Reference no: EM132854711

CAPSIM 2 Financial Structure Policy

Instructions: Prepare a written document answering the questions below. Make sure your final document is a Professional Business Document conveying clear, concise, relevant and understandable information.

Assume you are writing for the Board of Director.

How you organize your document will also be important.

Given the performance measures you selected earlier in the course, and your current strategy and vision (which may have evolved considerably since your original vision statement in Round 1),

(1) State your financial structure policy for the remaining rounds.

1.0 Purpose
The financial structure policy for the remaining rounds is designed to:
» Increase revenue
» Increase and protect assets
» Reduce Debt (Current and LTD)
» Increase Market Share
Exceptions to the written financial structural policies may only be made with the prior approval of the Finance Committee or the Board of Directors. Changes or amendments to these policies may be approved by the Board of Directors at any time. A complete review of the policies shall be conducted every year by the Finance Committee or other Board designee.

Roles
Treasurer and Finance Committee
The Board Treasurer chairs the Finance Committee, which is composed of member designated by the Board of Directors. The Finance Committee has whatever authority as may be designated by the Board of Directors, including:
» Performing regular, in-depth reviews of the organization's financial activity
» Overseeing the development of the annual budget
» Determining the allocation of investment deposits
» Choosing the auditor

Chief Executive Officer
The CEO has the responsibility for administering these policies and ensuring compliance with procedures that have been approved by the Board of Directors. The CEO has whatever authority as may be designated by the Board of Directors, including:
» Making spending decisions within the parameters of the approved budget
» Employing and terminating personnel
» Creating and amending operating procedures and controls
» Making decisions regarding the duties and accountabilities of personnel and the delegation of decision-making authority

By this point in the simulation you have probably achieved your most important strategic goals. Chances are good that you are beginning to spin off significant cash. NOT HAPPENING-WE ARE GOING TO BARELY BREAK EVEN
(2) How will you apply this towards your capital structure?

At this point in our organizational strategic goals, we are not spinning off significant cash. Due to this shortcoming, we can not give any back to shareholder or afford to poorly invest without doing sound research. In some instances, executive management may have extremely hard decisions to make regarding to lay-offs, sale of product lines, salary cuts (executive management), or even a potential acquisition/merger. Seeing that we are remarkably close to getting out of the negative and being able to turn a profit, it is critical that we avoid all of the above for obvious reasons.

Performance Measures

"Financial Structure" is simply the Liabilities and Owner's Equity side of the Balance Sheet expressed in percentages.

Given your performance measures:

(1) what should your financial structure be? (2) Why?

The financial structure should be to reduce debt and to possibly reduce segments to increase assets and profits. The possible focus in one niche market may help our organization dig us out of the hole and into the positive cash flow.Increasing inventory sales is also important within this financial structure. In order to sell out of inventory, our strategy will need to be:
» Maintaining price
» Adding automation
» Increasing promotion and sales budget
» Harvesting an old product
» Abandoning a segment to concentrate on a niche position

Accounts Payable is debt. You are leveraging your vendor's money. However, at 30 days they withhold deliveries and production falls by 1%. Your production costs go up as workers stand idle during parts shortages. At a 60 day policy production falls by 8%. At a zero day policy there are no shortages.
(3) Given your measures, what should your Accounts Payable policy be?
» Leverage Accounts Payable
o According to the analysis, production needs to be cut as appropriate. Pushing accounts payable to a 60-day policy will slow production to 8% but will also give our company time to move unsold inventory. Our policy should be shifted from 30 to 60 days.

(3) Given your measures, what should be your policy towards Current Debt?
» Current Debt
o Current debt is very pricy and should not be used unless it is an emergency. Per our policy, the CEO will approve this if no other option is available.

4) Long Term Debt is used to fund Plant and Equipment. However, you could use equity (Common Stock plus Retained Earnings). If you eliminate Long Term Debt, its interest payment will disappear, and earnings will go up. However, the profits used to pay off the debt essentially went into the bondholder's pocket. You could pay dividends to shareholders instead.

(5) Given your measures, what should be your policy towards long-term debt?
» Long-Term Debt
o Due to the financial situation, LTD will need to be taken, it is the goal to minimize taking the max allowed to allow for reduced interest payments and debt burden.

During these last few rounds the market continues to grow. Chances are you will make significant investments in new plant and equipment.
(6) Will you fund these with Long Term Debt, Stock Issues, or Retained Earnings?

Investing in Market Growth
o If the market continues to grow, investments can only be funded by long-term debt 100%. Whenever we are out of the negative, stock issues and retained earnings will be used at a combination of 70% to LTD's 30%.

Attachment:- Financial Structure Policy.rar