DOWN BUT NOT OUT

Mr. Rahim, the Chief Executive Officer of Poly Sdn Bhd (PSB), was
worried about his loan repayment especially after the meeting with his
bankers yesterday. Subsequent to the meeting, he was not able to sleep well.
PSB had borrowed from two merchant banks to purchase a new multi-million
ringgit machinery to satisfy the quality and other conditions imposed by a
potential customer. The customer, representing a large reputable
conglomerate, had verbally placed a huge order. When everything was ready,
this promising customer withdrew his order citing his company policy in
choosing suppliers. This unexpected decision pushed PSB into a quandary.
Worse, Mr. Rahim had no written agreement to fall back on to. One foreign
company had offered to buy the machinery at 20% of the original cost. PSB
faced a huge loan repayment problem as the new machine could not be used
to generate income. With his bankers chasing after him, Mr. Rahim was at a
loss as how to minimize his losses.

Background
In1994, PSB was incorporated in Klang, Selangor to produce polythene
bags (or P bags). It was owned and managed by four brothers. Within two
years of its operations, it was unable to supply the full demand for the P bags
since there was a huge demand from every industry; from food to
pharmaceutical industries. For future expansion, PSB decided to move the
company from Klang to Alor Gajah, Malacca. The location was well connected
by railways and roadways and had access to a good supply of skilled labour.
The state government also provided incentives through water and tax
concessions. All these motivated the brothers to go for a full production of
plastic and polythene-based products and the company was an instant
success.

The Polythene Industry

PSB first introduced small daily use polythene bags for consumers.
Polythene bags were very popular as the polythene films were easy to roll,
flexible and lightweight. Modern living required everything to be packed in air-

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and water-proof material not only for preserving them but also for aesthetic
value.
PSB supplied P bags to supermarkets and restaurants but as a
strategic move, management decided to venture into woven polypropylene
bags (WPB) which were mainly used by industries to pack fertilisers, poultry
feeds, sugar and flour. They shifted the company’s marketing strategy from
B2C (business-to-consumer) to B2B (business-to-business).

PSB supplied P bags to rice industries and woven bags to the fertilizer
industry. Mr. Yusri, one of the brothers, negotiated with government
departments which operated the feed mills such as FELCRA and FELDA. He
was hopeful of getting orders from these industries in the near future.
Among the ASEAN nations, Indonesia and Thailand had sizable
markets. Singapore though an industrial nation has a small market. She
imported polythene bags from China as it was cheaper. Cambodia was
another big market for polythene bags. These countries were still not
concerned about pollution and environmental protection especially from
polythene products. As such, these markets were designated as growth
areas by Mr. Yusri.
Governments around the world were concerned about the usage of
polythene. Polythene was not only non-biodegradable but also blocked
drainage. Water pollution was rampant due to the accumulation of polythene
waste in lakes and rivers. They destroyed marine life and changed ecological
balance quickly. The European Union was very strict and did not allow the
use of non-biodegradable packing materials in imports and exports.
The Malaysian government at both the state and federal levels
encouraged the non-use of polythene on “No Plastic Day” schemes. These
governments also withdrew the incentives and subsidies provided to the
industry. Although the governments discouraged the use of polythene
products, its demand continued to grow. When Mr. Rahim contacted several
interested groups on banning plastics and polythene, they agreed that it was
impossible to discontinue the use of P bags. Consequently, they suggested
re-cycling and re-use. Re-cycling is expensive and pollutes the air. Melting
makes polythene loses colour and shine.

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 Mr. Rahim came across polythene re-used in road projects in India.
Roads were laid with tar and polythene mix lasted longer and was cheaper,
not easily damaged by rain. In India, state governments bought plastic and
polythene materials for this re-cycling purpose at a good price. This process
needed no cleaning or purifying the used polythene. As such, the used
plastics had a good market elsewhere.

