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Financial Management : Theory And Practice Method

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Question:

Discuss about the Financial Management for Theory and Practice Method.
 
 

Answer:

Introduction

Each corporate organization executers on money and it is the blood that keeps the organization up and executing. Therefore it is most vital for the management to take imperative decision on financial cases. Wrong decision at wrong situation or time can cause financial loss and brand name also. As stated by the Berk and DeMarzo, (2017), corporate finance is the field that is related to the monitory functions of running business. In present report I am going to discus about the optimum solutions for the organization Pilochary polymers. Pitlochry polymers are the UK based organization listed on the United Kingdom AIM. The organization manufactures and markets a range of specialists chemicals to the oil refining and extraction and its goods are mainly expensive and need delicate handing if they may be effectual to utilize. In order to perform its operations the organization uses the special properties of containers which are patented lining made from material called BWF. The objective of the report is to evaluate and analyze the benefits and disadvantage of several alternative and finds the optimum solutions.                 

Relevant cost analysis techniques 

A Make or Buy decision is taken when the company has an option of buying the goods it is producing or use the available capacity to produce other items in the factory. (Saxena and Vashist, 2013). 

Pitlochry Polymers plans to outsource the task of making containers used for packaging to an external supplier. Packing is considered to be an important activity for this company since the products of the company are expensive and its use in the hand of consumers depends a lot on the way it is handled. The company had all these while maintained a separate department which looked after the packing and used patented lining material for the container.  However currently Mr Anthol, the production manager feels that outsourcing the container business can contribute to the profitability without affecting the quality of the container.

Accordingly the production manager after due consultation with the supervisor of the container department and chief accountant decided to check the feasibility of the idea of buying the container instead of making it. The three alternative choices which came up for the purpose of compare and contrast are as follows. The comparison for all the options are being done for 5 years in order to equalize the cost since Dunkeld has quoted price for a 5 years contract

The company manufactures the container as well as maintains them. This is the procedure which was being followed by the company.

This is the cost which is actually being incurred by the company over the period of time. The rent has been adjusted according to the figures stated.

The company outsources the manufacturing process as well as the maintenance to Dunkeld Ltd for 5 years. 

 

Since the company is outsourcing both the production and maintenance of the container, so there is no need for the existence of a separate container department. Mrs Johnston who is the supervisor of the department is being retained and transferred to another process. It wouldn’t be possible for the company to retain the remaining employees and hence all of their services would be terminated.  Stewart and McEwan who had spent more than 40 years serving this company would be paid a yearly allowance of £3000 since their termination has nothing to do with their performance.  Similarly no further material will be required. Hence the patented chemical BWF which was purchased at a price of £1000 is being sold at £800 incurring a loss of 32000. Similarly the machinery which was acquired for £240000 four years back with an effective life of 8 years is being sold at £40000 thus incurring a loss of £80000 according to his book value. Rent is also not required since the cost of storing the container now will be incurred by the supplier. In spite of the closing of this department the allocated central overhead is suppose to be same. The calculation for the remaining 4 years is suppose to remain the same barring the losses on patented chemical and machinery which has been absorbed in the 1st year. The total cost incurred by the company for acquiring 3000 container is £250000 and the amount charged for maintenance is £75000. The total cost incurred by the company if the option of complete outsourcing of production and maintenance is adapted will be £1992000 in 5 years. 

The company only outsources the manufacturing process of the container but retains the maintenance of the container through the in house facility.

Under this scenario the container department is retained with the objective of performing limited functionality with reference to the maintenance of the container. However the machinery is sold in the same manner as discussed in the previous option with an aggregate loss of £80000. It is also decided that one of the senior employees will be promoted as the supervisor and the move is expected to save around £6000. The current supervisor will be re-designated in some other department. The new container department will retain 20% of the employees which will include the senior and experienced one so that no further compensation for severance is paid. The company will continue to retain the storage facility for storing the container as well as patented chemical and hence bear the cost of rental. It was also ascertained that 10% of the regular consumption of the patented chemical will be used for the maintenance process. Taking a hint from the previous year consumption of 40 liters’ it was decided that 4 liters will be required for maintenance in the current period.  The 5 year quotation from the seller for 3000 container continued to be £250000. The expense for the loss on sale of machinery will largely remain same over the 5 years except the additional head of loss on sale of machinery which will be dealt in the 1st year itself. The total cost incurred for the 5 years is £1875000 with an arrangement to buy the containers and have a in house arrangement of maintenance

Calculation and assumption

In order to find the values of the organization weighted average cost of capital technique is implemented. Moreover it has been seen that WACC is the effective tools and helps the management to select the optimum project among several options. The main benefit of this procedure is that capital structure of the company is not changes and risk associated with project is easily determined. The biggest process of use of this procedure is that it is easy to calculate and promote effective decision making process.  

 

Decision based on the calculation

Considering the three options from financial point of view it can be concluded that minimum cost or maximum profitability can only be achieved by following the third option. In this option the cost involved is £1875000 which is significantly lower than the other options. Although the company Dunkeld is offering a much lower price in manufacturing the container than it was possible through in house facility but it was charging a much higher rate for maintenance. Hence the ideal arrangement is purchasing the container from an external supplier and conducting the maintenance of the containers through an in house facility.  (Bhatta, 2010).

Net present values help the organization to determine how much cash the company earned during the completion of the project. It is mainly defined as the difference between present values of cash outflow and inflows. The main benefits of this procedure are that it helps the organization to determine which project is associated with the high profits.

As per the above calculation show in appendix it has been said that the best and profitable options is options 4 because i.e. keep maintain and .outsource manufacturing  it is associated with the lower net present values i.e.-835200 pound.

