRAVIB – SKYROCKETING EBITDA? Case Solution

IDEAS TO INCREASE THE EBITDA

Below are the main ways in which the EBITDA can be increased of any organization. The organization taken as the consideration is METRAVIB, a member of the ACOEM Group.

The main ways in which the organizations can increase the EBITDA figure can be analyzed through breaking down the components of the Income statement of the organization, which are REVENUE, COST OF SALES, ADMINISTRATIVE EXPENSES and OVERHEADS. These basically have a major role in deriving a firm to calculate its EBITDA and all relates to the operations of the organization. Financing and taxation matters occur below the EBITDA Figure and are unnecessary for our report. Below is the breakup of components mentioned above and their respective ways in which the EBITDA can be increased without the involvement of Creative Accounting.

REVENUE

Revenue is the first element of the Income Statement, and will form the first basis of our scrutiny. The main way in which any organization can increase the EBITDA figure is to increase the sales of the organization, if the sales will be increased all the multiples will show a positive indication such as EBITDA itself.

METRAVIB Organization, and considering our business unit of PEARL SOLDIER PROTECTION, and PILAR VEHICLE PROTECTION; the sales figure needs to be increased in order to increase the EBITDA. The ways in which an organization can increase its sales are through:

GLOBAL INTEGRATION and BLUE OCEAN:

The first strategy to increase the sales of the organization is to increase the position by enhancing towards other markets. This means to perform on an international level. This will increase the revenue turnover highly. An example can be taken of the NETFLIX INC. which used the blue Ocean Strategy to enter in new markets around the globe, and have now integrated into the EAST ASIAN Market. This was a way to get over the competitors as global integration provides a high boost towards sales growth.

In consideration to METRAVIB, the organization is following on the same strategy as the press release of METRAVIB February 2015 stated the organizational ties with 20 countries around the world with 13 being of NATO partner countries. (METRAVIB, 2015)

B2B: BUSINESS TO BUSINESS

As the organization’s current focus is towards the Business to Government (B2G) sector, the organization can also expand itself in the B2B sector. There is a big security industry with valuation in billions of Dollars, the organization can approach different security companies and can equip their vehicles through PILAR Product which will influence and will enhance the sales figure, which would in return increase the EBITDA of the organization.

SALES RETURNS

The sales return is a part of the income statement and it will reduce the net sales figure if it increases in high quantity, which would in turn reduce the EBITDA of the organization.

The organization should focus highly on the quality and terms of its sales so that the sales return figure will be very less and it would not reduce the net sales figure in the financial statements.

According to the METRAVIB, it is advised that the terms of the sales should be decided in such a sense that the buyer organization does not have the authority to return the goods and the responsibility of items will be sought by the buyer. This will also be a factor when we consider the revenue recognition principle upon the FASB.

RISK OF SALES

There is also a risk attached with increase in sales for the increase of EBITDA Figure, this will relate to the revenue recognition policy changes.

This is an area which the organization should be highly considerate towards as if the organization directly amends the revenue recognition criteria and records pre-sales before the risk and rewards are transferred, then this will be called as Creative Accounting and will be directly against the GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) and will be against the Law. (Wokukwu, 2015). In short, for the Organization, to increase the EBITDA figure, it should not choose the option of Earnings Management as this will be a Negative Indicator for the organization if caught, and it will create highly negative publicity, fines, and even imprisonment for those charged with governance.

COST OF SALES

Next element to be considered is the cost of sales in the EBITDA. Evidently, companies are primarily engaged in the manufacturing of military equipment and sometimes report EBITDA in their quarterly earnings, however the financial analysts frequently cite it as well. Ignoring interest and tax expenses usually allows the analyst to keep focusing specifically on the operational performance of the company in the long run. It also provides an insight to the company about the operations and cash generations for the capital investments.

Even though, there are countless ways which can be used by the METRAVIB in order to optimize the performance of the company, it is important to keep focusing on the strategies and technical plans which are achievable through adopting streamlining production of the military equipment, modern and effective breakthroughs or technologies and focusing to implement the quality as a competitive differentiator. Like any other performance measure, the single indicator is EBITDA with levers which can be manipulated in order to drive improvement. For the purpose of developing a health picture of the company, a metric’s multitude has to be taken into account and should be evaluated for the cause as well as effect on the company’s EBITDA. Afterwards, the current level of the company’s targets and performance has to be identified that would assist in driving the improvement of the process and optimize the performance of EBITDA.

Role of Cost of Goods Sold in increasing EBITDA:

The cost of goods sold is the cost of the inventory that the business usually sells during a particular period of time. By lowering cost of goods sold, the EBITDA of the company can be increased. Under cost of goods sold, the valuation of inventory is a critical aspect; it is an effort to capitalize, value, property account for, depreciate and report military equipment. This can be subdivided into various parts which are listed below;

To value refers to determining the complete asset cost.
To capitalize is to reflect the expenditures as assets instead of expenses for the military equipment.
To depreciate is to determine the capitalized value of the assets over the useful life of asset.
To account for is to make sure that all the military equipment assets are recorded in the record system.
To report is reflecting the military equipment’s correct value on the financial statements.

Prior to the financial year 2003, the military equipment was expensed on the company’s balance sheet and thus categorized as the national defense property, plant and equipment. In the later years, it was then re-categorized as the general property, plant and equipment and it was treated as capital asset on the financial statement of the department.

However, the question arises that how should the military equipment be valued? There are guidelines which are determined in order to ease the valuation. Below is the consideration given on how to value the equipment and what are business rules in respect to the valuation?

It is important to expense the cost of Research and development, test and evaluation (RDT&E) when it is incurred until and unless the costs which are related with the end items development that would be issued for military operations.
If the research and development test and evaluation costs are associated with the fielded assets, it is important to capitalize them as military equipment Invalid source specified..

The military equipment should comprise of many features which are listed below;

The physical inventory must be reconciled to the book inventory.
The company has to keep accurate stock item count.
First in first out (FIFO) control.
Custom management reports must be generated.
There should be multiple or single warehouses.
The stock management of mobile with the bar code scanning.
The stock that has been received must be tracked.
Reduce issue out and time to receive stock.
The standard cost of stock must be maintained.
Provides local and global inventory levels.
The supplier information must be maintained.
Raw material, finished goods and work in process must be categorized.

The valuation of the military equipment should follow first in first out method as it is easy to operate and understand. It is suitable in case of falling prices of material and non-voluminous transactions. It also avoids obsolescence and deterioration. In addition to this, the management and accountability of the military equipment include;

The capital asset’s physical accountability is improved.
The capability of the capital assets management system is increased.
Accountability transition plan.
It is significant balancing between physical and fiscal accountability.
Full compliance to be achieved with the statement of federal financing accounting standard no 6.............

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