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Week 3 assignment

Week3 assignment

Duedate

Introductionto George’s Trains Company

George’sTrains Company is among the oldest and highest performing stores formodel trains in Toronto Canada. According to George Olieux, hestarted his model trains business as a hobby and completely had noentrepreneurial skills and start-up capital. His interest in modeltrains began after creating a train layout for his nephew andperforming minor repairs in other hobby shops. With active decency inhis work and aggressiveness, he developed deep expertise and finally,George was able to start a family business which he runs togetherwith his sons. George’s specialty lies within sale, repair, andtinkering of all brands and kinds of model trains. As a familyentrepreneurial venture, George`s Trains firm is based on traditionalprinciples of integrity, fairness, and sincerity.

George’sTrains working capital practices

Capitalpractices encompass all strategies employed to run a business andmaintain organizational success. George Olieux adopted an aggressiveworking capital policy in which he tried to operate with minimalstock coupled with substantial short-term loans (Bank, 2012). Hisstrategies made sure that he constantly had merchandise in handthough not voluminous. For instance, to cut costs to a minimum,George states that he only kept a reasonable level of inventory foreach item and reordering when one toy of any model was left. Hismaster program of not overstocking aided him in the long run. Throughthis mode of operation, he was able to gain trust from his bank, andhe was granted a loan to develop his business. When his company wasalmost sold out, his bank offered him more loan to purchase thebuilding and keep his business running.

Thismode of keeping less inventory may result in lower profits sincecompetitors with large stocked businesses might steal away both loyaland potential customers. Sometimes overstocking attracts clientssince it makes them believe that the firm contains a vast variety ofthe merchandise in question. Furthermore, adopting aggressive venturecapital policies exposes the business to the risk of default andbankruptcy since compressed merchandise can lead to inadequacy andloss of sales. Additionally, George’s mode of reordering when onlyone model train is left could put him at the risk of losing customerssince sometimes it is possible to experience delayed deliveries. Thusthere is a need to reorder when there is still a significant amountof stock. On a similar line, employing aggressive venture capitalstrategies may not generate an adequate return on capital employeddue to high risks associated with short-term liabilities.

Diversificationis one of the best practices in any business. When one product isunderperforming the firm is maintained by the other commodity sold.As for George`s Trains, he spends his capital on only one type ofproduct that is model trains. Imagine what would happen to hisbusiness if the model trains went out of business. What if there wasa drastic change in demand for trains? The point is, engaging capitalin diversification programs is crucial to take care of futureuncertainties. Diversification takes different forms, and it would bewise to engage in such capital practices.

Capitalbudgeting commonly referred to as investment appraisal relates to theprocess in which any organization`s management determines whetherprojects are worth funding or undertaking. For firms like George`sTrains that commenced with cash issues, capital budgeting is ofparamount importance to determine which investments to undertakeconsidering the many competing projects. When Olieux began hisbusiness, it was majorly dependent on the sale of classic Lioneltrains. Nonetheless, when the demand for these model trains declined,he had to make an investment appraisal decisions and venture into newproduct lines. The major capital budgeting technique that Olieuxadopted was observing and analyzing market trends. Since race carsand small trains were trending at the moment, George`s decided tostart selling them.

SinceGeorge failed to use more reliable capital budgeting techniques suchas net present value (NPV), the internal rate of return (IRR),Profitability Index and discounted payback period among others, hehas first to examine the success of only one product line. Apotential pitfall with his current method of capital budgeting isthat investing in one product at a time may result in misuse of moneyin case several following product lines fail to add value to thebusiness. Sophisticated investment appraisal such as NPV method wouldallow him to discard product lines that may not increase the value tothe firm. These techniques would also aid in comparing various viableinvestments and arrange them in the order of their returns hence itis possible to pick the most profitable products. It does notnecessitate to venture into any product line to determine whether itcan add value to the business.

Documentationof cash flow is of paramount importance in any business since itkeeps track of cash in and out of the firm. It also indicates acompany’s core operations, investment programs and sources offinancing. George Olieux maintains his financial statements from theprevious year that show the flow of cash and business cycles. Hemanages his cash flows by anticipating increased demand and orderinghis merchandise accordingly. He orders the same amount as theprevious fiscal period or different numbers according to theseasonality of the request. Although this business is not seasonal innature, there are some aspects of recession and booms in financialincomes. The company expects slow returns immediately after incometax payments, and the benefits begin to blossom again in the summerdue to increased tourism activity. George was able to use previouscash flows to predict that small trains and race cars would havegrowing demand and in that case, he increased the purchase of thesetoys. A simple cash flow statement for George`s Trains can bedeveloped using information provided. However, no figures will beattached since such information has not been disclosed.

George’sTrains Company

Cashflow statement for the year ended November 2016

Cash inflow

Income from sales of trains and cars

Income from repairs

Total cash inflow

X

Cash outflow

Loan repayment plus interest

Salaries to his sons

Purchase of merchandise

Miscellaneous expenses

Taxes where applicable

Total cash outflow

X

Net balance (Cash inflow-outflow)

Firstand foremost I would recommend that George develops a better andcomprehensive cash flow statement to track his movement of finances.According to Hekal (2010), a detailed cash flow statement aids inmatters relating to capital budgeting. The information provided inhis pay statements is enough to develop a broad picture of thecompany`s net present value which would allow George to maintain somecash for future uncertainties. Lack of money cushion is aconsiderable factor that results in the failure of small businesseshence the need to manage a firm`s cash cycle (Byrd, Hickman &ampMcPherson, 2012). Moreover, I would recommend for adopting ofsophisticated methods of capital budgeting as discussed earlier. Itis possible to assess the expected returns from potential productswithout necessarily having to invest in them first using suchtechniques. Finally, George needs to study records for past years,not just the previous year. This would give him a better picture ofmarket trends and cycles and hence help him invest wisely.

Giventhat George Olieux started with no entrepreneurial skills, hisaggressiveness in maintaining his business is worth rewarding. Thereare several reasons to believe that he can act as a role model andmentor to small business ventures and other start-ups. To succeedplanning is of fundamental importance.

References

Byrd,J., Hickman, K. &amp McPherson, M. (2012). Managerialfinance.San Diego, CA: Bridge Point.

Heckal,R. (2010). Whatis cash flow statement? Retrievedfrom http://www,investopedia.com/articles/04/033104.asp

Bank,E. (2012).Aggressive vs. Conservative working capital practices. Retrievedfromhttp://smallbusiness.chron.com/aggressive-vs-conservative-workingcapital-65216.html