Capstone Research Project
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Introduction: Durango Manufacturing Company is a medium-scale start-up manufacturing organization. The chief executive office of the company has a manufacturing background and has a great deal of experience in the supply chain industry as well. The following assessment is a business plan which includes a five year strategy for increasing the overall revenues of the company by 10%. The plan also includes recommendations related to creation of a significant organizational structure to ensure firm corporate governance of the internal controls of the Durango. The provided recommendations are duly approved by the Board of Directors of the company before the initiation of its operations.
Question 1: As the consultant, create an argument that you will present to the CEO that suggests accounting and financial management knowledge and skills will be essential to the company's success and stability over the next five (5) years.
Answer: Accounting and financial management knowledge and skills: Financial knowledge and management are considered to be the one of the most important aspects of business. Every business, right from being a start-up to an existing one, needs a great amount of knowledge in order to be successful in the long run. The process of strategic organization, planning, direction and control of the financial transactions, activities and undertakings in a business or an organization is known as financial management (Brigham & Daves, 2012). This also includes the application of the principles of management to the fiscal assets of a company, meanwhile playing a vital role in the financial management at the same time. The primary objectives of financial management are maintenance of adequate funds' supply for the company, efficient and optimum utilization of finance, ensuring that the company's shareholders are able to earn significant return and finally, creating safe opportunities for investment.
For a company like the Durango Manufacturing Company, there are various accounting and financial management skills and knowledge which will be essential to the company's success and stability over the next five years. The company would need to possess basic technical skills of accounting. Such technical knowledge and skills include knowledge regarding how to record and classify transactions and determining how the financial statement of the company would be affected by accounting transactions and entries. The company's ability of conducting research related to accounting and finding solution to the related problems is of greater importance than just general accounting knowledge. The standards of accounting change frequently hence the organization would need to cope up with such changes however staying reliable on the accountant all the time might not be effective for the company. It would rather need to stay aware regarding the impact of the changes discussed above, which subsequently would help Durango in being less reliable on its accountants.
Furthermore, the company would need to pay primary attention to minute details, communicate financial information effectively and work upon evaluating the same as well. Accounting and financial transactions are usually complex in nature. The company would need to pay attention to the tiny differences within the accountancy details and identify how a transaction's classification is changed by these details. It is important for a business to have the ability of arguing from analogy. In several situations, the generally accepted principles of accounting do not have the specific guidance section which is related to the issue of accounting (Hail, Leuz & Wysocki, 2010). In such situations, company like Durango should be able to make a judgement weather attacks position is appropriate or an accounting treatment is significant. In such a situation, if the business has the ability of thinking of various ways of dealing with such situations, it would be able to determine and identify if proper decisions can be made and whether these decisions would be reasonable enough.
Accountancy and financial management is usually widely considered as a subject appropriate for only those who are good at numbers. However, in contrast to this, the communication of accounting data verbally as well as in written is as important as recording of the transactions of accounting. Skills in communication and writing financial data are important for such businesses for various reasons and purposes. Naturally, the owners of the business would be expected of being able to explain how the organisation's economic reality is reflected by its financial statements and reports. Such expectations are held by external users of the financial reports like creditors, potential investors and Bank lenders. Furthermore, Durango manufacturing company might opt for using financial information while training and coaching its employees, especially the company management and sales staff.
In order to ensure growth of the company in the next five years, Durango would need to take advantage of the managerial accounting benefits in the best possible manner. As such, the company would be able to understand the process for evaluation of information that would be required for decision making within the business. If financial data and information or not properly analysed and assessed by the company significantly, the decisions that are taken by the company might not be in its best interest. In addition to the above, the company should posses various accounting knowledge related to calculation of the required capital, capital structure formation, proper investment of the capital, profit allocation, money management, financial control, etc. Durango manufacturing company would also need to posses other financial management skills such as accounting skills, analytical thought, verbal and written communication, technological expertise, etc. Additionally, various different budgets should be developed on a regular basis for the company each year so that its actual expenditure can be compared with that of the budgeted ones.
