Zzzz Best Carpet Cleaning Company Case Study

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Register to read the introduction… He was introduced to the carpet cleaning industry at the age of twelve by his mother, who worked as a telephone solicitor for a small carpet cleaning firm. Due to the lack of barriers to entry in this industry (no licensing requirements, no apprenticeships to be served and only minimal start-up capital needed), it is not hard for anyone to start a carpet cleaning company. But at the same time, no barriers to entry meant that there was a cutthroat competition within the industry and it was not that easy to run a profitable company. In the early months, Minkow realized that though it was not easy to start a carpet cleaning company, it was even harder maintaining the business due to customer complains, collections, bad checks and impatient vendors demanding payment. At that point Minkow knew that if he wanted to survive in the industry, he would need working capital. He went to various banks, but due to his age and the fact that ZZZZ Best was only marginally profitable, local banks refused to loan him any money. As a result, Minkow decided to come up with his own ways to finance the growth of his business: check kitting, credit card forgeries, and staging of thefts to fleece his insurance company. So when he could not meet payroll, he would steal checks and deposit them in his bank account. He would kite checks, overbill customers and overdraw his checking account. He would do whatever it took to stay afloat. His age and his personal charm allowed him to get away with a lot of things. What actually made him believable was his verbal ability. Minkow was a smart kid and he realized from early on the benefits of an extensive social network of friends and acquaintances. For example, he became friends with Tom Padgett, an insurance claims adjuster, for his own benefits. He promised to pay Tom $100 per week if he would simply confirm …show more content…
By comparing the two years, the ratios can point out significant discrepancies from year to year. For example, in 1986 the current ratio decreased from 36.55:1.00 in 1985 to 0.0977:1.00. The current ratio shows a company with no cash in 1986 despite record "revenues" (red flag). Also, the debt to equity ratio increased from 0.017:1.00 in 1985 to 1.486:1.00 in 1986 (an 8600% increase). Moreover, the return on equity decreased by more than 75%.
Selected Ratios (www.aicpa.org): 1985 1986
Current ratio of assets to liabilities 36.552 .0977
Working capital: Total assets 0.5851 (0.0080)
Collection ratio N/A 26.131
Asset turnover .144 1.041
Debt to equity ratio .017 1.486
Receivables turnover N/A 6.984
Times interest earned N/A 43.136
Cost of sales: Sales .465 .423
Gross margin percentage 53.51% 57.68%
Return on equity 183.75%

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