The Capital Structure of Cyclermate Limited Company - Case Study Example

Individual report on Cyclermate Limited Company of (Tutor) (Date) Introduction The firm kick started its operations in the 1950’s starting with a traditional upright cycle a design that was common during the 1940’s and 1950’s. Cyclermate Ltd has three shareholders, Lewis Llewellyn, Dai Armstrong and Linda Llewellyn. It started to slowly grow to a full fledged local cycle shop to the extent that it was not able to meet their demands. Even after moving to a new space and employing new staff to assist it still struggled to live up to its operational costs. By the year 2010 the business is dwindling as the quality of the products is compromised, operational costs were escalating. The production unit is manual and cant cope up with the demand, painting with a traditional cellulose spray technology, the assembly personnel had to work overtime in order to meet the deadlines, also the larger inventory items like the steel sheet and frame tubing are kept in one wall of the factory and often rely on vision to determine if the stock has run out. The company has been recently incurred loss of profitability, the rapid rising of overdraft, increased overdraft facilities, reduction in the staff morale and motivation, bloated unproductive staff, and finally use of out dated technology in the production process. Therefore, the report is aimed at giving short term solutions to the firm to ensure survival of Cyclermate. This would ensure funds are generated in the shortest time possible as banking on long term solutions will further aggravate the stressful financial times the firm is experiencing. The solutions include stemming of the staff population and their remuneration, increasing liquidity and capital structure, improvements to be done to increase efficiency and reduce manufacturing costs, and finally strategies to be put in place to ensure long term profitability and survival of the company. Discussion In view of the short term scale, the firm in consultation with the bank must find quick solution to salvage the firm before going ahead with any investigation of future opportunity. Therefore, in relation to the meeting between the Cyclermate’s Bank and Davis, Davies, Jones and Faniente several proposals were tabled in order to attain quick solutions. The recommendation of the bank has it that they must determine if the base operations of the firm is viable before embarking on giving solutions. Therefore, the immediate short options to be incorporated to alleviate the liquidity and capital structure problems include the use of equity financing which will guarantee higher returns. The long term sources include equity and debt finance, while the short sources comprise of cash and reserves like the reinvested profits (R.E’s). Through internal financing the Cyclemate Limited may actually be assured of survival. Also, basing on the capital structure of the firm, it must ensure that it utilizes short debt financing which include trade credit. Short term debts can actually boost growth and efficiency through effective monitoring. Thereby, there is a necessity to choose a debt that has a short maturity time. Besides, the firm can use new capital from parties that are not involved like venture capitalists and inventors. Just like when Dai Armstrong said he had a cousin who was retiring from BAE’s wing division in Liverpool could be convinced to invest in the cycle business. The utilization of the domestic liquidity for optimization of corporate performance and growth is also viable (Uremadu & Efobi, 2012). In addition also the firm may suspend the payment of dividends to the shareholders to raise the money. Some other sources of funds may include the applying for grants from the government, borrowing from friends, seeking for venture capitalists to invest in the business, approaching the banks for loans, and finally approaching creditors until the goods are sold (Morelec, 2001). Since the budget suggests losses in the coming year, with regard to pricing modeling of prices it is required to operate within the recommended prices of its competitors. The Cyclemate Company should ensure that you lower the prices and produce high quality products. The stock control system should be up to date to avoid the use of guess work when carrying out stock taking. The production levels should be projected according to the recent customer demands and ensures that they are of very high quality in order to be competitive on the market. Cutting of expenses is paramount and it is to be done in a rational manner in all departments to ensure it is within the operational limits of the company. Assets that might be sold leased or mortgaged to raise funds Some of the assets that must be sold to ensure quick raising of funds include ploughing back the 205, 254 pounds into the business, selling the traditional cellulose spray technology, ensuring the leasing of freehold land and the yard space used for wheels, chain guards since they are sourced from a cycle shop in Cardiff, selling elderly compressor and extraction equipment, and finally merging the high value cage with the main inventory structures and lease the high value cage. Performance of the company over the last five years The performance of the Cylcemate company in the last five years has shown a steady decline in growth due an ageing manpower, non-committed staff, competition from other companies like Pashley although they used traditional machines. With a prospection of growth in the coming years the firm is expected to improve its