Question 2: Suggest to the CEO how the company's stakeholders (investors, lenders, and employees) will use financial statement information and ratio calculations to make key determinations related to the financial condition and operational efficiency of the company.
Answer: Usage of financial information and ratios by stakeholders
The various stakeholders of the company such as customer, investors, customers, lenders, government, etc. can use the financial ratios, information and related information for making important determinations related to the operational efficiency as well as the financial position of the Durango in various ways.
The stakeholders of companies require financial statements and related information in order to help themselves in making decisions related to their investments or stock shares (da Silva Monteiro & Aibar-Guzmán, 2010). These decisions are related to holding, selling buying more shares of the particular organisation. The owners and investors of Durango would require information related to the financial statements as well as ratios of the company for making such decisions. The prospective investors of the company would require information for assessing the potential of the company of achieving profitability and success in the long run. Similarly, the owners of the company and other organisations would require financial information for determining if the organisation and its business profitable enough and whether investing in the same is feasible. The management of the company which includes managers as well as owners face economic decisions on a regular basis. These decisions are related to purchases, cash transactions, profits, target achievement, etc. First search decisions analysis of the accounting information and financial statements is necessary. Lenders of money and funds like private and government banks as well as other Financial Institutions have interest in the ability of the organisation of paying back its liabilities up on maturity or solvency. Just like the lenders and banks, the suppliers or trade creditors are also interested in the ability of the organisation of paying that its obligations as and when they become due. They also have an interest in the liquidity of the company which refers to the ability of an organisation of paying back its short term liabilities.
The government bodies of the specific state within which the organisation is operating, especially the authorities related to taxation, are interested in the financial information of the organisation related to regulatory and taxation purposes (da Silva Monteiro & Aibar-Guzmán, 2010). The taxation amounts are calculated on the basis of results of the operations of the business. Generally, the government is interested in knowing the amount that is made by the organisation for determining the amount of tax it is liable to pay thereof. The employees of Durango have a common interest in the stability and profitability of the company. They are interested in the company's ability of being salaries and providing the employees with necessary benefits. Some employees also have an interest in the financial performance and position of the company for assessing the opportunities for career development and possibilities of expansion. Durango manufacturing company has long term contracts and involvement with its customers. As such, the company's customers are interested in its ability of continuing its existence and maintaining a significant level of stability and its operations. Finally, the general public or anybody external to the company such as students, researchers and analysts have a common interest in the financial statements of the organisations for various reasons and purposes.
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Question 3: Determine which capital budgeting ratio is appropriate for Durango to evaluate its proposals for capital expenditures, such as NPV, IRR, etc. Defend your position.
Answer: Capital budgeting ratio: Durango manufacturing company can use various strategies for increasing its sales and revenue in the long run. The first strategy is increasing marketing. Boosting marketing is a very obvious way of increasing sales and revenues of a company. Since quantity does not necessarily refers to quality, careful monitoring, test marketing and planning the results of the company can help in maximizing its sales. Market please research can be conducted by the organisation for learning an assessing the messages which communicate with its target audience.
The next strategy which can be used by Durango is reviewing its existing pricing strategies. If the service or product provided by the company is sensitive to its price, primary attention should be paid to its existing pricing strategies. The company should promptly try to find out the prices charged by its competitors and accordingly lower or raise its prices on the basis of its long-term objectives. Lowering the prices of products and services can help in increasing revenues for making up lesser margins. Increasing the prices can help in creating a greater perceived value in the customers' minds an increase the margins of the company. Increasing the prices of the products and services can help in increasing the revenue of the company without needing to increase its sales.
Another strategy of increasing revenue is expanding the channels of distribution of the company. The revenues and sales of the company can be boosted significantly by changing where the products are sold. Durango should perform a proper study of the impacts of using wholesalers, distributors, online selling, retailers, etc. The other potential strategies for increasing the revenues in sales of the company which can be used or diversifying the offerings of the organisation are developing cross promotions and relationships.
