Business Strategies by Alex and Doreen - Essay Example

 Business Strategies Adopted by Alex and Doreen: Case Study 1. Introduction This paper seeks to prepare a report for Alex and Doreen in addressing their concerns including whether their strategies for Sparke Electrical are working. This would also identify their company’s strengths and weakness, make suggestions on how to improve their company’s performance and estimating the value of the business. 2. Discussion and Analysis 2.1. The major strategies adopted by Alex and Doreen and whether they are working The major business strategies adopted by Alex and Doreen can only be deduced from the limited information provided in the case study. What can be deduced as one from the Statement of Financial Performance (SFR) and Comparative Ratios Report (CRR) could just be the possibility that it was just performing near the average of other companies in the industry make. With the company’s total sales of $597,123 compared with the average of best of three of the companies at $653,764 from the CRR, the company could be deduced to be nearly close, although below, to the average. Since the company ranked third out of eight companies and yet below the average, it would mean the top and second ranking companies may have higher sales revenues than the company. As to what the best companies are doing in terms of strategies, the facts case study are not also clear. There is also no information on industry or company growth from one period compared to others periods for the purpose of deriving information on whether the industry is characterized by growth or not. In term of profitability, the company is observed to be performing less than the industry average using the best of the three from the other companies. With $39,227 as net income compared with $110,254 average of the best of three, the company is less superior. Thus the company can be considered performing less than the average, which indicates of weakness of its strategy. Since the company ranked fifth out of eight firms in terms of net income in relation to sales, it would mean that Sparke Electrical was performing less than half of all the total of the number of companies on the average. Thus, the strategies employed if any by Alex and Doreen are not working as to become part of best of the three companies or entities in the industry. 2.2. List and discuss the strengths and weaknesses of Sparke Electrical based on information contained in Exhibits 1 and 2 Any strength of Sparke Electrical is not evident based on its revenue and profitability performance compared with average of eight companies in the industry. As found to have less revenues and less profits than the average of best of three, the company could not be considered as part of best. It was not generating enough profits compared to the average best of three companies although its revenues ranked third or that it was part of the best of three in producing the highest revenues in the group of eight companies in the industry. Thus, the company could be categorized to have weakness in less producing revenues and profits than the average. Another obvious weakness of the company is the lack of other essential information of the business to help decision makers to lead the company to where it should go. It has no balance sheet or statement of financial position (Meigs and Meigs, 1995) as well as statement of cash flows (Meigs and Meigs, 1995) for other years aside from those given in Exhibit I under the case study despite the company having operated for ten years. The case facts provide scanty information including the number of electricians compared and the fact that Alex has spent the majority of his time in supervising and administering the business. Since Alex and Doreen want and advise on whether they should be doing better instead of managing the business. There is also no mention on what they could possibly do in case they will sell the business. One way to measure perhaps whether they should sell the business to other is whether their present earnings could suffice their personal needs as compared when they just work as employees of entities of which they are no longer owners. In the absence of the other information on their alternatives, deciding to sell the business would be a difficult thing to do. If the alternative is that they have none, they the fact that the company may be producing net income from its revenues would be a justification of continuing the electrical business. Because of that lack of information, the company would have the weakness of not being able to measure its liquidity and solvency when compared to its competitors in the industry (Helfert, 1994). 2.3. Provide Alex and Doreen with some suggestions as to how they might improve the operating performance of Sparke Electrical. To improve their operating performance, they need to increase revenues and reduce cost in relation to revenues. This is based on the assumption that profitability and measurement is based on income statement accounts. To increase revenues is to sell more services and to have more clients. To do the same however requires assets like cash and equipments, the information on them were not maintained. The use of assets would become expenses and whether the company should so use the same, it must be able to have profits for every additional sale of services it must make. Since the company has no balance sheet and statement of cash flow, it should by all means cause the production of the same to have a more objective way of measuring financial performance. Parts of the balance sheet include total assets, and total equity. By having its net income properly measured, a company can divides it yearly income with yearly total assets and the result would produce the return on assets or ROA ratio. The ratio would tell how much efficient the company is in employing its total assets. Having the net income also to be divided to its total equity would help the company to measure how much the owners get from its investment in the company. Although a company may be generating sales revenues and net income, if it does not have a balance sheet, there is no way of proving whether the company is spending all its cash for the year for personal consumption. Thus its cash position is not clear and it could not be measured whether it would be able to pay cash to its six electricians during pay or salary time. Since the company owners can also use the cash, there is no way of knowing the same if there is no balance sheet and statement of cash flow that are not prepared periodically for the business. 2.4. Determine two value for Sparke Electrical. The first should be based on the business’s current operation performance. The second valuation should incorporate the likely of suggestion in 2.3 above. Using their current operating performance and in the absence of information, the net income presently generated at $47,072 may be assumed to be the net cash flow per year. Since there are also no non-cash flow expenses generated during the year, the net income could be considered as the net cash during a given year. Since there are no comparative annual figures to estimate growth in the net income or net cash flow , the value can be assumed to be constant at the same amount. By dividing $47,072 by an assumed cost of capital of 7.88%, using the net profit margin as estimate, the present value would be $597,360, if the amount was assumed to be received indefinitely (Brigham and Houston, 2002), A second valuation that could incorporate suggestion would have to rest also on some assumption. By possibly reducing the cost of capital to 4.5% using the base rate of Reserve bank of Australia (Housepricecrash, 2010), and increasing the average net income of the three best companies at $110,254 as realistic target, if the amount was assumed to be received indefinitely (Brigham and Houston, 2002), the value of the company could go as high as $2.45 million. 3. Conclusion The Sparke Electrical may be considered profitable based on its statement of financial performance since it is operating at positive net income in relation to its total revenues. But as to whether it could go further or better, the answer should be in the positive since it is performing less superior than in average compared with the best competitors in the industry in terms of total revenues and net income. If compared with the three best of its competitors on the average, company may be categorized to have more weaknesses and strength as identified in term of lower profitability and lower efficiency. Recommendations were made to improve performance includes increasing is revenues and profitability and in addition to providing essential information for more basis for decision-making. It must have its statement of financial position and cash flow statement every year (Meigs and Meigs, 1995) as way of better measuring its financial performance and condition together. The evaluation of the financial performance becomes shaky if the related financial condition is not clear as it could mean that business is spending all its cash for personal use and leaving no assets to business and that the owners are living on a hand-to-mouth existence. The valuation prepared for purpose of possibly knowing whether it should be sold at how much assumes other information that may not be realistic for Alex and Doreen. Thus making provision of essential lacking information would make a great way for further improving the performance of the company and making decisions on what to do for the company. References: Brigham, E. and Houston, J. (2002). Fundamentals of Financial Management, London: Thomson South-Western Case study – Sparke Electrical Helfert (1994). Techniques for Financial Analysis. Sydney: IRWIN Housepricecrash (2010). Base Rate for Reserve Bank of Australia. Retrieved 25 Oct 2010 from Meigs, R,. Meigs, W., & Meigs, M. (1995) . Financial Accounting. New York: McGraw-Hill Read More