George’s Trains is one of the biggest and oldest stores in the U.S. The business establishment specializes in the production of different train models. Based in North America, George’s type of business focuses on the sale, repair, and trade-in of various makes of trains (Blackford, 2003).
In this paper, the author will evaluate George’s Trains’ capital budgeting practices in relation to the information acquired from a class video. The video is an interview with an administrator of the business. It is apparent that the company is a profitable venture. However, George is requesting for advice on his working capital practices. To this end, the author of this paper will analyze these practices, including the methods of budgeting analysis and techniques. In addition, a review of potential pitfalls of budgeting practices applied by George’s will be provided. The author will also formulate a statement of cash flow and point out key areas of improvement to ensure increased profitability for the firm.
George’s Trains: An Analysis of Working Capital Practices
A critical review of George’s Trains indicates that there is a continuous improvement in the working capital practices adopted by the business. For example, the current working capital of the store is five times more compared to that reported in 1962 when the store started operating. The operations of the firm rely on quality sales and services provided across all the business outlets (Blackford, 2003). In addition, George’s Trains strives to effectively manage its sales collection and inventory. Through this, the venture manages to improve and maintain liquidity in the industry.
George’s Trains employs various capital budgeting analysis techniques. They include net present value and accounting, as well as internal rate of return. Internal rate of return is a gain that is similar to interest earned. The company uses the technique to compare capital investment with other outlays. Net present value works by calculating George’s Trains’ cash inflow and outflows over a certain period of time (Almeida, Campello & Weisbach, 2004). In addition, the technique puts into consideration inflation and foreign interest rates. Through this, it shows the management the final profits of the business in terms of the current dollar value.
Possible Pitfalls in George’s Capital Budgeting Practices
All the capital budgeting practices employed by George’s have various benefits. However, the techniques have a number of limitations and weaknesses, which business owners should be aware of. One of the practices utilized by George’s is internal rate of return. One of the major drawbacks associated with the practice is that it presumes a company has the opportunity to reinvest the money acquired at the internal rate of return. In addition, it can be a challenge to calculate a budget when dealing with uneven cash flows (Shapiro, 2005). Similarly, using the net present value technique is associated with various assumptions. For example, it is presupposed that businesses have positive net present worth schemes. The schemes can be determined by business owners. The presumption is one of its major weaknesses
A Simple Statement of Cash Flow for George’s Trains
According to the information acquired from the video, George’s system of cash flow is influenced by anticipated increase in demand. Analyzing cash flow is an important as for both large and small businesses. The reason behind this is because it is the key to the sustenance and expansion of operations. The process comprises of two aspects. They include inflow and outflow (Almeida et al., 2004). To enhance efficiency, George’s Trains needs to create a balance between the two elements. As a result, the business will be able to manage funds to pay for operational costs and bills. In addition, it will be able to predict probable future problems. To determine the trend of future cash flows, George’s can use profit and loss and statements. The cash flow analysis comprises of three key components (Byrd, Hickman & McPherson, 2013). They include operating, investment, and financing activities.
Areas of Improvement
George’s Trains business is performing well by using good capital budgeting analysis techniques. However, various aspects need to be improved to ensure increased profits. To begin with, the firm needs to ensure it strives to maintain a reasonable cash balance at all times. In addition, the company needs to regularly review its payroll process. The two recommendations are vital in the area of cash flow.
The three capital budgeting techniques employed by the firm are appropriate to its operations. However, George’s should focus more on net present value and internal rate return. The reason behind this is because the two are easy to understand. Utilizing the two methods enable businesses to be more profitable and long-term oriented (Byrd et al., 2013).
Capital budgeting analysis techniques are vital for both small and large businesses. There are different methods used by companies to make budgeting decisions. Each of them has it benefits and probable drawbacks. Due to this, firms should ensure they have full knowledge of all the techniques before applying them. In addition, in-depth knowledge will enable businesses like George’s Trains to adopt the best approaches.
Almeida, H., Campello, M., & Weisbach, M. (2004). The cash flow sensitivity of cash. Journal of Finance, 59(4), 1777-1804.
Blackford, M. (2003). A history of small business in America (2nd ed.). Chapel Hill: University of North Carolina Press.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial finance. San Diego, CA: Bridgepoint Education.
Shapiro, A. (2005). Capital budgeting and investment analysis. Upper Saddle River, NJ: Pearson/Prentice Hall.