George's Train shop requires careful management of capital to enable exploration into other business opportunities as well as in achieving outstanding performance in their current activities. Research on capital budgeting explains the relationship that exists between conservative working capital schemes and their influence on the overall profitability of the business (Obradovich, 2019). The study revealed that there exists an undesirable relationship between the measure of profitability of organizations and financial bodies alongside the extent to which the working capital and policies are aggressive in running the daily operations within the George's Train Shop. The aggressive working capital schemes are characterized by trying to acquire desirable returns by using minimum investment along with some short term credits to run a business. The conservative working capital, therefore, entails the practices that ensure that an organization is equipped with adequate funds in the bank accounts with updated payables (Obradovich, 2019). Besides, they possess complete warehouses with inventories and realistic formalities of trade.
In minimizing the cost and increasing the revenues, George Olieux, the owner of George's Train Shop, keeps less inventory for their practices. The owner only sources more inventory when they are almost running out of their products. When the shelf has one product model, the owner always reorders for more. The activities always help in reducing the cost of operation according to George's Train. The shop utilizes aggressive working capital policies in running their activities.
Potential Pitfalls in George’s Trains Capital Budgeting Practices
The capital budgeting models have more significant impact on the Shop's receivables since George's Train Shop is likely to run short on the goods making them lose their profit margins. George should be aware of such risks which are related to the capital budgeting model in the shop. The constant instances of shortages of the inventory expose the organization to the risk of generating minimal profits as organizations in a similar industry which have a good stock of inventories can absorb George's Train Shop clients. Besides, the shop is at risk of bankruptcy as the capital budgeting policies are unable to facilitate good collection of revenues to pay the shop's credits. George should also be aware that the shop may not give back the substantial returns on its assets. The aggressive policies always embrace the short term assets and liabilities which do not give significant contribution to the value of assets (Johansen, Olsson, Jergeas & Rolstadas, 2019). In general, George should have realistic ways of approaching the risks and threats that the aggressive working capital policies pose on the business. Another potential pitfall in George's budgeting is the absence of sophisticated approaches to the overall budgeting like the net present value. The measures are paramount in selecting the projects that are valuable to the business and providing a practical rationale for picking a particular investment.
Cash Flow Statement for George's Trains
The cash flow statements for George's Train covers the previous years and have comprehensive cash flow documentation procedures with specific cycle trends for the business. The statement of cash flows incorporates the concept of cash flow timings and the magnitudes as they only lead increased cash flows in specific times such as summer that is commonly caused by increased tourism activities. However, their cash flows reduce during the times of income tax. George's Trains uses the cash flow statements to calculate the prospected inflows of investments. Besides, the statements record the frequency and the number of cash inflows and outflows within the business (Salas-Molina, Rodriguez-Aguilar, Pla-Santamaria & Garcia-Bernabeu, 2019). George always ensures that the cost of the inventories remains minimal to avoid reducing the volume of receivables and the number of credits for the shop's operations. They always acquire loans to purchase the business assets and pay back the interests of the profits made from the sales.
Generally, George's Train Shop requires sophisticated approaches to managing the aggressive capital budgeting models. George should apply the statements of the cash flow from the business in making evaluations of the budgeting projects that are necessary for increasing the margins of the revenues and receivables. The shop should, therefore, consider expanding their product lines by adding more Race Cars and small trains. Besides, George should comprehend the cash flow statements and identify the number of revenues that accrues from the primary activities. For instance, George should know the volume of receivables from the services offered by George's Train Shop. The knowledge is necessary for effective implementation of new financial management techniques as well as expanding their operations. They can also launch new products and secure a substantial market share if George understands clearly the statements of cash flows. George should also prove to the potential investors that the business can commit to the obligations made during the start and along the operations. The investors should view George to be interested in making profits as well as a trusted entity which can pay the short term obligations. Before George can expand his business, he must prove to potential investors not just the profitability of the company, but the ability to pay short term obligations. This will provide accurate assessment of the investors' value in the operational and expansions activities.
Johansen, A., Olsson, N. O., Jergeas, G., & Rolstadas, A. (2019). Project Risk and Opportunity Management: The Owner's Perspective. Routledge. Retrieved from https://www.taylorfrancis.com/
Obradovich, J. (2019). The impact of working capital management on the decision of production firms about the amount of dividends. pdf. Int. J. Business and Globalisation, 22(3). Retrieved from https://works.bepress.com/
Salas-Molina, F., Rodriguez-Aguilar, J. A., Pla-Santamaria, D., & Garcia-Bernabeu, A. (2019). On the formal foundations of cash management systems. Operational Research, 1-15. Retrieved from https://link.springer.com/
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