Silver Sales Company Case Study
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Question 1: Justification of opportunity
The raw and wastewater measurement is a worthwhile business opportunity that would prove beneficial to any company that specializes in it. The justification of the opportunity can be analyzed based on the customer base and perspective, the company in operation, competitors, the collaborators and finally on context.
Water is a basic necessity for survival either as raw water or wastewater. Every household has the need to have a constant supply of water to be used for household purposes or for the drainage of sewerage. In many cities and counties there are local governments and private organizations that have recognized the opportunity in supplying people with water and efficient forms of waste disposal. So as to remain in business, proper billing systems that ensure both the buyer and seller are satisfied have to be used. This is where companies like Silver come in. As years progress, the number of people in need of the services-both flow meters and assessment are on the rise. This only promises more and more business for the company. In addition, Silver president feels Ring, Ring Manufacturing president, is the main hindrance when it comes to matters seeking successful mergers. The existence of possible mergers shows different investors recognizes the opportunity as promising.
The level of market competitiveness is not very stiff as there are a limited number of companies in the same line of operation. Silver company is said to have 10 competitors all of whom none is really direct. In order to beat competition, a company has to have innovative features that give customers a reason to shift from competitor firms. For instance, flow meters that achieve a higher accuracy that the traditional products and ensures neither the buyer nor the seller stands to lose would offer a comparative advantage. Products that offer anything below the ten percent accuracy mark would be readily appreciated by the market. Moreover, the market is in need of flow meters that can measure the flow in challenging situations such as the when the flow is turbulent, dirty or moving in reversing directions. There are competing firms that offer waters assessment services as Grant firm had work for such a firm before. However, improving the services by efficient and timely repair could be an easy way to beat competition. The competitor pricing does not seem to affect the customer base as much. Silver Company customers tend to be price takers despite being offered that a chance to negotiate. This implies pricing may not offer competitive edge to any new entrant in the market. Working along these lines would enable a company to beat competition making the opportunity worthwhile.
Having a ready market and the right ideas to beat completion is not sufficient to make a business opportunity a success. The balance between supply and demand is vital for growth. In the supply of the flow meters and periodical assessment the company has to have a reliable supplier and the right expertise and understanding of the complications in the water assessment industry. The supplier should use the advanced technology that ensures the products are market competitive. For instance, to device a gadget that works in challenging situations and measures with a greater level of accuracy, the manufacturing company need to have the competent engineers with the relevant level of experience in the field. The supplier should be able to handle large production should the market appreciate the products and demand increase proportionately. Many years in operation would also serve as a natural check of the product’s ability to withstand recession. This safeguards the company from customer dissatisfaction that may result should the products be disappointing. At the initial stages, the reputation of the Silver Company was at stake as their products were leaking. Having a large initial capital would also give the company an added advantage. For instance, Silver Company founders must have contributed capital in different proportions. Having the right partners will determine how well the opportunity is exploited.
The way the company handles its tasks would also determine how the opportunity will be maximized. First is the kind of management in the organization. A new market entrant may have hiccups penetrating the market due to inexperience. Having the top management with a wealth of experience in both the technical and the efficient management of the organization ensures customers are satisfied and the venture is profitable. Flexibility of the company products, for instance the ability to measure raw water and wastewaters in different challenging situations will increase the customer base making the opportunity more profitable. Any company that can uphold these requirements would find the area of operation profitable.
Every house stead requires a water supply and means to track the water usage particularly in an arid area. Customers must have been dissatisfied with the traditional products whose accuracy is very low. Water agencies are already suffering huge losses due to the error margin resulting form the existing products. For instance, for every one 1,100,000 gallons of water supplied, the agency only receives compensation for 1,000,000 gallons of water only. Emergence of a company with more accurate products would be welcomed with great pressure. Moreover, the customer base is quoted to consist of the municipal councils in the different counties and other private water agencies. This can form a large customer base if well exploited. Though the existent products are priced rather cheaply, $2000-$4000 for installation, customers seem more concerned with the quality of service rather than the pricing. They prefer not to negotiate even when offered the chance to do so. A company that understands these customers and models their products to suit them should be able to reap a fortune out of such an opportunity.
