Custom Snowboards, Inc. is interested in securing funding to expand into the European market. Financial statistics have been provided within this report to discuss the feasibility of this expansion. To fund the project, Custom Snowboards wishes to secure capital debt of $1,000,000. Custom Snowboards has seen considerable growth in the percentage of sales and substantial increase in revenue. They expect future sales to continue to rise, which would be beneficial to the lender and Custom Snowboards. A horizontal analysis will be reviewed and will reveal the Custom Snowboards financial position over a three-year period. This will help in the actual approval process. The review will look at key points and will help to confirm Custom Snowboards ability to successfully expand into Europe.
The financial health of a company reviews sales, total assets and net worth in relation to how profit was earned (Hunt, 2013). Thus, income statements from a threeyear period will be reviewed and this will help develop a picture of Custom Snowboard’s financial health.
Net sales increased 32,200 or 0.49% from year 12 to year 13. This indicates strength within Custom Snowboards, even though the increase was minimal. Year 13 to year 14 net sales dropped by 3.4% or $225,400. This does not bode well for Custom Snowboards and could cause a concern regarding the ability to repay the debt. The CUSTOM SNOWBOARDS
Company’s corrective action plan should be reviewed to see if the changes implemented worked.
Cost of Goods Sold
The cost of goods sold in year 12 and 13 increased by 0.49% or $22,400. This is considered strength. It makes since that net sales increased that the demand for goods sold increased as well. However, when net sales decreased in year 13 and 14 so did the demand for goods sold. This decrease is equal to a decrease in sales of 3.4%. There was no over spending during this time frame and is determined by the cost of goods sold and net sales percentages were exactly the same.
Year 12 and 13 saw gross profit increase by $9,800. Again, sales were increased, so gross profit was increased by 0.049%. The gross profit was above $2,000,000 during year 12 and 13. Gross profit by year 14 had dropped 3.4% or $1,950,200. This is a concern for Custom Snowboards, since it represents a reduction in revenue and viability. Operating Income
Operating income for year 12 and 13 dropped by $63,000 or 23.56%. The operating income continued to drop during year 13 and 14. By year 14, the operating income had fallen $109,000 or 53%. This is a concern for Custom Snowboards and they may have trouble paying all their liabilities. Custom Snowboards finance team plans to implement protocols to correct deficiencies in operating income. Earnings before income taxes
Earnings before income taxes dropped by $57,800 or 30% in year 12 and year 13. This continues to drop 82.74% during year 13 and year 14. However, Custom CUSTOM SNOWBOARDS
Snowboards lost $106,000 on earnings before income taxes. Earnings before income taxes help establish a measurement of profitability, but do not really represent cash earnings (Investopedia, 2013). To decide on credibility, other factors have to be considered along with this item. However, Custom Snowboards wants to ensure transparency and accuracy in trying to secure this debt.
Net Income was down $43,350 or 30% during year 12 and year 13. This drop continued into year 13 and year 14 by continuing to drop 82.74% or $80,175. This is a concern for Custom Snowboards. This indicates potential problems
exist, such as workflow, production, and pay. Furthermore, the financial picture of the company is not a healthy one.
Trading activity within Custom Snowboards liquidity is characterized as high. The horizontal analysis will determine how quickly cash can be converted into use. Also, the horizontal analysis will help determine the company’s liquidity and the ability to meet obligations.
Cash and Cash Equivalents
Shares and bonds that can be easily converted into cash are considered cash and cash equivalents. This converted cash is then immediately available for use. Custom Snowboards had a cash and cash equivalent of 83.8% during year 12 and year 13, but that dropped to 7.2% in year 13 and year 14 since sales dropped during that period of time. This would be a concern for Custom Snowboards and indicates they may not have the CUSTOM SNOWBOARDS 5
assets available to keep immediate cash flow available, especially if sales are not as expected in Europe.
Total Current Assets
$142,260 or 19.3% represents the total current assets of Custom Snowboards during year 12 and year 13. However, in year 13 and year 14 total current assets fell 16%. This is a concern for Custom Snowboards since the company must have enough assets to fund operations and pay expenses. Continued low sales and limited assets is a concern for lenders and poses the question if Custom Snowboards would be able to meet its financial short-term obligations.
Custom Snowboards appears to be financially solvent from the review of the income statement and balance sheet. Custom Snowboards has reduced liabilities and maintained consistent repayments to reduce long-term financial obligations. This is strength for Custom Snowboards since they saw sales drop.
Year 12 and Year 13 saw long-term liabilities drop 6.4% and then drop another 6.8% in year 13 and year 14. This is strength for Custom Snowboards and shows a determination in reducing these liabilities. Custom Snowboards is attempting to demonstrate they are committed to expansion and growth. They anticipate the European expansion will help generate sales and earnings that will help them meet their long-term liabilities.
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Custom Snowboards posted total liabilities of $54,640 in year 12 and year 13, which is down 5.5%. Total liabilities continued to show a decrease during year 13 and year 14 of 6.2% or $57,520. This is strength for Custom Snowboards and shows a determination to reduce debt. Custom Snowboard has provided transparency of its financial records to provide an understanding of the mission of the company and to help with the approval process in securing the $1,000,000 debt.
