2021 Hisco Summary Annual Report

2021 Hisco Summary Annual Report

CEO Letter

Dear fellow members and charter holders,

Fiscal year 2021 was another busy year for our organization. We set our sights on transforming the healthcare sector through our improved and innovative product and also changing Hisco’s cash flow crisis experienced in the previous fiscal years.

I was privileged to manage Hisco as its Chief Executive Officer (CEO) for the just-concluded fiscal year. I was responsible for making most operating decisions, including the company’s financial decisions and strategies. My decision-making was informed by internal and external environment information obtained through my interaction with various company stakeholders and the industry news dashboard. My interactive calls during the year were especially helpful since they offered remarkable insights. I contacted our patron, Stan Sloane, twice during the year, and he offered great insights into the decision-making process. In our first conversation, Stan advised that Hisco’s electronic readers be maintained within the +/-20% range (Growing Your Business, n.d). The higher limit (+20%) ensured the price increase was within the appropriate range to the extent it would ensure the customers purchased electronic readers and did not switch to competitors’ products. On the other hand, the lower limit (-20%) ensured Hisco’s operations remained profitable (Growing Your Business, n.d). In our second and last conversation, Stan provided the required capital to procure solar panels, which cost $150,000, as part of the company’s long-term environmental sustainability plan. This project would also facilitate the reduction of costs in the long run.

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The main quality decisions during the year were inspired by my conversation with Stall Brick, who advised investing $45 per unit to enhance the product’s quality through research and development. Stall also advised the execution of a $10,000 training exercise to enhance Hisco’s employee productivity. This investment paid off since Hisco’s labor output improved by 80%. To facilitate increased production, the company had to enhance raw material availability; this was achieved through our conversation with Charlie the Chipmaker. Importantly, I reduced the average collection period to enhance the working capital flow in the organization. Since quantity and price are the primary elements influencing customer demand, I reduced the term days since this would exhibit the least impact on demand.

The various decisions implemented in different quarters brought about different results, as some quarters were profitable while others featured high losses. I learned the impact of my decisions since they adversely affected the company’s profitability. For instance, in the second quarter, Hisco incurred considerably high losses due to the expansion of its production operation, with the company not managing to sell all the products manufactured during the period.

To enhance the company’s economic value, I intend to maximize the production capacity by increasing the units produced annually. In the just-concluded year, Hisco executed decisions to enhance the company’s manufacturing capability. Firstly, I enhanced labor productivity by implementing the labor training program. Subsequently, the employees’ productivity improved, allowing me to incur lower labor costs in the future. I also increased the production lines’ throughput and increased the number of production lines by nine. Furthermore, I engaged in a long-term contract with Charlie the Chipmaker, whereby Hisco sourced raw materials at considerably lower rates, given the earned discounts. These decisions will be pivotal in Hisco’s cost leadership strategy by allowing bulk production. I also realized one of the reasons for the low sales was the result of the minimal investment in sales and marketing activities, which are crucial in increasing the product’s visibility in the market. In the coming year, I intend to undertake aggressive sales and marketing to increase the number of products sold. Secondly, I intend to invest in research and development to innovate new products to keep up with the intense competition featured in the industry. I plan to explore untargeted customer segments to enhance the company’s profitability. Lastly, I intend to execute risk management plans by identifying internal and external threats and formulating mitigation plans. Risk planning is aimed at mitigating business failure and losses. The current identified internal risks include insufficient cash flow, which will be addressed by identifying additional sources of finances and implementing effective cost management plans aimed at controlling operating expenses.

The “Stan Sloane Letter”

Dear Mr. Sloane,

Thank you for trusting me to manage Hisco in the just-concluded financial year. Managing the company has been a great eye-opener in the activities and the processes of management and has increased my competency in managing a growing technology-based company.

At the beginning of the year, I set out the objectives of enhancing the company’s profitability and taking the company to the next level by facilitating the attainment of both the long and short-term goals. Notably, most of my decisions aimed to enhance the company’s long-term sustainability. As much as I aimed to maximize the company’s profits, I aimed to streamline the production processes and enhance the profit earned by the firm. I varied my decision from quarter to quarter, depending on the results I obtained in the preceding quarters.