growth plan but on the contrary they are declining. Statement of financial position that efficiency gains might be attained to raise funds Efficiency gains might be achieved from the financial position of the firm. The efficiency gains ensure that you gain more while using the same input. Ensure devising ways that are better organized and utilizing equipment the equipment you own and the people employed. The efficiency gains include innovations, which boosts productivity by reducing capital or labor required to produce a unit of output. The product innovation also increases the production levels by increasing the value of output. Through reorganization of the production unit, merging the spray booth and curing oven with wheels and sundry parts to cut the length of production cycle. As the production seems to be done in a shambolic way, by reorganizing the warehouse efficiency can be achieved. The capital structure of the company The capital structure of the business is not sustainable due to the ever increasing overdrafts; some of the shareholders are not being paid their dues. They also have blended the equity and debt financing. As a management plan a company’s structure of capital fluctuates over time resulting to the value of its equity securities changing and the company servicing its debts. It is therefore more appropriate to use a management’s target capital structure, if the actual structure has veered off the course temporarily or if the plans of management alter the company’s capital structure. Lastly, is applying financial models to get the estimate of the company’s optimal structure (Success, 2012). The number of bikes that need to be sold to eliminate the budgeted loss and make a reasonable return on invested capital is 25 because it is limited to oven capacity. This is a good market projection as it can aptly satisfy the demand of the customers. Cost savings that could be made relatively easily The other cost savings include reducing the selling and distribution costs like the postage and courier, travelling and hospitality. Therefore, the use of price modeling on some product prices and volume scenarios is advisable. This is because it provides insights into the expected volume at the new prices, the key price points, sensitivity of price changing, portfolio pricing and finally competitive price matching. To some extent break-even is possible as this would actually lead to saving of costs. The SWOT analysis of the company enabled me to have a way to of summarizing the company’s current state, devising a future plan for the Cyclemate Company one that employs the strengths that are existing, redressing the existing weakness, exploiting opportunities and finally the defends directed towards threats. Strengths; the ability to make almost 25 frames in a day using an ancient but effective tube bending machine, the production of the traditional upright bicycle enabled the firm to size its niche from the market. They were also able to sell bikes at a lower price compared to their rival firms. According to analysts, the firm had a potential for growth if it modernized its production equipment. The resources the firm has include a staff of 11 who are on fulltime duty with 2 on part time duty, enough land to carry out its operations. The brand has made the firm to grow steadily from 1988 to 2010 which is tremendous growth business wise. Weaknesses: The rivals are able to produce other parts like the wheels, selling more irrespective of the firm lowering the prices. The reliance on the word to mouth mode of advertising has been passed by time, most customer dissatisfaction and complaints are generated from the fact that low quality products are produced. Most of the time employee dissatisfaction and complaints emanate for the fact that some of their skills are undervalued, lack of motivation, duplication of tasks and lack of a clear framework for doing things in the company, and finally lack of training and development programs for them. Opportunities: Where to apply the strengths of the business are aimed at salvaging the company from closing down. The customers and their changing needs need to be ascertained because most of them are leaving the motors for bicycles due to their flexibility in navigation. The ever technology changing has forced the business to embrace it in the production unit due to the expanding market of more people requiring cycles for mobility. The looking for new ways of producing products is actually not that profound as more people have been used to the company producing high quality products irrespective of using the traditional technology which has cut them a niche in the market. Threats: since most of the customers have been able to meet their needs with alternative products like motorcycles. Customers need changing away from Cyclemate’s product irrespective of lowering their prices. The rivals in the cycle business are actually not improving their product offerings or prices therefore an avenue for initiating competition. The emergence of new technology has not made the product of Cyclemate obsolete in the market. To some extent, the cash-flow and debt position is not that healthy for a competitive business. Turnover high is but is gradually reducing as new competition sets in. The sales are starting to grow slower than the industry’s average. A forecast figures of sales; the sales units of the company were increasing from 2006 to 2010, this later was reflected on the total revenue as it also increased from 876,850 to 1,404,520. The cots and cash flow for the whole year is projected to drop