Profitability is important in any business. To ensure profitability, cost-saving measures must be considered and initiated to reduce financial risks (Hunt, 2013). This will help Custom Snowboards continue to grow and see sales grow. Net Sales
Net sales dropped $225,400 or 3.4% in year 13 and year 14. Merkgraf (2013) believes the way to increase net sales is to hold staff accountable after the implementation of specific sales strategies and the setting the bar high. To accomplish this, the focus will need to be on repeat sales. This can be accomplished through marketing and thus the marketing budget will need to be addressed and have additional funds. Marketing and public relations can help increase the drop in sales and to inform consumers Custom Snowboards is planning expansion into the European market. A realistic goal to strive for is a 20% increase in sales each year for the next five years to help recover from the loss in sales and revenue. This will make the company more profitable and increase the net operating income. Marketing must focus on repeat customers and initiating creative promotional incentives that will bring in customer interest. Sales staff must also find CUSTOM SNOWBOARDS
These incentives beneficial so they are able to be resourceful when utilizing sales tactics and to turn potential customers into actual customers. The actual plan must implement methods that are cost effective and do not increase cost during production. The goal is to reduce spending and costs and increases sales.
Gross profit was recorded at $1,950,200 or a decrease of 3.4% at the end of year 14. This is a concern since the goal of all business is to increase gross profit to make the company more valuable. The company must increase sales to keep gross profit up. Operating Income
Year 12 and year 13 saw operating income drop $63,000 or 23.56%. Operating income continued to decline in year 13 and year 14 to $109,000 or 53%. Again, sales must increase for an increase in operating income to be seen. A possible strategy to increase sales is to offer personalized snowboards. These snowboards can be priced less than other snowboards, thus making them more attractive to the customer. Also, it gives the customer a chance to obtain a product different from others and cheaper than others, which can increase the interest to purchase the product.
Earnings Before Income Taxes
Year 12 and year 13 earnings before income taxes dropped $57,800 or 30%. This decline continued into year 13 and year 14 with a drop of $106,000 or 82.74%. This is not a good sign for Custom Snowboards. Costs need to be cut and management will need to determine where the areas that can be trimmed exist. The goal of any business is profitability and growth. The company will need to demonstrate they are capable of CUSTOM SNOWBOARDS 8
meeting financial obligations when expansion into the European market is well underway.
Net income dropped 30% or $43,350 in year 12 and year 13. This drop continued into year 13 and year 14 with a total drop seen of $80,175 or 82.74%. This indicates a poor financial picture and position for Custom Snowboards. There may be production or workflow problems that may become apparent and be concerning to lenders. This drop in net income affects everyone within the company. To increase net income, sales must be increased. Thus, the minimal advertising budget must have additional funds allocated to increase sales and public relations. This is especially important during expansion to let customers know Custom Snowboards will be involved within the European market. Cash and Cash Equivalents
Cash and cash equivalents were recorded at 7.2% in year 13 and year 14. This is a substantial drop from previous recordings. To avoid liquidity concerns, Custom Snowboards must increase the balance in cash and cash equivalents. Root causes for the decline must be determined and corrective plans must be implemented. An increase in marketing and public relations to increase product awareness is one example that could be implemented that would help generate sales.
Total Current Assets
Assets are important in the business arena and profitability needs to rise for a company to be successful. Total current assets dropped 16% in year 13 and year 14 for Custom Snowboards. This is a concern and companies that see assets drop are not profitable and over time lose money (Hammel, 2013). Total current assets need to be CUSTOM SNOWBOARDS 9
raised and to do so debt needs to be paid off or even down. However, Custom Snowboards needs to redirect some monies to be utilized during the expansion process. A3. Ratio Analysis
The solvency of Custom Snowboards will be reviewed and confirmed by the ratio analysis. Custom Snowboards is seeking a loan for $1,000,000 and has great potential for growth in the snowboard market. The snowboard market has seen a demand for the product and an increase in sales. Income statements and balance sheet from two years of financial information will be reviewed and presented.
Gross Profit Margin
Custom Snowboards financial health is determined by the gross profit margin. Year 13 Custom Snowboards gross profit margin was 30.4. This means Custom Snowboards retained $0.30 out of every $1.00 earned. Year 14 saw no change in the gross profit margin. A gross profit margin of only 30.4 is not a strong margin ratio and indicates a weakness for Custom Snowboards, especially when the industry average was 32.1%. Custom Snowboards experienced a reduction in sales and was able to maintain the $0.30 per dollar in revenue, which indicates strength within the company. It goes without saying that profitability will be low when gross profit ratio is low (Horngren, 2009). Custom Snowboards plan to help the expansion project by eliminating expensive liabilities.