In the course of the year, Hisco developed new items in the production process that included enhancing throughput, labor training, and CSR initiatives to enhance the company’s efficiency and image. In the third quarter, after contacting Lona Lines, Hisco expanded the throughput to 500 per line by investing $175,000 for 14 lines (Growing Your Business , n.d). Additionally, Hisco negotiated for a 2% discount on the leasing line, reducing the company’s overall expenses. The company also set out to improve its employees’ efficiency during the year; an investment of $10,000 was injected into labor training that enhanced employee effectiveness by 80%. Lastly, the company embarked on CSR initiatives to improve its image. Through Mr. Sloane’s funding, Hisco installed solar panels at the cost of $150,000. The overall enhancement aimed to enhance production efficiency, which is crucial in meeting customers’ demands. Moreover, including additional lines facilitates the expansion of the company’s manufacturing operations by implementing the future market leadership strategy. Importantly, this expansion would allow the company to produce quality electronic readers, improve the product’s functionality and appearance, and boost sales. On the downside, the company incurred a considerably high investment cost ($175,000), which was not recovered during the financial year, leading to a decline in its profitability. However, Hisco secured a 2% discount from the project’s implementation, which would help minimize recurring expenses.

During my first conversation with Ms. Buy It, she emphasized the essentiality of quality electronic readers, which lie at the heart of quality healthcare services. She contended that low-quality readers would adversely affect the quality of services offered by the hospital. To ensure Hisco’s product met the market demand, I invested in the company’s workforce by implementing a labor training program to enhance employee productivity. This program aimed to improve the output produced and quality of the Hisco readers to attract more customers, improving market share. T company would incur lower labor costs by contracting fewer workers since the training increased productivity by 80% (Growing Your Business , n.d). Additionally, with a trained workforce, the quality of the electronic readers improved remarkably. The solar panels project comprised Hisco’s Corporate Social Responsibility (CSR) initiative to enhance its image to the public. According to statistics, millennials are likely to purchase from environmentally conscious companies. Clients prefer to be associated with environmentally sustainable companies. The solar panel project also reduces the company’s energy costs in the long run, minimizing operating costs. This implementation was also aimed at absorbing the company’s social costs by implementing a clean energy source that minimizes pollution by enhancing its compliance with environmental laws.

Hisco’s future lies in producing decent product quality priced at reasonable costs. In doing so, the company intends to obtain economies of scale and trade discounts through expanding the production processes. To realize this, Hisco will order raw materials in bulk by executing the Economic Order Quantity (EOQ) that facilitates the reduction of ordering costs by maintaining replenishments to the minimum. This strategy will be executed with materials resource planning (MRP) to reduce inventory carrying costs and stock in liquidating working capital (Silver, Pyke,& Thomas, 2016). During the just-concluded year, Hisco experienced insufficient cash flows to the extent of exceeding the credit line on several occasions. In the second quarter, the company ordered excessive raw materials from Charlie, the Chipmaker, and experienced a cash flow problem as a result. The expansion program will be facilitated by the improved production lines implemented by the company and the expanded labor capacity achieved through training. Hisco anticipates push demand, which will be addressed through executing aggressive sales and marketing to maximize sales.

The operating decisions in 2021 resulted in changes that transformed Hisco’s macro and micro environments. For this reason, in the upcoming years, I would make changes to the SWOT analysis to include new strengths gained by the company, which include competent expertise and increased production capacity. The company also experienced several shortcomings during the year, expanding the list of weaknesses to include insufficient working capital needed to fund the company’s operations. The new threats will include innovative electronic readers launched by Hisco’s competitors. The end of the year added new opportunities, including exploiting the low-cost customer segment by providing decent quality products at reasonable prices. In the next two years of Hisco’s operations, I intend to adopt a market leadership strategy and negotiate with Hisco’s financiers to mobilize additional funding for the organization’s operations. I propose automation of the production processes to reduce the labor costs incurred by the company further. Moreover, automation facilitates the standardization of the final product and enhances manufacturing efficiency. Also, the firm should implement robotics in the warehouse to minimize material handling, which is crucial in eliminating product defects. Additionally, I propose for business process engineering to enhance Hisco’s value chain and lower the high expenses presently incurred by the organization. Hisco’s ineffectiveness in managing costs reduced the company’s profitability. Lastly, I propose total quality management to promote continuous improvement and implement controls to ensure the final product meets industrial quality standards.

