Financial management is a good business practice that ensures that there is a proper use of financial resources. Poor financial management causes various financial issues such as poor cash flow management, low profitability and even liquidity. Green Pastures a 400acre farm located in the outskirt of Kentucky Bluegrass and involved in providing boarding to broodmares and their foals is affected by the change in the economic condition requiring efficient management of its assets to generate revenues. As a result, to the economic downturn in the whole industry, the level of production has gone down and also led to increased competition in boarding business in general. The farm had to implement some of its promotional strategies such as conducting advertisement, providing entertainment to its customers and also absorb expenses formerly paid by some clients. All these actions are aimed at improving its competitive advantage and also increase its profitability
Primary Causes of the Loss in Net Income
The loss in net income of Green Pastures farm caused a major a reduction in the production capacity and an increase in operating costs. The effect of economic downturn reduced the boarding capacity than expected (Hofer, 2013). A decline in production capacity reduces the sales revenues which significantly reduces loss in net income. The production capacity declined from 60 units to 52units, and this has an adverse effect on the net income. The increase in operating costs such as feeding, veterinary fees supplies and blacksmith beyond the budgeted costs. This reduces the contribution margin more than what the farm expects to get. Furthermore, because of high competition, the farm also incurs additional costs such as advertisements and other expenses it did not anticipate to incur. The total of these expenses reduces net income significantly than expected.
Control of Expenses
The management of this farm did a good job of controlling expenses. The management tried very hard to manage expenses at a good level despite economic challenges. It only increased advertisement and entertainment of clients to solve it competition challenges. The management of Green Pastures farm only had unfavorable variance in advertisement and entertainment only.Other items in the actual result and budgeted had favorable variance and this is a significant sign of managing expenses well.
The management of Green Pastures farm improved its advertisement and entertainment of its clients to create awareness of the kind of mares and boarding services it offers. The entertainment it provides to clients differentiate it from other farms that provides the same services with it. In the process the farm, attracted and retained most of its customers resulting into reasonable fluctuation in the expected net income. Therefore, the management made a sound decision to stay competitive.
The loss in net profit can also be caused by decrease in the level of output and the increase in the operating cost (Vazirani, 2008). The farm failed to meet its expected level of output of 60 units and at the same time had an increase in operating cost resulting from advertisement and entertainment. The company budgeted for entertainment at $8000 but it used $12000 and entertainment was budgeted at $5000 but $7000 was used. The effect of these also increased a loss in net income.
Green Pasture was still able to generate a positive net profit despite an increase in operating cost and a decline in the level of output. It therefore means that it did a good job of controlling expenses. Suppose it did a poor job the cost of operating activities could have gone higher made the farm to make a loss but it only causes a decline (Hofer, 2013). This means that the increase in the cost of entertainment and advertisement has a positive impact on its income. It either retained the existing customers or attracted new ones. Therefore, the management made a sound decision to stay competitive because its competitors could have attracted most of its customers.
Recommendation and Conclusion
The management of Green Pasture should diversify its investments portfolios to ensure that it does not get a total loss. When one investment does not perform well, the farm will still have the opportunity to get profit from other investments. Furthermore, it should also use cheap means of advertisement such as social and digital media to minimize the cost of advertisement. This will reduce the cost of operating activities with a large margin.
Hofer, V. (2013). How Own Income Affects Net Income Loss after the economic downturn? SSRN Electronic Journal. doi:10.2139/ssrn.2842525
Vazirani, V. V. (n.d.). Nash Bargaining Via Flexible Budget Markets. Algorithm Theory - SWAT 2008, 4-4. doi:10.1007/978-3-540-69903-3_2
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