This paper seeks to summarize the nature of On Your Mark’s business and its business strategy, assess the internal and external risk factors for the firm. This will provide an analysis of the financial condition for the firm an evaluation of the firm’s creditworthiness. Further, this will discuss the competitive position of the firm and summarize the financial and accounting control procedures in place to ensure compliance with applicable regulatory agencies.
Analysis and Discussion
The nature of the firm’s business is manufacturing. On Your Mark is into the manufacture of athletic equipment apparel. I had just become a public company after its initial public offering (IPO). Its strategy can be described as developmental since the industry where it belongs is at the growing stage. Having its IPO would mean entering the market of bigger competitors which it might not have had before the IPO (On Your Mark, n.d.).
With approximately $50 million investment in producing seven unique and distinct products under seven different markets, the company may be considered indeed a growing and innovative company (On Your Mark, n.d.). Each product division is being made independent from each other with its group of sales, marketing, and manufacturing personnel implied independence. The divisions are united however by having the same support departments. This would mean allowing each division to address the special needs of customers who are segmented in terms of products and markets. A product may be defined as serving a specific need or wants to be called a separate product (Kotler, 1994). The strategy could also mean specialization or segmentation or diversification in one sense as a matter of strategy.
Internal and external risk factors for the firm
The internal risk and external factors can be described as manageable considering that the company has done things to reduce risk in important aspects. For internal risk factors that would human management, the company appears to have given independence or autonomy to division to grow the normal way as each division has its respective functional areas. It has reduced asset management as an external risk factor. The company has good liquidity and profitable operation as well as acceptable leverage as would be explained more later. It has also an excellent organizational direction by investing in growth strategies concerning the stage of the industry life or development (Porter, 1980).
For the external factors, it employed diversification of its products as discussed earlier to address the external risk factors like the changing level of technology and economic environment. It could mean reducing the risk of being a stagnant business and unresponsive to changing conditions external to the company. It had placed financial and accounting control procedures in place as would be discussed later and this would reduce the external risk of regulation that may be forced for suspension or closure in case of violation.
The financial condition of the firm
On Your Mark’s financial condition can be measured using the company’s financial leverage and liquidity. Financial leverage or long-term capacity to keep up to their stability over the long term or solvency. By comparing the total debt of the company to total equity, solvency could measure the capacity to recover long-term investments which may take longer to produce the needed returns (Helfert, 2001). The debt-to-equity ratio or gearing of the company at 82.5% is evidently less superior to the industry average of 50%. See Appendix A. But such a capital structure of less than 100% would mean that the company is still not too highly leveraged to be too risky for expansion purposes since debts can still be matched with equity. Its liquidity is also higher than competitors at a current ratio of 1.45 versus 1.25 as the industry average. See Appendix A. Such is very high considering using 1.0 as another benchmark.
As to whether the financial condition of the company could be sustained, one needs to consider its present profitability and efficiency level. As found the company can be considered more profitable and more efficient than the industry average.
Its return on equity (ROE) of 132% as against the industry average of 125% indicated more superior operating and financial performance of the company. See Appendix A. Such an ROE level would be a magnet that attracts many more investors. It would mean earning more than the amount of investment in years. For every US $100, the investors expect again $125. This may be explained by the fact the industry is a growing stage and that the profitability is still very high. This is consistent with the information from the CFO that the division can make an aggressive investment for new acquisitions and the development of new products. Said profitability is supported by the company’s more efficient operation than average competitors in the industry.
On Your Mark exhibited a higher ratio in almost the measures of efficiency. As its return on assets is higher than the industry average, such could also mean a better way of generating profits concerning assets utilized in business. The obvious better profitability and efficiency for the company against the industry average may be further confirmed in terms of higher net operating margin and net profit margin. The resulting operating profit margin was computed at 40.5% against the industry average of 35%. Net profit margin, on the other hand, resulted in 26.4% as against the industry average of 25%. See Appendix A.
