Role Play Scenario
The proposals of finance manager, in result of the poor financial ratios are debatable. There are many advantages and disadvantages of implementing all three suggestions. The first suggestion of reducing the holding stock by fifteen percent to twenty percent can reduce the holding and manufacturing costs. However, it will affect the trust of shareholders of the company. Shareholders may assume that the business is losing the market share, or the business is not capable of finding new markets for more profits. Therefore, in these circumstances the business may face a failure of the right issue. Moreover, in the competitive environment, the staff redundancy of staff from manufacturing department may cause problems in the future. The current staff is well trained and efficient. It is highly probable that the competitor will hire these skilled employees. The saving of funds by reducing the activity level and staff to manage the working capital situation is not a long term solution. (Corality.com, 2014)
The second suggestion from the finance director is to improve the debtor days to pay the loans or creditors. In any business, reduction in debtor days or receivable days is a positive sign for the business. However, the tactics of the finance director can damage the client and the supplier relationship. The idea of chasing the debtors by telephone and meeting them personally can create damage the long term business relations. Therefore, in these circumstances when there is a competitive market, the strategy of finance director must be to collect cash without disturbing the business relations. Finance director must offer early settlement discounts to attract debtors to pay early. This tactic will increase the cash inflow and the sales of products. Reduction of creditor days will also help in maintaining good relations with the suppliers. (Icas.org.uk, 2014)
Granny’s kitchen and Amy’s soups are the expensive products of the business and are sold in the supermarkets. The suggestion made by the finance director is to launch a massive advertisement campaign to capture the maximum market share. The market share of these two products is getting more competitive. Therefore, in these circumstances, it is important to place these products in the prime locations of the supermarkets, with reasonable advertisement, to increase the sales of the products.
Corality.com. 2014. Corality Financial Group. [online] Available at:
http://www.corality.com/tutorials/working-capital-trade-debtors-and-trade-creditors [Accessed: 10 Feb 2014].
Icas.org.uk. 2014. Non Executive Directors Their role and responsibilities in a private company.
[online] Available at: http://icas.org.uk/home/technical-and-research/technical-information-and-guidance/business-issues/non-executive-directors--their-role-and-responsibilities-in-a-private-company/ [Accessed: 10 Feb 2014].