Tyneside gravel Analysis
The family firm, Tyneside Gravel Company, was established in the year 1912. It is run by John hepple as the chairman and managing director. He is assisted by his two sons. The market for their products has increased due to the fact that in the Tyne area, projects concerning building and civil engineering have increased. This has made the firm seek expansion strategies. However, the chairman has been hesitant because he is scared of uncontrolled growth. The other employees including his sons feel that he should be open to expansion opportunities so as to be able to compete with other companies.
What decisions does the firm face with continued growth?
The company has to decide on how to expand the business but not to operate in their sub sites. The challenge in proceeding with this decision is the fact that finding new sand gravel sites in the new areas is hard because they are Scarce.The Company’s director Frank Wardlaw has found two sites at Celadon owned by the local council. However, they are leasing only one site hence the company has to decide which site to take. The first site, Bardon Farm, has sand and it is promising because of the development of Washington new town and also because in South Shields, the number of housing is increasing and therefore the market for sand is high. Cleadon Hill produces gravel and the positive side of this site is that it has a ready market where Tyneside Company can secure a four year contract with motorway contractors. The firm therefore has to decide which site to take.
What are the risks associated with expansion in particular the operational risks. John Hepple might, however, been justified by being against the expansion because of the operational risks that come with it. The one major risk is that the company might end up in debt thereby losing its property due to borrowing so as to finance the expansion. John Hepple, being the main shareholder, is against having new shareholders and hence that option of getting finances is out. The other operational risk is that the company has a lot of competitors whom it should keep in touch with to avoid being left behind. This will not be easy as the firm will be concentrating with expansion. Expansion also comes with a lot of work and everyone is working towards proving that they made the right decision (Sease & John, 1994). This may lead to the employees having a lot of pressure and their morale may be compromised. They may feel overworked and the firm may not be able to motivate them in the short run because all their finances will have been exhausted in the expansion. The firm also faces the risk of making losses if they are not able to attract new customers.
The company however can deal with the risks by ensuring that the money they borrow will be paid within a certain period and still leave them profits. The board of directors has selected a committee that will establish the feasible project so as to expand it. The committee which consists of employees gives them an opportunity to choose what they feel they are capable of achieving and therefore doing away with the risk of losing employees due to pressure. The firm should do enough research to know what their new customers expect. This way they will have new customers and also be ahead of their competitors.
Analyze the cash flow presentation. Identify any potential problems with the identification of the cash inflows and outflows. The company has come up with a cash flow that shows how money will move in and out enabling them to know the rate of return of the project. The cash flow shows movement of cash operations that is the sales; there are also the cash flows from financing. The difference between the cash inflows and outflows gives the net cash flow.
The tyneside firm may have potential problems in identification of cash inflows and cash outflows. This problem arises when purchasing items with cash which is an inflow unlike when purchasing items with borrowed money which is a cash outflow. The firm will be providing goods at credit and this might be a problem when the sale should be recorded as inflow or when it is an outflow. The problems that come with cash flows can be corrected by just understanding the records. The cash inflows and outflows are not the only important things; one should also look at the timing of the flows. The firm should be sure of when their debts after selling goods on credit will be paid. They should also ensure that they are aware if the working capital is sufficient or not and it is advisable to ensure that it is sufficient that way they will know that the projects liquidity is ensured.
The tyneside gravel firm can use the SWOT analysis to evaluate the investment to go for. The analysis will enable the firm to check on the internal factors like the Strengths and Weakness. They will also evaluate the external factors such as the Opportunities and Threats to determine if any that project is worth trying (Jury, 2012). The firm will look on how they will provide better products winning new customers in the new areas. They will be looking at the strengths, potential, and ways they can use to ensure they beat their competitors. The firm’s chairman, John Hepple, talked of having a controlled growth and that way they will be doing away with the weakness that may come with the expansion. They will ensure that the projects give them the required returns after investing reasonable amount in the project. The firm can look at the opportunities available when they invest in either project thereby going for the better evil. The threat includes the taxes and any government regulations.
