Book review Essay

Florence Industries, Inc. is a conjunction which provides three entirely diametric types of crossways and service through three fragments of the partnership consumer products region, industrial products member and professional services. Each division is ploughed as an entirely different company and the performance rating criteria is return on assets in recent years after major shift. Although, the divisions use to be treated as boodle centres, this decision meant they be treated much as enthronisation centres. The play along in 2008 & 2009From the in fetch statement for 2008 and 2009, it is noticed that there is an increase in revenue by 4% and 11% increase in net profit in 2009. From balance sheet for 2008 and 2009 it is noticed that Florence has issued overlap and borrowed long term loan in order to invest in project required luxuriously asset cost as the company asset has increased by $ 50,460,000 during 2009. The Company has also stated a dividend to equity of $ 1 2,570,000 during 2009 and keep $ $11,736,000 to meet future expansion and expense of business Issues and AnalysisRejecting Proposals expert Based On Gross Margin Requirement chief financial officer Ben Johnson has recently rejected the rude(a) product proffer of product development manager of consumer products division Calvin Marone as its estimated return of 13.67%(exhibit 1) per year was slight than the 15% minimum gross return % requirement any new investment funds proposal 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 target for each division to bring new product proposal of more than 15% gross return generating capabilities. Then again, gross return of Company 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 about 9.6% (Exhibit 2) which would have been even higher than 2008 gross return of 9.5%. So, rejecting proposals that would have actu anyy been beneficial just base on gross margin estimations seems redundant. Return on Investment Comparatively Low In terms of Free Cash Flow As per the balance sheet of Florence, it is noticed that there has been an increase in 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 flow generated from useable and financing activities in investing activities. However in case of Florence, the free cash flow is less than the amount of investment made by the company in 2009 which indicate that the company is highly underage on third party finance for expansion. However, the company has taken initiatives to counter this. They have broken land d ivisions into investment centres as compared to cost centres which will 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 managers to generate the profit to the company not only on the basis of revenue and expense notwithstanding also on the basis of total asset employed in order to run the division. Same Performance rating Standard for Each Division There are some negatives that came out of the Investment Center approach. First, it may not be appropriate 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 nebment because of asset age.These divisions cannot be compared with the same yardstick. For example, Professional services division does not use much asset so it will be inappropriate to measure its perfor mance 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 old 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 news reportable for costs and assets over which they dont have any stamp down 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, reducing in cost of corporate administration, increased motivation atdivision level, and freeing corporate trouble up for more effective utilization. However, there are some pitfalls as w ell. Just having return on assets as decision criteria isnt enough and they should take other criteria into account. Criteria like Economic Value Added which takes into account costs of financing the capital or even simple 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 depreciation 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 Balanced Scorecard Developing a balance scorecard should go some way to excite sure performance evaluation is fair and is illustrative 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 twain consumer products and industrial products divisions, returns ground on both net profit and ROA are important and give a fairer comparison. Customer satisfaction (in Industrial products divisions case its more the satisfaction establish on compliance with specific designs is another evaluation criteria for both and the target for both should be bettering fail years performance in each measures. For the professional services division, the product has been rapid in recent years and retaining that growth will be important. Another important measure is corporate affectionate responsibility i.e. environmental impact studies the division performs which not only is required by the law but also helps build reputation for the company and is part of CSR activities. So, its important to keep that into context. Develop evaluation criteria for new projects Florenc e Industries Inc. needs to change 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 before accepting or rejecting any new project 1)Project requital period2)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 strain 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 knowledge about how every division is doing based on more than one evaluation criteria 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 open-minded and take broader aspects in consideration and make things fairer for the divisions and the upcoming projects as well.