Sales, Marketing, & Industry

Curry (2016) contends a value chain is a business model that showcases and documents all the activities required to manufacture and deliver a product in the market. Given that Hisco’s primary activity was producing and selling electronic readers, the company’s supply chain’s onset is marked by the supplier and the final customer. In the beginning, the company conducts strategic planning, whereby the business strategy selected influences the operation carried out by the company (Fearne, Martinez, & Dent, 2012). The selection of a focused product differentiation strategy would call for procuring high-quality, custom-made raw materials to produce the desired electronic readers. On the other hand, selecting a cost leadership strategy would entail sourcing generic raw materials in bulk to obtain trade discounts.

The first step in the supply chain is strategic planning, which also entails forecasting customer demand and determining the units to be manufactured. The forecast is carried out during financial planning, specifically during the sales budget creation, and it outlines the number of units the company anticipates selling during the period (Bustinza et al., 2015). This document also outlines the pricing rates determined after benchmarking competitors’ prices. Notably, the sales budget is informed by both quantitative and qualitative data. The former constitutes historical data, while the latter entails consulting experts’ information. Hisco’s planned net income and quarterly sales revenue were highlighted in the company’s information dashboard. This figure guided me in determining whether the company was on track to attain its financial goals.

The second step is supply planning, whereby the required amount of direct raw materials, production, and labor capacity is determined (Curry, 2016). I engaged in these decisions every quarter, ordering raw materials and hiring labor to perform the operations. The third step is manufacturing, which involves producing the units stored in warehouses before being distributed to customers. The fourth and final step is order fulfillment, whereby the company delivers the electronic readers to customers who placed orders at the beginning of the quarter. The company sells through Danny and his sales and marketing team, which conducts aggressive sales and marketing to mobilize prospective customers to purchase Hisco electronic readers.

From the above analysis, Hisco’s primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Inbound logistics includes functions such as warehousing and inventory management (Fearne et al., 2012). After replenishing the raw material stock from the vendors, the company stores it in the warehouses awaiting production. Operations involve manufacturing the sourced raw material into the final product (electronic readers). Outbound logistics involves transporting the products from the company to the final customers. Sales and marketing involve enhancing the electronic readers’ visibility in the market by targeting the company’s customer segments. The activities involved in this operation include advertising, promotion, and even implementing pricing campaigns. Lastly, service involves activities aimed at enhancing user experience and includes functions such as repair, maintenance, refund, exchange functions, and customer service.

On the other hand, support activities enhance the efficiency of the primary activities. They include procurement, technological development, human resources, and infrastructure (Fearne et al., 2012). Procurement entails the procedure employed by the company in sourcing raw materials. During the simulation, I sourced additional raw material inventory from Chipmaker. Technological development is aimed at enhancing the manufacturing processes, for instance, automation. In the first and second quarters, I invested in projects to enhance the efficiency of the production processes. Human resources entails hiring, retaining, and recruiting workers into the company.

In some cases, I was constrained by insufficient labor, so I had to contract additional workers in the company. On the same note, I was advised by Stall Brick to invest in a training program that would enhance the employees’ productivity by improving their output by 80% (Growing Your Business , n.d). As a result, I invested in this program, and the company enhanced its output, as reflected by its profitability. Infrastructure entails the composition of Hisco’s management team. During the decision-making, I was guided by the company’s major stakeholders, which comprised the company’s key customers, investors, Hisco’s owner, the chip producer, and the quality engineer.

During the year, Hisco did not efficiently conduct the sales and marketing function to maximize the company’s sales. As a result, the company failed to meet its target revenue and hence did not attain its net income goal. Investment in sales and marketing entailed advertising, market promotion, and hiring additional sales employees. The company did not spend on these activities in the last three quarters because its finances were constrained. Yet, these activities were crucial in enhancing the product’s visibility to potential customers. On the other hand, Matek and Redex aggressively marketed their electronic readers and, as a result, sold more units.   The company’s product pricing was guided by Stan Sloane’s advice. During my interaction with Mr. Sloane, he advised a +/-20% margin when setting the product prices. An increase within +20% would prevent customers from switching to competitors’ products, while a 20% and below price cut ensures the company earns sufficient profit to finance the company’s operations (Growing Your Business , n.d).

