Year 12 IB Extended Essays 2017

What we can Learn from the Collapse of Dick Smith

Inventory Management is Essential

Inventory problems became noticeable in the second half of 2015. The company revealed it

would write down the value of its inventories by 20% or $60m. A spokesman for the Dick

Smith Group stated in an interview with Smart Company that “Frankly we bought inventory in

anticipation of certain sales levels – we didn’t achieve that sales level and that’s part of what

we’re clearing up today.” What followed was an enormous clearance sale, with old stock

discounted by as much as 70%, thus leading to huge financial losses due to negative cash inflow

and inability to pay rent. This pre-Christmas sale did not reach sales expectations which in turn

continued the decreasing trend during 2015 into the early stages of 2016.

Due to updated products, old inventory was near impossible to clear and the company likewise

had large difficulties finding finance to purchase new stock due to restrictions made from

manufacturer’s (McGrathNicol). The dispute can be made that this inability to acquire finance

could be due to the company’s cash insufficiency which could be argued was the consequence

of their over investment in new stores when online sales were beginning to rise. At this period,

Dick Smith was estimated to owe $140m to banks and circa $200m to creditors. A detrimental

situation to be in when new stock is needed to push sales in the modern era of technological

advancement. Writing down the true value of your goods to subsequently sell them at a “profit”

is one of the methods employed by the failed Dick Smith, according to records. The books

show “fair value adjustments” of $58 million to the value of Dick Smith’s inventory in 2012.

Relating this to other businesses, it is essential that stock intake and inventory numbers is

controlled in order to reduce the risk of unsalable items such as outdated technology in the case

of Dick Smith. No small business would contemplate doing such accounting. Poor accounting

practices can lead a business to failure through over expenditure and minimal sales.

Private Equity Floats Are Not Always What They Seem

Private equity floats are companies that bring current privately listed companies to the public

stock exchange through valuation of the business. The private equity group Anchorage Capital

in Dick Smith’s 2015/2016 financial year provides context as to why Dick Smith collapsed and

that private equity floats are not completely trustworthy in their valuations as Dick Smith

suffered a huge overvaluation upon its purchase and float onto the ASX. After the purchase of

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