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“Guillermo’s Furniture Store Scenario” tells a story of a private business, which was forced to review the possibility of the restructuring under the competitive pressure growth. The objective of this essay is to find and to explain some finance concepts in given scenario.
Guillermo’s Furniture
The first financial concept that should be discussed in the given scenario is the budgeting. The budget planning is the important part of every business, which can be defined as “setting the financial budgets for the business and each department within it (Investopedia, 2010)”. If the budget planning is the process of financial plan setting, the budget itself is a “quantitative expression of a plan of action (Andrews, 2003)”. In the given scenario the budget and budget planning can be used for the sort-term and long-term decision making. While the business owner faced the necessity to cut costs or find the other opportunity of financial performance improvement, the budget planning and the analysis of budget plans for previous years can help to choose the optimal business decision. The minor financial concepts related to budget planning for Guillermo’s Furniture are operating expenses, income statement and cash flow. These minor concepts help to evaluate a return on equity and a return on investment, to judge the productivity of different units and managers decisions.
The second concept is the Net Present Value (NPV). “NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account (Investopedia, 2010)” The analysis of NPV for Guillermo’s Furniture reflects that the decision to do nothing and continue business operations without any changes doesn’t need additional capital purchases because Guillermo already owns the building. However the net income after taxes (“what the company earned after all its expenses, charge-offs, depreciation and taxes – Investopedia, 2010”) in this case is the lowest.
The next concept for discussion is the opportunity costs. “An opportunity cost is the difference between the value of one action and the value of the best alternative” (Emery, Finnerty, & Stowe, 2007, p. 20). Every business decision in given scenario has its opportunity costs, and the higher cost means higher business risk for the owner. Guillermo has to decide what opportunity cost is appropriate for him.
One of main factor of influence in the given scenario is labor cost. Labor cost consists of the wages paid to workers plus payrolls, related taxes and benefits. The wages in certain region depends on many factors including the general development of this region, infrastructure, real estate market, climate, and so on. The level of development in the region changed due to new international airport: new jobs appeared, the living conditions improved and the wages grew. It is almost impossible to decrease the wages and stay competitive, so Guillermo has to find another way of costs shortening.
The material cost is also important factor for the business. Though it wasn’t mentioned in the scenario, it is obvious that the development of infrastructure in the region will lead the price growth on timber because of house construction. Thus, the alternative to shift to the primary distribution from the primary production seems the most reasonable.
At last, the concept of financial ethics is very important in this scenario. The lowering of ethical standards mean the possibility of fast success but the reputation of the company can have negative impact in the future. On the other hand, the strong ethical standards prevent the successful performance under the growing competitive pressure.
The case of Guillermo’s Furniture is the classical example of competition on the free market. It contains many financial concepts and some of them were discussed in the work.