Hisco operates in an industry featuring considerable industry rivalry from its key competitors, Matek and Redex. Eastern also competes against the four firms, although on a small scale. From a qualitative perspective, Redex is ranked best because it delivers superior-quality electronic readers in the market (Growing Your Business , n.d). In fact, the company was ranked best in technical quality at the end of the simulation. This results from Redex’s implementation of a focused product differentiation strategy. From a quantitative perspective, Matek is ranked as the market leader as it delivers the highest number of electronic readers in the market. Matek executes a cost leadership strategy that allows the company to price its products at lower rates than its three competitors. In doing so, Matek utilizes economies of scale in producing electronic readers, resulting in lower expenses.

Notably, Hisco encountered several risks that can be categorized into internal and external risks. The former included insufficient cash flows, poor decision-making, ineffective sales forecasts, and poor financial planning. Throughout the four quarters, Hisco encountered constrained cash flows and, as a result, had to abandon several projects that the company intended to implement to enhance its profitability. Poor decision-making entails the selection of choices that result in more costs than benefits to the company. To mitigate poor decisions, Hisco intends to rigorously study the industry and quarterly business reviews. Ineffective sales forecasts will be addressed by studying historical sales data. At some points during the year, I made poor sales forecasts that adversely affected the company’s profitability. Poor financial planning would be addressed by undertaking realistic forecasts and anticipating unforeseen expenses during the forecasting. The main external risk experienced by the company is the innovation of technological electronic readers by competitors. Hisco intends to address this challenge by investing in research and development so its electronic readers can remain at par with the industry’s standards.

Financial Statements

Financial statements communicate a company’s financial performance by indicating the revenue earned and expenses incurred in the income statement and the net assets and approaches in which they were financed (i.e., through equity and debt financing) in the balance sheet. The statement of cash flows presents Hisco’s use of finances, particularly in the operating, financing, and investing activities (Arnold, Ellis, & Krishnan, 2018). This evaluation is categorized as quantitative since it involves the amounts produced, costs incurred from the operations, and revenue generated from the processes. According to the Financial Accounting Standards Board, financial reporting entails communication through financial statements and additional information that depicts the enterprises’ performance. Financial reports offer crucial investment and credit decision information evaluating the company’s cash flow prospects (Arnold et al., 2018). Thus, financial reporting is a broad concept that comprises financial statements and their accompanying notes, supplementary information such as changes in product pricing, management discussions, and even letters to stakeholders. This comprehensive information is necessary for facilitating internal decision-making undertaken by the company’s management and external decisions performed by creditors, investors, and even the government. Investors analyze financial information to assess the company’s viability. For instance, Victoria Cash, a venture capitalist, analyzed Hisco’s past performance before she could issue capital. Creditors utilize the financial statements to evaluate the company’s creditworthiness while the government evaluates the firm’s compliance in servicing its tax obligations. This report rigorously evaluates Hisco’s financial statements by analyzing the balance sheet, income statement, and statement of cash flows.

Income statement

This section evaluates Hisco’s total sales, total Cost of Goods Sold (COGS), gross margin, pretax net income, and net income. In 2019, Hisco registered a gradual increase in sales over the four quarters. The increase in sales over the quarters in 2020 was slightly higher in comparison to the previous year. In 2021, the company recorded a remarkable increase in sales, clocking $1,008,440, in comparison to the first quarter of 2019, where the company recorded $265,860 in sales revenue (Growing Your Business , n.d). The increase in sales revenue is attributed to the increase in production output achieved by enhancing labor efficiency through training, enhancing the line manufacturing throughput, and increasing product lines. As a result, Hisco produced and delivered more units to the market, which enhanced its sales revenue.

The company’s COGS recorded a steady increase that corresponded to the rise in sales and registered a decline in the last quarter of 2019 (Robison & Barry, 2020). Notably, the COGS continued recording a steady increase in 2020 and 2021. Hisco’s gross margin steadily increased over the three years, with the highest figure recorded in the last quarter of 2021. The base costs decreased in the second quarter of 2019 and rose in the last two quarters. In 2020 and 2021, the base costs increased steadily compared to the reduction experienced in 2019. This reduction is attributed to the increased efficiency of the production process. The company’s operating margin experienced mixed trends in 2019, increasing in the second quarter, decreasing in the third quarter, and slightly rising in the last quarter. In the first three quarters of 2020, the operating margin decreased before it increased in the fourth quarter. In 2021, the operating margin decreased in the second quarter of the year, in which the company recorded a loss. It then increased in the third quarter and drastically rose in the last quarter, surpassing the $100k mark at $101,439 (Growing Your Business, n.d.).

