Business Simulation Diary and Finance Department - Assignment Example

Quarter One Entry The main financial concern for Spam Computers in the first quarter is the source of funds to mobilize the marketing strategy the team has chosen as well as the funds that will be used to purchase the market research. Moving on blindly is not an option for Spam Computers if it wants to succeed and there is a lot of concern on mobilizing people and marketing campaigns that money issue becomes important. At this stage, the organization has two options to choose from when it comes to financing its activity – debt financing or equity financing. With debt financing, Spam Computers will have to approach banks and other financial institutions that would lend their money to the company to be paid with high interest rates for a specific period of time. With equity financing, Spam Computers can have the funds it needs but will lose ownership and control of the company. I am looking at $500, 000 - $1, 000, 000 capital funds needed to mobilize the plan and meet the goals set by the marketing and advertising departments. Everyone in the team thinks that Spam Computer is too weak (financially) to acquire debts. At the same time, the PC Division does not have enough strength to work independently from Spam Computer and proceed with an IPO to gather funds from stockholders. Majority of the members of the team thinks that it is unwise to lose control of the decision process of this stage of development of the PC division. I am looking at the following strategies (as well as the justifications of these strategies) for the next three months in order to help the organization achieve its goals and objectives. (a) Choose debt financing to fund financial needs. Spam Computers would need to retain decision making process within its management team as the success of the project lies on the key personnel responsible for various tasks ahead. Business organizations such as Spam Computers would prefer to borrow money from lenders in exchange for the freedom from outside interference when it comes to making huge business decisions (Richards, 2008). As it is, Spam Computers has a high probability to succeed if it retains ownership of the company and can make decision on its own without having external factors interfering in its decision making processes. Since the PC Division wants to enter a new market, the debt financing it needs to finance its activities does not necessarily mean it has to borrow from external sources. (b) Appropriate the budget to the various departments that would need it and require budget plans for approval from these departments before approval is given. Budgeting is crucial in working with scarce funds. By requiring the Brand Management, Advertising, and Sales Management teams to submit their proposed budget for the whole duration of the project, the whole team can anticipate financial issues that may rise in the future. (c) Struggle with the disadvantages associated with debt financing. Of course there are prices to pay for choosing debt financing over equity financing. Some of the notable disadvantages of using debt financing include the forced repayment of the debt, high interest rates, cash and collaterals, and impacts on the credit rating. Credit institutions usually require proofs of ability to pay for the loaned amount (or collateral) in the form of cash or properties. Debt financing holds back most of the company’s plan to invest in the future as it forces the company to earn sufficient money to pay for the periodic debt payments and operate top speed at the same time. In order to avoid possible issues in the future, the strategy must deliberately include these disadvantages to optimize resources and income-generating activities and minimize activities requiring expenses. Richards, Daniel. 2008. Debt Financing. Accessed from http://entrepreneurs.about.com/od/financing/a/debtfinancing_2.htm Quarter Two Entry The decision to opt for debt financing to finance the activities of the project is not successful. The team was able to acquire steady streaming funds from the Corporate Headquarters and that in itself is good news. So far, the decision made during the last quarter is on the right track since the whole organization never wanted to let go of the decision-making ability of the PC Division. However, the decision made in the first quarter reflects a pessimistic point of view when it comes to looking for sources of funds. It implies that more I need to think more objectively than let myself be overwhelmed with the Herculean task before me. Quarter 2 has started and I only have $774, 900 to work around with. The expense incurred in setting up the sales office is a justified expense since the PC Division needs to have a strong market presence in order to attain its target market share and product differentiation. Below are the financial targets for the second quarter as well as the appropriation of the available funds for the PC Division marketing campaigns. Allocation of Funds (a) The funds that will be used for research and development must not be less than 20% of the current funds but no more than 30% of it. A bias must be given on the research for branding as branding involves the careful manipulation of every element of the marketing mix and is subject to economic changes (Rice, 2004). The more the R&D endeavors develop products that resemble what the target market wants, the more likely it is for the company to recover from the expenses it has incurred in the development of the product. In other words, R&D could not be constrained financially else the whole project will not see its good ends especially if wrong product means no sales. While it is important to allot significant amount for the research and development for brand features, Quarter 2 will begin to focus on capturing the attention of the market and any efforts in capturing the market would require appropriate budget. This is the reason why (b) at least 35% of the available funds will be allocated in preparation for the activities that the sales force will undertake and the (c) remaining 35% will be divided between the marketing team and the advertising team. Should there be any excess amount from the allocated budget, this amount will automatically be included in the allotment for marketing and advertising. Financial Projection At this stage, cash inflow is yet unexpected as the major part of the product marketing and advertising campaigns would rely on the result of the brand research and development before full blown marketing and advertising