Guillermo furniture store scenario - Essay Example

Guillermo Furniture Store Scenario of Phoenix Connie Johnson March 12, The Guillermo Furniture Store scenario illustrates a companythat needs to adapt to the market changes in order to stay competitive. In the scenario there were several financial concepts that were discussed. Throughout this paper those concepts are going to be analyzed. The company had a good business going due to the fact that the firm faced minimal competition, low labor costs, and the firm was able charge a premium price for its products.

Then suddenly things changed as a new competitors enter the marketplace. The Sonora region became a hot spot of business activity which raised operating costs particularly labor costs. The profit margins of the firm were reduced dramatically by the rising costs. In order for a manager to realize that the profitability of a company is declining the person must evaluate the financial statements of the company. The specific financial statement that deals with profitability is the income statement.

The top line of the income statement illustrates the total sales of the company for the accounting period. The costs of goods sold are subtracted from the revenues to obtain gross profit. The operating expenses and taxes are subsequently subtracted to arrive at the net income. The enterprise faces a tough dilemma because the firm has to make changes to adapt to the new realities of their marketplace. A factor that changed the furniture market in Sonora Mexico was the arrival of foreign competition.

Foreign competition is a business variable that must be evaluated by business analysts and managers of organizations. The reason that the arrival of foreign competition at times hurts the profitability of an industry is because in developing countries such as China manufacturers only pay as little as fifty cents per hour of labor. It is impossible to compete with those types of numbers. Guillermo Furniture Store is currently facing inflationary forces including rising labor costs. A potential solution for the company was to upgrade their machinery and equipment in order to automate the entire production line.

This would eliminate the necessity for the majority of the labor the company is currently using. A major obstacle and drawback of this solution is that it requires a high capital investment. To determine if a company has the financial resources to invest in this type of project the manager must analyze the balance sheet of the company. The balance sheet of a company is a statement that illustrates the financial position of a corporation at a specific point in time. The three major elements of the balance sheet are assets, liabilities and stockholder’s equity.

The balance sheet follows the logic of the basic accounting equation which states that assets are equal to liabilities plus stockholders equity (Emery & Flinnerty & Stowe, 2007). The top section of the balance shows the assets of the company. The assets are listed in order of liquidity from top to bottom. The most liquid asset is cash. In order to implement the automation project Guillermo Furniture Store would have to have sufficient liquid assets to invest in the project. If the company does not have the liquid assets there are still alternatives available.

The liabilities of the company are illustrated in the middle part of the balance sheet. A low debt position would enable the company the opportunity to finance the project through loans. A good way to determine if a company is in a favorable debt position is by applying ratio analysis. The debt ratio and the current ratio are two good metrics that evaluate the debt condition of Guillermo Furniture Store. A third way to raise money for capital projects is by issuing common stocks. In order to sell common stocks in the open marketplace the company would have to become a publicly traded company.

The process of converting a private firm into a public firm is called an initial public offering (IPO). Another financial concept that was mentioned in the scenario is merger and acquisitions. A merger is the combination of two companies to form a new firm, while an acquisition is the purchase of one company by another in which no new firm is formed (Answers, 2011). Guillermo does not like the alternative because it leads to a loss of business control. References Answers.com (2011). Merger and acquisitions.

Retrieved March 11, 2011 from http://www.answers.com/topic/mergers-and-acquisitions Emery, D., Flinnerty, J., Stowe, J. (2007). Corporate Financial Management (3rd ed.). New Jersey. Pearson-Prentice Hall.