This case study is about Guillermo’s furniture store which is manufacturing its furniture near Sonora, Mexico. Things were going perfect until a competitor from oversees entered the furniture market and start using high tech approach which putted great stress on Guillermo and aroused great financial challenges for them. Guillermo Furniture Store case study gives a very practical way to study and then apply the financial principles in highly competitive economic environment.
By using the different financial concepts, Guillermo will be able to make the right decisions, and move his store in the right direction. Opportunity Cost The first financial principal that Guillermo will be interested is opportunity cost. An opportunity cost is the cost of forgoing the next best alternative. Guillermo has three choices to follow to for his company. When choosing the best alternative Guillermo will also have to take into account the opportunity cost of each alternative. (Emery, Finnerty & Stowe, 2006) Analysis of Financial Statements Another concept Guillermo will be interested is the analysis of financial statements.
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In the making of business decisions, analysis of financial transactions are very important so as to choose the best alternative and its impact on market with respect to its competitors. By analyzing the financial statements of his store, Guillermo will be able to calculate ratios which will help him in better decisions. For example, by calculating the liquidity ratios, he’ll be able to better judge his liquidity position in the future. Financial transactions build the basis of foundation for making a business strategy and getting an insight in order to encounter the financial challenges as faced by Guillermo furniture store.
(Emery, Finnerty & Stowe, 2006) Adverse selection The third concept Guillermo should know about is of adverse selection. The concept of adverse selection is that if the competitors are offering cheaper furniture, then this implies that their furniture is of a lower quality than Guillermo. Consumers that value quality will come to Guillermo. (Emery, Finnerty & Stowe, 2006) Time Value of Money Guillermo might need to borrow some capital to expand, and compete with the competitors. Therefore, he should also be aware of the concept of time value of money.
By taking into account the time value of money, he’ll be able to calculate the future value of an investment, and will be able to make a decision as to whether the initial expense was worth it. (Emery, Finnerty & Stowe, 2006) Cash Flow By understanding the cash flow of his store, Guillermo will be able to make a better financial decision. He’ll know the sources of his cash, and where is it being spent. Cash is the lifeblood of any store or company. The importance of cash flows is that it will show whether the stores will be able to run itself, without the help external financing. (Emery, Finnerty & Stowe, 2006)
Risk Return Trade Off This principle states that to achieve great returns, you need to go for high risks. If Guillermo join hands with the competitor, he is taking a risk. If the competitor is unable to fulfill his commitment, then Guillermo will be risking his reputation. (Emery, Finnerty & Stowe, 2006) Conclusion In conclusion, all these financial concepts and principles will help Guillermo to make better decisions. He’ll be able to analyze his situation in a better way, and hence, would be able to compete with the new foreign rivals. References Emery, D. R. , Finnerty, J. D. , & Stowe, J. D. (2006). Corporate Financial Manage
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