Question 2: Business model
a) Proof of existent market
Silver Company has demonstrated that there exists a probable market for its products with the large initial sales that were realized in its first year of operation. Though relatively low compared to the subsequent years, the fact that customers agree to purchase their products within the first year demonstrates a ready market for their products. The sales have continued to increase over the four-year period indicating acceptance of the product by the market and the growing customer base. A growing customer base indicates the companies products have managed to deliver satisfaction to its customers. Initially, the company made a loss that could have resulted from the huge fixed expenses experienced at inception. It has then made profit in the subsequent years indicating the venture as profitable. Again, the amount of expenses determines the amount of profit realized. Keeping these costs constant as depicted in the forecast period would ensure the company increases its profits as the years progress. Grant Silver, the company president is optimistic the company can realize sales of up to $6million by the year 2003.
b) Cash-flows, gross margin and net profit margin
Silver Company has demonstrated that it can provide good cash-flow all the year round from its operations. The company has managed to grow its current assets relative to its current liabilities. Since inception, the current assets, particularly the cash at hand, has increased considerably reflecting the company’s ability to settle its meet its current liabilities. The sale of the flow meters seems to generate growing cash inflows over the years. The profit margin for the products is also bound to increase as per the forecast made. The operations cash-flow for the four years is -20%, 80%, 27% and 14%. The cash shortfall quoted in the text due to its long selling procedure could have led to the emergent decline. However, the figures indicate it is cash-flow to current liabilities ratio needs to be boosted. Ring manufacturing projects that future increases in production could lead to a reduction in the production cost per unit and will transfer the effected change to the price of their commodities. However, given the nature of the customers, Silver Company will have the option of increasing its profit margin by the reduced cost or reduce it effectively for the customers. This is will provide extra cash-flows.
The company has also posted a good gross margin throughout the trading period depicted in the balance sheet. The gross margins for the years 1998, 1999, 2000 and 2001 were 57%, 37%, 35% and 34 % respectively. The decrease is due to the increasing costs of all the goods sold that seem to increase in a greater proportion compared to the sales. The many offices opened up by to bring in more business don’t seem to attract the required volume of sales. However, their effects cannot be overlooked as the forecast indicates the sales could double in three years increasing the gross margin to 64%. However, extreme reliance on the forecast values could be misleading as they are prepared by Demetrius who is infamous for wrong computations. Since no projected figure of the minimum sales that the company will require in order to become entitled to reduction of production costs is mentioned, the gross margin could remain at the same level for the years to come.
The net profit margin before tax for the four years from 1998 to 2001 is -10%, 15%, 2% and 0.1%. Initially, the negative value at inception was due to the huge expenses incurred that could be due to the fixed costs associated with starting up a business. In the following year the expenses are reduced leading to the perceived increase. The decrease in between 2000 and 2001 is also due to the same reason. The interest expense is relatively similar in all the years and could not have caused such significant changes. The projects net profit margin for the future years is 6%, 3%, 7% and 14% respectively. Though these figures may not be essentially reliable, they indicate that maintaining the expenses constant would better the net profit margin figures. Otherwise they are not so impressive.
A critical issue that the company needs to look at is the expenses it incurs in the course of it operations. With the exception of the year 1999, expenses have been on the increase, yet no proportionate increase has been reflected by the sales. This implies that the costs can be forgone or cheaper alternatives sought as they will not affect the cost of goods sold. Secondly, having wrong cash-flow figures, for instance those in Year three, could mislead the firm. A qualified accountant should be hired to maintain the books or the company should seek the services of an external auditor.
c) Credibility of sales volume
Sales revenue projection is a credible basis to evaluate the project if the figures used are reliable. Comparing the gross profit to the sales volume indicates by how much the company should adjust either its sales or search for means to cut down the costs of production. In addition, an analysis of the ratio of the net profit to sales volume will indicate whether the projected sales volume matches projected expenses. A mismatch will be reflected by a low net profit margin. The company can thus take the necessary precautions to cut down the expenses before hand.
a) Possibility of investing in the company
Yes, I would invest. The opportunity to sell flow meters that the company sells is viable and does not seem to disappear in the near future. All that is necessary is to ensure that the company’s products are in line with current technology. The need for water increases with growth in population and hence is bound to bring in more business. The sales trend seems optimistic and only a few managerial changes could see an improvement in the ratios discussed. The problem with the company is not in the opportunity, rather is in management which can be altered.
