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Table of Content
Acknowledgments- 3 Executive Summary-4

Acknowledgments:

First of all I would like to thank a person who has been helping me with this project from the very beginning until the last day, my Business and Management teacher, Mr. John.

I would also like to thank the co-owner of Homag, Mr. Omar Najjar, who was kind enough to share his time and attention with me, as well as providing me with the information that I needed to carry out this investigation.

Executive Summary:

The management and main shareholders of Homag, a company that produces woodworking machinery has expressed the necessity for an increase in profit for the company to ensure its survival in the competing UAE market. The company was once very profitable, but due to a series of unforeseen events and circumstances followed with the recession that occurred in 2008 the companys revenue began to negate. The company then began on a mission, to find out how they could increase their profit in the year 2013, as to prevent a negative cash flow from occurring yet again.

I suggested to the company several methods of reducing their costs, and increasing their profit. One problem with the company was that they had very high costs, one of the highest being the employee salaries. The company has not fired any employees since the recession, and wants to keep their workforce due to ethical reasoning. This, with a combination of a decreasing demand of woodworking equipment has led to the company spending more than it is earning.

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Introduction: Homag is a company that was established in 1995 by Mr. Othman Bin Hindi, and Mr. Omar Najjar. It is a business that is seeking to provide premium woodworking machinery to the U.A.E. The company has been losing money since the recession that occurred in 2008. With what shows to be a declining interest in woodworking machinery, and heavy expenses that the company has, it is left in a position to survive. With the great endeavor being put forward by Mr. Omar and Mr. Othman it is not very likely that the company will survive this tough period they are going through. When going through the financials, and seeing all the expenses that they have it is possible to see ways to reduce them. Leaving the question How can Homag increase their profit in 2013, to prevent a negative cash flow? to be answered.

Research Question:

Keeping in the financial downturn of the company in the recent years and considering the effects of global financial crisis, this research will answer following crucial question: How can Homag increase their profit in 2013, to prevent a negative cash flow?

Procedure & Methodology:

This research study is aimed to adopt quantitative approach. For the purpose of making sound understanding of the situation of Homag Middle East, both primary and secondary data collection techniques are adopted. Primary data is collected with the help of open

ended questions and the owner of the company was interviewed. List of questions are also attached in the appendix. This helped in analyzing the primary data and also to get clear picture or situation of Homag Middle East. The secondary data is collected from the annual reports of the company. From this report, financial health of the company is assessed. Furthermore, ratio analysis is done to assess the financial performance of the company. In order to conduct and perform this investigation I contacted one of the owners of the company, Mr. Omar Najjar, and inquired his companys financial information, as well as his responses to some questions that I had about the company such as their main concerns, their goals and what they are currently doing in attempt to improve the state of the business. All of this was done in an attempt to help myself better understand the issue that is currently going on with the company allowing me to try and find a possible solution to resolve their ongoing predicament.

Main Results and Findings:

It is mentioned in the previous section that the secondary data of the company is collected through the annual financial statements. Ratio analysis of the company is done and the measures such as Return on Equity (ROE), Return on Assets (ROA), and profitability margin, asset yield and financial leverage are calculated for two consecutive years of 2011 and 2012. Table 1 shows the prominent measures applied to the financial data of the company. The figures show that the financial condition of the company is very poor. The company is facing huge losses each year. It is also told by the owner of the company during the interview that company is not doing well since global financial crisis hit UAE

market. He added that after the crisis our clients are more cost sensitive and his company is facing intense competition from the market as other competitors are ready to sell their products at lowest prices. The clients of the company are now price conscious rather than quality. Table 1: Ratio Analysis of Homag Middle East Financial Measures ROE Profit Margin Asset Yield Leverage Return on Assets 2011 -42.33 -11.51 53.02 6.94 -6.10 2012 1473.52 -25.77 82.10 -69.65 -21.16

