Tag: Financial analysis

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Venture Capital and Private Equity

Background

One major question that clicks into the mind is how the private equity and venture capital is different. Mere because both are used to refer firms that sell their investment in equity financing after they have invested in an organization. For the matter of facts, there exists a significant difference between these two; first, it is the way the firm performs their duties when involved in the two types of investment.

Secondly, the funds are used to purchase a different sizes and types of companies, and thus, claim a different percentage of equity in their invested companies, Cumming, (2013). In a technical way, Metrick, (2011), defines the term private equity as the money or cash invested in a company that becomes a private company through the investment. At the same time, these scholars state that sometimes, this term is used to refer companies that other firms through leveraged buyouts (LBOs).  On the other hand, VC is an investment in business in the concept, start-up or during the early years of their establishment.

The paper will look into the Skylock Enterprise, which is a company that deals with clothing products. Frankly, speaking this is a fascinating company to be part of since established two years ago. Each and every day there a new opportunity present itself to build the great legacy we dream of. This company has grown into an integrated manufacturer of the highest quality clothes. This company operates one big plant located in the United States, seven outlets that provide retail services to our business.

In total, there are 543 employees for this company and walk home with over $100 million annual revenue, plus other health benefits (notably, the paper will work with US dollar unless otherwise stated). This company has a stellar reputation since its establishment in those two operational years. Its strongest suites being cotton clothes, women’s wear, men’s wear, as well as the children’s clothes.

Despite its good starting, this company is faced with a lot of challenges in the future. Skylock, manager Stanley White sees impending danger as there is a great competition from the large multi-national companies like Nike, Ralph Lauren among others. Great scholars like Ahlers, (2013), competition in most cases theoretically results in lowering the prices of the commodities, hence if this happens it can narrow the marginal revenue of the company.

Thus, this may limit the development and expansion of this great visional company. This makes the manager question whether this company will remain as innovative as it is, or does it need to adopt some changes. Thus, the major question remains, where Skylock Enterprise will focus its effort. 

Due to the market condition in the United States, our company is a price taker, and we need to work on the set market price. In particular, we operate in a free market where no firm or entity has the ability to influence the prices in the market, Dix‐Carneiro, (2013). To succeed, we have to work with the price constraint and at the same time deliver the best quality goods. In fact, quality products always win the customer’s heart. This is in accordance with the factors that affect the demand for a commodity one being the quality (which affect the taste), the price among others Mankiw, (2014).

The Skylock company has excellent structure and one general manager who overlooks all the activities of the enterprise. Figure 1 is a management structure which portrays the general overview of the management team.

Figure 1: Skylock enterprise management structure.

Investment Case

The primary focus of the firm in two years has been in the sales department since it plays an import role in advertising the company’s product. The core aim of this department is to increase the sale by two digit percent. Critical to note, in the two years of operation, the company revenue has risen by 5% and 8.6% consecutively. Thus, we are aiming at increasing this percentage to about 13%, this seems impossible, but through the proper financing of our sales, for appealing the commercial market is more oriented to the direct marketing than mass advertisement Danaher, (2011).

The statistics indicate that the firm used almost the same amount in direct marketing and advertisement. Hence, it will be ideal to adopt the direct marketing. Furthermore, the database used to target our marketing indicates that there has been an increase from 500 to 2500. This database includes suppliers and persons targeted specifically.

Skylock Enterprise also is also planning to produce newsletters and brochures that feature new designs and clothes in the market.  This will be supplied free to opened outlets and any other targeted market, newsletters will also if there is, recent studies carried out by the firm. This will ensure that the customers are in the know what is going on with the company. Involving the company to the progress of an organization creates trustworthy and thus the customers feel more welcomed Mankiw, (2014).

Nevertheless, as compared to the main competitors to our company, we advertise less often. Taking into consideration that most of these firms have been in business for a long time. Thus, we need to advertise more often so that people can know about our existence. The aim is to raise the expenditure by 20% and target some of the new television series, which will quite improve company’s sales. The advertisement will majorly focus on all the brands in our store.

One of the greatest challenges that faces Skylock Enterprise is that it does not have many retail outlets as compared to its competitors. The location of the seven stores is in the main cities in the US. It is vital to operating our own retail shops since most of the larger firms (our competitors) control retailers. This has limited our sales as we solely depend on that seven retail for the entire revenue generation. The risk that the company faces the reputation risk, if it were to be damaged, the customers will become wary of doing business with us.

This will have not only an effect on the losing the customers, but also the revenue, and worst the sponsors and advertisers may turn their back on us. That is the reason we have a technical director that work with research and design team (R&D team) and the quality control department to ensure that all is well. The R&D department, more importantly, needs to be trained well, so as to keep the company with the trending fashions and also the market structure.

