Guillermo_Furniture_Store_Scenario_Analysis

Guillermo Furniture Store Scenario Analysis FIN/571: FINANCE March 1st, 2012 Guillermo's Furniture Store Scenario Analysis Guillermo’s Furniture Store is located in Mexico and is a well-known furniture manufacturer that has been functioning well through the years. In the late 1990’s international competition started to affect regular business operation of Guillermo’s Furniture Store and forced owner of the store Guillermo to consider different business alternatives. Guillermo began implementation of Self-interested behavior by focusing on financially advantageous actions for the business. Opportunity cost principle came into effect when Guillermo began researching and studying competitors' behavior and business approaches to understand the scope of needed measures. Since Guillermo wanted to have a life-work balance, business take over was not considered, nor was Guillermo looking to buy another company. This decision also refers to the Principal of Self-interested behavior but on individual level. Through the observation of Guillermo’s Furniture Store's competitor who was using a high-tech approach to everyday business, the Signaling principal was utilized. The actions of foreign competition forecasted increase in labor costs and decrease of profit margin for Guillermo's store. Behavioral Principal is an application of the Signaling principal, it was exercised as well, as Guillermo started using newly obtained information to find a strategy for the business to continue making profit. Guillermo had an option to follow one of the store's competitors and update equipment used in furniture manufacturing to a high-tech. This decision would decrease labor costs and improve the profit margin. However, the option of updating the equipment meant high costs associated with this action. Guillermo used Options Principle, as there was an option to either update equipment or not. Provided Income Statement shows that there is a great financial benefit and improved Net Income if the equipment is changed to high-tech, but the Options Principle does not obligate Guillermo to act upon the option of equipment change. Using the Principal of Incremental Benefits, on the other hand, dictates the necessity of the equipment change because of the incremental value of this decision. By upgrading to high-tech equipment the sales would increase substantially and lower labor costs would contribute to higher Net Margin and increase the Net profit after taxes from $24,695 ($42,577-$17,882) before equipment change to Net profit after taxes of $113,427 ($195,564-$82,137) after the equipment change (Douglas R Emery, 2007). Guillermo has another option of changing the Furniture Store from being a manufacturer to becoming a distributor. This option is considered since one of Guillermo’s Furniture Store's potential rivals in furniture manufacturing is heavily relying on chain of distributors. Becoming a distributor would exercise the Principal of Risk-Return Trade-Off for Guillermo as there would be a chance of risk involved by moving the company from manufacturing to distribution. The case does not provide financial breakdown and the level of risk involved by moving from manufacturing to distribution process, so the level of risk is unknown. Existence of uncertainty and risk when making a decision regarding future business operation of Guillermo’s Furniture Store brings another important principle for consideration: Time-Value-of-Money. If Guillermo obtains a new high-tech equipment, then a big sum of money would be spent for the purchase instead of being invested or used otherwise and would create existence of opportunity cost. Since Present Value of a certain amount of money is greater than the Future Value of the same amount, Guillermo would need to estimate expected future cash flows before and after updating company's equipment. Cash flows from changing the company's profile and becoming a distributor would need to be estimated as well to make the optimal decision regarding future operation of Guillermo’s Furniture Store. Guillermo should also take into account existence of patented process for furniture coating that has been used by Guillermo's store. If Guillermo decides to become furniture distributor, the patent may be sold to Guillermo's Store's competitor. The existence of patent correlates with the Principle of Valuable Ideas and can be used to Guillermo’s Furniture Store's advantage. Guillermo’s Furniture Store analysis revealed the presence of many principles of finance and financial concepts, like Self-Interested behavior, Signaling Principle, Behavioral principle, Principle of Valuable Ideas, Options Principle, Principle of Incremental Benefits, Risk-Return Trade-off, Time-Value-of-Money and Opportunity cost. Considering all these principles and estimating outcomes of every possible solution would help Guillermo to make the best financially sound decision. REFERENCES Douglas R Emery, J. D. (2007). Chapter 3: Accounting, Cash Flow, and Taxes. Prentice Hall.