FISRT FARM CORPORATION

I. BACKGROUND OF THE STUDY

First Farms Corporation was established by the Francisco, Joselito and Arturo
Evangelista in the 1950s where they started a small animal feeds manufacturing
plant in Caloocan with 15 employees. The company has expanded to other
agribusiness products and set up nationwide facilities. In 1995, FFC raised P1.1
billion from its initial public offering. P500 million of the proceeds was used as
working capital (livestock inventories and raw materials), P476 million went to
expansion of operations and acquisition of properties while P69 million was used
to pay part of the corporation’s long term debt. In the same year, the Company
acquired exclusive rights to develop and operate California Chicken and Gulliver’s
Chicken restaurants in the Philippines. During the 1990s, 60 percent of its revenues
are coming from its chicken business and its main markets are supermarkets,
retailers and the hotel and restaurants industry. During the Execom meeting for the
performance in the first half of 1996, the company faced a problem in their cash
flows and the proposed actions were to extend the 30 days credit term to 60 or 90
days and to offer a 5% discount to their customers who pay within 10 days.

Consolidated sales for the year still amounted to P5.7 billion which is 44%
higher than the previous year. P3.508 billion or 62% of revenue was from chicken
sales hence, taking over leadership in the business from Marigold Foods Inc.
Moreover, FFC has outpaced the industry growth on chicken sales volume which
is largely attributed to the company’s increased contract growing base. Net
income was also up 89% amounting to P280 million despite the increasing costs
of production.
II. STATEMENT OF THE PROBLEM
1. What action should Mr. Ricardo recommend for the next Execon meeting
to improve their current states, strategies and financial position in the
poultry business?
2. Is it recommended for the FFC to proceed with the expansion through the
construction on new chicken dressing plants and new feed mills?

III. OBJECTIVE/S
 1. To identify and present the action of FFC in the next Execon meeting and
with their valued customers.
2. To plan weather there is a need of additional warehouse posed by the
expansion through the construction of chicken dressing plants and new feed
mills.
IV. AREAS OF CONSIDERATION
A. SWOT ANALYSIS
a. Strength
i. The company is considered as a leading poultry integrator in the
country and expanded with multiple product lines such as, fresh frozen
chickens, processed meats, animal health products and feeds.
ii. Fast-growing revenues by more than 20% annually and ROE with
increasing 50% annually in the 1990s.
iii. A largest consumer of corn and other feed grains in the country which
allows it to buy raw materials at a lower cost compare with other
competitors.
iv. Considered as a leader of chicken industry in 1995 with a volume sales
of 27% market shares.
v. The first to introduce the aqua feed that floats to guarantee fish farmers
better feed hygiene and higher aqua farm productivity.
b. Weaknesses
i. With the present of poor forecasting with the market, resulting to a
higher production of chicken and offering good quality product at a
lower cost.
ii. Feeds requirement increasing in every delayed harvest
iii. Most of the company’s inputs or raw materials are prone to price
increase which cause the increase in cost of production.
iv. Production is constrained by the production capacity of the company
available facility and to require an expansion will also need large
investment.

c. Opportunities
i. Increasing demand for their new product line (aqua feeds)
 ii. New facility may encourage potential buyers due to accessibility of
plants and greater reliability of supply.
iii. Lower tariff cost for exporting poultry would be an opportunity for the
business
d. Treats
i. Inefficiencies in corn production in the Philippines resulted to higher
production costs for the local chicken producers
ii. With the lowering of import tariff of chickens, there is a high
potential that there will be oversupply of chickens in the country
hence decreasing its price
Relevant information/data for the analysis of the company’s performance

 Offering a 5% discount for customers who pay within 10 days will result to
reduction in the average collection time by 20%
 The current credit term of the company with their suppliers is 30 days
 Feeds accounts for only 30% of FFC’s current business and operating profit
was positive at approximately 10% of sales
o This information indicates that expanding its feed milling business
(especially the new aqua feeds) is a good investment opportunity
 Consolidated Balance Sheets (December 31 1993 – June 30 1996) will be used
for computing financial ratios
 Consolidated Statements of Income (December 31 1993 – June 30 1996) will
be used for computing financial ratios
 Details of Inventory Account (December 31 1993 – June 30 1996) shows that
a big proportion (56% which includes the livestock and processed foods) of
the company’s inventory is coming from its chicken business
 Breakdown of revenues and volumes by major product category (1992-1995)
shows that the company is intensively expanding its chicken and feed milling
business

