Business Decision Analysis for Advanced Construction Materials LTD - Essay Example

Haofei Chen College: 5/7 Decision Analysis Business Project Mr James Wiesman is a professional engineer ready to venture into a new business of supplying construction material that will reduce the costs and time taken for construction. However, he faces two main problems. Firstly, he has to make a decision to either sub-out the manufacturing of the product or buy/lease the required equipment required to fabricate the product. Secondly, he has to decide the source of financing for the initial capital. The capability of a company to be able to generate more income than the expenses incurred helps in deciding on whether to venture into the new business (Joan et al, 219). This analysis report will help decide whether James starting a new business will generate enough income to cater for the income that James will forgo so as to run the new business. Also, the report will give him sound financial advice for his decision-making process. We shall also use US Code 1031- tax free exchange in the report. The rule states that a company can defer capital gain taxes if he sells property to reinvest in another one. PROBLEM 1: to buy the equipment for production or buy from another company. Mr James Wiesman faces the major challenge of deciding whether or not he should buy/lease the equipment needed to manufacture the products or buy them from another company. Currently, Mr James owns a construction patent of a process that reduces the cost of production tremendously. The patent is highly lucrative, which has led to Mr James to sign contracts with the U.S. government to supply the products to the navy and army for Barrack constructions. The facts of this problem are that the cost of producing the products himself will attribute for 60% of his total costs (Glen& Howard, 91). In addition, the cost of production of the materials will be a third of buying it from another company. It is evident that the cost of buying the product from another company will be much higher than the former. Based on the mentioned facts, it is advisable that Mr James Wiesman buys/leases the equipment needed for production. # PROBLEM 2: Determining the source of financing for the new business Buying or leasing equipment will require Mr James to open his own firm. The initial costs of production include the purchase of land, building costs and the working capital that sum up to over2,120,000 $. Mr James has to decide the sources for his financing to make this decision. He has two options to choose. Firstly, Mr John Money Bag is willing to give him 2,000,000$ for controlling interest of the company as well as semi-active management participation. Secondly, Mr James can sell off some of his assets to raise the funds necessary for production. Mr James is concerned that if he partners with Mr Moneybag, he might lose his patent rights and overall control of the company. However, he co-owns over 2,000 acres of land valued at 3,250$ per acre with his brother William Wiesman. His brother is willing to pay James 3,250,000$ for his share of the land. I would advise Mr James to agree to sell the land to his brother and invest this money in beginning manufacturing of the product. In addition, Mr James is already in the process of purchasing 80 acres of farmland near Pullman Washington, which is the ideal location for the business. I would advise Mr James to use 5 acres of this land as the site for the manufacturing plant. Although, the site development will add 100,000$ to initial cost, this will be much cheaper than purchasing land anywhere else. Mr James also has the task of deciding what kind of business form he is required to register to start the business. According to Joan et al (217), the means of raising capital intended by the owner determines the form of business he should register. Mr James has the option of deciding whether to register the company as a Limited Company, a corporation or as a partnership. The major advantages of registering as a limited company include: Mr. James can retain the control of the company within his family, hence run the company as a family business (Glen& Howard 177). Mr James will be able to develop his young company since he is the one most conversant with the production process, and his relatives are able and willing to be involved in the family business. His son Robert is a mechanical engineer and, therefore, can help James in the manufacturing of the product. Also, his wife and daughter Mary and Mary are qualified accountants and can, therefore, help in the management of the company. James could also include Mr Moneybag in the management for his experience as a businessman. James could register the company as a partnership if he decided to take on Mr Moneybag’s offer of 2,000,000$ for controlling interest. However, James will not have control over how the business will grow and won’t have major control of any decisions made. In addition, James can register as a corporation. The major advantage of a Corporation is that shareholders incur all liabilities equally (Glen& Howard, 115). However, this would mean Mr James to hand over control of the company and patent ownership. As a result, I would advise Mr James to register the company as a limited company so as to ensure continuity as a family business. The Analysis of This Decision Is In the Attached Decision Tree Diagram A Limited Liability company will offer James more flexibility in terms of paying taxes as compared to a Corporation. When an owner is running a limited company, he only pays taxes as an individual and not on the income of the business. Therefore, it will require less paperwork to start a Limited Liability Company as compared to a corporation. Setting up a corporation requires vital documents such as Members of Association. In addition, for a limited liabilities company tax are taxed at the individual level for stakeholders whereas for a corporation James will have his companys profits taxed. Importantly, since corporation shares are traded publicly, ownership of the company and control belong to shareholders, contrary to Mr James requirement of controlling interest. According to Glen& Howard (117), when a limited company undergoes a loss, the owners of the company will incur the full liabilities. This poses a risk to Mr James since, in the instance of any losses or bankruptcy, his family will lose all the capital invested. Since Mr James’ wife and children have the professional capabilities to help him run the company, there will be a huge reduction of initial and recurrent costs.They may not require a stable salary in the first year of operation. The time required to make the first production will be at least one year. As a result, there will be no cash inflow in the first year. The family can operate with incomes from their cash savings and residential rents (Joan et al, 211). The proceeds from the sale of 1,000 acres of land to Mr William Wiesel will be used to buy the equipment, construction of the buildings and site renovation. The remaining cash can be used to pay workers in manufacturing as well as sourcing for ready markets for the product. Mr James has the task of now choosing the management team for the new company. Mr Monebank could be a key person in management because of his experience in running and managing the business. Luckily, Mr James will us the expertise of his family members, so he just need to hire a few more people in the key management team, namely the sales and marketing manager and production manager. The management needs to formulate the roles