Fin 571- Guillermo Financial Analysis -Week 6

Topics: Net present value, Weighted average cost of capital, Discounted cash flow Pages: 5 (1694 words) Published: May 12, 2013
Making a sound financial decision is a vital component of the success of a business. The business must conduct market research, description of products, services and marketing strategies, and setting principles for the business’s success. Expenses should be noted prior to writing a financial plan. The goal of a business is to operate on a predefined budget. Ensure there are no undefined or hidden cost that could cause problems later. The business plan helps the business to make day-to-day decisions on its operations. Team“D” will analysis Guillermo’salternatives and make a recommendation on which alternative will enhance the businesses financial decision. Maintain Current Operational Levels

One option available to Guillermo is to make no adjustments to the company’s current operations. This option supports the top concerns of acquisition from a larger firm and spending a large amount of cash on high-tech equipment investments, it does not solve the problem of a shrinking profit margin because of a rise in labor costs. Supporting the option to maintain current operations overlooks potential opportunities that are identified to allow the company to move away from its primary manufacturing role and act as a distributor for the Norwegian competitor. According to the assets, liabilities, and equity information provided by the University of Phoenix, sales growth is slowing to 1% from previous periods. These low profit margins willnot sustain Guillermo in the long-term;they will not improve if there is not a choicemade to adjust to the financial situation. Maintaining current operations does not address the shrinking profit margins. To continue to move Guillermo furniture in a positive direction, Mr. Navallez needs to apply some options already available and within the current operating structure. One option available to Guillermo is expanding the patented flame retardant process already in use within the manufacturing process, by applying a similar coating. This option requires no additional investment because Guillermo owns the equipment as part of the existing manufacturing process. The new coating adds value to the furniture, and makes it more appealing to consumers (University of Phoenix, 2009). The net present value of the project must be calculated in order todetermine ifthis is a strong option. For planning and budgeting purposes, a three-year life cycle is assumed for the coating project with an initial investment cost of $222,705 that is absorbed during the first year of the project. This produces a projected cash flow of $1,733,562, leaving Guillermo with a net income profit of $42,557. Net present value for the three-year project calculates to $197,171. Another option available and immediately implemented is to reduce inventory by quickly turning over products, thus increasing the cash flow. Planning an accurate budget supports the inventory overhead by reducing costs associated with maintaining inventory. The flex budget data shows that Guillermo furniture underestimated June operating expenses by $101,740. If these costs estimates were more closely tied to production costs, a substantial amount of cash would have been available to reinvest in other areas of the business. Closely managing this inventory will make more cash available for expansion in other areas of the company. Last year Guillermo experienced a $3,671 increase in its year-end inventory. Keeping a large amount of inventory on hand ties up cash, which otherwise can be investedin other areas of the business. Guillermo’s option to hold fast and maintain current course is setting the conditions for failure. However, to maintain its current course and improve its financial standing, Mr. Navallez can leverage small opportunities that maximize the financial condition by leveraging the existing patent and reducing inventory.

High Tech Business Upgrade
Guillermo’s high tech alternative is based off a process...
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