Critical Analysis Of Business Decisions Essay.

Case 1:
To write a memo as a consultant to the company’s CEO and audit committee about the difference and the advantages and disadvantages from the short-term and long-term debts financing.

Case 2:
To write a memo as an auditor to the audit committee of the company about advantages and disadvantages of hiring a new CEO to increase the profit with a profit-sharing plan (% from each year profit), as a result of 30% decrease in the profit last year in compared to budget.

Case 3:
To write a memo as a consultant to company’s CEO about benefit and advantages and disadvantages from taking the discount of 2% from the supplier if you pay the due amount within 10 days, in addition, what is the advantages and disadvantages if the company decided to pay the full due amount at the end of the grace period without benefiting from the discount.

Case 4:
To write a memo as a consultant about the advantages and disadvantages if the company decided to adopt the balanced scorecard method.

Case 5:
To write a memo as a consultant about the advantages and disadvantages if the company decided to adopt the activity based method cost of accounting.

Case 1: Short-term and Long-term Debt Financing

Case 1

From: STUDENT NAME, Consultant

To: CEO & Audit Committee

Date: November 12, 2017

Subject: Critical analysis of short term & long term financing

Dear Sir

Financing is crucial for the smooth functioning and expansion of any business. With regards to various sources of financing, some provide short term financing such as commercial papers and working capital loans. On the other hand, there are others such as corporate bonds and term loans which tend to provide long term financing. In order to choose which one to prefer, it is imperative to indicate the respective advantages and disadvantages.

A key advantage of short term financing is that the interest rates are lower. Also, these are quick to obtain and these enable resolving short term financing needs. These debts are also typically repaid in short term from business cash flows and hence do not present high risk. However, these financing sources are not suitable for capital expenditure targeted at expansion. Also, the token size of these loans is typically small (Damodaran, 2015).

A key advantage of long term financing is that these funds are available for a long duration and thereby allow funding of capital expenditure. Also, the repayment is gradual and hence does not adversely impact the company cash flow in a given flow. However, the disadvantages include higher interest rate (higher risk), leveraging of balance sheet and greater default risk owing to large quantum of these loans (Parrino & Kidwell, 2014).

It is apparent from the above discussion that both short term and long term financing have their respective pros and cons and usually suitable funding means is one which has approximately the same maturity as the underlying asset it will be used to fund.

Yours Sincerely

STUDENT NAME

Case 2

From: STUDENT NAME, Auditor

To: Audit Committee

Date: November 12, 2017

Subject: Critical Analysis of hiring a new CEO

Dear Sirs/Madams

Owing to the significant underperformance of the company under the current CEO, it may seem prudent to hire a new CEO with a profit sharing plan in a bid to enhance profits. However, before hiring a new CEO, the respective advantages and disadvantages associated with such a move need to be critically analysed.

The key idea of hiring a new CEO with a profit sharing plan is that it enhances the chances of improved profitability as potentially new ideas would be brought by the new CEO. Further, inventive would exist for the CEO to take decisions aimed at enhancing the profits. Besides, a new CEO can also act as a change agent and take a fresh perspective at the business (Petty et. al., 2015). However, there are certain downsides to the hiring of a new CEO with profit sharing plan. It may happen that the new CEO may take risky decisions to maximise the profits which may backfire. Also, the existence of profit sharing plan and the hiring of an unethical or incapable CEO would imply increase in incidence of financial fraud (Drury, 2016).

From the above, it is apparent that hiring of a new CEO would be preferred only if a capable, experienced candidate can be found who would be given time to understand the organisation and perform rather than being obsessed with profit from the time of joining.

Case 2: Hiring a New CEO with Profit Sharing Plan

Yours Sincerely

STUDENT NAME

Case 3

From: STUDENT NAME, Consultant

To: Company CEO

Date: November 12, 2017

Subject: Critical analysis of availing supplier discount

Dear Sir

The objective of this memo is to critically analyse the advantages and disadvantages for the company if it decides to avail the supplier discount for making cash payment within 10 days. Based on this, a decision can be reached in this regards.

The obvious advantage of making the payment to supplier within the specified 10 days period is that the company would be able to avail a 2% discount on the purchases which would lower the cost of goods and enhance the gross profit margins. Also, it would help in forging good relationships with suppliers since early cash would imply higher liquidity. However, one disadvantage of indulging in early payment is that the company may face cash crunch leading to higher working capital requirements which may erode the benefits (Petty et. al., 2015).  If company decided to avail the complete credit period, then the disadvantage would be in the form of foregoing the discount. However, the advantage is that the risk of cash crunch would be lowered and working capital management could potentially improve (Brealey, Myers & Allen, 2014).

Hence, it is apparent that availing the discount makes sense when the company has enough liquidity to meet the working capital requirements as it is imperative that cost of goods should not be lowered at the cost of cash crunch in business.

Yours Sincerely

STUDENT NAME

Case 4

From: STUDENT NAME, Consultant

To: Company CEO

Date: November 12, 2017

Subject: Critical analysis of adopting a balanced scorecard approach

Dear Sir

In the recent times, performance measures have evolved and no longer only economic parameters are expected to be sufficient. As a result, there is a trend where balance scorecard is being increasingly deployed by companies so as to measure progress in key domains and hence ensure a more holistic progress (Parrino & Kidwell, 2014).

One of the advantages of using a balanced scorecard is that it helps with framing strategy since the objectives in various dimensions is apparent. Also, the alignment of the departments and divisions can also be driven by balanced scorecard. Besides, it acts as a great communication tool which makes it evident to employees as to what the key priorities of company are and hence individuals can align accordingly (Bhimani et. al., 2017).  On the flip side, there can be issues with regards to implementation especially because everyone may not be on board with the expanded definition of performance. Besides, strong support from top is essential for implementation of this framework. Training needs to be taken care of managers so that they can use the balanced scorecard (Drury, 2016).

From the above discussion, it can be concluded that balanced scorecard is useful but there are challenges that need to be overcome particularly in the form of organisational support and commitment to top management.

Yours Sincerely

STUDENT NAME

Case 5

From: STUDENT NAME, Consultant

To: Company CEO

Date: November 12, 2017

Subject: Critical analysis of activity based costing

Dear Sir

There is a shift from traditional costing system to activity based coting system. However, before making the shift, it is imperative that the various advantages and disadvantages need to be analysed that are associated with this shift.

One of the key advantages of shifting to activity based costing is that it leads to better allocation of overheads across different products and hence promotes accurate costing. This leads to improvement in pricing which becomes more competitive. Also, the management decision making ability would improve through the use of activity based costing as accurate costing data is available (Drury, 2016). However, one of the issues is that activity based costing is complex system which requires manpower with specialised skills coupled with time and money. Also training needs to be given to managers those who are involved in decision making so that the information from activity based costing may be used effectively. Further, the migration to activity based costing is not of use when there is only one product that is produced (Damodaran, 2015).

From the above discussion, it is evident that migration to activity based costing makes sense only when the company manufacturers multiple products and also is willing to dedicate resources in the form of manpower, time and money for the implementation of this system.

Yours Sincerely

STUDENT NAME

References

Bhimani, A., Horngren, C.T., Datar, S.M. & Foster, G. (2017), Management and Cost Accounting 4^th ed. Harlow: Prentice Hall/Financial Times

Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6^th ed. New York: McGraw-Hill Publications

Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York: Wiley, John & Sons.

Drury, C. (2016) Cost and Management Accounting: An Introduction. 6^th ed. New York: Cengage Learning

Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London: Wiley Publications

Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015). Financial Management, Principles and Applications, 6^th ed..  NSW: Pearson Education, French Forest Australia.