The evaluation and analysis of the Income Statement of Twin Peaks Building Supplies shows financial challenges. The fact that in the past nine months of operation the company recorded a loss of $33,000 is a clear indication of that. This loss could be attributed to poor management. The actual cause of the loss is a higher value of expenditure than the income of the business. This is directly linked to the mechanism used to determine the price of the products, the manner in which expenses are prioritized and the criteria for determining the types of expenses to be incurred. The pricing mechanism directly determines the value of sales. The priority of expenses is also a determinant of the net profit/loss. If expenses that require a lot of money are prioritized then the value of expenses becomes extremely high. This is magnified when these expenses do not generate an equivalent returns.Some expenses are totally unnecessary to the business. They are irrelevant and do not contribute to the actual running of the business enterprise. If money is spent on such expenses, the gross value of expenses rises without bringing returns. Generally, these factors are greatly influenced by the financial decisions made by the business enterprise. In the case of Twin Peak Building Supplies, the management could have neglected the balance of the three factors which determine the value of sales and that of expenses. This could be called poor financial management.
Contributing Factors
Even though the realization of a loss is the main challenge, there are a number of factors that have led to the loss. For instance, both owners of Twin Peak Building Supplies had neither professional nor academic skills of business management. Whereas Chris White is a factory Technician, John Noel is a sales representative. A combination of the two shows that the business owners lack the proper business management skills that would otherwise be acquired through academic and professional experience. It is explicit from the background information that none of the two owners had any business management skills. Furthermore, the recent history of the business shows that it had experienced decreasing returns in the previous two years. This could prove that the business had started experiencing financial problems even before the change of ownership. It is a high possibility that the trend of net profit realized by the business was slanting downwards. So even in the change of ownership, some few factors only helped it decline even more from making profits to making losses. Another possible cause of the problem is the fact that five existing employees of the business were retrained. This is a move that contributed to the removal of a human resource that was well aware and up to date with the business operations. Introduction of new employees could have taken time for them to learn and get an efficient production strategy for the business. Since proper financial management is the key to having profits for any business, a good financial manager would have been essential for Twin Peaks Building Supplies. The fact that the new owners, Chris White and John Noel opted to hire a part time book keeper might have contributed to the loss. This is because a part time book keeper has divided attention to the accounting of the business. Elsie White could not been fully dedicated to proper financial management of the business because she was a part time book keeper. In addition, the pricing mechanism for the products was poorly determined. Instead of letting the market forces of demand and supply determine the prices of products; the new owners had a rigid price determination mechanism based on “reasonable” profits. This limits the value of sales that can be realized. Lastly, the expansion bid occasioned by the $20,000 credit was also a contributing factor. This is because it led to more expenses being incurred thus causing a deficit between income and expenses.
Positive Factors
The new owners hired Peter Jones as the manager. Peter Jones had been an employee of the business under the previous management. This is a positive move because there was somebody positioned in the human resource, which had experience with the operations of the business. Jones could help prioritize and implement the existing plans and strategies put in place by the previous management. On their part, the owners showed commitment and dedication to the business. This is because they spared time to visit their business several times a month. They also inspected the books of accounts. This shows their concern and commitment to make the business successful. Even though they employed a part time book keeper, the mere fact that they acquired one is a positive move. This helps keep the accounting records of the business as well as carry out financial management.The owners allowed customers some quantity discounts for large volumes of purchases and cash discounts to their debtors. This creates a good clientele for the business since it entices the customers to be loyal enough.
Probable Solutions
Chris White and John Noel had a number of solutions at their disposal. For instance, since they both lacked business management skills to run their enterprise, they could enroll for academic seminars and exhibitions to acquire some skills and knowledge for running their businesses effectively. They could also have done adequate market research to know how they can manage the business. This would involve getting information from other individuals from the same industry on how well to adapt to economic changes.Furthermore, it was a mistake for the two owners to retrain five existing employees. A better move would have been to retain all employees of the company. This is because only existing employees would have explicit knowledge of the company, its customers and all its activities. They would also have perfect knowledge of what is expected of them so as to make the company more enterprising. Part of the human resource should have been a strong financial human resource. This means a person or a group of people who would make sound financial decisions. These people would be responsible for determining the pricing mechanism and expenses. Therefore, they should have employed full time and dedicated individuals to mange their finances wisely, contrary to the part time book keeper who was employed. One of the sound financial decisions that the owners should have considered was a price mechanism determined by demand and supply forces of the market. This would be better since it would not put a limit to the value realized from sales. Therefore, they would stand to gain from the dynamic nature of the market since every unit change in the market would bring a subsequent and proportionate change in the profit realized. This allows a flexible price determination mechanism.