In order to assess the project and findings optimum solutions from alterative sources, IRR, ARR and payback period are not applicable because each project is associated with the negative cash flow, therefore the payback period for completion of the project is not calculated from them.

Issues associated with the management face before proceeding

As per the above scenario it has been seen that management implement some new changes at workplace in order to gain higher profits and achieve better quality of services in vital and successful manner. From the analysis and computation it has been observed that management tries to implement some changes i.e. they purchase the container from the external suppliers and maintenance part done organization. Use of such strategy would help the organization to save lots of money as well as achieve higher quality of goods and products in vital and successful manner.         

From the computation it has been seen that options one cash flow is -854913 whereas four options PV is -835200 respectively. But as per the company point of view it has been seen that management needs to select options 4 because ultimately or cost point of view options 4 is optimum procedures to analyze and assess the project in most vital and effective manner Therefore from the findings it has been seen that Best choice will be the option with lowest PV, i.e. -835200 respectively. If an organization implements options one i.e. self manufacturing and maintenance then high risks and cost is associated with project. So, from the findings it has been said that “manufacturing outside and maintenance inside” is better options for company and helps them to achieve set of outcomes in vital manner.

 

Issues associated with the management at workplace are following;

Communication: - In order to deliver the project within the time limit and achieve set of objective in accurate manner communication plays the vital manner. Therefore communication is considered one of the top change management issues as seen (Hinner et al., 2011). If the management is not being able to communicate with their employees and workers then they not achieve such type of services which they expected from them. As from the analysis it has been seen that management selected option 3 i.e. they order container from the external suppliers and maintenance them into workplace (Heath and Palenchar, 2009). Thus in such situation if the roles and responsibilities or communication not done in well manner the staffs are not be able to deliver their job within the time limit.

  • conflicts problems: As per the study it has been seen that most of the workers work in the company for several time, that they are not be able to acquire change management in better manner. Therefore this creates negative culture environment and conflicts problems. Conflict is also one of vital factors that hamper the organization performance effectively (Montana and Charnov, 2012). If management implements some changes in which some staffs members lose their works so that this lead conflict problems between the management and staffs members. If the conflict problems will be high then it converted into the strike problems and this not only hampers the organization performance but also their brand reputation.
  • Employees resistance: As in the cases study it has been seen that department leader i.e. MR. Johnston not happy with the management decision because they worry about their features or employment (Heath and Palenchar, 2009). Therefore in such situation most of the employee will not supported the changes or resist changes. They become happy with the manner the organization is executed. They known their roles and reponsiblteis within the organization and if some changes established then some workers of the organization will upset of not in favor.
  • Leadership issues: - To execute any employment in successful manner leaders plays the vital roles. Therefore in workplace leader plays the vital role to execute any job in successful manner. Therefore in present scenario it has been seen that management incorporate some changes at workplace for purpose of gaining higher profits and achieving effective quality of goods and products. Thus in this situation if leader failed to set the roles and reponsiblteis of workers within the workplace then the company not be able to gain such type of services which they wants from  the implmentiaon of the changes. Difficulty delegating jobs occurred if not popper leadership style is incorporated. Staffs motivation level also degraded if not proper leadership style is implemented within the organization.
  • Planning issues: - With not step by step planning, change within the business is likely to decrease apart or because more issues as compare to the profits or benefits (Montana and Charnov, 2012). Therefore, it is the prime role of the management to understand where change is needed. As per the given case scenario it has been seen that planning and evaluating are the main task for the management and if they are not planning well then the business performance will be slow down.
 

Conclusion

Therefore from the above analysis and discussion it has been seen that decision making procedures plays the vital role for success of any business and if the management is not be able to make decision then the business performance is degraded and hampered. The analysis reveals that the main objective of any business is to improve the organization performance and maximize stock price and this can be effectively done by the managers with help of implementing better decision making procedures. The above discussion also shows that before implementing any changes organization needs to evaluate several issues in better and successfully manner. From the computation of the findings it has been occurred that if the management outsource their containers from external suppliers and maintenance part done in own department they achieve higher profits.

 

Reference

Bhatta, H. (2010). Cost accounting. 1st ed. Mumbai: Himalaya Pub. House.

Brigham, E. F., and Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Chandra, P. (2013). Financial Management. 8th ed. New Delhi: Tata McGraw Hill.

Chadwick, L. (2001). Financial management. 1st ed. Oxford: Heinemann.

Gupta, S., Sharma, R. and Gupta, N. (2009). Financial Management. 1st ed. Ludhiana: Kalyani.

Khan, M. and Jain, P. (2011). Financial Management: Text, Problem and Cases. 6th ed. New Delhi: McGraw Hill Publishers.

Saxena, V. and Vashist, C. (2013). Advanced Cost & Management Accounting. 7th ed. New Delhi: Sultan Chand.

Weetman, P. (2010). Management accounting. 1st ed. Harlow [u.a.]: Financial Times/Prentice Hall.

Weetman, P. (2016). Financial and management accounting. 1st ed. Harlow: Pearson.

Berk, J. and DeMarzo, P. (2017). Corporate finance. 1st ed. Harlow, England: Pearson.

Heath, R. and Palenchar, M. (2009). Strategic issues management. 1st ed. Los Angeles: Sage Publications.

Hinner, M., Dreiso?rner, M., Felich, A. and Otto, M. (2011). Business and intercultural communication issues. 1st ed. Freiberg: Techn. Univ., Fac. of Economics and Business Administraion.

Montana, P. and Charnov, B. (2012). Management. 1st ed.

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