and responsibilities of all employees so as to avoid overlapping of roles and also manage all functions of the company. Proper management of property and equipment is highly necessary as well as stock control. Adherence to accepted accounting standards is necessary for proper management of funds and operations. If Mr James registers the company as a corporation, he should endeavour to own at least 51% of the total shares to maintain controlling interest of the company. In such a situation, he will appoint an independent management to run the company. The management will be in charge of making decisions on behalf of the shareholders. The patent will be part of the company’s assets and not his individual asset.The transfer rules differ in the form of company. For corporations, any member can buy off the majority shareholder’s shares. For Limited Companies, the owner can transfer the shares to anyone they want. Therefore, Mr James can easily transfer his company to his children on retirement or death. He can divide the shares equally among his children (Joan et al, 220). In conclusion, it is evident that Mr James has the financial capabilities and ready market necessary to start his new company. Although the start-up capital is really high, the ready market provides a level of optimism to venture into the new business. He should make the decisions that offer convenience and low-cost management. Basic Business Plan for Advanced Construction Materials LTD The basic business plan for Advanced Construction Materials will entail a few key elements. Firstly, the plan will highlight the form of business the company is and its source of financing. Secondly, the plan will highlight the organizational structure of the company from management level to subordinate staff level. Finally, the plan will highlight the transfer agreements in accordance regulations. Organisational Plan Advanced Construction Materials is a limited company started by Mr James Wiesman and Mrs Mary Wiesman and is generally a family business. His passion for engineering lead to the birth of the business idea of developing construction materials that is cheaper and faster than other materials. The company shall be registered as a limited company since Mr James wants to maintain control over the operations of the company. However, Mr James has the mandate to delegate some of the duties to those more capable to manage some of the company departments. Management Since the company is small, Advanced Construction Company can first start off with member management structure and as the company grows and enters into partnerships, they can venture into manager management structure. Mr James is the owner of the company so he maintains control over the overall management. The following managers are needed to run the company during the first year of operations: Accounts and finance manager, sales and marketing manager, manufacturing and building manager, procurement officer. Roles and responsibilities Manufacturing and building manager The general overseer of all operations as he is the owner of the company Oversee the running of manufacturing the product in time and up to standards. Hire any staff needed in the manufacturing process. Can delegate his roles to any employee within the manufacturing team. Sales and marketing manager In charge of intensive sensitization and marketing of the new product in the market. In charge of contacting and carrying out transactions with distributors and potential customers. Come up with sales estimate to be used by manufacturing to maintain certain levels of production. Accounts and finance manager Oversees all financial transactions in the company. Maintain proper books of account and ensures all costs and revenues are accounted for. In charge of disbursement of funds to all operations and payment of all employees. Procurement officer In charge of procuring all the necessary equipment for manufacturing and administration. In charge of stock keeping and maintaining appropriate stock levels. Since the company is a family business, transfer of ownership shall be within family ties unless otherwise stated buy the owner of the company. There will be over 5 managers, as a result, managerial disputes shall be decided during management meeting and Mr James will have more voting rights than all other managers. Opportunities Currently, Advanced Construction Material limited has signed a contract with the US government to supply construction materials to the navy and army. In addition, the company is negotiating with Lowes and Home Depot and other material companies to be supplies of his product. The positive feedback from the companies is an indication of the ready market for the products. The new technique of producing construction material is like no other, as a result, the estimated demand for the product is unlimited. The supply might be the major challenge. Financial statement estimates 1) CASHFLOW STATEMENT 2015 2,016 Balance brought forward 3,250,000 320,000 Sales - 996,000 total cash inflow 3,250,000 1,316,000 Cashoutflow     building and construction 1,000,000 - site development 100,000 - purchase of equipment 1,000,000 - Salaries 670,000 670,000 Materials 100,000 100,000 Overheads 60,000 60,000 total cash outflow 2,930,000 830,000 Balance carried down 320,000 486,000 The cash flow statement indicates the expected flow of cash in the company within the first two years of production. There are a few assumptions made. Firstly, due to the already pending orders from the government and other institutions, we assume that 100% of everything produced is sold. Also, products are sold at a mark-up of 20% of total costs. The 3,250,000$ are assumed to be proceeds from the sale of 1000 acres of land. Salaries and overheads are estimated to be 670,000$ and 60,000$ respectively for the first two years but are expected to rise as level of production rises. From the statement, it is evident that the cash balance remaining at the end of year has increased. Thus indicating Advanced Construction Materials has the ability to expand with increased demand of the materials. 2) Balance Sheet   non-Current assets     Land 250000   equipment 1,000,000   Buildings 1,000,000 2,250,000 Current assets     Cash in bank 1,050,000 1,050,000 Total   3,300,000 The balance sheet above only indicates the assets Advanced Construction Materials has in the first year of operation. The land has not been paid off yet; therefore Mr James still has a loan balance. I have not included any of Mr James personal property since the company is a limited company and therefore an independent entity. According to US code 1031-tax free exchange, since Mr James is using the funds gotten from sale of land to be invested in the company. He can defer all the capital gain taxes on the start-up capital. From the financial statements, it is evident that venturing into the business is highly profitable and manageable. The US real estate industry is booming thus providing optimism for Advanced Construction Material LTD as there is no product like it in the market. The major threat for the company is not having enough funds to cater for the demand. As a result, Mr James needs to do a thorough analysis of the market for setting up the prices of the materials and coping with the demand in the US. Work cited Joan, Akenm, Hans, Berends, and Hans, Der Bij. Problem Solving In Organizations: A Methodological Handbook for Business and Management Students. New York, NY: Cambridge University Press. (2012). 122- 248 Glen, Utzman and Howard, Utzman. Limited Liability Companies. 2013. 1-193 Read More