Human Resource
PSB was managed by the four brothers: Mr. Rahim, Mr. Yusri, Mr.
Zulkiply and Mr. Nordin. Mr. Rahim, the eldest and 49 years old, was a
chemical engineer from Imperial College of London. He looked after
production, ordered the machinery and decided on the raw materials, the
supplier, quality and distribution to the customers. The Human Resource
Department was run by the third brother, Mr Zulkiply. He was 43 years old
and obtained a degree in Human Resource (MSHRM) from UNIRAZAK, a
local boutique university.
Marketing was assigned to Mr. Yusri, the second brother. He was 47
years old and had a marketing degree from an Australian university. He used
his communication skills to negotiate and capture new customers for the
company. Although he was in marketing, he had an extensive knowledge in
other areas of company operation. He frequently advised the brothers on
financial matters too. Mr. Nordin, aged 35, the fourth brother, had an MBA
with specialization in finance. He managed the finance side of the business.
PSB used local software for accounting and other functions. Payroll,
inventory, suppliers and customers’ data were entered into a database by two
administrative staff. This data could be retrieved for tax computation. It was
not fully automated software and had not been changed for a long time. The
software delayed preparation of statements for banks and income tax
calculation.
There were 78 employees, including 13 as directors and managers.
The remaining workers were in production of which 27 were local employees,
14 from Indonesia and 24 from Nepal. According to Mr. Rahim, high labour
turnover was not only experienced among the local workforce but also among
the foreign employees. He complained that at times, the workers did not even

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stay for three months. To recruit new workers was difficult. The immigration
department made it difficult to recruit foreign workers.
From January 2013, the company implemented the minimum wage
policy on foreigners. Due to this, the labour cost increased by 20% to 30%,
thus, draining the company’s cash and profitability.
The directors were brothers with strong cultural values, for example,
obeying their eldest brother in decision-making. Despite these traditional
values, they expressed their opinion frankly when asked. In the last five
years, they did not get any dividends for their shares as the cash position and
profits were weak and the bank overdraft was growing. However, they
received sumptuous directors’ fees and allowances of approximately
RM25,000 per month.

Production Process
Plastic is a by-product of hydrocarbon from crude oil. Plastic granules are
heated to 80 degree Celsius to enable the granules to become molten semi-
liquid plastic, which is then rolled into thin films. Any label can be printed on
them. To get different colours, the heated molten plastic is mixed with colour
chemicals. Finally, the films are cut in different sizes and pressed in a heater
to produce P bags. The WPBs are produced by weaving polythene threads
such as, cloth which are stitched into bags that are mainly used for packing
fertilisers, sugar, animal feed, etc.
Quality of materials is important to maintain quality. Mr. Rahim had
picked some local suppliers who were reliable to provide the right quality,
quantity and price. In the last 19 years, PSB had never faced any difficulties
in the supply of materials. Moreover, these suppliers extended a credit period
of 45 days without interest and charged only 2% per month for delayed
payments. For early payments, some suppliers even extended 2% cash
discount if the customer pays within 30 days (otherwise the credit term is 45
days). To meet demand and to ensure continuous production, Mr. Rahim
always stocked two months’ worth of raw materials in his stores.
In 1996 when the company moved to Alor Gajah, they were producing
consumer polythene bags but later switched to woven bags. They set up
machinery for this production, which fully occupied the space. When they

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changed to woven bags, there was no space in the factory. They purchased
another building named as Factory 2 located about 500 meters away as there
was no nearby building or land for expansion. In Factory 1, the weaving took
place. Once weaving was over, the work in progress was transported to
Factory 2 where the labeling, stitching, inserting the inner bag and bundling
were carried out. This two-factory system increased labour costs and time for
completion of finished products.
In Factory 1, there were some 28 circular weaving machines; 16
imported from Taiwan and the rest from South Korea. There was one new
plastic extruder flat film-stretching machinery purchased for RM1 million.
These machines jointly performed about 60% of the work. They weaved and
rolled them to be shifted to Factory 2. The remaining 40% of the work was
done in Factory 2.
The company was running at optimum capacity till 2011. In 2011, the
order of a substantial quantity of woven bags from a big conglomerate in the
petroleum sector required PSB to increase production and quality. This
company also provided PSB with information on where they could purchase
the machinery, the price, etc. However, PSB did not enter a formal
agreement for the supply. Based purely on verbal agreement, PSB borrowed
heavily from the banks and later ordered and installed this new and expensive
machinery with the hope that the conglomerate would fulfill its promise.
When the production was about to start, the customer backed out. Its
board of directors decided to place the order among several suppliers rather
than buying from one company. This created 40% to 50% idle capacity which
PSB could not handle. PSB also could not find an alternative market for these
quality bags in such a short time.
The banks did not accept these excuses and the company had faced
difficulties in repaying the loan. The company tried to sell off the machinery
but there was no buyer. It could only be sold as scrap metal which fetched a
mere 20% of the acquisition cost.

