Financial Analysis of Durango Manufacturing Company - Research Paper Example

 Financial Analysis of Durango Manufacturing Company Introduction There is little doubt in the value of enterprise-wide supply management practices among supply chain professionals in large, complex companies (Csaszar, 2012). The is also no doubt over the importance of sufficient management of finance in such organizations. Large manufacturing and supply chain companies require drivers of value like requirements development , demand management, purchase volume aggregation, management of financial information, and the management of finance, amongst others. This analysis employs Durango manufacturing company's organizational situation to access the form and nature of financial management and the impact of the principles of stakeholder management, alongside aligning the organizational structure to achieve the right efficiency for the generation of high revenues. Case Study Durango Manufacturing Company is a firm that deals in manufacturing of a variety of products and the supply of industrial products . The firm deals in aircraft manufacturing, apparel manufacturing, automotive manufacturing, chemical and allied products, glass manufacturing, home and garden supplies, industrial importers and exporters, paper and pulp, railroad manufacturing, and other forms of manufacturing. The organization has in the past received Best Business Bureau (BBA) accreditation , which recognized their relentless commitment to make strenuous efforts of satisfying consumer complaints. The award considers the period of time the business has been in operation, the amount of information available concerning the business, and most importantly, there should be no consumer complaint filed with the Better Business Bureau (Csaszar, 2012). Durango manufacturing company’s Chief Executive Officer (CEO) does not have sufficient expertise in financial management and creating value for the firm’s various stakeholder groups. Financial Literacy Brigham and Ehrhardt (2013) provide that financial crises in most organizations are attributed to weaknesses and failures in corporate governance, including risk management mechanism. Corporate finance is directly tied to organizational strategies. As such, corporate finance is directly linked to the administration of organizations. Corporate finance is crucial as it defines how organizations fund their activities and achieve their goals and objectives. Organizations are always faced with a dilemma between re-investing their excess revenues or using it to pay shareholder dividends. An ample financial literature is crucial as it enables chief executive officers to rationally appropriate the finances of an organization, while maintaining a high quality shareholder relations. The Chief Executive Officer (CEO) of Durango manufacturing limited should seek financial training to enhance his financial literature. The firm is a large multinational firm with extensive financial implications. Also the magnitude of its daily operations represents a relatively large financial risk that requires high-tech financial management expertise. Because of the complexity of the organization, the managing director should seek training in financial management or management accounting. Management accounting comprises the provision of financial information, as well as financial advice to a business (Brigham & Ehrhardt, 2013). Financial management starts with the management of financial information (Bhat, 2008). Financial information refers to data like credit card numbers, account balances, credit ratings, and other monetary details concerning an organization, which are used in implementing various activities like credit assessment, loan transactions and sundry. The chief executive officer should know how to process financial information to safeguard Durango Manuactiuring Companyprofile from bad publicity associated with financial misappropriations. A well managed financial information system also offers security to clients and investors, thus safeguarding future profits (Brigham & Ehrhardt, 2013). The managing director should oversee the establishment of a financial information system for Durango Manufacturing Company so as to facilitate the accumulation and analysis of financial data. Such a system will help in optimal forecasting and financial planning of outcomes and decisions respectively. If the chief executive officer implements the provisions of this section, Durango firm will be in a position of maximizing operating results within the shortest time possible (Csaszar, 2012). Stakeholders and Financial Information Durango manufacturing company’s stakeholders include all persons, groups, and organizations which have interests in the firm. They include shareholders, suppliers, employees, unions, directors, government, the community, creditors, board members, consultants, and others. Stakeholders are always affected by any action, policies, and objectives that the organization pursues. They offer a multi-dimensional pool of resources from which the organization draws from. Baik, Chae, and Choi (2012) categorically argues that the chief executive officer is charged with the role of managing stakeholder relations and power dimensions in most cases. A well managed stakeholder relationship represents a successful organization. This is because an effective stakeholder network ensures that organizational activities are carried out swiftly and policies implemented in the latter. The chief executive officer of Dango Manufaactiring Company should hire a consultant to offer advice on the principles of stakeholder management. The chief executive officer is the custodian of the organization. As such, he is charged with the responsibility of minimizing negative environmental social impact, while promoting positive impact through the engagement of all the stakeholders. Stakeholders are the ingredients which form an organization. The organization represents a collection of interests and a series of ideas brought together for the satisfaction of everyone. Together, they sit down and formulate the objectives of the organization in their different capacities. Consequently, their involvement in the implementation process is crucial as each stakeholder has a role to play in the attainment of those goals (Baik, Chae, & Choi, 2012). Stakeholders are always interested in the financial information of an organization. This need is founded on the fact that they need to get an understanding of the performance of the organization. The financial information reflects the organization’s assets, all financial investment, liabilities of the organization, as well as profitability. In order to guarantee success in implementing Durango’s 