Guillermo Furniture Store : Financial Concepts

Introduction

This case study focuses on Guillermo Navallez furniture store located in Sonora Mexico. Since the 1980's Mr. Navallez has made custom furniture and enjoys an extensive distributorship in the Sonoran region. Everything was going smoothly until a new competitor from Europe stated making mass volume of customized furniture with high tech robots. Aside from that, the cost of labor in Sonora has increased significantly because of relatively good living conditions in Sonora. Now Guillermo is at a crossroad. He either gets to go head to head with the European competition by adopting a new strategy from a manufacturer's standpoint. Or he can adopt a distribution strategy by leveraging his current distribution network. In the next paragraphs, the author will guide and advise Guillermo on which decision to take by relating each finance concepts to his situation. Guillermo Furniture Store scenario provides a classical study on how one can apply financial principles in a highly competitive economic environment.

Diversification or 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 obvious choices to follow 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). For one, he can stick with manufacturing customized furniture as he is doing now. Basically it would be considered a status quo where sales will be dwindling and he would have to close shop at the end of the day. Second choice is to replace the old archaic production system with a state of the art production line consisting of ultra modern robots doing all the work on a new production line. This would eliminate a lot of the workforce as well and by adding a special painting room for the formulated anti flame retardant paint. Lastly, he can consider a third alternative is to become just a distribution company by important the European's competitor's good and take highly customized and handcrafted job with just a team of a few people. For each case, Guillermo Navallez needs to consider his opportunity costs for choosing each alternative. Let's say he choose the fully automated version, he would save on labor but he would have to spend a lot more on capital expense to have a quicker ROI at the end of day due to 4 times the production capacity.

Analysis of Financial Statements

Prior to making such important decision, Guillermo needs to seat down with his CFO and take a hard look at his financial statements. Another concept Guillermo will be interested is the analysis of financial statements. According to Emery, Finnerty & Stowe (2006), financial transactions