An Introduction to business economics and finance
- a) An evaluation of the proposed Fox and Co.’s salaries reduction strategy
According to BRATTON (1993) the duty of the management is to ensure company’s decisions and actions enhance profit margins and shareholder gain. The decision to reduce salaries at Fox and Co to achieve shareholder wealth maximization objective may seem appropriate in the short run but in the long run it may work against that same objective. In the short run the company will be able to reduce the operating expenses which will enhance net profits.
This strategy has a lot of ramifications and may work against the long run interests of the shareholders. According to BRATTON (1993) for Fox and Co to maximize production it depends on the collective goodwill of all stakeholders and more importantly the employees. This goodwill presupposes that the company will reciprocate by rewarding each employee well (BRATTON, 1993). Reduction of salaries will therefore interfere with the existing goodwill from employees and employees may reduce their production levels.
The salary reduction strategy will cause injury to the employee’s personality. This is because the relationship between the employees and the company is more than economic; it is a quasi- community (BRATTON, 1993). This quasi-community status leads to some form of identity and reducing salaries affects the employee’s ability to socialize and associate which will demoralize them. Demoralized employees become lethargic leading to low productivity and increase in workplace accidents. According to Anonymous (2008) the decision to reduce pay may result in departure of top performers and damage morale which leads to low production levels.
Printweek (2010) noted that reduction of staff salaries does not always lead to saving of jobs. In fact most companies thereafter end up declaring redundancies or closing anyway. Printweek (2010) also observed that employees down the line demand for higher salaries than would have been the case to cover for the lost income and this eventually worsens the financial state of the company. This decision also sends wrong signals to the business community and competitors and ultimately dents the company’s reputation (Printweek, 2010).
- General conclusion about the business’s goal and evaluation of the impact on other
stakeholders
The decision to reduce salaries in order to maximize shareholder wealth will not only affect the employees but will also affect other stakeholders namely the government, trade unions, suppliers, customers, competitors and the society in general. According to Printweek ( 2010) salary reduction may seem to be a good decision as it keeps people employed but it also reduces the amount of taxes payable to the government which affects the government’s ability to provide essential services such as security, roads etc. According to BRATTON (1993) the decision carries with it political costs. Political costs may include various forms of sanctions which will work against the shareholder wealth maximization objective.
. The decision to reduce salaries will only favour one interest group; the stockholders and betray the interest of the others and more notably the employees (BRATTON, 1993). It is important to note that the employees constitute the most important interest group that actively participates in the company’s mission. Employees who feel unjustly treated may react by reducing their level of productivity (BRIDGES, MARCUM & J, 2003).
The salaries reduction strategy will send wrong signals to the business community, competitors and job seekers and will ultimately dent the company’s reputation (Printweek, 2010). Suppliers may cut their business volumes fearing bad debts arising from sales made to the company. The company will find it hard to attract and retain talent in future as potential employees will shun the company.
The company will face back clash from business ethicists. Dobson (1999) noted that companies are increasingly coming under pressure from Non Governmental Organizations to uphold ethical business practices. Those that fail to uphold good ethical business practices receive bad publicity which destroys their value. According to Dobson (1999) companies which uphold ethical business practices succeed in long term because they reap from stakeholder goodwill. Reducing salaries to maximize shareholder wealth will be regarded as greed by other stakeholders and will result in bad publicity and tongue lashing from business ethicists.
- Evaluation of the statement of financial position.
The statement of financial position measures and reports the assets of a company and hence it is a valuable tool that measures the value of a company at a given point in time (Khan, 2011).
The statement of financial position shows the financial position of an organization at a given point in time (DOODY, 2006). It has been taken as being useless but the balance sheet is very important for decision making. According to SHINER (2011) the statement of financial position shows what the company owns otherwise called assets and how the assets were financed. The assets are normally financed by liabilities and/or equity. Liabilities are what the company owes whereas equity represents what portion of assets is financed by owner’s funds (SHINER, 2011). Using the balance sheet one can know the cash flow position of the company.