Net Profit Margin
Custom Snowboards net profit ratio was 1.5% in year 13 and with a downturn in sales in year 14 the ratio had dropped to 0.3%. This was well below the industry average CUSTOM SNOWBOARDS of 5.1% recorded by Winter Sports. This is a concern for Custom Snowboards since the business sustainability is in question if profit drops or is absent. Custom Snowboards needs to increase sales and show an increase in profits to ease any concerns lenders may have regarding the company’s efficiency to reverse the unforeseen decrease. Return on Total Assets
Custom Snowboards return on total assets was recorded at 5.4% in returns in year 13, which is considered a strong performance. The profitability and sales were strong as well. However, Custom Snowboards return on total assets had dropped to 1.0% by the end of year 14 due to poor sales and profitability. A major competitor, Winter Sports, recorded a more profitable year at 4.8% return on total assets. This demonstrates the competitor was able to control overhead better than Custom Snowboards. Return on Common Equity
Return on common equity demonstrates how equity is effectively used to create more profits and is a significant ratio for the company. The return on common equity for year 13 was 11.4% and is seen as strength for Custom Snowboards. It figures to $11 return on every $100 earned by the company. However, by year 14 the return on common equity had dropped to $2 on every $100 earned. This was subpar and below the industry average. A major competitor, Winter Sports, recorded 8.1% return on common equity ratio.
Problems with liquidity can be found within a common financial ratio. This will give an idea of what the working capital position is like for that company. Furthermore, CUSTOM SNOWBOARDS it will be a good indicator to determine if a company will be able to repay a debt within a 12-month time frame. A company with a high current ratio often has cash or inventory necessary to pay for short-term debts. The current ratio for Custom Snowboards during year 13 was 6.82. This is an acceptable number, as 2 often is the indicator that determines whether a company is able to pay for short-term liabilities. Again, year 14 saw a decrease in numbers and lost almost one full point in the current ratio dropping to 5.84. This is not a cause for concern, but demonstrates strength for Custom Snowboards and their position to meet short-term liabilities. This ratio is better than a major competitor, Winter Sports, who recorded a current ratio of 4.20. Acid-Test Ratio
Investopedia (2013) defines an acid-test ratio as one that determines whether inventory needs to be sold to cover immediate liabilities or if a company has enough short-term assets to do so. Along with a current ratio, the acid-test ratio should have a higher number to be in a better financial position. Year 13 recorded the acid-test ratio at 6.82 and year 14 at 3.64. Year 13 and year 14 are seen as strengths, since an acid test ratio should have a 1 or higher to be considered able to meet current liabilities. Year 14 saw Custom Snowboards lose sales in a struggling economy yet maintain a higher acidtest ratio than the industry average of 3.40. Again, this is seen as strength for Custom Snowboards and the ability to meet short-term obligations.
A debt ratio is reviewed to see the financial ability of a company to repay its debts and the ability to have a “cushion” to fall back upon should the need arise. Custom CUSTOM SNOWBOARDS
Snowboards has stringently worked to accumulate large cash and cash equivalent balances to help in case of an economic downturn and prevent a cash crisis. The debt ratio was 52.5% in year 13 and 50.4% in year 14. This reduction demonstrates company strength, since Custom Snowboards was able to continue to reduce debt while facing a decline in profits and sales. However, Winter Sports were able to record a lower debt ratio of 38%. Custom Snowboards must develop a strategic plan to increase sales, reduce costs, and reduce current debts so they are able to reduce the risks for insolvency. Time Interest Earned
A higher time interest earned ratio is indicative on how well a company can make payments on interest owed for debts. To find this ratio, you must know the total earnings before interest and taxes of a company then divide by the total amount of interest due on the debt. Custom Snowboards recorded a 2.58 time interest earned in year 13 and 1.29 time interested earned in year 14. A time interest earned ratio of 1.5 is indicative of the company’s ability to make payments on the debt. Thus year 13 is strength for Custom Snowboards and was generating enough money to meet the interest payments owed. However, year 14 saw a decrease and a weakened financial position. This was due to a decline in sales and difficulty generating revenue. Winter Sports had a much stronger financial position and recorded a time interest earned ratio of 5.10. B1. Historical Analysis
The past and present performance information of Custom Snowboards liability and equity will be reviewed utilizing a horizontal analysis for year 12, year 13, and year 14. The balance sheet and income statement will be reviewed and compared to measure CUSTOM SNOWBOARDS 13
growth and reduction. The review will also look for insolvency so corrective
actions may be implemented.
Net sales and growth in profit is important for company existence. Net sales for Custom Snowboards were recorded at $6,601,00 in year 12 and increased by $32,200 or 0.49% in year 13. Year 14 saw a decrease in net sales and recorded a drop of 3.40% and net sales of $6,407,800. Net sales, when up, indicate strength for a company and are indicative of a thriving business, but when down there is an effect on profit that everyone notices.