Weave or Buy Dilemma

As mentioned earlier, Factory 1 completed the weaving work which was close
to 60% of the total work while the remaining 40% was completed in Factory 2.

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An Indonesian supplier was willing to supply the woven bags of good quality
material at a cheaper price. Buying this semi-finished woven material and
completing the printing, stitching, inserting inner liner would not only speed up
the work but it also cheaper. If the management had bought from the
Indonesians, Factory 2 would become idle and useless.

Statement of Financial Position and Income Statement

The comprehensive income statement for 2011 and 2012 showed the sales
revenue as RM17 million and RM16 million, respectively while profit before
tax stood at RM264,000 (2011) and RM56,000 (2012). The finance expenses
grew from 2011 to 2012.
PSB’ s equity was stable at RM2.5 million. PSB financed its production
activities in four ways. Bank overdraft was highly flexible but PSB had to pay
an extra 1.5% as interest than the term loans. The other ways were short-
term borrowings, hire purchases and long-term loans.
Cash flow statements record only cash flows unlike the income
statement, which incorporates accrued items. Cash flow statements are more
reliable than income statements. Increase in inventory, accounts receivable
and borrowings and decrease in accounts payable are all bad signs for the
company. In 2012, despite these difficulties, the cash position increased to
RM423,000 from RM51,000 in the year before. But the income statement
showed a contradictory view. All PSB’s financial statements are shown in the
Appendix.

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Apendik/Appendix

Jadual di bawah menunjukkan penyata kewangan PSB untuk tahun kewangan

berakhir 31 Disember 2011 dan 2012.

Tables below show the financial statements of PSB for the financial years end 31st
December 2011 and 2012.

Jadual 1: Penyata Pendapatan Komprehensif bagi Tahun-tahun

Kewangan 2011 dan 2012

Table 1: Comprehensive Income Statement for the Financial Years 2011

and 2012

31-12-2012 31-12-2011
(RM’000) (RM’000)
Hasil/Revenue 16,191 17,194
Kos barang dijual/ 13,064 14,001
Cost of goods sold
Pendapatan kasar/ 3,127 3,193
Gross income
Belanja kendalian/ 457 461
Operating expenses
Susut nilai/Depreciation 998 975
Kos pengedaran/ 441 468
Distribution costs
Belanja pentadbiran/ 657 770
Administrative expenses
Pendapatan/(rugi) lain/ 0 2,553 (97) 2,577
Other income/(loss)
Untung kendalian/ 574 616
Operating profit
Belanja faedah/ 518 352
Interest expense
Untung sebelum cukai/ 56 264
Profit before tax
Cukai/Tax 1 (126)
Untung selepas cukai/ 55 390
Profit after Tax

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Jadual 2: Penyata Perubahan dalam Kedudukan Kewangan bagi Tahun
Kewangan 2011 dan 2012

Table 2: Statement of Changes in Financial Position for the Financial

years 2011 and 2012

31-12-2012 31-12-2011
(RM’000) (RM’000)
Aset bukan semasa/
Non-current assets
Tanah/Land 944 944
Bangunan/Buildings 2,661 2,701
Kilang dan mesin/ 8,680 9,410
Plant and machinery
Peralatan pejabat/ 34 33
Office equipment
Perabut/Furniture 4 4
Kenderaan/Vehicles 330 422
Jumlah aset bukan semasa/ 12,653 13,514
Total non-current assets