from 1,355,942 to 855,942 because of the increased costs of doing business. This is because the overdrafts have become expensive and the bank is unwilling to extend any more overdraft facilities, thus the bank overdraft is unsecured. The revenue generated cannot sustain the operations of the firm. This is evidenced by a declining trading profit from 155,169 to a paltry 48,578 dropping thrice. Moreover, a retained profit of 9, 524 projected at the end of the year is absolutely unsustainable thus need to look for avenues to quickly generate cash in the short term to ensure Cyclemate survival. A bloated staff and less revenue will lead to an exodus of employees from the company in the long run because of the high salary demands. Production methods used by the company and improvements made to increase efficiency and reduce costs in the manufacture of the existing product The production methods used in the firm include a special steel tube stock is cut to size using an old but automated tube cutting saw and an ancient but effective tube bending machine; “traditional” cellulose spray technology for painting; assembly of parts; testing; and packaging done by any person who is free; and riveting is also necessary to attach brackets to guards; the inventory is kept using the card based stock control system. The modes of production need to upgraded to the current technology like the automated tube cutting machines, increasing the oven capacity of the compressor and extraction paint equipment, using the modern “two-pack” automotive painter which involves careful mixing of paints, rapid spraying, and then baking in a low heat oven will guarantee best products. The assembly section is to have a schedule for its activities. In addition, the process of packaging to done continuously by all staff on schedule. The Cyclemate firm should have an inventory for raw materials, finished goods and for work in progress. Can also incorporate the use of computerized inventory system is time saving, increased accuracy, and is consistent when its processes are executed in a consistent manner (Henderson, 2012). Reduction of costs requires a complete knowledge and mapping of costs, inventories, suppliers through the supply chain. The cost reduction always needs a trade off –analysis among the conflicting alternatives using the total cost approach. This requires that purchases would also be increased in the long run but in the short run the purchases would be reduced before starting to increase gradually. Buyers can actually play a major role in reducing the costs incurred in the supply chain by incurring the costs as the goods flow from the suppliers to the retailers or customers. The inventory will also exhibit an easy flow of items coming in out of the company but as the time goes by it will be used regularly as the purchases also increase. Finally, production will be increased as there would be an increase in raw materials resulting in more products being delivered to the market. Human relations issues Cyclemate Company has an employee population that is not sustainable. Some of them are ageing, ailing or not motivated. In the light of proposed changes to the manufacturing operations and your production forecasts, I recommend the following to be done with the workforce. Firstly, the workforce should be increased to curb the shortages being experienced at the various sections of production. In addition the workforce should be diversified so as different people with different skills and knowledge. This would result to specialization and division of labor. Workforce planning is required to determine the output of the production desired. Environmental scanning is done to determine the set of facts that surround the situation of a work force. The current profile of the workforce as defined by the factors of demand and supply is very vital in organization of employees. Moreover, the future views of the work force to be determined with consideration to the emerging issues and trends. When closing the gaps in the workforce, must ensure that there is resourcing, learning and development, better remuneration, competitive recruitment, good industrial relations, retention of workers, designing the job, and lastly management of knowledge (Julie, 2010). In relation to reducing staffing, or reduce wage levels. Staffing is reduced through organizational change. This is achieved by explaining to the employees why organizational change is equally important. The sizing down of staff makes the company to operate within its operational limits. Harmonizing employee salaries of management and other technical staff can help the company to reduce expenditure on employees from the current 246,340 to 180, 340 pounds. Those employees that are laid off are to be given a golden handshake for their services. Changes are effected in the organization through training and development to increase the knowledge and skills of the employees. In addition, by adjusting certain roles and responsibilities there would no chance of duplication of duties. Also, through organizational change employees would feel appreciated for everything they do because their skills and knowledge would no longer be ignored by the directors. Rewarding of the best performing employees increases internal competition thus leading to high quality work. Other, methods to ensure quality service includes; Staff to be provided with work life balance; Allowing unlimited access to information and technology by staff; Rapid promotions and opportunities in careers; Timely feedback attributed to performance; Having the