Analysis of the Alternatives
With the owners having come up with some solutions which they could implement, a close analysis of each of the proposed solutions indicated some merits and demerits. The advantage of the first alternative; increasing their credit with their bank, is that this would result to increased capital in the business. This increased capital would enhance the production activities of the company since it would increase the amount of disposable money for the business. In addition, the two owners would find it easy to guarantee their credit. Their argument suggests adequate personal property that can guarantee the credit effectively with unlimited liability. The negative side of the alternative is that the prevailing situation could not be good for credit financing. This is because the interest rates are extremely high and therefore any credit would mean that on maturity, a lot of money would be lost in the process of paying it back.
If the two owners settle for inclusion of a third proprietor into the business, this would as well produce some positive and negative impacts. The positive side of it would be increase in disposable money as a result of additional capital. This is even magnified by the fact that the added capital does not come with a liability.The potential investor is also experienced in this type of business, therefore there would e added experience in management skills. However, an extra investor and newer ideaswould call for strategic change management. This could be hard for the business in adjustment.
The final alternative would be closing out. This would benefit the owners since they would be able to settle their credits adequately without making losses themselves.The demerit of this is that the owners wouldn’t have any business to provide them with any extra income.
Of all the alternatives, the second one would suit the situation. This is because an introduction of a third proprietor would not come with any liability. It would only increase the owners’ equity. At the same time, it would avail more money to be spent by the business in re-strategizing.
Lessons Learnt
From their experience, Chris and Noel must have been enlightened on the requirements to be fulfilled before on can start and run a business. There should be sound financial management to manage inflow and outflow of money. The owners require adequate relevant knowledge before engaging in any business activity. Furthermore, they must have learnt that any business operates within an economic environment. This means that it should considerprevailing economic status in terms of demand and supply mechanism of price determination.With this knowledge, the proprietors can convince their bank using a strategic plan. This is a document that shows the prevailing situation of a business together with the future plans that would ensure growth and development of the business. The document that the business can present to the bank is as follows;
Twin Peaks Building Supplies
Business Plan and Strategic Plan
As evidenced in the Income Statement of the above named company, the current financial status of the business is wanting and the owners, Chris White and John Noel acknowledge this, as well as the concern of the bank. In order to address this issue, the company has devised a short term plan that seeks to revive it in order to generate profits rather than losses. This plan covers financial, personnel and marketing management as follows
Financial management will ensure a cut in the expenses of the business relative to the sales in order to have more net profits. This will also ensure proper record keeping of financial records by a fully trained full time accountant of the business. The accountant will also create expansion policies in the financial sector of the enterprise.
Personnel management will ensure that an adequate human resource that is well trained and experienced inbuilding supplies is acquired. This is to ensure that all sectors of the business are vibrant enough.
The marketing department will be enhanced so that more advertising and product promotion can be done. This is our business objective to ensure that many individuals get access to our products thus create a loyal clientele.
In order to achieve this, the business will enter negotiations with a potential investor who is willing to inject more capital into the business as a third proprietor. We hope that the bank will kindly accept our request.
Bank Response
Following your submission of your business plan and strategic plan, the bank wishes to inform the proprietors that inclusion of a third proprietor is fully supported by the bank. The bank is keen to see increased profitability as well as higher capital in the business. However, the payment for the credit offered is still limited to the first contract signed by the two parties.
Conclusion
Twin Peaks Building Supplies suffered a loss in only nine months. This loss is as a result of poor management of the business. It can be attributed to a number of faults in the business operation. These faults include retraining existing employees, poor financial management, ignoring the economic environment of the business as well as lack of management skills by the owners. The two owners, Chris White and John noel acknowledge that the business is experiencing problems. They seek to get solutions to the problem facing their business. However, out of all the alternatives raised by the proprietors, having a third investor seems more beneficial to the business since it will lead to increased capital at no increase in the value of the liabilities of the business. This is a solution that can see them settle the bank credit as well as expand their business operations if well implemented.