 Revenues and costs by product category for the year 1995 shows that 61.71%
of the company’s operating expenses is from the chicken business
V. ALTERNATIVE COURSE OF ACTION
Proposed actions:
 1. Offer a 5% discount for customers who pay within 10 days
2. Extend credit terms to 60 days
3. Extend credit terms to 90 days
Proposed Actions using Qualitative Analysis
Table 1. Advantages and disadvantages of the 3 proposed actions
Proposed Action Advantages
Offer a 5% discount for  Collection period will
customers who pay within decrease by 20%
10 days  Liquidity of the company
will improve
 Sales will improve
With credit terms  Financial risk will be
extended to 60 days reduced
 Effective rate of interest
will decrease
With credit terms  Financial risk will be
extended to 90 days reduced
 Effective rate of interest
will decrease
Disadvantages
 Lower revenues per unit of
output
 Possibility that the supplier
will not agree
 Possibility that the supplier
will charge a higher
interest
 Possibility that the supplier
will not agree
 Possibility that the supplier
will charge a higher
interest

Evaluation of Proposed Actions (Quantitative Analysis)

 The trend of financial ratios of the company will be computed to analyze its liquidity,
efficiency and profitability

Table 2. Financial ratios

For Years Ended

Ratio December December December June
1993 1994 1995 1996
Gross Working Capital (PhP) 934,042,000 1,229,568,000 2,759,178,000 3,198,659,000
Net Working Capital (PhP) (926,000) (3,119,000) 720,358,000 (21,902,000)
 Liquidity Ratios
Current Ratio 1.00 times 1.00 times 1.35 times 1.00 times
Quick Ratio 0.37 times 0.43 times 0.61 times 0.54 times
Profitability Ratios
Net Profit Margin 2.96% 3.75% 4.93% (5.65%)
Operating Profit Margin 7.87% 8.93% 7.75% (10.96%)
Return on Investment 5.09% 7.48% 7.19% (3.74%)
Return on Equity 13.57% 21.09% 15.50% (11.26%)
Asset Management Ratio
Average Collection Period 25.73 days 32.17 days 47.68 days 114.76 days

Gross Working Capital

As a result of intensive R&D of the company in improving the chicken production
technology and increase in fixed assets (PhP747M in 1993 to PhP1.72B in 1996), working
capital requirements have also increased from PhP934M in 1993 to PhP3.20B in 1996. Gross
working capital was more than doubled (124.40%) in 1995 which improved the company’s
performance that helped in achieving the top spot in chicken volume sales (Figure 1). In 1996,
the company further expanded its fixed investments by 50.51% but the increase in gross
working capital is only 13.93%. This would mean that the fixed assets were not fully utilized.
The company had to limit their production because there was an oversupply of chickens in the
market, which resulted to inefficiencies in production and high inventory. This problem could
be solved or minimized with the proposed action of Mr. Sarmiento to offer a 5% discount for
customers who pay within 10 days. This will result to higher volume of sales.
 Gross Working Capital Fixed Assets

