Guillermo Furniture Store Concepts - Essay Example

The labor component in furniture manufacturing, in case of Guillermo, is substantial because all its products are hand-crafted and the company has no way to control its labor cost. On the contrary, it is on increase due to influx of other businesses for the favorable conditions in the region. Financial Concepts Involved Guillermo has to view the whole business scenario from a different perspective. If the company decides to be high-tech just like its competitor to replace its costly labor, then the company needs to estimate the risk-return trade-offs as making the company automated will require huge capital investment.

In this process, Guillermo will need to apply numerous financial concepts to arrive at the conclusion whether it is worth investing huge capital to thwart the challenge posed by the competitor. First of all, the company needs to undertake a detailed budgeting exercise to evaluate the viability of high-tech model of manufacturing in its case. The company would need to estimate the total fund requirement for going high-tech in this business. The company will have option of financing this capital expenditure either through equity or through mix of debt and equity.

In the case of later, important thing will be to find appropriate debt-equity ratio for financing the project. Guillermo being a running and profitable company can certainly attract banks and other financial institutions to lend them for this project but leveraging should be within the prevailing norms as applicable for these kinds of businesses. High leveraging (high debt) creates higher business risk and that must be avoided as often occurs during economic slowdown. In a bid to ascertain financial viability of the investment, the company will need to estimate the break-even point in terms of volume (no.

of pieces of each product variety) and value both. Break-even volumes will mean all revenue earnings meet all expenses of the company including fixed and variable ones. The break-even calculations (Break-even analysis, 2012) will also force them to chalk its marketing and sales strategy – the distribution channels, number of retail shops and the geographical reach necessary to achieve those sales. The financial budget formation, capital required, capital structure deciding about equity-debt ratio, break-even volume analysis, cost of capital including weighted average cost of capital (Weighted Average Cost of Capital – WACC, 2012) present value of all expected future streams of revenue (Present value, 2012) until the useful life of machines, internal rate of return (Internal Rate of Return, 2012) will finally decide whether it is worth investing in the automation process so as to compete with the overseas firm effectively.

Conclusion It is certain that Guillermo has gone through above mentioned detailed financial viability analysis to ascertain whether the company should go for this new business model or not. Having found the return on investment not lucrative, the company thought of outsourcing entire supply from a second competitor who has similar business model of manufacturing process