The company’s pretax income increased in the second quarter and decreased in the third quarter before registering an increase in the fourth quarter of 2019. In 2020, it drastically declined in the three quarters and improved in the fourth quarter. In 2021, the pretax income decreased in the first three quarters before improving in the last quarter. Hisco recorded the first positive pretax income in the last quarter of 2021, indicating an improvement in its profitability. Similarly, the net income recorded was negative in the first two years (2019 & 2020) and the first three quarters of 2021, with the last quarter of 2021 recording a positive figure. Notably, this was the only quarter Hisco serviced its tax obligations since the negative pretax income earned in the previous quarters resulted in deferred tax expenses. Given the high % taxation rate of 50%, the company incurs considerably high tax expenses.

Balance Sheet

The balance sheet evaluation thoroughly reviews Hisco’s net assets, total liabilities, and equity (Albanese, Crépey, Hoskinson, & Saadeddine, 2017). Hisco’s total assets recorded a steady decline in all four quarters of 2019, which later improved through 2020. In 2021, the company recorded a remarkable increase in the four quarters. In the first quarter of 2019, the assets were recorded at $270,828; in the last quarter of 2021, the total assets were recorded at $2,212,221.81 (Growing Your Business, n.d.). The cash assets significantly decreased in all four quarters of 2019, with the last two quarters recording $0 cash assets.

The total liabilities and equity declined in the last three quarters of 2019, with a steady increase being recorded in 2020. Notably, the company’s liabilities increased from 2020 to 2021, with the last quarter of 2021 registering $2,212,221 in total liabilities (Growing Your Business, n.d.). On the other hand, Hisco’s equity steadily declined in the two previous years (2019 & 2020) before increasing in the third and last quarter of 2021.

Cash Flow Statement

The cash flow statement indicates the cash used in operating, investing, and financing activities. It’s a better measure of profitability in that it highlights the primary activities performed by the company and their impact on the net cash flow. Hisco experienced cash flow constraints in the better part of the year. The cash used in both investing and financing activities was more than the amount obtained from the company’s operations, explaining the negative pretax income recorded in the income statement (Arnold et al., 2018).

During its three years of operations (2019, 2020, and 2021), Hisco recorded negative cash flows from its operating activities in most quarters. The only exception to this trend was in the last quarter of 2021 when the company recorded a closing cash flow figure of $46,297 (Growing Your Business, n.d.). Additionally, Hisco did not engage in investing activities except in the last quarter of 2021.

Credit Line Analysis       

In 2019 and 2020, Hisco recorded a steady credit line of $325,000; in 2021, the company recorded a credit line of $425,000. The company exceeded its credit line in the last quarter of 2020 and the last three quarters of 2021. Notably, exceeding the credit line was among the major problems faced by the company in the year. This credit line issue arose from the company’s investments in projects intended to enhance production efficiency, which consumed considerable financial resources (Albanese et al., 2017). For instance, the company invested in labor productivity, increased production lines, and enhanced throughput, hence increasing its costs. Unlike the manufacturing operations, these activities do not produce immediate cash benefits, hence the reduction in cash flows required to finance the business.

In the first quarter of 2019, the company’s collateral was recorded at $153,633.86, rising to $199,650 in the last quarter. In 2020, the total collateral was recorded at $242,913 at the beginning of the year, rising to $334,204 at the end of the year (Growing Your Business, n.d.). The highest collateral in all three years ($772,721.30) was recorded in the last quarter of 2021.

Financial Ratios

Financial ratios facilitate the evaluation of an organization’s financial performance. This section will evaluate Hisco’s profitability and DuPont ratios to assess the company’s performance.

Gross Margin

Gross margin is a profitability ratio that compares the gross margin of a business to the net sales (Jin, 2017). This ratio determines an enterprise’s profitability. Hisco recorded an average gross margin of 50-55% in both 2019 and 2020 (Growing Your Business, n.d.). In 2021, the gross margin rose to 60%, suggesting Hisco‘s operations were effective in that the income earned was able to finance the company’s activities.

