Guillermo Finance A Practical Application of Basic Concepts in Finance: The Guillermo Furniture Case Study

In any situation that a business might face, there are many different perspectives that can be brought to bear on the issue in order to help develop an effective and well-reasoned decisions. Analysis of internal strengths and weaknesses as well as external opportunities and threats -- a standard SWOT analysis -- is one largely qualitative way of developing an understanding of a business's current position and its potentials for success in any number of alternative choices. Other methods include industry analyses such as Porter's Five Forces, focusing on the overall changes occurring in the market and the industry rather than specifically scrutinizing the organization at hand, and direct and actionable examinations of strategy based on competitors current reactions to changing situations.

At times, however, an examination of financial data is the most effective way to develop a successful and responsible decision following major changes to internal capabilities and/or external environments. Financial considerations are always important, of course, but they are not always the central feature of analysis when selecting a response to changes in industry and company potential. An understanding of some basic concepts in finance are a necessary for any business owner, and for a more complete financial analysis -- which is definitely necessary in a time of extreme change for a business -- a more solid grounding in these concepts is needed. Such is the case with Guillermo Furniture.

Though Guillermo's furniture factory has been successful for many years, automation by a foreign competitor and the rising cost of labor in his (and his factory's) native region of Sonora, Mexico has begun to seriously threaten his ability to continue competing. Several different options have been identified for the future of Guillermo's Furniture, and while it is unclear precisely which way forward is best for this company it is quite clear that the company cannot continue operating as it does now. One option is for Guillermo to invest significant amounts of capital...

He could also transition the business into one that focuses on distribution, as another foreign manufacturer is looking for a North American distributor and Guillermo already has a distribution network in place.
Financial Issues

Certain financial issues can be seen on the surface of this issue, even before examining Guillermo's specific financial figures. For instance, the cost of labor that is referenced in the case description is an example of overhead -- the costs that are inescapable parts of running a business (Besley & Brigham 2007). At the same time, labor costs as the factory operates now are not fixed, but rather are variable -- the more that is produced, the more expensive labor becomes, and the less produced the less has to be spent on labor (Besley & Brigham 2007). Costs of automated manufacturing would be far more fixed, however,

An examination of fixed vs. variable costs is certainly important for Guillermo Furniture as its owner ponders what direction to take the company in its future, as this will affect the marginal costs of increasing production -- the cost that is incurred for producing each individual unit (Helfert 2001). This can be compared to the marginal revenue, which is defined as the increased revenue the company would generate with each individual unit (Helfert 2001). With more fixed costs, marginal costs would be much lower and marginal revenues much higher at higher levels of production. This in turn relates to other key financial concepts such as revenue -- the cash that the company can count oncoming in based on sales -- and profits, which is the actual amount of money the factory makes after taking care of expenses (Banks 2010). Guillermo is not having problems with his revenue stream right now -- his furniture is still selling -- but his profits are so low that his business is being threatened.

An examination of Guillermo Furniture's actual financial data can of course reveal more basic concepts in…