The balance sheet shows how much is owed to the company by outside parties and how much the company owes. If the amount of money the company owes in any given year exceeds the amount of current assets available to pay off the creditors then the company will be in trouble (SHINER, 2011). The balance sheet also shows whether the company is profitable or not over time. This is done by comparing the balance sheet over several reporting periods. Companies that have been profitable will reflect increasing shareholders’ funds over the years (SHINER, 2011). The balance sheet can be used by bankers to decide whether to lend to the company; by employees to decide whether to continue working for the company; by creditors to decide whether to continue doing business with the company e.tc (SHINER, 2011). The balance sheet cannot be overlooked by savvy business executives.
- A) To determine profit or loss;
| STATEMENT OF FINANCIAL POSITION | |||
| ASSETS | EQUITY & LIABILITIES | ||
| Non -current Assets | 53000.00 | Trades payable | 2700.00 |
| Inventories | 2500.00 | Lon term loan | 10000.00 |
| Cash at Bank | 5100.00 | Equity | 50000.00 |
| Trade Receivable | 700.00 | Drawings | (15000.00) |
| Profit & Loss | 13600.00 | ||
| Total Assets | 61300.00 | Total Equity and Liabilities | 61300.00 |
The company’s profit was 13,600 pounds
- B) It is important for Claire to draw an income statement because of the following reasons;
According to HUNT (1994) an income statement matches revenues earned in a given period with the expenses incurred to earn that revenue to determine whether the company made a profit or a loss. The analysis above does not show how much revenue was made in the accounting period. Without an income statement the company may record expenses that were not necessarily incurred to earn revenue in the time. Income statement is not solely used to determine the profit and or loss of a company but it is also used to control expenses.
If the company does not prepare an Income Statement it will be unable to determine what expense items it should monitor to cut costs to increase profits or reduce costs. According to Canadian Underwriter (2006) an Income Statement is a mandatory document for a company which intends to sell shares to the public through the stock market. It is also an important document for revenue authorities to determine taxes owed. The income statement will enable the company to carefully monitor net profit, gross profit and overheads. The proprietor will also monitor the operating profit so that she can work on improving the performance in future. The owner will also monitor the gross margin to ensure it is as per industry levels (SHINER, 2011).
References
Anonymous, (2008), Nov 05. Dilemma of a downturn: to force pay cuts or slash jobs?. Financial
Times, 14. ISSN 03071766.
BRATTON, W.W., (1993). Confronting the ethical case against the ethical case for constituency
rights. Washington and Lee Law Review, 50(4), pp. 1449-1449.
BRIDGES, S., MARCUM, W. and J, K.H., (2003). The relation between employee perceptions of
stakeholder balance and corporate financial performance. S.A.M.Advanced Management
Journal, 68(2), pp. 50-50.
Canada strengthens financial reporting requirements. (2006). Canadian Underwriter, 73(4), 74-74. Retrieved from http://search.proquest.com/docview/224964659?accountid=45049
DOODY, D., (2006). The Balance Sheet: a Snapshot of Your Financial Health. Healthcare Financial
Management, 60(5), pp. 124-5.
Dobson, J. (1999), “Is shareholder wealth maximization immoral?”,Financial Analysts Journal, vol. 55, no. 5, pp. 69-75.
HUNT, C., (1994). The overburdened income statement. CA Magazine, 127(10), pp. (53-54).
Is it better for firms to cut wages or to make redundancies? (2010). Printweek, , pp. 8-8.
Khan, S. (2011), “The Interactive Effects of Intellectual Capital Components on the Relevance of the
Balance Sheet as an Indicator of Corporate Value”, Journal of American Academy of Business, Cambridge, vol. 16, no. (2), pp. 130-136.
SHINER, L., (2011). The Balance Sheet, Part Ii. CustomRetailer, 10(9), pp. 14-14.
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