Problematic Aspects Of An Organisation - Essay Example

Assignment This paper is an attempt to demonstrate the certain problematic aspects of a top warehouse equipment supplying company operational in Russian market. The author will first throw light the actual problems of its chosen business firm after which it will provide three alternative strategies. The researcher will present advantages (or benefits) and disadvantages (or costs) of the suggested alternative policies and will then choose the most feasible action plan for betterment, growth and enhancement of its company. Company Background: It is worthwhile to mention that our company is expert in manufacturing and supply of warehouse equipment that is heavily demanded by other business firms such as manufacturers or producers, whole sellers, distributors, large and medium scale retailers. In other words, our company offers Business to Business products (B2B) that are widely accepted and appreciated among all Russian businesses. This should be recalled that our company largely operates in Russian market where it enjoys optimal ranking due to sound reputation and goodwill among Russian entities. Although, the company has established its operations in European economy, yet it has to expand by opening new branches and sales outlets to enhance its reach among potential buyers. For instance, the strategic planners and top managers do have plans to improve global presence by initiating new business ventures in Europe, especially, Poland. As far as the financial position of our company is concerned, it is worthwhile to mention that annual sales turnover is reported to be 30 million GBP. The employed personnel at the company are nearly 500 which include engineers, technical staff, finance, marketing and HR executives, IT specialist, production staff and miscellaneous staff. The entire pool of skilled, semi – skilled and un – skilled workers opts to showcase optimal performance that, in turn, leads to growth and sustainability of our company in core Russian market. It should be highlighted that no matter how efficient and popular a company becomes, there are always some perceived weaknesses and shortcomings that are to be identified and corrected to ensure faster growth and development in this absolutely unstructured, uncertain, unpredictable and unclear business environment. Hence, the next section will cover some core business issues that are discovered by the author and that should be rectified to foster growth and sustainability. Core Issues: Among the very genuine business issues, the first and foremost is escalating trend in business costs that have increased substantially because of increase in discount or interest rate by Russian Federal bank. It is worthwhile to mention that the company depends heavily on debt financing in comparison to equity financing to meet rising demand of its warehousing products across main markets. The business enterprise, therefore, is facing some cash flow problems because of higher debts against lower current assets. For instance, the company obtains loans from Russian banks at a very high interest rate of 12 - 15% per annum. The interest rate differs as it depends upon short and long term financing needs. Obviously, the rule of finance says that the interest expense incurred by any business entity would be higher if loans are sanctioned at high interest rates. The 15 – 17% annual rate has adversely impacted upon the costs structure of our company because the total expenditures incurred increase while net profit margin contracts. Although, sales have observed an increasing trend, yet there is dire need to control interest expense followed by other operating expenses to reduce aggregate business costs and enhance firm’s profitability. It should be noted that raw material and input prices are already doubled in past 6 years that has placed significant financial burden over company. Hence, the strategic planners are willing to obtain loans at lower interest rates as well as seeking alternative financing sources to gain competitive advantage over rivals in Russian market. The next most important issue that I have observed at the company is that there are certain loop holes in the internal management system. Indeed, it is better to use the word “childish management” because employees are treated like young kids and are barely permitted to make their own relevant decisions. In other words, workers are not allowed to participate in decision making and problem solving process, rather they are being obliged to follow commands and instructions from top managers. In various cases, bosses do not delegate the tasks to their subordinates because of low trust factor even though the workers are capable enough to complete such tasks if assigned. As far as the third major issue is concerned, it should be pointed out that company is operating in some European nations but certain cultural barriers have been hampering its global expansion business strategy. Indeed, the top management has chosen Poland as a highly lucrative potential business market and has inclination to open more branches; however, the language problems and cultural issues societal norms, standards, and values are the actual impediments. Indeed, the marketing research personnel are opting to resolve this matter by gathering additional insight over ground realities and societal trends in trends. Yet, the situation could not be called as satisfactory. Suggested Action Plans: In the wake of above problems, the most important issue is the rising costs of doing business and the subsequent impact over financial statements and profitability. In order to resolve this core issue, the research has developed the following alternatives that will be analyzed in the light of possible merits and demerits. Loans from Europe: The first strategy is to obtain loans from European banks that offer financing facilities at a relatively lower interest rate to medium and large scale businesses. For this purpose, the company has to use its European subsidiary to obtain loans from domestic financial institutions. The advantages are: 1) Loans could be obtained at a rate of 8 – 10% against higher interest rate of 12% from Russian banks. In this way, the interest costs will be controlled and net profit margin will increase substantially. 2) In addition, the additional savings and retained earnings may also be used to reinvest in existing and new operations that will further enhance company’s target market and reach. Indeed, new ventures could be opened and real business growth rate would increase as a result. 3) If costs of goods produced and sold (CGPS) increase in future because of surge in raw material and input prices, then these interest cost savings may be used to adjust the negative impact of rise in CGPS. Hence, profitability will still remain same in future even in adverse business scenario. 4) The additional profits could be used to bridge gap between debt and equity investment. In other words, dependence on external financing facilities would reduce because of availability of these funds. The demerits are as under: 1) The terms and conditions of banks in Europe would be different as compared to those in Europe. The company may have to fulfill more legal formalities because of highly advanced financial system in Europe. 2) The company has to reestablish its distribution network in Europe as well as has to import the equipments in Russia from European sites. In this way, cost per unit may increase. Greater Equity Financing: The next action plan is to increase the ratio of equity financing against debt financing so that negative effects of loans obtained on higher interest rate could be minimized. This could be done through additional investment by owners, partners and directors of company in Russia. 1) The first merit is that the interest expense would be reduced because of greater equity financing. This would also balance the cost structure in future. 2) The net profit margin will increase in the short run, thereby providing sufficient time to become a public limited company. The demerits are as under: 1) The owners may not be willing to increase risk on their personal savings by investing additional amounts in the same business. They would prefer to remain liquid or to invest in other profitable ventures, thereby involving in diversification of business portfolio. 2) The expansion in future will against create a demand of extra loans; hence, these new investments would not permanently resolve the business issue. Transformation into a Public Limited Company: The third available alternative for warehousing equipment supplier is to transform itself into a public limited company so that it could attract shareholders’ investments. The advantages are as under: 1) In this way, company could raise additional funds in short and long run by increasing its issued capital stock with the passage of time. 2) The second advantage is that owners do not have to risk their personal investments and savings that they have earned from operations. 3) The owners now will not directly responsible for debts from creditors, instead the registered organization will be deemed responsible in case of any bankruptcy or failure of business. In other words, the liability to failures or losses will be limited. The disadvantages are as under: 1) The original owners will lose managerial control over the firm because they also have to provide voting rights to shareholders as well as to consider their suggestions and recommendations. 2) The dividends are to be disbursed to preferred and ordinary shareholders that will also reduce retained earnings to some extent. Conclusion: Having analyzed the above, the author would like to mention the fact that the first alternative is, indeed, the best alternative in this business scenario. The first reason behind this choice and recommendation is that the option is a relatively permanent solution because the warehouse equipments supply company will always require debt investment even though it becomes a public limited company or increase equity financing. Hence, in this way, it could be concluded that obtaining loans from European banks at lower interest rate is the best available alternative, which would certainly help the business enterprise in reducing its total costs of doing business. Competitive advantage would be gained on rivals in the same industry because of lower average total cost per unit. Read More