Case #11
Deutsche Brauerei

Synopsis and Objectives

A newly-appointed director of a small German beer brewer must prepare to vote on three issues coming before the board of directors the next day: (1) approval of the financial plan for 2001, (2) declaration of the quarterly dividend, and (3) adoption of an incentive compensation plan for the marketing manager. The task is to evaluate the past and prospective financial performance of the company and to critique its liberal credit and inventory policies. The objectives of the case are to:

• Introduce and exercise tools and concepts of financial-statement analysis (including financial ratios, break-even analysis, and cash-flow statements).
• Explore possible definitions of the “financial health” of a company.
• Illustrate the linkage between operating policies and financial performance.
• Consider the interdependence among corporate objectives regarding growth, dividends, and debt financing.
• Explore the linkage between compensation incentives and financial performance. In this case, the marketing manager is motivated to build sales volume, which he accomplishes with a dramatic build-up in receivables and inventory.
• Illustrate some of the challenges of doing business in an emerging market.

Suggested Questions

1. What accounts for Deutsche Brauerei’s rapid growth in recent years? Specifically, what policy choices account for this success?
2. What is Deutsche Brauerei’s credit policy toward its distributors in Ukraine? Why is it different from the policy toward its other distributors? Is the company’s credit policy appropriate? Is it profitable? If not, how would you change it? If so, what arguments would you offer to the board of directors in its defense?
3. Why does this profitable firm need increasing amounts of bank debt?
4. As a member of the board of directors, how would you vote on:
a.