Cost of Goods Sold
The cost of goods sold in year 12 and year 13 increased 0.49% and recorded expenditures of $32,000 more in year 13 on cost of goods sold. This actually amounted to the same as net sales during the same time period. Year 13 and year 14 saw costs of goods sold drop and net sales drop to 3.40%. These can be seen as strengths for Custom Snowboards since they are meeting the demand for their product and demonstrating a relationship between profit and cost of goods sold (Kennon, 2013). Gross Profit
Custom Snowboards recorded an increase in gross profits of 0.49% in year 12 to year 13. This is not surprising since net sales and cost of goods sold were recording an increase at this time. This is considered strength for Custom Snowboards because gross profits increased when sales increased. Year 13 to year 14 gross profits saw a dramatic drop of 3.40% or $600,000 due to the decline in sales from the economic downturn and the possibility of competitors selling similar products at reduced costs. CUSTOM SNOWBOARDS 14
Operating expenses for Custom Snowboards increased 4.21% or $733,000 in year 12 and year 13. This trend continued into year 14 and increased another 2.23% or 40,400 to a total of $1,853,200. Custom Snowboards must find a way to determine how operating expenses can be reduced without raising product prices yet increasing sales. General and Admin Expenses
Custom Snowboards increased administrative salaries 4.76% in year 12 and year 13 when sales were increased as well. Salaries also increased during this time period 13.63%. This makes sense because sales were increased, so production would need to be increased as well. Administrative compensation is a concern upon review and rose from $210,000 in year 12 to $250,000 in year 14. Year 14 saw sales drop and gross profits drop. The demand for products has been reduced and this is not feasible that compensation should continue to increase more than 13%.
Custom Snowboards increased executive salaries 2.63% in year 12 and year 13. The company proceeded to increase executive salaries again in year 13 and year 14 10.26%. This is not feasible and a concern for Custom Snowboards. The company needs to be cutting operating costs and compensation of executive salaries since a loss of sales and demand for products has happened. Custom Snowboards needs to standardize production practices for maximum efficiency, reduce staff hours to compensate for the decrease in production demand, and reduce costs while the demand remains low. CUSTOM SNOWBOARDS 15
Custom Snowboards recorded increased utility costs of 7.14% or $17,000 in year 12 and year 13 and then a continued increase of 1.96% or $5,000 increase for year 13 and year 14. The increase in year 12 and year 13 is not surprising because the demand for products was higher and sales were increased. The cost for utilities and energy consumption should then have decreased when production demand waned. The utility budget for Custom Snowboards was not realistic, since sales increased 0.49% or $32,200 and that is less than half of what monies are provided within the utility budget. Current Assets
Changes in percentages on multiple accounts can affect profitability. Custom Snowboards recorded current assets that changed period to period by increasing and then decreasing.
Cash and Cash Equivalents
Custom Snowboards recorded an 83.8% increase in cash and cash equivalents in year 12 and year 13. This gave the company a large cash balance and the ability to meet short-term obligations without problems. A 7.2% reduction in cash and cash equivalents in year 14 was recorded when sales declined. The higher the cash and cash equivalents the more availability the company has to liquidate assets to cover short-term obligations. Accounts Receivables
Custom Snowboards recorded a minimal increase of 0.5% in accounts receivable during year 12 and year 13. To have an increase in accounts receivable is a concern for the company since it’s indicative that customers are often having trouble making payments for products purchased. Accounts receivable was improved in year 13 and year CUSTOM SNOWBOARDS 16
14 when a decrease of 3.4% was recorded. This would be strength for the company and indicate the customer has paid for products purchased and revenue is moving in the right direction.
Raw Materials Inventory
Raw materials inventory increased 0.5% in year 12 and year 13, but decreased 3.4% in year 13 and year 14. To have limited raw materials inventory for production is strength for Custom Snowboards. This limited inventory is easy to store when sales decline and easily accessible when sales rebound and production increases. Liabilities
Liabilities are obligations owed on short-term and long-term debts. Custom Snowboards decreased liabilities 5.5% in year 12 and year 13. The company was further able to reduce liabilities 6.2% in year 13 and year 14. This is strength for Custom Snowboards and is indicative of positive financial repayments. Accounts and Notes Payable
Custom Snowboards accounts and notes payable increased 0.5% in year 12 and year 13, but decreased 3.4% in year 13 and year 14. This is considered strength for Custom Snowboards and is indicative of positive financial repayments. Total Current Liabilities
Custom Snowboards total current liabilities increased for year 12 and year 13 0.3%, but year 13 and year 14 recorded a decrease of 3.4%. This is strength for the company and again shows a positive repayment history that exhibits
creditworthiness. This should tell lenders that Custom Snowboards is committed to repaying liabilities even when a decline in sales happens.
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B1a. Future Performance
A trend analysis will be conducted to view financial changes that have transpired over the multiple years within Custom Snowboards. These changes will then be calculated, evaluated and used for comparison to the base year to help develop a plan of action and provide direction for which Custom Snowboards will head financially. The base year is year 12 with $6,601,000 in net sales at 100%. Net sales recorded minimal growth in year 13 at 0.5% over base or 100.5%. Monetarily net sales recorded a $33,200 growth in year 13, which is not seen as a strong growth, especially since the demand for the product was decreasing. Year 14 recorded a drop in net sales to 97.1% from baseline in year 12 and 96.6% in comparison to year 13. This is a concern for Custom Snowboards since sales could not be maintained.