ability to have impact; Lastly, engaging, motivating, and informing throughout the life cycle of the employee (Judith, 2010). Options for the Company’s long term survival and profitability First by the company going for short term solution it sets the pace for long term solutions. The long term solutions to ensure survival of Cyclemate Limited Company include; the company having a larger baseline; Ensuring that the workers are to be paid if they work for overtime; Acquiring a modern spray booth to be used for spraying frames, mud guards, and chains (Hurst, 2010). In the long run the company could apply for debt and equity financing that have longer maturity periods. Conclusions and recommendation To recover the situation in the short term should go ahead and sell off the traditional cellulose spray technology and elderly compressor and extraction equipment. Moreover, leasing of freehold land and the yard space used for wheels and sundry is recommended to raise funds. To sum up, borrow money from friends and from the government as grants to quickly raise the cash. Lastly, efficiency gains can be achieved to raise cash in the short term. In conclusion many firms depend on price to cover production costs, paying of expenses and provision of incentives to operate in the business. In the long run, the staff should be highly motivated and their skills and knowledge recognized thereby being rewarded for their efforts. Also specialization and division of labor is recommended to avoid duplication of duties and things being done on a shambolic way. Provision of training programs to brace the employees with up to date knowledge. According to Lewis the firm could be sold to a UK firms that manufactures or assembles cycles; Cyclemate to embrace the use of computerized inventory system as it saves time and it is accurate; Looking for venture capitalists; Development of the product range, Strategic direction of the business. Reference List Henderson, K. J. (2012, August 12). Chron. Retrieved January 11, 2013, from What Are the Benefits of Using a Computerized Inventory System?: http://www.smallbusiness.chron.com/benefits-using-computerized-inventory-system-2044.html Hurst, P. (2010). Busines Survival and Prosperity Guaranteed. Lomdon, United Kingdom: Petteridge. Judith. (2010, December 14). Retrieved January 11, 2013, from Workforce for the Future: http://www.mwdh2o.com/BlueRibbon/pdfs/Workforce-Future.pdf Julie, S. (2010). The Workforce Planning Imperative . Hampshire: JSM. Morelec, E. (2001). Asset Liquidity, Capital Structure and Secured Debt. Journal of Financial Economics , 61, 178-203. Success. (2012, July 31). Retrieved January 11, 2013, from How capital structure affects business valuation: http://www.cshco.com/News/Articles/How_capital_structure_affects_business_valuation/ Uremadu, S. O., & Efobi, U. (2012). Impact of Capital Structure and Liquidity on Corporate. International Journal of Academic Research in Accounting, Finance and Mnagement Sciences , 2 (3), 6-15. Organizing CyclerMate’s Management Week commencing 4 Feb Cleaning up CyclerMate’s Production process Week Commencing 10 Feb CyclerMate’s HR position. Stabilization plan; Formative group presentation Week Commencing 17 March Submission of individual report 11 March 2013 CyclerMate’s Market Opportunities Start of Phase 2 Identification of Potential Routes for the Market Week Commencing 14 Mar Quantification of CyclerMate’s new Profit Margins and Revenue Week Commencing 21 March Presentation of CyclerMate plans to Venture Capitalists – end of Phase 2 Week Commencing 28 March Table for Time plan Draft Statement of Financial Position - 30 September 2010 Non-current Assets Cost Depr. Net £ £ £ Freehold land 160,000 160,000 Freehold factory 80,000 32,000 48,000 Machinery and equipment 15,000 12,200 2,800 210,800 Current Assets Stocks of materials 102,300 Stock of finished machines 185,790 Trade debtors 200,571 Cash in hand 657 489,318 Total Assets 700,118 Share capital 30,000 Retained profits 205,254 Shareholders Funds 235,254 Loan from Geraint Williams 200,000 Current Liabilities Trade creditors 87,500 Bank overdraft 177,364 264,864 Total Capital and Liabilities 700,118 Budgeted Direct costs per machine unit price prod. unit   £ units £ Frame tube set 75.50 1 75.50 Frame lug set, including brackets 32.45 1 32.45 Front fork 26.00 1 26.00 Headset 9.46 1 9.46 Bottom bracket 7.42 1 7.42 Chain and chainset 14.30 1 14.30 Pedals (set) 8.00 1 8.00 Saddle, post and clamps 32.90 1 32.90 Handlebars, stem and grips 15.40 1 15.40 Brake levers and cables 19.10 1 19.10 Alloy extrusion (wheel rims) 86.50 8 10.81 Spokes (72 set for two wheels) 4.60 1 4.60 Sturmey-archer gear and brake hub 52.87 1 52.87 Dynamo and brake front hub 33.50 1 33.50 Tyres and inner tubes (set of two) 10.35 1 10.35 Steel sheet (mudguards and chain guard) 24.00 10 2.40 Wire (mudguard stays) 8.00 20 0.40 Paint 18.00 12 1.50 Basket 3.00 1 3.00 Rear carrier 5.20 1 5.20 Pump and brackets 1.80 1 1.80 Lock 3.20 1 3.20 Lamps 4.89 1 4.89 Assorted minor parts (kit) 1.00 1 1.00 Direct cost per unit     376 The costs of inefficient liquidation and illiquidity are significant economically and substantial compared with the benefits associated with debts, and many company directors try to control these costs by adjusting the probability of incurring the costs of liquidation and leverage. Asset liquidity has a positive impact on the on firm debt when the managers cannot dispose the assets of the firm and curvilinear effect or firm debt whenever they can (Morelec, 2001). SWOT-Strength, Weakness, Opportunities, and Threats Read More