WT Grant Company was known as the largest retail company in the urban areas of the United States. The main reason for the success of the company was its low-cost chain as compared to its competitors in the US market. The company liquidated due to its ineffective strategy to counter the competitive environment factors prevailing in the market. The major causes of the company’s failure in the market are mentioned below.
Financial Distress
It was the main reason for the failure of WT as it was unable to remain financially strong and increased credit risks to a high extent. The main purpose of the company was to apply the strategy that can increase the revenue generation in future. For this purpose, WT managed to increase the revenue via increasing production and applying various marketing strategies. The problem was with the credit sales that increased to a high extent in this period, and ultimately the accounts receivable did not properly manage by it. It resulted in the stuck of the high amount in the market that was not recovered within a specified time limit. In this way, its liquidity position got weak and the matter was uncontrollable by the upper management of WT Grant Company (Wahlen, et al., 2014).
Persistent Decline in Various Financial Components
The financial component of the company was not in control of the management as they were showing a continuous decline. The management did not keep an eye on the decrease in gross and net profits of the company even when the revenues of the company increased to a certain extent. It was the responsibility of the financial management of the company to keep managing and controlling various components while working in the competitive environment in this industry. The strategies were not designed to increase profits, but they were effective for increasing revenues that were also not achieved by WT (Wahlen, et al., 2014).
Negative Ratio Values
The ratio analysis shows that the net profit margin and ROE of WT were decreasing and reached to the negative value. The company did not take any action at the certain time, so it resulted in a great financial loss to the management. The position of the company could have controlled by the management at the time when it was closer to 1 percent (Wahlen, et al., 2014).
No Control Over Inventory
The inventory management of WT was ineffective as the costs of inventory was not assessed and controlled by the management. The direct costs and expenses on this inventory created a pace in the decline of the company’s financial position. The main reason was the increasing costs of inventory due to diseconomies of scale. Also, the generation revenue pressure was also observed in the production area where employees were influenced to produce a large quantity of goods to boost the sales. The strategy did not work efficiently as the managers were seeking to boost up sales and did not pay attention to the increasing costs of inventory that put direct effect on the gross profit of WT.
Change in Revenue Recognition
Revenue recognition is a critical element in record keeping of business transactions. The principles are mentioned separately in GAAP that every company is entitled to follow. Unfortunately, the management of the company did not pay attention and recorded unearned revenue as revenue in the financial statements of the company. The manipulation accounted for increasing revenue in two years that suddenly declined to the high extent that was uncontrollable by the management. The sales of the subsidiary of the company were on lease, so WT was entitled to record a part of the income that is earned in the revenue account.
All the above causes created a big financial problem for WT Grant and it was unable to control the entire situation at the end. WT made ineffective strategy to increase the income of the company but ignored to control the costs associated with it. The decline in the growth of the business in this period was an alarming situation for the company. Although the financial distress in the last year was big, the problem arose when the company started to record various transaction earlier than the period that is revenue. The motive for increasing sales of the company was simple that it wanted to compete in the local market where competitors were seeking to apply various strategies and increasing their profitability. The financial problems can be lowered by taking strict actions in the beginning of declining performance as it could be controlled in the coming period. There was no other environmental or economic factor for the failure of WT as its competitors were working accordingly in the same industry. WT could align its strategies to counter the strategies set by the competitors.
Reference
Wahlen, J. M., Baginski, S. P. & Bradshaw, M., 2014. Financial Reporting, Financial Statement Analysis and Valuation. Mason: Cengage Learning.