Procedures may need to be reviewed to check for inconsistency and inefficiency in production and sales so this may be corrected and sales can be boosted. Pricing adjustments can be made and the product may become more appealing to potential and existing customers. Custom Snowboards forecasts a recovery of 3% in year 15 on the trend analysis, which will help strengthen their financial picture. Management envisions growth and net sales will occur and increase consistently as the economy improves. The forecast for year 16 is not as favorable as year 15 and net sales drop 1% or $100,000. The prices on products will be adjusted to remain competitive within the industry. Management believes the economy will recover then net sales and revenue will improve. Year 17 is forecasted to improve 3.7% over base line or total earnings of $6,647,452. This trend analysis shows the management of Custom Snowboards believes the company can recover and become prosperous and grow.
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B2. Improvement Revision
Line items in use will be reviewed in the overhead analysis to see what is profitable, cost effective and best practice for personalizing snowboards.
The goal for Custom Snowboards is to increase net sales and revenue and limit liabilities, while making everyone happy. The company must maintain prices that can be competitive within the industry and European market yet maintain profit margins that are reasonable to succeed.
A traditional costing method is currently implemented at Custom Snowboards. The company currently has two product lines, regular snowboards and customized snowboards. The individual type of snowboard and the inventory ordered for each determines the cost of each snowboard. The assumption is the manufacturing cost drives the price of the product. The concern with this type of cost driver is it does not take into consideration all the underlying costs that affect the overall product price (Johnson, 2013). Custom Snowboards must be more accurate in production costs to have increased profits without rising product pricing and remain competitive in the industry. Activity based costing could be something Custom Snowboards wants to implement to help obtain a more accurate picture of production costs. This method allows a company to see the overhead in manufacturing and what each activity actually costs in the production process. It is more accurate and adjustments can be made with specific activities to reduce the amount of money spent.
Custom Snowboards produces regular and personalized snowboards. Activity based costing can compare these manufacturing processes and see where the overhead costs are in each step of the production process for each product. The material and labor CUSTOM SNOWBOARDS
Costs for both traditional and activity based costing is $3,375,143 for the regular snowboard. The personalized snowboard material and labor costs is $1,177,344 utilizing both the traditional and activity base costing methods.
Custom Snowboards has a lump sum overhead charge for manufacturing using the traditional costing method. Regular snowboards sum is $1,068,982, while the personalized snowboards sum is $334,048. Utilizing the traditional costing method the total production cost is $4,444,125 for the regular snowboard and $1,511,392 for the personalized snowboard.
Activity based costing distributes costs among the activities it takes for manufacturing to help determine accurate product pricing. Some activities included in activity based costing consideration are product development, quality control, package assembly and shipping, and miscellaneous items. Regular snowboards have a manufacturing cost of $546,863 utilizing the activity based costing method. Personalized snowboards activity based cost for manufacturing is $856,167. Thus, total cost for production for regular snowboards is $3,922,006 and personalized snowboards is $2,033,511.
The activity based costing method reveals Custom Snowboards has overspent during the manufacturing and production process while utilizing the traditional costing method. The new personalized snowboards have a greater factory setup cost, but should decrease over time as the product is sold. One improvement identified is packaging and shipping of both products. There is a significant difference between the cost with regular snowboard packaging and shipping costing $266,072 and personalized snowboards packaging and shipping cost of $66,516. This is quite a dramatic difference, especially CUSTOM SNOWBOARDS
Since regular snowboards comprise on 20% of sales while the personalized snowboard sells 80% of the sales output. The activity based costing method can help trim costs and overspending while being able to forecast more accurate pricing and sales to ensure a better return on investment.
Custom Snowboards could utilize the just in time costing method that follows the principle materials do not sit in the warehouse, but are “pulled” when the demand is there for the product. This is not an ideal costing method for some businesses, since it leaves no wiggle room when forecasting the future. The just in time method does minimize costs and production time, since these things take place when there is a demand for the product and no excess inventory is left sitting around. This leaves more cash for the company to re-invest and improve costs.
For just in time costing to work requires the company to forecast sales and
evaluate excess inventory and materials. Custom Snowboards had $143,136 in excess inventory in year 14. This will continue to increase by 0.1% annually if no adjustments are made to production. Custom Snowboards has previously had excess inventory and materials left over annually. Utilizing the just in time costing method can help increase income for the company and help save time, costs, and resources during the production demands.