campaigns is initiated. This means that profit-generating activities are limited as of the moment and the team will expect to incur more expenses for this quarter up to the first phase of the following quarter. Rice, J. 2004, Brand Jargon: More on Positioning. What’s Your Brand’s Mantra, Accessed from http://brand.blogs.com/mantra/2004/03/more_on_positio.html. Quarter Three Entry The outcome expenses for the third quarter were unexpected during the second quarter planning and projections, particularly because I fail to allot a percentage of the remaining funds for operating expense - so it can be said that the strategies I came up with for the third quarter are unsuccessful. I noticed that I focused (again) on the future financial concerns of the team and failed to allocate enough budget for operations. While the oversight is difficult to ignore, the financial projection of the worst-possible outcomes for the second quarter brings a good understanding of contingencies. In the same manner, the financial projection that expenses will significantly increase in the previous quarter is correct. Projected Financial Performance for Q3 Massive expense is expected for this quarter since production will start and marketing, sales, and advertising campaigns will start as well. This is also an exciting stage of the project as the financial activity picks up speed. For a sales projection of 250-500 units, the minimum expected cost of goods sold (based on the volume of production), the total revenue, and the total profits appear below. Red Pepper The Spamelot # units 250 250 cost of goods sold $ (2,003) $ (2,558) total cost of goods sold for Q3 volume cost -500,750 -639,500 $ (1,140,250) aevrage selling price 2,449 3,449 Total Gross Margin for Q3 Gross profit 612,250 862,250 1,474,500 net profit $ 111,500 $ 222,750 $ 334,250 These figures are very promising for Spam Computers. If we are to incorporate the -$658,555 cumulative net profit for the past three months, the figure would indicate that the project is indeed very promising. This is because even with the minimum projected number of units sold, the division shows significant profitability in this quarter alone as the expected profits yield positive figures. Looking at the upper limit expected profit (i.e., 500 units sold), I could easily get $668, 500 as profits which is $9,945 more than the projected cumulative profit for Q3 indicating that the track the project has taken is on the right path. Red Pepper The Spamelot # units 500 500 cost of goods sold $ (2,003) $ (2,558) total cost of goods sold for Q3 volume cost -1,001,500 -1,279,000 $ (2,280,500) aevrage selling price 2,449 3,449 Total Gross Margin for Q3 Gross profit 1,224,500 1,724,500 2,949,000 net profit $ 223,000 $ 445,500 $ 668,500 Financial Projections for Q4 The positive values obtained for the projections on Q3 is due to the fact that the product is not yet in full production and is still on its test stage. Bigger and more complex expenses are yet to be expected for Q4 as the marketing and advertising campaigns moves to the bigger market scale, introducing a lot of uncontrollable factors that may interfere with the profitability of the products. Thus, the financial strategy for Q4 will rest mostly on aggressive funding on marketing, advertising, and production activities with minimal budget for operations costs. Quarter Four Entry As expected, the positive result projected in Q3 totally changed when the product is entered in the market in Q4. The financial performance of the division is very bad and the products it offers to the market is threatened to be removed from the market because of its failure to meet the expected market share and returns on investment. The cumulative loss that the project has incurred in the last four quarters is threatening to overtake the amount of investment being poured by Corporate Headquarters. While the financial figures are depressing, there are a lot of ways to turn around the financial performance of the division. Financial Performance in Q4 The overhead expense as well as the fixed and variable expenses flow in the cash flow statement and are growing continuously. As can be noted in the cash inflow, the profit that the products generate for the company is insignificant compared to the cost of producing, marketing, and selling the product. This is a serious matter for finance. If this financial performance goes on, there is a potential threat to the stability of the division and Spam Computers will have a great chance to pull out its products from the market without reaching break-even. In other words, the team needs to find alternative ways to deal with the issues associated with product branding, marketing, and sales. Strategies for Q5 The options available for Spam Computers to improve significantly in Q5 fall down in the following categories: (a) Control variable cost. While it is generally true that the increase in variable cost would significantly affect the company, it is not always true that this increase in the variable cost can negatively affect the companies. The increase can be maneuvered to be advantageous for the company in a manner that the company could be more than willing to take the additional cost of operation or production because it could give better returns for the company. For example, instead of focusing on the sales and wages increase, the PC division can use the increase in the variable cost in its promotions and advertising in a manner that it can gain more exposure to the market and market reception can be assured to increase by intensifying its promotions, sales, and marketing strategies. (b) Consider outsourcing production, marketing, and sales processes. Outsourcing has become a household name for business organizations as this fresher look at business processes offers a lot of avenue for companies to save their time, money, and effort as they allocate huge volume of their normal task to a third party and expect to yield the same quality of results. In addition to that, business outsourcing allows the company to focus more on its strategic planning, implementation, and management because the risks of the outsourced function are shared between two companies (Faulhaber, 2005). Another thing is that variable cost incurred by the division can be turned into fixed cost as can be agreed with any business process outsourcing (BPO) company. Faulhaber, Thomas. Outsourcing (Parts 1 to 3). The Business Forum Online. 