Higher inventory turnover and fixed asset faster receivable turnover and asset turnover than industry average further confirm the company’s better efficiency. The shorter collection period and long payment period compared with the industry may be the results of terms arranged with customers and suppliers and the same should bolster that company’s better competitive position. See Appendix A.
The firm’s creditworthiness
To evaluate creditworthiness normally include looking into the capacity, condition, capital and collateral, and character or the Five Cs of credit (Lasher, 1994). Capacity would refer to the ability to pay in terms of liquidity which were determined earlier to be very high. The condition would refer to conditions of any borrowing that would be availed and whether the same is favorable to the company. In the absence of the terms of a loan that would be availed, this criterion cannot be used to evaluate creditworthiness. But given its lower collection period and longer payment period, the company may be considered to pass this test. Collateral is the capacity to provide security, and which can be declared position considering its still acceptable financial leverage. A character would refer to its reputation and the fact that it was successful in its IPO should prove its reputation to be trusted (Lasher, 1994).
The competitive position of the firm
The competitive position can be done by looking at how the company vies with its competitors in the market. Does it have the market and financial position that can be defended? CFO’s aggressive pursuit of new business opportunities including expansion and through acquisition and the development and implementation of new products (On Your Mark, n.d.) would indicate that the company can compete with confidence in the industry with new products. This is in the light of it having seven unique and distinct products in seven different markets (On Your Mark, n.d.). It has the strategy of differentiation that could provide the company better profitability and that the company does not have to compete head-on for price reduction but in how different its products are concerning competitors (Porter, 1980). With the information that the company can pursue growth and development, the same may be interpreted as a significant supported by the higher management which encourages growth and expansion at this stage. Given its generally more profitable, more efficient, and more liquid condition as against its competitors then it may be considered to have a strategic financial position to defend a reasonable market position.
The financial and accounting control procedures in place
The financial and accounting control procedures can be categorized to be in place to ensure compliance with applicable regulatory agencies. These may include how the company’s organizational structure has assigned responsibilities with the assurance of demand accountability from these officers. Since government regulations are aimed at protecting the investing public, the company must have good corporate governance controls that would ensure accountability in the organization.
This researcher’s role as division manager, with the responsibility for compiling and reporting on budget/forecast data, for purposes using financial information in decision making, and for assessing and valuing new business opportunities and which will have to ultimately be presented to upper management and approved by the latter could speak of good internal control within the organization meriting compliance with applicable regulations.
In addition, the manager of the athletic team division reporting to the plant manager shows a correct functional responsibility since this researcher is considered part of the operation.
Having to work closely with the financial officer (CFO) and requiring the assistance of the accounting department’s accountants in budget/forecast, will not affect the efficient and effective functioning of the division and still a good internal control (On Your Mark, n.d.). The CFO above the division level is compliant with regulation particularly with the Sarbanes-Oxley act of 2002 since CFOs and CEOs are required to make certification as the truthfulness of matters relating to financial information (Welytok, 2008). As division chief from operations, the primary function should be about the growth and development of unique and good products for the survival and growth of the division and On Your Mark. The same is supported by the present organizational structure.
This researcher found the plan of the company for expansion to be supported by strengths and weaknesses and given the company. It has a good financial condition and passed the creditworthiness test. It has what it takes to do with its efficient effective financial and accounting control. With is also higher profitability and efficiency against industry competitors, an investment decision with the company for more wealth should be an easy thing to do.
Brigham, E. And Houston, J. (2002) Fundamentals of Financial Management, London: Thomson South-Western Case Study – On Your Mark.
Kotler, P. (1994). Marketing Management. Analysis Planning. Implementation and Control, London: Prentice-Hall.
Lasher (1994). The perfect business plan made simple Made Simple. Doubleday.
Porter (1980). Competitive Strategy. London: Free Press.
Welytok (2008). Sarbanes-Oxley for Dummies.