HBS case: Bausch and Lomb, Inc
Bausch and Lomb, Inc is a manufacturing company that specializes in optical and other health care products. The company was established through a partnership between John Jacob Bausch and Henry Lomb. Until 1995, the company enjoyed a smooth ride in the market under the leadership of Daniel E. Gill. By 1993, the management resolved to create divided the operations into two major segments; the optic segment and the health care segment.
The new sales strategy
The entrance of Johnson and Johnson, Inc in manufacturing disposable soft contact lenses posed a competitive uphill task for B&L Company to reach its sale target. As a result, a new sales strategy had to be devised promptly to mitigate the looming loss of market share. The new sales strategy was to channel conventional contact lens through the distributors in the US instead of the previous channel direct to the customers who bought in bulk. Johnson further authorized those distributors to absorb 1.8million of stock before they have been ordered by customers. Any distributor who possessed $600000 net worth of capital base would be allowed to take $2.5million worth of stock.
According to the financial accounting standards board, revenues are recognized realized or earned. When company delivers services to a client delivers services and products to the client, the company presumes to have earned the cost of services or goods delivered even if the payment has not been effected. This transaction is sealed through the issuance of promissory notes that acts as an agreement between the client and the company. Additionally, the revenue accumulated from the transaction is only recognized in the books of accounts when cash or cheque is received by the service provider. In the case of Bausch and Lomb Inc, Johnson contravened the financial accounting standards when he authorized transfer of conventional soft lens stock to the distributors despite there being any equivalent demand. Consequently, the financial managers continued to recognize abstract revenue in the books account. This led to a recording of impressive net sale of $1195.5million. The act contravened the financial accounting standards that state that revenue should not be overestimated or underestimated. The B& L Company provided unrealized sales revenue that could lead to unrealized net profit and thus prompt the company to declare unrealizable dividends to the investors.
Additionally, the strategy led to a setback in the company since most customers did not buy the products as expected and thus the distributors had to return the goods to the warehouse. Consequently, the company’s financial statement had to be altered to conform to the current situation. According to the security exchange commission’s guidelines, revenue could be recognized if there is a validly written contract between the buyer and the seller on the modalities of payment. For instance if the buyer states that he would pay for the goods at the start of the following financial period, the seller recognizes the sales revenue realized in the books of accounts as accrued income. B $ L company had no contractual sales agreement and, therefore, recognition of soft lens sales was a breach of accounting standards.
The intervention of Securities Exchange Commission (SEC) to audit the Bausch and Lomb incorporation was timely because it shielded the company from insolvency due to reliance on unrealized revenue. Additionally, the distributors would be shielded from non-payment of wages due to the company’s inability to realize the targeted revenue. Similarly, the Securities Exchange Commission (SEC) shielded the investors from exaggerate ted hopes of financial gain that has not yet been received. If the commission did not intervene, the company would have been at risk of insolvency and redundancy of stock.