2005. Accessed from http://www.businessforum.com/outsourcing1.html   Quarter Five Entry Somehow, the company did well in the last quarter as it garnered the second place based on the cumulative scorecard. However, the financial performance of the company is not doing well as it ranked as the second to the lowest among the group. On top of that, the PC division is forced to remove one model from the market and introduced two new models in order to catch up with the competition. At this stage, any financial decision becomes closely related to production, marketing and advertisements, and sales processes as these teams’ performances would reflect the financial performance of the organization. Financial Performance in Q5 It would be very difficult to say that Spam Computers did well in Q5 when its cumulative loss is growing steadily. Even if Spam Computers get high cumulative rank compared to majority of its competitors, the need for the company to be profitable remains the single, most accurate measure of team success. As can be seen in the profitability of the project division, the cumulative loss of the whole project is at $4 million already and careful but quick decisions must be made at this quarter in order to increase sales (and thus profitability) to cover for the losses. Strategies for Q6 (a) Focus financial support on sales and marketing efforts. Of the two investment choices for this quarter, more emphasis should be given to media exposure of the product to new markets and to the target audiences of the American market. In other words, all the financial resources will be used to back up efforts to increase sales of existing products and second only for the development of new and improved products that needs to get into the market. Spam Computers has not made any decent profits in the last five quarters and it needs to grab the opportunity of exposing its products to new markets rather than focus of prepping the product with features that other brands can do better. (b) Sacrifice profit by introducing value to the product. This approach is much related to marketing and promotional campaign. In order to capture a bigger market share, Spam Computers need to add value to its products in the form of rebates, promotional discounts, etc, in order to entice the market to try the products they offer. This may mean a significant slash in per unit profitability but the division can expect to increase the volume of its sales. This may be a long-shot effort to increase market share and profit margin and it may push the company to even deeper losses but this marketing effort is worth a try. (c) Consider outsourcing processes to turn variable cost into reduced fixed cost. This is alternative still stands for the company in an attempt to increase profitability especially that growth in sales will not be expected for this quarter. Quarter Six Entry The team strategy was still unable to come up with a better solution than it did on the first five quarters. The remaining money is below the contingency fund requirement of $2,000,000 and the revenue generated from sales still does nothing significant to the financial performance of the division as a whole. This is a very worrisome scenario for the whole team as the financial performance could not keep up with the expectation of the Corporate Head. Financial performance of Q6 Overall, the financial performance of the PC division is far from good but is comparably better compared to its competition. The team has decided to push through with its product R&D to prepare itself to the projected hype in the last few quarters. The funds are distributed between new product research and development and marketing/advertising/sales campaigns in order to prepare for the expected market turnover in the last two quarters. New features are researched and integrated into the product and the number of sales support is increased in the three regions that the team has focused on expanding. These efforts have been made possible at the expense of losing the long-term stability of the division which will falter anytime should it fail to increase its sales in the three areas it has determined. Strategies for Q7 The best financial strategy for Q7 is to emphasize more on the marketing, advertisements, and sales efforts to gain a bigger chunk of the American, European, and Chinese markets. The more intense the effort is, the greater the chance that the brand will be able to penetrate the consciousness of the market. As Chernatony (1984) puts it, “trust must be achieved through credibility, [through] catchy advertising campaigns”. (a) Highlight brand image. This is the perception that consumers have of a brand.  The brand owner through marketing campaigns or product positioning usually carefully develops brand image.  Occasionally, the image of a brand may develop impulsively through customer responses to a product or service.  The image of a brand can be seriously tarnished through inappropriate advertising or association with somebody or something that has fallen from public favor.   (b) Enhance brand value. Companies and their brands are always linked to each other.  Along with this, the core values, the mission, and the vision of the company must be practiced so that it would reflect on the minds of the consumers.  Because of this, consumers will somehow remember the brand and the satisfaction that they experienced from using it. (c) Spend for brand positioning. One of the main differences between a corporate and its brand is that the company is run by people, where as a brand is a perception created in the consumers’ mind.  Creating an identity and a brand that is authentic, consistent and speaks powerfully to your market in everything you do, is the central challenge for the brand. Thus said, it is worth to spend for brand positioning for the next quarter in order to increase the market reception of the product the brand will offer (think of Apple). (d) Spend more for positive brand perception. The first step in doing this is to recognise one specific attribute of the product or brand that sets it apart from competitors.  ‘other products may have chosen to use a certain tag-line but this does not mean that your product cannot use it anymore’ according to Rakin, Jacobs and Verlegh (2006). Intel has been successful in gaining a positive brand perception from the market with its Intel Inside tag line. Chernatony, L.D. 1989, Marketer’s And Consumer’s Concurring Perceptions Of Market Structure, European Journal Of Marketing, Vol. 23, No. 1, p. 189-202. Rekom, J., Jacobs, G., & Verlegh, P. (2006). Measuring and managing the essence of a brand personality, Marketing Letters, Volume 17, Number 3, p. 181-192. Read More