B3. Internal and External Risks
Risks that can be controlled by the company are internal risks. Risks that happen outside of the company and the company cannot control are external risks. External risks often happen without warning and this is why companies must have the forethought to be prepared for many things. Some external risks include environmental issues, currency CUSTOM SNOWBOARDS
Exchange rates, economic factors, and legal issues both domestic and internal. Internal risks may include production staffing, language barriers, and management structure. Management Structure and Staffing
Staffing and management structure would be considered an internal risk since Custom Snowboards will have to make changes in the management structure with expansion into Europe. The company will have business operations in two countries and the goal will generally need to remain the same at both locations. The leaders will need to be both effective and efficient to guide the company to a successful transition. Staffing will play a major role, since multiple positions will have multiple people working in that role in both facilities. The leadership of the company will have to evaluate these positions to maximize efficiency to work towards increased revenue and profits. Loss of Focus
Expansion may often cause a shift of business focus to change and move away from important issue like quality assurance, production efficiency, and production deadlines. Leadership must ensure the company has a strong core to stay focused on the business goals for current and future project successes.
Language and Cultural Barriers
Expansion into Europe is bound to cause language and cultural barriers. A new country and market can cause interactions to be strained if language and cultural barriers cannot be breached. Language is important in business to ensure communication is effective the company must have leaders that know the language in the new country and are sensitive to the cultural differences for a successful expansion. It would be CUSTOM SNOWBOARDS
Deferential to offend potential customers, thus ruining company relations. The business goal is to prosper.
Currency Exchange Rates
The expansion into the European market will require Custom Snowboards to deal with foreign currency. The foreign currency rates change frequently and Custom Snowboards will have to convert this into US Dollars. The company will have to ensure they are not losing money on their products and they are not overspending on production costs. The company cannot control this external risk factor, but they do need to try and prepare for any eventually that may affect the company. The US economy may be strong, but a variety of things can cause this to crash and the same goes for the European economy. Foreign economy can lead to large fluctuations and for great revenue gains, but it also means it can cause big losses as well.
International Legal Risks
International and US legal risks are similar in nature and can cause several problems. Custom Snowboards must understand the tax laws and operations as it expands into the European market. The company must understand the legal standards of the business operations in the market. The company must ensure they have met all the obligations of the law within the countries they will be providing services to and to defray any problems that may arise. Also, by understanding these laws Custom Snowboards can eliminate costly legal fees and fines.
An external risk beyond Custom Snowboards control is an environmental risk. Snowboards require snow and winter. Environmental factors can severely
affect sales of CUSTOM SNOWBOARDS
Snowboards. Dry, warm climates are less likely to need a snowboard. Marketing is important in this aspect and should focus on areas that have winter seasons and snow. European areas vary in climate and marketing should focus on areas that are prime for skiing. Weather patterns may also play a role in environmental risk. El Nino and La Nina can affect the winter season and how much snow and how cold the area actually gets.
Complete Customer Service
Customer service is important with any business. The goal is to help resolve any issues a customer may have to reduce the dissatisfaction. Custom Snowboards will have a large area to cover within the European market and must be cogzignant of a wide variety of languages and customs to be aware of. Customer support should be convenient for all consumers. A positive customer service experience will lead to good reviews and word-of-mouth sales, which boost revenues. Poor customer service travels fast and would hurt Custom Snowboards and reduce sales and revenue.
Custom Snowboards must be able to get products to the European plant to produce the snowboards. Communication skills are key to dealing with business partners to reduce any potential obstacles. Business practices must be clarified to avoid any complications. Product quality must be written contractually to avoid any possible confusion. Individuals with good communication skills must be placed in the positions to help secure these suppliers to keep product quality the best and available for production. CUSTOM SNOWBOARDS
Management Structure and Staffing
A management and staff model must be developed and utilized to mitigate risks. The plan must outline the company’s organizational chart and who reports to whom. The organizational chart will outline each department of the company and the staff that are identified within each department. The company will then develop specific job descriptions for each position to clarify the role and expectations. Custom Snowboards management team will then be able to identify what positions are exactly needed and where cuts can be made. This will help ensure the strongest staff is in place for the expansion to deal with issues as they arise. A plan in place will ensure the company can ensure smooth transitions for future expansions.
Loss of Focus
Loss of focus in current business practices requires a business plan to keep the company trained on the goal. The business plan will actually outline the goals Custom Snowboards has and where they want them to lead to. The company will implement the staffing plan into the business plan to mitigate risk. A taskforce will be formed that will focus solely on the management of the US plant, but will receive updates on the planned European expansion.
Language and Cultural Barriers
Language and cultural issues require training and education to reduce risk. Employees who are educated on languages and cultures are more likely to be comfortable and less likely to offend the customer. Custom Snowboards can hire interrupters’ to help staff until all are comfortable within new positions and skills have been attained. The CUSTOM SNOWBOARDS 25
company should also consider hiring staff from all different cultures to strengthen the moral and company. Custom Snowboards should hold training seminars frequently to reinforce cultural identities served, especially when employees will be traveling to a new area.
Currency Exchange Rates
Currency exchange rates are external risks, but Custom Snowboards are preparing to reduce any damage that affects the company. The exchange rates change frequently. The company will want to compare products with competitors to understanding pricing concerns prior to the expansion. The cost for production should carefully considered reducing all necessary overhead to increase revenue. The European financial market trends must be evaluated and then trend projections can be created. The financial market is not totally predictable so it not able to mitigate risk completely.