5 year financial objectives, the chief executive officer should invest in stakeholder relationships and stakeholder engagement. Accounting information offers stakeholders a picture of the economic reality of the organization, its liquidity, profitability, and how it relates to the economy. The records help in the maintenance of the organization the reports and statements are the basis of periodical settlements with the government. The reports are a perfect way of determining the effectiveness of the organization, as well as carry predicts its future performance. Revenue Growth In order to increase revenue by 10% in the next 5 years, the chief executive officer of Durango should indulge the organization’s stakeholder’s in an expansion plan. This will greatly involve coming up with strategies to expand Durango’s market share in the manufacturing industry. To increase future revenues, the firm is required to expand its capital base, as well. Manufacturing firms rely on their capital expenditure to increase future revenues (Baik, Chae, & Choi, 2012). Capital expenditure is the cost of financing long-term assets and projects.capital expenditures create future benefits when incurred in an organization. One of the important functions of financial information to the stakeholders is that it helps them deliberate on capital expenditure implications. Durango manufacturing company’s chief executive officer should note that the actual expense of capital expenditure will not immediately impact the income statement. Nevertheless, it will slowly reduce the organization’s profits on the income statement in the course of the expansion period through depreciation. The nature of expansion will determine the attainment of 10% revenue growth through capital expenditure. The chief executive officer should oversee the evaluation of various capital expenditure ratios like the Net Present Value (NPV), Internal Rate of Return (IRR), cash flow to capital expenditures, and other ratios to determine the financial risk of the venture (Baik, Chae, & Choi, 2012). All these ratios (capital expenditure ratios) will help disclose the risk associated with Durango’s financial structure as it seeks to expand its revenue base by 10%. Most of these ratios are a representation of the relationship between profits and spending, sand will help to offer advice on whether to proceed with the expansion. This will help the company determine its capacity to acquire the 10% revenue growth using their cash flows. The ratio can be achieved through dividing the cash Flow from Operations with Capital Expenditures. The greater the ratio deduced, the better the position of the company to achieve the five year revenue growth plan. Durango Manufacturing Firm should analyze their cash flow to capital expenditure (CF-CAPEX) (Csaszar, 2012). Capital expenditure ratios will show whether Durango is earning more money from its major activities or will spend more in the expansion program. This suggests that the firm will succeed in using its capital expenditure, thus it will achieve the 10% revenue target (Brigham & Ehrhardt, 2013). The debt to capital ratio determines the debt used by the Durango Manuactiuring Company with respect to its capital structure/Expenditure. It is acquired by dividing total debt to total capital. Total debt included the firm’s current and long-term debt, whereas the capital expenditure can be the firm’s total debt and the total shareholder’s equity. Durango manufacturing can determine their probability of succeeding in the 10 % revenue growth plan by determining the net present value (NPV) of their cash flow. This presents the difference between present cash inflows and the value of cash outflows. The firm can use the net present value of their cash flows to analyze the profitability of their expansion plan. This analysis is sensitive to the consistency of the cash flows for the next 5 years. Lastly, the chief executive officer should determine the internal rate of return from capital budgeting of Durango manufacturing. It will help the management to know the company’s rate of growth in the next five years. They will be able to determine whether the 10% growth plan is possible. The higher the internal rate of return, the better the chances of the firm to attain its objectives (Csaszar, 2012). Operational Efficiency Operational efficiency exists when players are able to execute transactions and pay for services at a price which equates fairly to their actual costs (Brigham & Ehrhardt, 2013). The chief executive officer should engage the finance department to ascertain the inflow and outflow of cash for the transactions. The sales and marketing department will also be crucial in determining operational efficiency. The sales function will come in handy in management of sales records and comparison of prices. The department will provide records of prices, and also receipts. Operational efficiency is all about prices and transactions (Csaszar, 2012). The marketing department will be required to offer in depth deliberations on the trend of the market, as well as its nature. The sales department will handle the job orders wile the finance department will preserve financial information that accrues. The chief executive officer needs the input of the finance department and sales department to carry out sufficient activity-based costing. The sales department has information pertaining to prices of different products and services needed, while the finance department will determine the cash outflows that the organization can manage. Outsourcing Manufacturing Operations The only reason for outsourcing should be to reduce operational costs. In deciding whether to outsource or not, business leaders should consider financial and business implications before implementing the course of action. Outsourcing presents one of the ways for business to cut costs while still maintaining their competitive advantage. Durango has identified that the cost of labor in overseas markets is cheaper . Labor remains one of the largest costs in the manufacturing industry (Brigham & Ehrhardt, 2013). Durango Manufacturing Company Seeks to outsource its manufacturing operations , but first the chief executive officer needs to carry out a labor analysis of the two regions. Comparing labor costs and the labor implications between the current country of operation and the strategic country for outsourcing is crucial as it will identify the cheaper region. There are other implications as well. These include government regulations in the outsourcing region, the business environment, the cost of capital, cost of transportation, taxation issues, and other factors associated with outsourcing. If Durango Manuacturing Company decides to