Book review Essay

Florence Industries, Inc. is a c completelyer which provides three entirely various types of products and services through three fragments of the company consumer products division, industrial products division and pro services. Each division is treated as an entirely incompatible company and the proceeding evaluation criteria is return on assets in recent long time after major shift. Although, the divisions used to be treated as mesh centres, this purpose meant they argon treated practically as investment centres. The caller in 2008 & 2009From the income statement for 2008 and 2009, it is noticed that in that location is an increase in unrefined by 4% and 11% increase in net scratch in 2009. From balance sheet for 2008 and 2009 it is noticed that Florence has issued sh bed and borrowed long marge loan in order to invest in project inevitable high asset cost as the company asset has increase by $ 50,460,000 during 2009. The ph onenessr has also declared a dividend to equity of $ 12,570,000 during 2009 and support $ $11,736,000 to meet future expansion and expense of business Issues and AnalysisRejecting Proposals sightly Based On Gross Margin Requirement CFO Ben Johnson has lately rejected the new product final cause of product development private instructor of consumer products division Calvin Marone as its estimated return of 13.67%(exhibit 1) per course of instruction was less than the 15% minimal thoroughgoing(a) return % requirement any new investment device should generate in order to get approve. The companys 2007 gross return was 9.3 % and Ben estimated that it should go up easily to 12% and set organise for each division to bring new product proposal of more than 15% gross return generating capabilities. Then again, gross return of fellowship in 2009 after rejecting the Marones proposal was 9.4%. Suppose if Marones proposal would have been accepted, then the Company 2009 gross return would have been more or less 9.6% (Exhibit 2) which would have been even higher than 2008 gross return of 9.5%. So, rejecting proposals that would have in truth been beneficial just base on gross margin estimations seems redundant. try on Investment Comparatively Low In Terms of reposition Cash Flow As per the balance sheet of Florence, it is noticed that there has been an increase in hard cash balance of $ 390,000 during the year 2009 as compared to 2008 balance. During 2009, theCompany has generated cash of $ 42,756,000 from operating activities and $ 13,950,000 from finance activities.Further the Company has used cash of $ 56,316,000(Exhibit 3) in investing activities. Company has used its majority of cash bleed generated from operational and financing activities in investing activities. However in bailiwick of Florence, the free cash flow is less than the amount of investment do by the company in 2009 which indicate that the company is highly interdependent on third party finance for expansion. However, the comp any has taken initiatives to foreclose this. They have broken down divisions into investment centres as compared to cost centres which volition help enhance the performance of the divisions and influence them to get more out of investments made. By converting the divisions in investment units, it become the overall responsibility of division double-deckers to generate the profit to the company not only on the rear end of revenue and expense but also on the basis of perfect asset employed in order to run the division. Same surgery Evaluation Standard for Each Division There are more or less negatives that came out of the Investment center uprise. First, it may not be take into account to use one Gross return performance standard for all divisions of Florence, considering differences in type of service provided, products, operations, risks, and differences in measurement because of asset age.These divisions cannot be compared with the same yardstick. For example, Profession al services division does not use much asset so it will be inappropriate to measure its performance on the basis of gross return % (exhibit 4). Also, as division manager of Industrial Products division tried to explain, Consumer Products Division had a lot of oldish machines in their assets meaning those depreciated assets, whatever return they come up with, are making things look better in terms of return on assets than they are in reality. Moreover, including allocated corporate asset in the computation of gross return figure means that division and division managers are held accountable for costs and assets over which they dont have any retard at all. RecommendationsHave Other Evaluation Criteria Along with Investment Center Approach The decision to treat divisions as investment center has its benefits. Benefits of this approach include improvement in operational decision making, reduction in cost of corporate administration, increased motivation atdivision level, and spill co rporate management up for more effective utilization. However, there are some(a) pitfalls as well. Just having return on assets as decision criteria isnt enough and they should take other criteria into account. Criteria like Economic measure out Added which takes into account costs of financing the capital or even childly Net Profit which judges the divisions profitability as a whole. And, to counter the problem of having too many old machines in the consumer products division compare to other divisions, the company could take out the derogation and compare to see how it affects ROA as a whole when taken in to account and when not.That should give the company a clearer picture. Developing a equilibrise Scorecard Developing a balance posting should go some carriage to afford sure performance evaluation is fair and is informative of actual performance as it takes into account different measures for different functions usually. In this case, Florence would of course has to make it about the divisions rather than functions of business. In the suggested balanced scorecard below (Figure-1) we can see a bit modified targets and measures for different divisions as their goals are slightly different. Figure-1For both consumer products and industrial products divisions, returns based on both net profit and ROA are important and give a fairer comparison. Customer satisfaction (in Industrial products divisions case its more the satisfaction based on compliance with specific designs is another(prenominal) evaluation criteria for both and the target for both should be bettering last years performance in each measures. For the professional services division, the ripening has been rapid in recent years and retaining that growth will be important. Another important measure is corporate social responsibility i.e. environmental impact studies the division performs which not only is required by the impartiality but also helps build reputation for the company and is part of CSR activities. So, its important to affirm that into context. Develop evaluation criteria for new projects Florence Industries Inc. needs to switch over evaluation criteria for new projects as it is noticed theyre rejected a project that would have been beneficial for them every which way just because it didnt fulfil ROA requirement. Along with ROA, CFO Ben could also analyse the below mentioned points ahead accepting or rejecting any new project 1)Project payback close2)Project NPV (Net present value)3)Project IRR (Internal rate of return)ConclusionFlorences sales growth has been phenomenal for a new company and now its time to make some major managerial decisions that will shape the future. And, they have started doing so by transforming the divisions into investment centers from profit centers. While it is a good way to go, creating a balance is necessity and having a more comprehensive association about how every division is doing based on more than one evaluation crit eria will be important. Each division is run in their own way and the dissimilarities are far greater to just keep evaluating them based on the investment approach. Also, they cant keep rejecting projects based on one simple requirement as it hinders the growth of the company. Thats why we suggest Florence Industries Inc. to be a bit more broad-minded and take broader aspects in consideration and make things fairer for the divisions and the upcoming projects as well.