During the interview of the owner of the company, it is found that the company is selling the products of Homag Groups in Middle East and the main product of the company is woodworking machinery. The owner told that after the global financial crisis the demand of the woodworking machinery has drastically declined. During the analysis of the financial statements of the company, it is found that company has two major partners and they are taking the money out of business in huge amount. Even though, the company is facing huge losses, the owners of the company took the amount of AED 2,838,423 out of the business in 2011 and AED 3,062,651. This is why the total equity of the firm in year 2012 became negative which is extremely dangerous for the existence of the company. Table 1 depicts the financial performance of the firm which shows that in each and every way, company is going towards destruction as none of the measures are speaking about

any favorable condition. ROE of the company is around -42.33% which is drastically low. Same is the case with other measures such as ROA, leverage, and asset yield. The figures are declining over the years as the condition in 2012 is worse than 2011. In 2011, the company was facing loss and the profit margin percentage was around -11.51% whereas in 2012 it became -25.77% and is expected to become even worse in coming years. It is also found during the interview with owner of the firm that after the global financial crisis, company didnt fire any employee as a posture of goodwill and also on ethical grounds so a huge amount is gone to giving the salaries to the employees. Currently, there are thirty employees in total and the owner told that the number of employees is excessive as per business condition in current scenario.

Analysis and Evaluation:

After collecting both primary and secondly data for assessing the performance of the firm, it is found that company is facing huge losses due to many reasons. First of all, the money is going out of the business in huge numbers to personal accounts of partners of the business in shape of withdrawals. Secondly, the demand of companys products has drastically declined due to two main reasons. The first reason of decline in demand is because of the global financial crisis and due to this there is less construction work in the region. Most of companys customers halted their constructions and real estate industry in the region is also squeezed after recession and their major customers are from this industry. The second reason is tough competition prevailing in the market. The customers of the firm have now become more price sensitive rather than quality. The competitors

are always ready to sell their products at lowest margins. On that price, it has become extremely difficult for Homag Middle East to sell their products. The strong point with Homag Middle east is hidden in its high quality products with best customer service. The company is not cashing this competitive advantage. The other thing which is proved to be a major threat for the company is decline in the equity of the company as partners of the company are taking the money out of the business and equity in 2012 became negative due to this. On the other hand, company is having excessive number of employees which are beyond their requirement. The efforts of cost cutting are not observed both during primary and secondary data collection procedures. The company must immediately reassess its pricing and marketing policies. The owner of the firm told that they are utilizing various marketing means to better advertise their products but marketing policies are highly recommended to be changed and they must highlight the strong points and features of their products in the eyes of the customers.

Conclusion and Recommendations: In the end of this research report, I would like to suggest various recommendations to Homag Middle East to come out of this financial distress and to become profitable. Some of the recommendations are: The partners of the firms must retain more earning in the business and not to make huge withdrawals from the company as they did in the recent years The pricing and marketing policies and strategies must be redeveloped and reassessed and they must highlight the strong points and features of their products to get the attention of the customers.

The company must become serious in cost cutting and not to do unwanted expenses so that the financial condition of the firm could be better than now.

The company must save revenues by getting rid of excessive employees and if they dont do so then it would be very difficult to bring the company on its feet again

The Equity of the firm has become negative so the owners of the company must increase the amount of capital by means such as long term debt because presently it is highly required to inject more money into the business.

There is no doubt in the fact that global financial crisis of 2008 has affected this region of UAE and GCC countries very severely. Most of the companies are still struggling for their existence after even five years since the recession came. Very few companies are able to come out of the effects of recession but most of the companies are still facing the aftereffects of the recession. It is also true that the real estate and construction industry was hit very badly by recession and at that time most of the ongoing projects halted. Investors are still feeling reluctant to invest in the construction industry. Most of the Homag Middle East customers are from this industry and that is why Homag is directly hit by the recession. All of the customers have now become more price conscious and they buy from the firm who offer lowest price. The buying trend of customers has now shifted from quality consciousness to price consciousness. But still, it is possible for Homag to be profitable again if the management of the company takes serious steps to decrease their expenses and costs by reducing excessive employees and by modifying their marketing techniques. Homag is still better than the companies who have become

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bankrupt and stopped their businesses after financial crisis. If Homag Middle can survive then there is no doubt in the fact that the company can be profitable again by making some changes into its policies and strategies.

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