140.00%
124.40%
120.00%
Percentage Increase

100.00%

80.00%

60.00% 51.29% 50.51%

40.00% 31.64%
15.93%
20.00%
0.73%
0.00%
1993-1994 1994-1995 1995-1996
Years

Figure 1. Percentage increase in gross working capital and fixed assets of First Farms
Corporation, 1993-1996
Net Working Capital
The company is employing an aggressive strategy because it has negative net working
capital for the years 1993, 1994 and 1996. This means that the company high financial and
liquidity risk and is highly sensitive to changes in market.
Liquidity Ratios
The company is operating too aggressively because their current ratio is approximately
1 and quick ratio is 0.54 in 1996 which implies that their cash and accounts receivables are not
sufficient to pay their current liabilities. The company has to reduce their inventory or current
liabilities in order to improve the ratios. The 5% discount would help in reducing the
inventories because more customers will demand due to lower selling price or the company
could shift their short term liabilities into long-term liabilities.
Profitability Ratios
The business is not profitable during the first half of 1996 because of negative net profit
margin, operating profit margin, return on investment and return on equity (Table 2).
Asset Management Ratio
The company becomes very inefficient in their management of accounts receivables
during the first half of 1996, from 47.68 days in 1995 to 114.76 days in 1996. Given that the
credit term with supplier is only 30 days, the company faces a big problem in its cash flows.

As indicated by Mr. Sarmiento, the 5% discount will reduce the collection period by 20%. If
the company will implement the discount, the collection period is going to be 91.81 days. It is
still not enough to solve the problem in the cash flow. The extension of credit terms to 90 days
will close the gap between the collection period and credit terms thus the management of
accounts receivables will be efficient.
VI. DECISION/ RECOMMENDATION
1. Mr. Ricardo Sarmiento should recommend that the company must offer 5%
discount to customers who pay within 10 days and request its suppliers to extend
their credit terms to 90 days. With its implementation, the working capital of the
company will be managed properly because they will have enough time to collect
the funds needed to pay their suppliers. Their strategy of being too aggressive poses
constraints in their cash flows so they must improve their working capital thru
disposing inventories at a shorter time or shifting their short-term debt into long-
term debt. The company can further expand its feeds division (especially the new
aqua feeds line) because it showed good performance because of the successful
launch of the new product.
2. Based on the evaluation of the company’s strengths and weaknesses and the
opportunities and threats posed by the expansion, it is recommended NOT to
proceed with the expansion through the construction of new chicken dressing plants
and new feed mills. Despite FFC’s strengths and limited internal weaknesses,
several macroeconomic and external factors, mostly beyond the control of the
company, hinders the possible increase in sales of the company and outweigh the
potential benefits of expansion. Although the expansion will result to the increase
in the production capacity of the company and while it can be assumed that market
demand for the products of FFC will increase, increase in sales and net income is
still uncertain given the tight competition and supply glut in the industry.
Cost of inputs and operating costs are increasing but prices of products cannot be
increased by same proportion due to the competition. “Competition is keeping tight
rein on prices, particularly in the chicken business, even as the industry continues
to operate in an environment of increasing costs of production”.

VII. DECISION
a. Mr. Sarmiento shall allot two weeks in the assessment of the company and
preparation of solutions in order for them to report a profit at the end of 1996.
Plan Person Involved 1st week 2nd week
Assessment of the company’s Mr. Ricardo Sarmiento
financial performance and his team
Preparation of recommendation Mr. Ricardo Sarmiento

b. Implement strict collection Policy. It is recommended to improve the collection

period and account receivable turnover ratio to increase cash on hand and to
improve company’s liquidity. Percentage increase in the sales should be almost
of same proportion with the percentage increase in the account receivables.
c. Review Manpower. It is recommended to further evaluate the current system of
operation of the company to determine if the workforce of over 1,700 employees
is being maximized. Further assessment is recommended to identify if it is
optimal to hire 1,700 employees or if a certain system can be improved that may
lower the necessary workforce. Likewise, trade-off between investing in
machineries (automation) and hiring manpower can be further studied.
d. Evaluate macroeconomic factors to determine possible price increase. Further
study of the macroeconomic variables is suggested to determine if the company
can increase price of the products given the macroeconomic condition, and if
possible, to assess the extent in which the company can increase price that
would still result to increase in profit. Macroeconomic analysis should be done
to identify the product’s elasticity, market demand and supply, which will be
the basis for the computation of change in profit relative to change in price.
VIII. CONCLUSION
If the company’s poultry business problems were not eliminated/minimized with the
proposed solutions. The company will have to sacrifice their position as the market
leader of the poultry business industry and focus on its feed milling business.