Case Study on "Financial Decision-Making"

Case Study 3 pages (1435 words) Sources: 4

[EXCERPT] . . . .

Business Planning/Financial Decision Making

One of the popular axioms about American history is that the country was made by the small entrepreneur- after all; Microsoft and Apple were both garage projects before launching into multi-million dollar businesses. However, the sad fact is that most small businesses fail, and many people who have a passion for a particular product or service simply do not know how to run their passion as a money making entity. In fact, small business opportunities are so important to the American economy because they represent 99% of all employer firms and employ just over half of the private sector. In general, small businesses pay 44% of U.S. total payroll, and have generated almost 70% of net new jobs over the past two decades. Small businesses are innovative, too, making up about 97% of exporters producing 1/3 U.S. export volume; in addition, they produce 13 times more patents per employee than even the large patenting firms (U.S. Small Business Administration, 2011).

Investing in a Small Business- We now know how important small businesses are to the overall American economy. Without investment, it is unlikely that there would be as many small business opportunities as there are, nor would small innovators have the money to change the economy through their innovations. Still, most financial advisors say the basic principle of investing is: never invest more than you can afford to lose. In the same light, always understand that any investment, no matter how well planned, is risky. Small businesses especially are notoriously non-liquid -- even though they may have paper security. There are, however, several things that on can do to minimize ris

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k and make investing a win-win situation for companies in which the investor believes will see a return on investment:

Check details; length of expertise of owners or time in business.

What is the salary structure? Are owners taking unreasonably large salaries with benefits in view of the company's stage of development?

What percentage are the owners willing to risk (are they taking 80% of the profits while offering 20% of the shares?)

What is the trend in the industry? Is this a hobby business or something that has real fiscal potential for the medium and long-term?

Does the company have a realistic marketing plan and the funding to execute that plan?

What are the chances the company will go public or sold? (State of Wisconsin, 2009).

Company Analysis- The following three organizations are looking for investors and have presented their business plans for consideration. Highlights of each are as follows:

Acme Consulting -- Start up; consulting company specializing in marketing of high-technology products for the international market. They will offer high-tech manufacturers a reliable, high-quality alternative to in-house resources for business development, market development, and channel development on an international scale.

Owners -- Founders are former marketers of consulting services, personal computers, and market research, all in international markets.

Sales -- Projected just over 1/2 million first year growing to $1 million by year 3.

Finances -- Needing $50, 350 to start; asking for three investors, two at $20K, one at $10K

Competitive issues -- Several high-level services for major corporations, few that work with smaller concerns; challenge will be in convincing U.S. firms the need for help when dealing in the international marketplace

Market segmentation -- vast potential in the U.S. high tech market, showing 10% annual growth; target market will be larger corporations that need particular expertise in international areas.

Staff -- 3 to 5 partners, flat at the beginning, at least one based in Europe, possibly one based in Asia. Salaries of $144,000 for first year growing to $200,000 total for all partners in 1998; payroll expenses of almost $200K first year to mid-$400 range in third year.

Interstate Travel Center -- Start up; travel center based in Dallas, Texas. Consisting of a convenience store, gas/diesel islands, at least one restaurant, and amenities for truckers and travelers off the major highways around the Dallas area.

Owners -- Founders are husband and wife team; husband has extensive experience within automotive repair, wife who has over 20 years financial and bookkeeping experience.

Sales -- Projected $8.2 million Year 1; $8.6 million Year 2, $9 million year 3; profits include a 26% margin.

Finances -- Need $325,000 in revenue per month for… READ MORE

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Quoted Instructions for "Financial Decision-Making" Assignment:

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Lots of elements go into the creation and evolution of business plans, and the financials themselves are not self-revealing but must be evaluated in light of the whole company context. Here are three variations on advice about how to put such plans together; each has their own take on how to present and interpret financial data:

Darrell Zahorsky, Critical Steps to Writing a Business Plan About.com

NASA, Some Guidance on Business Plans

BusinessTown.com, Creating your business plan.