The Operating Margin

The operating margin is a ratio that measures a company’s revenue after servicing the fixed and variable costs (Korkmaz, 2016). It is also referred to as return on sales. This ratio indicates the profitability of a company’s operations. Hisco’s operating profit margin was recorded at -8.2% and -13.85 in both the last quarters of 2019 and 2020, respectively (Growing Your Business, n.d.). The negative operating margin resulted from the negative pretax income recorded in these periods.

DuPont Analysis

DuPont analysis was developed in 1920 by DuPont Corporation and facilitated the rigorous assessment of its profitability (Jin, 2017). It incorporates five metrics: return on sales, assets turnover, return on assets, financial leverage, and return on equity.

Return on Sales (ROS)

Return on sales evaluates a company’s efficiency in generating profits from its revenue. In doing so, this metric establishes the percentage of revenue turned into profit by a company. Hisco’s ROS was considerably low; the lowest recorded was -12.9%, and the highest was -4.1% between 2019, 2020, and the first three quarters of 2021 (Growing Your Business, n.d.). In the last quarter of 2021, the company recorded 2.7% ROS, indicating its efficiency in generating profit from its revenue.

Assets Turnover

Asset turnover evaluates a company’s effectiveness in generating sales from its assets. During the three years, Hisco’s highest turnover ratio was 1.45, and the lowest was 0.6 (Growing Your Business, n.d.). The ratio in the last quarter was 0.46, suggesting Hisco generated 46 cents for every dollar invested in the company’s assets.

Return on Assets

This ratio measures a company’s profitability in relation to the total assets invested over the period (Jin, 2017). This ratio offers insights into managing approaches in which the organization can convert its investments into profits. The lowest return on assets recorded was -16.3, whereas the highest was registered at 1.2%. This ratio indicates Hisco’s inefficiently utilized its assets in generating sales.

Financial Leverage

Financial leverage entails credit in financing asset purchases with the expectation the capital gain earned from the assets will exceed the cost of borrowing (Jin, 2017). In the first quarter of 2019, Hisco’s financial leverage was 1, rising to 9.63 in the last quarter of 2021 (Growing Your Business, n.d.). Notably, the year 2021 showcased the highest financial leverage, as was illustrated by the company exceeding its credit line. The high leverage resulted from the increased investment activities performed in the year. In addition, the expansion operations conducted by the company escalated its operating costs. The highest financial leverage registered was 25.13 in the third quarter of 2021, which resulted from increased activities in this quarter.

Return on Equity

The return on equity is a profitability ratio that examines a company’s ability to generate profit from its shareholders (Korkmaz, 2016). It indicates the amount of profit earned from each dollar of shareholders’ investment in the company. In this case, Hisco’s investors did not maximize their investment due to the low ROE earned by the company. Hisco earned the lowest ROE compared to its key competitors (Redex and Matek). The low ROE resulted from the company’s low profitability recorded in 2021.

Average Collection Period

The average collection period is the period it takes a company to collect invoices from its debtors and evaluate the effectiveness of an organization’s credit-granting policies and collection efforts. Hisco recorded an average collection period of 30 days in 2019, increasing to 60 days in 2020 (Growing Your Business, n.d.). In 2021, the company reduced the average collection period to 15 days after the conversation with Danny; this conversation led to the realization that demand and price were the main constituents in influencing customers’ demand.

Management Discussion and Analysis (MD&A)

Hisco’s operating decisions were informed by the various conversations with stakeholders through the role-play calls. In the first quarter, Stan Sloane (Hisco’s owner) advised the price margin should not exceed +/-20% (Jing, 2016). Increasing the price margin by more than 20% would reduce the sales revenue since the customers would switch to competitors’ electronic readers which are priced at a lower rate than Hisco. On the other hand, lowering the price margin by more than 20% would result in unprofitability to the extent that Hisco could barely service its operations (Growing Your Business, n.d.). In the third quarter, I increased the margin by more than 20% due to the low cash flow experienced by Hisco. As predicted by Mr. Sloane, I lost some customers and, as a result, reduced the company’s market share, seeing that Hisco’s primary competitors (Redex and Matek) possessed larger market shares in comparison to Hisco (Growing Your Business, n.d.). Therefore, in the future, Hisco should maintain the price rate changes within +/-20% to retain its market share and maintain its profitability and competitiveness. At the same time, product pricing is determined by the strategy implemented by the company. If Hisco executes a focused product differentiation strategy, the high costs would be justified since they are required for the company to recover the research and development investments (Kharub, Mor, & Sharma, 2019). On the other hand, a cost leadership strategy would facilitate large-scale production, earning the company economies of scale and trade discounts by purchasing raw materials in bulk. This approach would allow the firm to price the product at lower rates and still make a profit.