The procedure which involves a company in determining and assessing whether decisions such as buying a new machinery or investment into a long term venture is worthy, is known as capital budgeting (Daunfeldt & Hartwig, 2014). Often, capital budgeting is also known as investment appraisal. The most popular methods which are used for capital budgeting are discounted cash flow (DCF), Internal rate of return (IRR), payback period and Net present value (NPV) (Hasan, 2013). The capital budgeting ratio which is the most appropriate for Durango for evaluating its capital expenditure proposals is discounted cash flow (DCF). DCF is directly in relation with the NPV and IRR. In fact, the net present value and the internal rate of return are types of DCF analysis themselves. Both the capital expenditure proposals require estimated future payments to be taken and being discounted into the present value.
Question 4: In order for the company to improve its operational efficiency, recommend which production departments should use process, job order, and activity-based costing-all three (3) of which must be implemented within Durango. Defend your choice for each department.
Answer: Production departments: The production department that would be involved in the mass production of same kind of or homogenous products would use the process costing. Here, the cost related to the individual output units would not be differentiated from each other. The cost of every product produced by this department would be ascertained to be exactly the same as that of other products. Processing cost would be used in this department because its costs get accumulated over a time span which is fixed, and they are allocated to all the produced units after being summarized (DRURY, 2013).
The production department of Durango which would be indulged in the production of customized services and products would be using the job-order costing system. Such customized orders are better known as batches or jobs. For instance, the men's department of a clothes manufacturing company might receive order for manufacturing men's shirts of specific colour, design or size. When such a department accepts jobs or orders for different services or products, the task of assigning cost to each of the product is not easy. In these types of situations, the record of cost of every individual order is maintained because every order has a distinct product and hence has a distinct cost related to it.
Finally, the production department of Durango which is involved into production of such products which do not incur or cause costs, however require certain activities which in turn are the reasons behind all the incurred costs, would be using the activity-based costing system. Such production departments have a more complex flow of manufacturing process, is why it would be using the activity-based costing (DRURY, 2013). The existence of non-value-add activities would be highlighted by the shift in the focus from products to activities. Here, if a particular activity does not significantly contribute to the finished goods and services' production, it can be marked for elimination or reduction (DRURY, 2013). As such, the total costs of this production department would be reduced.
Question 5: Create an argument either for or against outsourcing the manufacturing operation to a foreign country.
Answer: Outsourcing manufacturing operation: The Durango manufacturing company should go for outsourcing its manufacturing operations to a foreign country as labour can potentially be supplied cheaply overseas. There are various benefits of outsourcing the operations to another nation. Firstly, outsourcing would help in increasing the profits of the organization. When the costs of labour incurred are lower, it would result in a greater amount of revenue, consequently, increasing the profits of the organization (Mohiuddin & Su, 2013). Although loss of local jobs might be seen as a negative impact of outsourcing, resisting the benefit of inclined profits is harder for manufacturing companies. Outsourcing can also be done for avoiding or decreasing the costs or expenses of hiring and training the internal employees.
Secondly, economic efficiency of the Durango manufacturing organization can be enhanced. Sometimes, the primary reason for outsourcing by companies is due to the opportunity costs related to products of goods or services. When people with high amount of skills can outsource work of lower value and spend a greater amount of time on work of higher value, it results in benefitting the business or organization. Outsourcing proponents imply that the overall economic efficiency is enhanced with the help of outsourcing as work is distributed amongst people with significant level of skills and the workers with high skill are allowed to be more productive (Arias-Aranda, Bustinza & Barrales-Molina, 2011). Finally, outsourcing can potentially help Durango in distributing the jobs or work from the developed nations to the developing ones. As such, the gap between poor and rich countries can be narrowed or bridged.