As your case assignment for this module, you are to read the following three sample business plans:

Acme Consulting

Interstate Travel Center

Silvera and Sons

SOURCES FOR THE 3 SAMPLE BUSINESS PLANS IN THE SAME ORDER LISTED ABOVE:

ACME CONSULTING: http://www.paloalto.com/sampleplans/bpp7/enu/live/acmeconsulting_live.pdf

INTERSTATE TRAVEL CENTER: http://www.bplans.com/truck_stop_business_plan/executive_summary_fc.cfm

SILVERA AND SONS: http://www.bplans.com/coffee_export_business_plan/executive_summary_fc.cfm

For this assignment I want you think in terms of being an investor and what interest rate you would require on your investment in each of the companies. The discount rate for determining net present value is related to risk in a business and the interest rate charged by investors. The article on buying a business by T. Berry, http://articles.bplans.com/index.php/business-articles/buying-a-business/buying-a-business-know-what-you-are-getting/ , talks about the discount rate and risk. You want to make sure that you charge a high enough interest rate to recoup your investment and make some money. Remember the higher the risk, the higher the interest rate (return on investment) you want to charge.

The background information has further material on using financial data to assess risks and comparatively evaluate the future possibilities for companies. In addition, you may wish to seek out further information through your own research. When you have reviewed the advice and the plans. please prepare a short (3-5 page) paper discussing:

Which of these three projects do you think should have the highest discount rate reflecting risk inherent in the business plan? Which one do you think should have the lowest?

Please carefully explain your reasoning about each of the three businesses, with reference to the appropriate financial and other information. You do not have to perform calculations or determine a specific interest rate you would charge - that would be extremely difficult in an introductory course. A rating of high, medium and low will do.

Case assignment expectations:

Use information from the modular background readings as well as any good quality resource you can find. Please cite all sources and provide a reference list at the end of your paper.

LENGTH: 3-5 pages typed and double-spaced.

The following items will be assessed in particular:

1.Your ability to effectively reason about the relationship between busines risk and the discount rate;

2.Some in-text references to modular background readings

SOURCES PROVIDED FOR BACKGROUND INFORMATION ON FINANCIAL DATA AND HOW TO ASSESS RISK AND COMPARATIVELY EVALUATE THE FUTURE POSSIBILITIES FOR COMPANIES:

BPlans.com. Interstate Travel Center Retrieved Nov. 8, 2010 from http://www.bplans.com/truck_stop_business_plan/executive_summary_fc.cfm

BPlans.com. Silvera and Sons Retrieved Nov. 8, 2010 from http://www.bplans.com/coffee_export_business_plan/executive_summary_fc.cfm

BusinessTown.com. Creating your business plan. Retrieved Sept. 23, 2007 from http://www.businesstown.com/planning/creating-plan.asp

NASA. Some Guidance on Business Plans. Small Business Innovation Research Office. Retrieved Sept. 23, 2007 from http://sbir.nasa.gov/SBIR/BusPlan.html

Palo Alto Software. Acme Consulting Retrieved Sept. 23, 2007 from http://www.paloalto.com/sampleplans/bpp7/enu/live/acmeconsulting_live.pdf

Zahorsky A. Critical Steps to Writing a Business Plan. About.com. Retrieved Sept. 23, 2007 from http://sbinformation.about.com/cs/businessplans/a/aa020903a.htm

Berry, T., Buying a Business? Know What You Are Getting!, BPlans.com, Retrieved Apr. 25, 2008 from http://articles.bplans.com/index.php/business-articles/buying-a-business/buying-a-business-know-what-you-are-getting/

EconEdLink. The time value of money, Retrieved Feb. 24, 2008 from http://www.econedlink.org/lessons/index.cfm?lesson=EM37

Study Finance. The time value of money, Retrieved Feb. 24, 2008 from http://www.studyfinance.com/lessons/timevalue/index.mv

Experiments in Finance, How to calculate discounted cash flow, Retrieved Feb. 24, 2008 from http://www.experiglot.com/2006/06/06/how-to-calculate-discounted-cash-flow-dcf/

How to Reference "Financial Decision-Making" Case Study in a Bibliography

“Financial Decision-Making.” A1-TermPaper.com, 2011, https://www.a1-termpaper.com/topics/essay/business-planning-financial-decision/39224. Accessed 5 Oct 2024.

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A1-TermPaper.com. (2011). Financial Decision-Making. [online] Available at: https://www.a1-termpaper.com/topics/essay/business-planning-financial-decision/39224 [Accessed 5 Oct, 2024].

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1. Financial Decision-Making. A1-TermPaper.com. https://www.a1-termpaper.com/topics/essay/business-planning-financial-decision/39224. Published 2011. Accessed October 5, 2024.