b) Investment conditions
Investment in the company would only be under the condition that Ring sells out part of his company ownership to reduce the possibility of him calling the shots each and every time. Grant faults Ring for their inability to secure bank credit as a reason for the cash shortfall implying that Ring is the main hindrance to the company’s success. Grant seems enlightened enough to manage the company and should be retained to oversee the operations. I would prefer the managerial control to be in a position to appoint the senior management of the company. No matter how good an opportunity is, having the wrong management could ruin the whole process. The fear of job loss due to poor performance would ensure the CEO and CFO work in coordination to ensure the company realizes the intended profits. The cash added, if well managed, could improve the cash shortfall by reducing the interest expense and other administration expenses. This will in turn better the ratios discussed above.
c) Disagreements between Grant and Demetrius
Despite Silver’ complaints, Demetrius is a capable CFO. Ring manufacturing has succeeded under his management of its cash-flows over the years and even gone to the extent of starting up Silver Company. His only mistake was entrusting his assistant to handle the task of preparing the books of the company without his supervision. This can be termed as sheer negligence due to lack of consequence in case of ignorance of responsibility. Silver, on the other hand seems to have the taken the problem on a personal basis as Ring tries to avoid. He may seek to find mistakes in the future cash sheet records prepared by Demetrius which will shift the company’s focus from successful business to wrangles between the two. To avoid this, an independent body of internal auditors should be formed to ensure the proper book records are maintained. This will ensure Silver Company benefits from Demetrius wealth of knowledge as CFO and ensure his work is checked to avoid minor errors. Silver will then be in a position to lay focus on more beneficial aspects of the company. However, the number of auditors should be limited to about two to avoiding increasing the company’s costs.
a) Grant’s position as CEO
Grant Silver should retain his position in the company owing to his experience. His educational background is sound and can prove vital in handling technical issues particularly with the customers. Moreover, his experience working at a competitor firm adds the valuable advantage of adopting the competitor’s mindset which helps come up with innovative ways to beat competition. As an entrepreneur he has contributed a lot in terms of effort right from the start up to date. His thoughts of selling his share are a way of expressing his dissatisfaction with the returns that do not match his efforts. He does not only work for the salary but seeks to ensure the venture is profitable to all the partners. This is evidence of an ‘owner’s mindset’ that is vital in an entrepreneur. There are no quoted complaints of the staff about the kind of management conducted by Silver. This implies Grant has the relevant leadership qualities necessary for the coordination of employee activities in the firm.
Grant has also succeeded considerably as a manager. He has seen the company thrive in its early years of operation to the estimated worth of $100,000 it should attain by the year 2003. The hardest period of any business is inception as a company tries to curve its niche and fit in the market while facing stiff completion from the old market players. Silver’s flow meters are said to work with both new and existing customers implying that the marketing strategies devised under his watch have proved essential. Moreover, his keenness in identifying the errors in the financial records prepared by Demetrius indicates he is concerned about the management of funds of the company. A manager whose can use the present occurrences to forecast the future correctly and hence take the relevant precautions in time would be a valuable asset to the company. Grant had foreseen the cash constraint that was as a result of the company’s long selling procedure and advocated for acquiring a line of credit with the bank. However, Ring’s control tendencies had thwarted the initiative. Therefore, with an increase in authority and decision implementation, Grant would be in a position to propel the company to greater heights.
b) Best source of equity
Ring is the best person to seek equity from. He has the power to call all the shorts due to his large shareholding. However, he is not interested much in the successful economic life of the company and is more concerned about being the boss. Despite being one of the proprietors, there are no particular decisions that he has made that have proved beneficial to the company. Instead he has only become a hindrance to the implementation of the decisions. Reducing his equity would ensure the company has the ability to go ahead with decisions that could brighten its economic future such as creation of means to access bank credit.
Buying Grant’s share would not be such a wise decision. First it would only put the investor at Grant’s current situation of having good ideas that may never get implemented. Secondly, buying his equity and retaining him as the CEO would reduce his work moral since he no longer shares in the profits. His major concern at the moment is his inability to reap as much as he puts in. Buying Ring equity would enable him make the right decision that affects the company as Ring’s power and control would be reduced. He will consequently feel fulfilled and give the company his very best.
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