International Legal Risks
A legal team that is well versed with international law is key to reduce risk. Also, a management team that is aware of potential pitfalls and risks associated with international is key to have in charge during expansion. The company must comply with all laws and ensure they understand all the laws of the countries that they will be doing business with. The company should educate staff on what laws are pertinent to their respective departments and keep them abreast of changes. Custom Snowboards should ensure they have enough cash available to survive, should issues arise. Environmental Risks
Custom Snowboards has absolutely no control over the environment. They can ensure plants and warehouses are up-to-date and in stable condition to be able to weather CUSTOM SNOWBOARDS
Any type of weather they may encounter. Production needs to take place in multiple areas, so should something happen to one area they can continue production without further losses. Custom Snowboards can review and analyze annual weather reports to help forecast trends and be prepared for the unexpected. An environmental risk can take many forms and is hard to predict and control. The company must have multiple contingency plans in place for this reason.
Customers are essential to a business. The profitability of a business relies greatly on how satisfied a customer is, repeat business and potential new customers because of word of mouth advertising. A toll free call center will allow customers to call in with any questions or concerns regarding the products purchased. Custom Snowboards staff will be able to address these concerns and questions, but only after undergoing an educational training session and establishing a process standard of communication. The company will develop a communication and relationship curriculum to help focus on long-term relationships (Joseph, 2013).
Custom Snowboards must research suppliers available within the area of the European expansion to ensure a reputable supplier is found that is both reliable and has quality products. The business terms and contractual details must be attended to minimize the chance of fraud. The contract must be written in terms that both parties understand to ensure no misunderstandings take place. It would be helpful for Custom Snowboards to employee area natives to help interpret when needed. CUSTOM SNOWBOARDS
B4. Potential Returns
Custom Snowboards is planning to expand into the European market. They will expand their customer base, increase revenue and experience a growth rate. Projected annual sales are expected to increase for year15 to year 19. Year 15 annual sales of $1,271,720 are projected and expected to increase to $2,390,085 at year-end of 19. Also projected to increase is net cash flow especially as this has a direct relationship with the cost of goods sold. The forecast net income peaks at $256,703 in year 19 up from $98,550 in year 15. The European expansion is projected to build a strong financial future for Custom Snowboards.
The Net Present Value and Internal Rate of Return are reviewed when looking at the capital budget of a business. The future value and present value of a company is indicated based on cash flows under the net present value. Custom Snowboards is ready to invest $1,000,000 into an expansion project in Europe. This is based on cash flows over five years and the present total value of the company with a market change factored in or $1,028,437. This means the company will be profitable in the European market and see a return on their initial investment. The internal rate of return looks at the rate the project grows at. Custom Snowboards looks at to return 10.8% over 5 years based on the initial $1,000,000 investment. The minimum rate of return or hurdle rate is set at 10%. This means the company will make a profit in the future on the initial investment. The net present value and internal rate of return are beneficial to companies when predicting future growth on investment. Companies that have a strong net present value and internal rate of return are able to secure loans and expand. This is important for the future CUSTOM SNOWBOARDS 28
successes of companies. Custom Snowboards is predicting returns on their initial investment with the European expansion and increases in revenue. Custom Snowboards must evaluate their fiscal responsibility to determine if leasing or buying is in the best interest of the company. The company will need to put a $50,000 down payment from working capital and $800,000 to either buy or lease a facility. Analysis determines purchasing a facility would be in the best interest of the company. The present value outflow to lease is $653,355 and $597,723 to purchase a building. The tax deductions available would provide a benefit to the company as well. Custom Snowboards should consider obtaining borrowing money for a long-term debt from an outside source. The optimal capital structure that would provide the best return is to fund the project in Europe over five years. This would allow for 1.547 earning per share to accrue even though the debt will require a 6% interest rate on return. This will also help preserve cash flow since a constant repayment is easier to budget and earnings can continue to grow. Custom Snowboards is reliable and creditworthy. This will be easier for them to obtain the long-term debt.
Debt financing can provide a benefit to Custom Snowboards since they would be able to deduct interest on the business taxes at the end of the year (Daniels, 2013). Having an outstanding debt can be a downfall for a company as well. The company is under the obligation to make payments to the lender in a timely manner and if the projected revenue is not as expected this will be detrimental to the company and capital structure.
The budgeting process will help Custom Snowboards decide to expand into the European market. The management team must look at all the capital budgeting CUSTOM SNOWBOARDS 29
techniques to understand the total viability of the project. The decision will not be an easy one, but will require careful review of the entire financial picture. B5. Summary
Custom Snowboards has demonstrated that European expansion is an idea that is viable for the company. The company must now decide if they wish to build, merge, or acquire within the European market. This will not be an easy decision, but meticulously made after analyzing the capital structure and corporate strategies. Custom Snowboards has the option to build a new plant within the European market. They would need to determine where the plant would be located and acquiring the necessary land and permits. The company would be required to start from scratch to get started.
