Business and Management of Laundromax - Case Study Example

? Laundromax Case Study Generally, during the development stage of businesses, financing is a major critical success factor. As pertains to the Laundromax case, whose major goal was to revolutionize the laundry industry and seek nationwide recognition, the company would hence have to incur major capital, corporate and development expenditure. With my financial management role, my plan for financing would start with personal owner equity. This would act as a show to outside investors of the personal trust that the founders have in the growth and success of their business and hence worth a further inducement for additional outsider investment. In order for Laundromax to attain self-sufficiency as a company, 100 stores must be established at an estimate of $500,000 per fully functional and operational store. This puts the total capital required to attain self-sufficiency at an estimate cost of $50,000,000. With such heavy initial capital outlay, personal equity would not be sufficient to meet this expenses and hence the vision of the business. I would result to investment capital with major focus on investment banks and venture capital firms who are willing and able to raise a major part of the required capital in return for an equivalent stake in the company’s assets. Dependent on the ability and willingness of the private investors to provide the necessary required capital to attain self-sustainability of the company and generation of profits to investors, an IPO would be the fund of last resort as it may dilute the control of the founders and the equity holding of the current private investors In appropriation of the total capital required to achieve 100 fully operational stores nationwide, the company should maintain a low gearing ratio since its vulnerable and unstable. This would hence warrant a larger proportion of the initial capital outlay and the capital required for expansion to be financed by owner’s equity and a lower percentage by debt. In my opinion, as financial manager, 60% ($30,000,000) should be generated from owners’ equity and 40% from debt. As pertains to the timing of the infusion of the capital, it would be rather unreasonable to be able to acquire that sort of finance at one go. The rate at which the funds should be infused in the business will be greatly dependent on the strategic expansion motive of the management. In this case, from the given projections, the 100th store may be opened sometime in the 4th year of operation with the highest number of store opening before the 100th being in the third year. Thus, according to the historical information and the forecasts presented, the preferable allocation of capital according to the number of stores required would be $4,500,000 in the first year, $11,500,000 in the second year, $25,000,000 in the third year and $14,000,000 in the third year to attain the 100th store mark comfortably. The above estimations of the capital requirement of the business in its various stages of development are not sufficient financial projections to be able to convince potential investors of the financial soundness of the business and to give them assurance of the security of their investment. In order to present a proper financial plan in their business plan, Reese and Mounger should include certain financial forecasts including: Cash flow forecasts, A break-even analysis, A projected statement of profit or loss, and A projected statement of financial position. There in, the cash flow forecasts give a view of the expected cash inflows and out flows to and from the company, the break even analysis shows the expectation of future profit by the company detailing the point at which the company would equate expenses to revenues generated, A projected statement of profit or loss details the expected revenues and expenses to the company, while the projected statement of financial position shows an expectation of the company’s holding of assets and liabilities. With these projections, Reese and Mounger would have a proper financial plan lay out to present to potential investors in their business plans. Once the business unfolds and has become operational, the element of financial techniques is necessary to maintain its proper operations and to guide the management on areas that may require correction and more attention. In the case of Laundromax, various techniques and ratios may be used to analyze the financial and the general performance of the business. Ratio analysis which may be a key indicator of performance may be categorized into: Liquidity ratios, Solvency ratios, Profitability ratios and Turnover ratios. In a nutshell, Liquidity and solvency ratios measure the ability of the company to service its debt, Profitability ratios measures the ability of the firm to turn a unit of sales into profit while the Turnover ratio will indicate the efficiency with which the company is utilizing its available resources. The techniques and ratios applied can hence be used to predict the future financial potential of the business. It is quite natural however, that things may not always go as planned. Similarly the plan and information detailed out in the business may not come to pass due to several inhibiting or unaccounted for factors. As in the case that Laundromax had some developmental pitfalls that lead the company to being in a vulnerable position financially, it is possible that the situation may have been avoided. As the chief financial officer of this business, I would have ensured the developmental pitfalls, especially with capital have been avoided by ensuring a well-balanced and strategic expansion of the stores by allowing some stores to be self-sufficient before pumping out more capital into further capital expenditure relating to new stores. Further, in order to avoid the financial squeeze that comes along with rapid expansion, I would direct more effort in market analysis to ensure that primary stores are opened up in areas where they are likely to generate returns, and hence profit faster in order to generate greater cash flows to supplement the ones used in investing. In the unfortunate case that the business is unable to get back on its feet and it’s forced into liquidation, the proper procedure would be to prioritize the stakeholders of the business in making pay offs from the money generated from the sale of company assets. The creditors will have priority followed by the preference shareholders and lastly the ordinary shareholders would participate in what will be remaining on a pro rata basis. Reference Laundromax. An Entrepreneurial Business Case Study Read More