A second risk that this company may face is the financial risk. In particular, the cash that is flowing in and out of the organization, and the possibility of sudden financial loss. Our firm extends credit to some of the largest clients, hence, if they fail to pay on time or fails totally, then we are prone to incur a significant financial risk. To reduce the risk, the firm intends to operate at minimum credit services, and if it happens, it will be extended only to the few trustworthy customers, and it will only be a short-term credit. This is as suggested by the great economics scholars like Horcher, (2011).

Value Enhancement

As stated earlier, there are some of the strategies that the company is planning to undertake so as to improve the business performance, especially increasing sales volume. The firm first has prioritized the strategies and noted the objectives of each plan. First is the direct marketing strategy, which aims at increasing the sales, exploring the market and at the same time take the commodities to customers at their convenience places. Danaher, (2011) stipulates that direct marketing is convenient and also increases sales, especially when the products are unique and of high quality.

In fact, this is as a result of the impromptu purchase of the customers. The key measure that will be used to evaluate the success of this strategy is the use of consumption metrics. This is one of the many methods used to measure the content market success Parmenter, (2015). Importantly, they help in understanding the consumption behavior of customers to a particular piece of content. Thus, this will help Skylock to understand which design has high demand. The set strategy primary mandate is to increase sales by 10 percent.

The second strategy that Skylock will take to improve returns is increasing the number of retail outlets in different parts of US cities. This will be a way of ensuring that we expand the channels through which we reach our esteem customers. Furthermore, it is a method of increasing our market (through geographical coverage).  This will increase the sales by about 50-77 percent.

The key performance indicator that will be employed to evaluate the success of this strategy is through data collection and analysis. As stipulated, the core purpose of data analysis is to understand their meaning, so as the firm can understand where the improvement opportunity lies Parmenter, (2015). Analysis will encompass all the sales made through all the Skylock’s retail outlets so as to determine whether the objectives have been fully met.

It is vital to note, before adopting any strategy, the firm will evaluate and decide the frequency at which they will collect relevant data on the achievement of the plan. At the start, the first step will be to assess the market effectiveness, which will be done weekly, and then can go to monthly to reduce the evaluation cost and so on. This is important since it also ensures that the marketing goals are set, KPIs are defined, and people to collect and analyze data are determined.

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Management Structure and Incentive Scheme

The incentive scheme in the firm will be (a must) transparent, for all the staff members understand all the mechanism involved in the calculation. Simply because, a well-designed scheme has a powerful and positive effect, increasing the productivity, quality, and importantly efficacy of an institution Brealey, (2012). Conversely, a poorly designed staff incentive scheme will have a detrimental effect on the overall company performance.

Thus, the main objectives of this scheme will be achieved, which is increasing performance level, change the attitude and/or change the behavior of the staffs. Key to note, the introduction of incentive program results in an increase in revenue as well as boost the company’s reputation (which is one of our risks).

Staff incentive is paramount for the development of an institution and at the same time exciting. Some of the most benefiting parties of this strategy are the shareholders (owners), clients, employees as well as the creditors Brealey, (2012). To start with the owners, this includes even the Venture Capital and Private Equity investors, since the firm’s performance increases drastically through these measures. This aligns with the objectives of the owner, that is, to improve the achievement to a certain degree, and also reducing the standard financial performance. In other words, reducing the financial risks.

In addition, incentives should be directed to the management team of the institution. This is because the success of this organization and its reputation entirely depend on the managers. In other words, they have been delegated the duties of ensuring the firm’s objectives are met. Sometimes, this separation of management and ownership can be problematic as owners may lack means to make the managers perform their best to achieve the firm’s goals.

Further, the managers give the employees some duties, and they are supposed to make a decision and take actions. Thus, it is vital to ensure that incentives are designed in a way that even employees execute their duties are the top management will want.

The incentive scheme will motivate the whole team to work on achieving the organization’s goal. This will, on the other hand, increase the revenue return which in turn increases the cash the stakeholders receive for their capital contribution. To sum all up, the best strategic plans that Skylock Enterprise can adopt for their success have been well illustrated. This will make them more competitive, build a high reputation, and more importantly, increase their revenue, of which it is the core principle of establishing a business.

References

Ahlers, R., Schwartz, K. and Guida, V.P., 2013. The myth of ‘healthy’competition in the water sector: the case of small scale water providers. Habitat international, 38, pp.175-182.

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.

Cumming, D.J. and Johan, S.A., 2013. Venture capital and private equity contracting: An international perspective. Academic Press.

Danaher, P.J. and Rossiter, J.R., 2011. Comparing perceptions of marketing communication channels. European Journal of Marketing, 45(1/2), pp.6-42.

Dix‐Carneiro, R., 2014. Trade liberalization and labor market dynamics. Econometrica, 82(3), pp.825-885.

Horcher, K.A., 2011. Essentials of financial risk management (Vol. 32). John Wiley & Sons.

Mankiw, N. G. R. E. G. O. R. Y. (2014). Principles of macroeconomics. Cengage Learning.

Metrick, A. and Yasuda, A., 2011. Venture capital and other private equity: a survey. European Financial Management, 17(4), pp.619-654.

Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning KPIs. John Wiley & Sons.

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