At the beginning of 2021, Hisco ventured into the market by implementing a focused product differentiation strategy to deliver electronic readers that featured superior quality. Later in the year, Hisco was forced to abandon the strategy halfway due to insufficient cash flows to finance both the research and development and Six Sigma activities. As a result, the company switched to cost leadership to better manage its expenses and fit within its budget (Kharub et al., 2019). This adversely affected the electronic readers’ quality, seeing that Hisco ranked last in this metric. Even so, with the change in strategy, Hisco managed to break even and make a profit in its last quarter.

Customers’ feedback is an important aspect and helps inform the strategy to be implemented in the preceding year. The most significant customer feedback during the year was from Ms. Buy, a representative of one of Hisco’s major clients, who was responsible for most of the hospital’s purchasing operations. In the first conversation with Ms. Buy, she emphasized the importance of low product pricing and decent quality. She argued that good-quality electronic readers were crucial in ensuring that hospitals offered high-quality service. Simultaneously, the healthcare facility could not afford the highest quality electronic readers due to the hospital’s financial constraints. In the second conversation in the last quarter, Ms. Buy underscored the essentiality of low prices since the hospital faced severe cash constraints. Therefore, Hisco should strive to deliver a decent quality product at a lower cost to lead the market (Cao, Jiang, & Wang, 2016). Notably, Redex, which offered the greatest product quality, did not lead the market since many customers could not afford the high-priced product. On the other hand, Matek led the market by delivering a lower-priced product at a decent quality. Therefore, Hisco intends to integrate cost and market leadership strategies in the coming years to enhance the company’s profitability and improve its long-term viability.

In the second quarter, Hisco recorded the most inferior financial performance due to the incurred losses. This unprofitability resulted from the organization purchasing excessive raw materials, more than required for the production processes. Hisco ordered 1500 units, each priced at $93.94, from Charlie Chipmaker. Moreover, the company engaged in a long-term commitment that entailed securing 1825 units in Q2’21, 2000 units in Q3’21, and 1500 units in Q4’21 at $82.74 (Growing Your Business, n.d.). This decision was inspired by episodes of insufficient raw materials experienced by the company, which constrained production decisions. To solve the raw material shortage, Hisco sought additional components and engaged in long-term commitment. This decision was inspired by the need to ensure raw material availability throughout the year to mitigate shortages, which would disrupt the company’s production processes (Melati & Slamet, 2019). Therefore, Hisco secured the raw materials to act as buffer stock. Even though this decision was justified, it resulted in more costs than benefits because working capital was tied up in the stocked raw materials, reducing Hisco’s liquidity and cash required to finance the production operations. In response, the company secured additional debt to resolve the funds shortage. Moreover, the company incurred increased operational expenses resulting from inventory carrying costs. The situation worsened as the company did not use all the stocked raw materials in the production processes. For this reason, Hisco should select an effective inventory management technique in the coming years. This approach should minimize inventory carrying costs while ensuring availability during production. The Just-in-time (JIT) technique would be preferable in that it eliminates the stock holding costs hence freeing up the working capital and increasing cash flow.

In the course of the year, Hisco enhanced throughput by upgrading the nine existing lines, which cost the company $171,000 (Growing Your Business, n.d.). This decision also resulted in more costs than benefits. Even though the company’s production capacity increased, the production did not compensate for the investment costs since the company couldn’t fully utilize the upgraded lines. In the next year, Hisco should reduce investment in throughput even though Lona lines highly recommend it.

Lastly, Hisco’s investment in employee training was a good decision in that it enhanced labor productivity by 80%, hence lowering the company’s labor requirements (Growing Your Business, n.d.). Even with the upgraded productivity, Hisco effectively utilized its labor capacity and maintained a small team to perform its operations. This sums up Hisco’s best investment in the year, as the returns obtained from this investment exceeded the initial cost of $10,000.