outsource, it will greatly cut its labor costs. This applies if the chief executive officer adopts a policy that focuses on the exploitation of flexible outsourced labor. One of the advantages of outsourcing is that the organization will be more flexible to decrease or increase the staff as required at a particular time. This insinuates a lower hourly remuneration to a temporary worker. Outsourcing eradicates the complexities brought about by the employment of skilled, full time employees who require health care and other benefits. Csaszar, (2012) states that outsourcing will also reduce Durango manufacturing company’s overhead costs. Some of the overhead costs include utilities like electricity, water, gas, and maintenance expenses. Outsourcing will also lead to specialization in one line of activity. If Durango Manufacturing Company outsources its manufacturing operations, it will be in a better position to focus on selling its products and let other people specialize in the production process. This will help the company enhance its competitive front. Business Environment The economic and business environment in the next five is sound and lucrative. The world is still recovering from the 2007 financial crisis. Consequently, most economic regions are enjoying sound economic policies and there are financial safety measures in place. This suggests that the world is not going to experience financial difficulties any time soon (including the next 5 years or so). Furthermore, many states are contemplating the idea of smart cities. The phenomenon presents intelligent and efficient business environments characterized by high-tech information communication technology. Advances in technology brought by smart cities will really improve distribution chains. This will deal with the current inefficient distribution chains associated with manufacturing companies like Durango manufacturing company. The company will also benefit from low taxation and low cost of doing business in the smart cities (Csaszar, 2012). Strategy Durango manufacturing should carry out SWOT (strengths,weaknesses, opportunities, and threats) analysis of their organization to ascertain its place in the next five years. The paper has already offered the financial recommendations that can be applied in the analysis. This will help identify the organization’s capacity to achieve its 10% growth plan in the next 5 years. Financial Fraud Advanced Battery Technologies (ABAT) is a Chinese company that manufactures Polymer Lithium-Ion batteries. There have been several reports that have labeled the company as a fraud. One report uncovered a shady activity by management. It involved a transaction in which the Chairman transferred his remaining shares in Heilongjiang ZQPT, a key subsidiary, to ABAT in 2006. Consequently, this gave ABAT full ownership of the company. In the company’s 2009 financial report, the firm maintains that Heilongjiang ZQPT is completely owned by the Chairman without offering an explanation of how ownership was transferred back to him. The internal defect in Advanced Battery Technologies lies more in its communication channels with its stakeholders pertaining to the shares in question. This is because the management had not informed its shareholders of the transfer of the shares. This is unethical as it is tantamount to offering insufficient information to ABAT’s shareholders, and it can pose detrimental consequences. This can earn the company a negative image and can result in loss of future investors (Csaszar, 2012). Potential for Fraud Durango manufacturing can suffer the problem of hackers interfering with their information communication systems, as well as digital financial systems. An inefficient information technology system can create business communication problems. This can lead to inefficiencies (Csaszar, 2012). For instance, if the information and technology system is not working properly, email messages will delay, and there will be delays in response. This also undermines the efficiency of teams in the organization because team members cannot communicate properly/liase effectively. Internal Audit Model Internal audit is one of the most effective ways of managing an organization’s quality management system (QMS). The feedback obtained from the process is crucial to the growth of the organization. The model of internal audit that Durango should adopt is one that is considered just as important as a whole QMS process. Furthermore, the process should have the full backing and cooperation of the senior management. Understanding and supporting the internal audit process will sharpen the QMS edge of the firm. Failure to base the process on the importance and status can be interpreted differently, and hurt the audit process. The definition of status of the audit process is crucial as it determines how a specific department, facility, discipline, or process is performing. They can be measured against established objectives, goals, policies, and expectations. A department, process, or group that meets expectations is considered efficient enough (Csaszar, 2012). Conclusion This analysis has sufficiently explored both current and future implications (5 years to come) of the financial position of Durango Manufacturing Company. The paper has extensively revealed why the firm’s chief executive officer should reflect a good understanding of both financial information and stakeholder management for the future success of the business (Brigham & Ehrhardt, 2013). The firm’s management should use capital expenditure deliberations to determine if the company is in a position to achieve a 10% growth rate in the next 5 years. According to the argument presented in this paper, Durango Manuactiuring Companyshould adopt superior financial and stakeholder management to ensure the attainment of its organizational goals and objectives. ReferencesTop of Form Bottom of Form Top of Form Bottom of Form Top of Form Top of Form Bottom of Form Baik, B, Chae, J.,& Choi, S. (2012). Changing in Operational Efficiency and Firm Performance: A Frontier Analysis Approach. Contemporary Accounting Research, 30(3), 966-1026. Baker, H. K., & Powell, G. E. (2005). Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub. Bhat, S. (2008). Financial Management: Principles and Practice. New Delhi: Excel Books. Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory and practice. Mason, Ohio: South-Western. Csaszar, F. (2012). Organizational structure as a determinant of performance: Evidence from mutual funds. Strategic Management Journal, 33(6), 611-632. Sturm, J.E. (1998). Public capital expenditure in OECD countries: The causes and impact of the decline in public capital spending. Cheltenham: Elgar. Bottom of Form Read More