Aset semasa/Current assets

Inventori/Inventory 1,463 1,322
Penghutang 1,959 1,840
perdagangan/Trade Debtors
Penghutang lain/Other debtors 524 581
Simpanan tetap/Fixed deposit 468 1,653
Tunai dan bank/Cash and bank 423 51
Jumlah aset semasa/ 4,837 5,447
Total current assets
Total assets 17,490 18,961
Liabiliti bukan semasa/Non-
current liabilities
Pinjaman/Term loans 7,522 8,118
Liabiliti semasa/
Current liabilities
Pemiutang perdagangan/ 1,683 1,887
Trade creditors
Pemiutang lain/Other creditors 542 463
Hutang kepada pengarah/ 42 86
Due to directors
Overderaf bank/Bank overdraft 298 302
Pinjaman jangkapendek/ 2,846 3,602
Short-term borrowing
Peruntukan untuk percukaian/ 14 15
Provision for taxation
Jumlah liabiliti semasa/ 5,425 6,355
Total current liabilities
Jumlah liabiliti/ 12,947 14,473
Total liabilities
Ekuiti/Equity

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 Modal berbayar/Paid up capital 2,500 2,500
Pendapatan tertahan/ 2,043 1,988
Retained earnings
Jumlah ekuiti/Total equity 4,543 4,488
Jumlah liabiliti dan ekuiti/ 17,490 18,961
Total liabilities and equity

Jadual 3: Penyata Aliran Tunai Bagi Tahun Kewangan 2011 dan 2012

Table 3: Cash flow statement for the financial year 2011 and 2012

31-12-2012 31-12-2011
(RM’000) (RM’000)
Untung sebelum cukai/Profit before tax 56 264
Untung atas jualan aset tetap/ (4) 0
Gain on disposal of fixed assets
Hapuskira aset tetap/Fixed asset written-off 1 0
Susut nilai/Depreciation 998 975
Kos kewangan/Finance costs 542 293
Pendapatan belum peroleh/ (17) (17)
Unearned income
Tunai sebelum modal kerja/ 1,576 1,515
Cash before working capital
Tambah/kurang dalam inventori/ (141) 1,020
Decrease/Increase in inventory
Tambah/kurang dalam penghutang/ (119) 443
Decrease/increase in debtors
Tambah/kurang dalam penghutang lain/ 67 (6)
Decrease/increase in other debtors
Tambah/kurang dalam pemiutang/ (204) (556)
Decrease/increase in trade creditors
Tambah/kurang dalam pemiutang lain/ 79 (8)
Decrease/increase in other creditors
Tambah/kurang dalam belum bayar lain/ (53) 71
Decrease/increase in other payables
(371) 964
Tunai dari aktiviti operasi/
Cash generated from operating activities
Faedah dibayar/Interest paid (266) (126)
Cukai dibayar/Tax paid (2) (51)
(268) (177)
Tunai dari operasi/Cash from operations (937) 2,302
Tunai dari aktiviti pelaburan/
Cash from investment activities
Faedah diterima/Interest received (24) 58
Pembelian aset tetap/ (134) (194)
Purchase of fixed assets
Tunai dari aktiviti pelaburan/ (158) (136)
Cash from investment activities
Tunai dari aktiviti kewangan/
Cash from financing activities
Belibalik saham/Share buyback 0 (825)

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Faedah dibayar/Interest paid (252) (227)
Bayaran balik pinjaman bank/ (1,236) (1,279)
Repayment of bank loan
Bayaran balik caj sewa/ (100) (49)
Repayment of hire charges
Tunai dari aktiviti kewangan/ (1,588) (2,380
Cash from financing activities )
Tunai diguna dalam perniagaan/ (809) (214)
Cash used in business
Baki awal tunai/Opening cash 1,402 1,614
Baki akhir tunai/Closing cash 593 1,400
Terdiri daripada:/Composed of:
Simpanan tetap/Fixed deposit 468 1,651
Overdraf/Overdraft (298) (302)
Baki bank/Bank balance 423 51
593 1,400

Dikehendaki/Required:

a) Bincang 4 (empat) isu utama dalam PSB.

Discuss 4 (four) major issues in PSB.

b) Guna maklumat dalam penyata kewangan untuk membincang kecairan

PSB.

Use the information in the financial statements to discuss liquidity of

PSB.

c) Beri empat (4) cadangan berserta justifikasi untuk PSB.

Suggest and justify 4 (four) recommendations to PSB.

.

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