The main strength of the firm is its financial stability and sound understanding of the market and the industry of operation. In this respect, the firm stands a better chance of growth in the industry and gaining market dominance. On the other hand, the firm maintains sound financial policies that give it an edge in terms of financial stability and accountability. In terms of opportunity, the increase in the demand for financial expansion and services by the public presents a potential growth in the customer base, hence more potential customers and clients. Like other firms in the industry, this firm faces a great threat posed by the rise in the technological integration and advancement which threatens the security of the organization in terms of internet monetary transactions (Chorafas, 2006).
Is there a difference in the financing decision versus the investment decision? The firm has both financing and investment decisions to make. The investment decision is the one that results in the outflow of money while the financing decision results in the inflow of money. The financing decision that the company has made so as to fund their projects is to use what they have internally and borrow money from financial institutions that charge fair interest rates. The investment decisions are how they will use the money they have to make their projects a success. The expenses they will incur when investing should be regained after the sales have been made.
Present an evaluation of the cash flow presented based on your knowledge of project evaluation i.e. payback,NPV or IRR.There are certain measures used in the analysis of cash flows like the net present value of cash flows, internal rate of return, profitability index, and the payback. Tyneside firm has used the net present value to analyze their projected cash flow. The present value is calculated using the discount rate which is an annual rate and the period that it is been examined. The firm’s cash flow have different periods of time and this way, the comparison may be hard since the time period should be the same. The firm can calculate the present value using the same period of time and determine which project will give higher returns.
What are the risks associated with the selection of either investment? There are certain risks that the firm would face if they choose either of the projects. The site, Bardon farm that the firm is depending on is based on the fact that there is growth in the area. The customers, however, might be having their own suppliers and therefore there is the risk of not having new customers due to competition. The firm is also depending on the local council tenders which they might not always win despite lowering their costs because the other firms may use the same tactics (Chorafas, 2006). The other site, Celadon hill, the only sure thing about it is that the first four years will be fruitful. The firm, however, is not sure of the years after that period. There is also the risk o f not keeping up with competitors because they will be busy providing for the motorway contractors. These two projects have the same risk of not knowing how much the land will require during reclamation. It may be more damaged than they had planned and therefore require more money.
How would you advise the management?
The management, having had the cash flow analysis, can be able to tell what project they expect to give higher returns (Jury, 2012). They should, however, not only consider the short term returns but also consider the long term returns. They should put into consideration their employees and choose the project they will be comfortable doing. This way, they will not lose any of them due to the expansion. They should select the projects that have few or controlled threats. The firm’s management should choose the project that enables them to exploit their full potential and be able to use the opportunities available (Jury, 2012).
What issues do you find with forecasting methods? How would you minimize the risk associated with the forecasts? Forecasting methods are used to predict the future; it can be applied by using scenarios. They firm can look at the best scenarios, the worst and also the medium. The committee having written all of the scenarios done will be able to make the best decision. The risk in this method is that it is hard to measure best and worst situations, and therefore mistakes can be done. Forecasting can also be done using time where they can use different periods of time. Thoughts and feelings can also be used to provide predictions. The risk with forecasting methods is that they are not accurate because they may be based on opinions and not data. Forecasting methods may use past experiences and this may have nothing to do with the future. These risks can be reduced by using more than one method and that if one fails, there is a backup. The decision should also be made by more than on individual.
What lines of argument would you present if either project is pursued? The Bardon farm site can be chosen because the firm can be able to win new customers by providing the best services at an affordable price. They can offer what other companies cannot offer and ensure availability of their products at all times. The firm has also entered into business with the local council through operating in their site and by offering quality and fairly priced commodities; they can be able to win all the local council tenders (Chorafas, 2006). The Celadon hill is also a good site because they are assured of their returns in the first four years by signing a four year contract with the motorway contract. After the four years, they might also be able to continue working with Mowlem which is a higher possibility. These factors considered the best scenario is when they invest in the Bardon farm site where the customers will keep flowing once they get them. The worst scenario is investing in Celadon and having to close once the four year contract is over. The medium scenario is when the company will be able to continue working with Mowlem.
Chorafas, D. N. (2006). Wealth management private banking, investment decisions and structured financial products. Amsterdam: Elsevier/Butterworth-Heinemann.
Jury, T. D. (2012). Cash flow analysis and forecasting the definitive guide to understanding and using published cash flow data. West Sussex [England: John Wiley & Sons.
Sease, Douglas & John A. Prestbo (1994), Baron’s guide to making investment decisions, Prentice Hall.