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Question 6: Predict the economic and business environment over the next five (5) years, indicating at least two (2) ways it may impact Durango Manufacturing Company's ability to achieve the desired 10% growth in revenue.
Answer: Economic and business environment prediction
Economic environment: Over the next five years, the economic environment of Durango might go through various changes. The labour intensive growth of the manufacturing industry might be slowed down in the coming years. This is primarily because of the shortage in labour and increasing wages of the same. As such, the ability of Durango of achieving its revenue growth might be affected. In the next few years, the overall population and competition might rise and become stiffer. One of the key challenges to the company would be retaining the competitive advantage and national branding on a long-term basis. The changes in consumer demand and patterns of consumer behaviour, changes in nature of the products and services, production economies and value chain economies would also be considered. These factors can altogether impact Durango's profits.
Business environment: The major changes in the business environment of Durango would be related to the competition, political and legal influences, demographic changes, technological changes, and social changes. Furthermore, the changes might come due to influence of entrepreneurs, managers, workers and customers. In the next five years, investors might get a different mindset related to investment into the company. The managers' work and management style might be altered with time as the nature of business environment is dynamic in general. The workers and employees might demand more, in the form of wages and benefits. This is because technological advancements cause rise in usage of machineries, as a result causing a decreased need of workers. Finally, the demand patterns of the customers might get more specific and complex.
Question 7: Formulate a strategy to improve the opportunities for Durango to reach its revenue goals.
Answer: Strategies for reaching revenue goals: One of the best strategies for Durango manufacturing company to increase its revenue and sales by 10% in the next five years would be developing strategic partnerships and managing its costs related to customer acquisition effectively. Initiating strategic partnerships would help in servicing a wider base of clients and business opportunities together (Raut, Bhasin & Kamble, 2012). On time diligence and careful planning can help in addressing all the possible obstacles and issues before their occurrence. The best approach for attaining profitability and increasing revenue is engaging professional help from business, financial and legal experts. The value of an alternative or forgone activity while another option is taken into consideration is known as opportunity cost. The pricing strategy of Durango would be informed by the evaluation of the cost of customer acquisition.
Question 8: Assess the potential for fraud within Durango based on the lack of IT controls, and determine at least two (2) ways Durango will structure its internal IT controls to ensure that such controls are effective in detecting fraudulent transactions.
Answer: Potential for fraud: A lack of Information technology controls can lead to potential fraud within Durango manufacturing company. If the policies and controls of the company are not properly documented and continuously enforced, it could increase the chances of fraud. The most obvious frauds that could occur due to IT control failure are billing scams, non-financial theft, disruptive fraud and cyber attacks (Shanmugam, Haat & Ali, 2012). Disruptive fraud might arise due to misappropriation of funds of the organization by accountants or analysts. The two ways by which the internal IT controls of Durango can be structured for making sure that these controls are effective in detecting the frauds are:
a) Implementing specific and significant internal controls should be implemented within the company. These controls are related to programs and plans implemented for safeguarding the assets of the company, deterring and detecting theft and fraud, and ensuring the company's accounting records' integrity. The segregation of duties and responsibilities would also help in reducing the fraud risks.
b) Enforcing and documenting controls and policies on a regular basis, incorporating internal threat awareness into security training, assessing proper asset valuation, and implementing strict accounting management practices and policies.
Conclusion: It can be concluded by the above assessment that it is possible for the Durango Manufacturing Company to attain a potential increase of 10% in its overall revenues. This can be done by adopting necessary financial and accounting management knowledge and skills which would ensure stability and success of the business. Using strategies such as expansion and capital expenditure and developing strategic partnerships would largely help the company in the long run. Outsourcing should be used promptly by Durango for increasing its costs effectiveness, and subsequently, its profits in the coming years. The business and economic environment of the manufacturing firm would be dynamic and possibly unfavourable in the next 5 years. However, adoption and implementation of appropriate strategies would help in being a success.
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