The plant would be built to the company’s specifications and could be economical, but would require a large amount of money for start-up initially. Buying a building is another option available to Custom Snowboards, but ties the company to the area. This would be the smartest move based on the financial data available. It would be cost effective and allow the company to move in after the building is adapted to the needs of the company. However, leasing a facility would give Custom Snowboards the opportunity to leave the area if the forecasted expectations are not attained and things are not as viable as hoped.
Custom Snowboards has the option to merge with SnowFun, Inc. This would provide the expansion into the European market that Custom Snowboards desires. The merger would provide the opportunity to increase profits, earnings per share from $0.98 to $1.18, have less competition, and expect a strong return on investment. SnowFun stockholders will benefit more from the merger than Custom Snowboards in regards to CUSTOM SNOWBOARDS 30
earnings per share, since SnowFun will see earnings per share will go from $0.26 to $1.18. Custom Snowboards would have 200,000 market shares pre-merger and 500,000 after the merger has taken place. Custom Snowboards can buy shares back to reduce the amount available to the public and the stockholders will increase the earnings per share. This would be beneficial to the stockholders, but is not always available immediately after a merger has taken place.
Custom Snowboards would also see increased company worth if a merger took place. They would gain invaluable contacts from SnowFun and gain insight on the European snowboard market that they would not otherwise have. However, a merger would leave the company with excess employees. This can lead to disgruntled employees and low staff moral. Customers may be aware of this and shy away from purchasing products from this newly merged company. Custom Snowboards will need to ensure everyone feels valued and is happy. It would be beneficial to find displaced employees another position, but that is not always possible. This would go along ways to reassure customers as well, as it shows the company is willing to make concessions to keep the customer happy and taken care of.
Finally, Custom Snowboards could acquire SnowFun, Inc. Custom Snowboards would then have to buy out SnowFun and acquire full ownership of the products, materials, and debts they have. SnowFun is requesting $720,000 from Custom Snowboards to acquire full rights to the company. The net present value of SnowFun is $732,522. An increase of $12,522 would be seen for Custom Snowboards over a fiveyear period. This option would increase the earnings per share to $2.40. CUSTOM SNOWBOARDS
As mentioned with the merger option, Custom Snowboards would gain invaluable contacts from SnowFun and gain insight on the European snowboard market that they would not otherwise have. The company would increase earnings per share for stockholders. They would have factory and production equipment readily available to start production right away without delay. They would gain product development knowledge from what SnowFun had previously completed and this could lead to refined processes of current products.
However, a merger would leave the company with excess employees. This can lead to disgruntled employees and low staff moral. Customers may be aware of this and shy away from purchasing products from this newly merged company. Custom Snowboards will need to ensure everyone feels valued and is happy. It would be beneficial to find displaced employees another position, but that is not always possible. This would go along ways to reassure customers as well, as it shows the company is willing to make concessions to keep the customer happy and taken care of. Also, it is hard to integrate two companies and acquire the debt from SnowFun. This could harm the company if they do not budget for this newly acquired debt. Custom Snowboards best option is to decline the offer to acquire SnowFun, but to merge the companies. The costs to start a new company would be limited and there would be a readily accessible building, contacts, product knowledge, market knowledge, and increased earnings per share. Not all employees will be able to retain their job, however the employees that remain will be the most knowledgeable regarding the product to boost sales and revenue. This will help the company attain the success it hopes to achieve.
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The recommendation was made to initiate a merger between Custom Snowboards and SnowFun, Inc. The financial information reviewed shows the companies will produce an increase in capital from net sales and reduce production costs. This will provide the stockholders with a higher return on investment due to growth after the merger has taken place.
Merging will not require Custom Snowboards to acquire a large amount of funding or long-term debt since a stock exchange will take place. The earnings per share for Custom Snowboards will increase $0.92 and SnowFun $0.20. A total of 500,000 shares will be available after the merger. SnowFun will receive 3 shares to every 1 share that Custom Snowboards receives. There are four structures to review: Long term debt, 30% long term debt and 70% common stock, 80% long-term debt and 20% common stock, and no long-term debt (common stock only). Custom Snowboards hopes to obtain $1,000,000 through one of these types of structure. The earnings per share for each year based on earnings before interest and taxes from the European forecasts for year 15 through year 19.
Year 15 Year 16 Year 17 Year 18 Year 18 Year 19
0.034 0.203 0.407 0.589 0.720 1.953
0.068 0.130 0.204 0.270 0.318 0.99
0.052 0.165 0.300 0.422 0.509 1.448
0.072 0.121 0.179 0.231 0.268 0.87
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The long-term debt option would be the second choice for expansion for Custom Snowboards should they not want to merge. The total earnings per share in year 19 would be $1.953 and higher than any other option. The long-term debt would also have consistent payments monthly that would be easier to budget and to forecast sales against. Custom Snowboards is a viable company that is growing and making advances. Areas of improvement do need to be made to continue this progressive growth, but they are in a position to expand into Europe. Thanks to financial responsibility they are in the position to take on debt if necessary to make this expansion happen. A merger with SnowFun, Inc. would provide virility to the company and provide a positive base for continued growth.
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