Guillermo's_Furniture_Store_Analysis

Guillermo’s Furniture Store Financial Concepts University of Phoenix FIN/571 November 18, 2012   Guillermo’s Furniture Store Scenario Guillermo’s Furniture Store scenario outlines a furniture business in Mexico, owned and operated by one man, Guillermo Navallez, who until major competition moved in was operating a fruitful custom furniture business. Guillermo operated successfully because of a varying abundance of local wood and inexpensive labor costs. With the encroachment of a high-tech business that could provide goods at low overhead costs and the rising cost of labor because of an incursion of people and jobs Guillermo’s profits shrank considerably. Guillermo implemented a number of finance concepts, explained below, to counteract the effects of the competition and higher labor costs and turn his business around to improve revenues (Emery, Finnerty, & Stowe, 2007). Principle of Self-Interested Behavior: People Act in Their Own Financial Self-Interest Guillermo implemented the Principle of Self-Interest Behavior. He wanted to repair the damage done to his business in a way that allowed him to not sell to a larger company, purchase another company, or go out of business. His solutions were to implement innovative technologies in his manufacturing plant and partner with an overseas company as its distributor in the United States, essentially changing his main priority to distributing instead of manufacturing (Emery et al., 2007). Behavioral Principle: When All Else Fails, Look at What Others Are Doing for Guidance The implementation of new technologies, such as the computer-controlled laser lathe, also reflects Guillermo’s use of the Behavior Principle. Guillermo looked to other businesses and found that the use of the laser lathe not only cut down labor costs but also increased output because it could move between pieces quickly and operate 24 hours per day, increasing output, which could again increase profits (Emery et al., 2007).   The Principle of Valuable Ideas: Extraordinary Returns Are Achievable with New Ideas Guillermo employs the Principle of Valuable Ideas in his idea to partner with the competition in Norway to become their distributor in the United States. This allows Guillermo to profit from the other company’s sales within the United States without experiencing the cost of manufacturing the products himself (Emery et al., 2007). Principle of Incremental Benefits: Financial Decisions Are Based on Incremental Benefits Guillermo exploitation of the Principle of Incremental Benefits is another benefit of partnering with his competition in Norway. Guillermo will not benefit with a one-time, large sum of money through this deal, such as if he would have sold his business to a local competitor. He will benefit however from long-term, smaller payments as each local sale of the competitor’s goods occurs. This will benefit Guillermo in a longer term than a onetime sale of his business that will not allow profits to continue (Emery et al., 2007). Principle of Risk-Return Trade-Off: There Is a Trade-Off Between Risk and Return Guillermo also uses of the Principle of Risk-Return Trade-Off. By using the implementation of the laser cutter and partnership with an overseas company to turn his company around he does inherit certain risks. The cost of the laser cutter is an extensive, up-front cost however its benefit is that it drastically reduces labor costs after the acquisition. Partnering with a competitor in Norway also carries risks inherent with doing business with overseas companies. The geographic nature of the transactions however reduces the risk. Guillermo can ensure he receives his payments before the company in Norway receives theirs. Guillermo chose to accept these risks to maintain profitability (Emery et al., 2007).   The Principle of Diversification: Diversification Is Beneficial Guillermo’s use of the Principle of Diversification shows that he is willing to adapt to changing times and customers. The purchase of the laser lathe and the use of fire-retardant products and optional finishes permit varying furniture designs to attract more customers with different wants and needs. Partnering with another company allows Guillermo to diversify his income possibilities by not only profiting from his own manufacturing but also from another company with different products (Emery et al., 2007). Conclusion Guillermo does not want to lose his business, income, or independence and is willing to implement various financial concepts to ensure this does not happen. Many of the six principles mentioned above overlap in use however the principles combined will aid in Guillermo’s success. If the changes Guillermo implements are successful he will not have to partner, sell-out, or go out of business and will be able to once again be profitable and provide for his family (Emery et al., 2007).   References: Emery, D.R., Finnerty, J.D., and Stowe, J.D., (2007). Corporate Financial Management, Third Edition. Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx University of Phoenix. (n.d.). Guillermo’s Furniture Store Scenario. Retrieved from University of Phoenix, FIN/571-Corporate Finance course website