Capital structure

A capital structure entails companies’ primary approaches in raising finances to fund the entities’ operations. Debt and equity are the two primary strategies employed by most companies. During the simulation, Hisco employed debt, equity, venture capital, and owners’ equity to finance the company’s operations (Serfling, 2016). A competent capital structure is a source of competitive advantage as it can be harnessed into lowering the cost of capital. Hisco’s operations were primarily financed with debt, seeing that the company exceeded the credit line in the last three quarters of 2021. In the previous years of operations, Hisco’s financial leverage was 1% but escalated tenfold in 2021. The highest leverage was recorded in 2021’s third quarter (25.13), while that of the last quarter was 9.63, which was considerably high (Growing Your Business, n.d.). This indicates the company employed more debt than equity financing, which is unsuitable for the company. As a result, the firm incurred substantially high operation costs due to the extravagant interest expense. Additionally, Hisco obtained $130,000 venture capital from Victoria Cash in exchange for a 13% stake in the company (Growing Your Business, n.d.). The company should reduce its reliance on debt financing by enhancing its profitability so that the retained earnings could be plowed back into its operations. To reduce reliance on debt financing, Hisco should acquire more equity. In doing so, the firm should enhance its return on equity (ROE) to improve its viability and attract investors. Over the years, the company has recorded a negative ROE, which remarkably improved in the last quarter of 2021.

In the last quarter, Hisco needed to invest in corporate social responsibility through enhancing its environmental sustainability by purchasing solar panels. Given that the company’s cash resources were constrained, Hisco’s founder sponsored the solar panel project implementation by offering $150,000 in cash resources (Growing Your Business, n.d.). This implementation not only enhanced compliance with environmental standards. It would also lower the operating costs in the long run by reducing the energy costs incurred. Hisco should continue improving its commitment to CSR initiatives, particularly environmental sustainability initiatives. This commitment is crucial because it influences the customers’ perception of the company. According to a recent survey, millennials prefer purchasing from environmentally sustainable companies (Allen & Spialek, 2018). Therefore, these initiatives would improve Hisco’s image as a company responsible for its social costs, attracting more customers to invest in the company. On the same note, investing in environmental sustainability initiatives enhances compliance with environmental law and policies, establishing good relations with the regulators. Moreover, investors would be willing to purchase the company’s stock. Investing in environmental sustainability issues requires incorporating the projects into the company’s budget during the annual financial planning. In this case, this project was not considered during the planning process; hence, the company was not financially prepared to invest in the initiative and hence had to seek external financing sources.

References

Albanese, C., Crépey, S., Hoskinson, R., & Saadeddine, B. (2017). XVA analysis from the balance sheet. Preprint.

Allen, M. W., & Spialek, M. L. (2018). Young millennials, environmental orientation, food company sustainability, and green word-of-mouth recommendations. Journal of food products marketing, 24(7), 803-829.

Arnold, A. G., Ellis, R. B., & Krishnan, V. S. (2018). Toward effective use of the statement of cash flows. Journal of Business and Behavioral Sciences, 30(2), 46-62.

Bustinza, O. F., Bigdeli, A. Z., Baines, T., & Elliot, C. (2015). Servitization and competitive advantage: the importance of organizational structure and value chain position. Research-Technology Management, 58(5), 53-60.

Cao, J., Jiang, Z., & Wang, K. (2016). Customer demand prediction of service-oriented manufacturing incorporating customer satisfaction. International Journal of Production Research, 54(5), 1303-1321.

Curry, E. (2016). The big data value chain: definitions, concepts, and theoretical approaches. In New horizons for a data-driven economy (pp. 29-37). Springer, Cham.

Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2018). Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.

Fearne, A., Martinez, M. G., & Dent, B. (2012). Dimensions of sustainable value chains: implications for value chain analysis. Supply Chain Management: An International Journal.

Galabov, M., & Zlateva, P. (2019). Analysis of the natural disaster impact on the company’s economy by a modified Dupont model. International Multidisciplinary Scientific GeoConference: SGEM, 19(5.3), 53-60.

Growing Your Business (n.d). – A Management Simulation. (https://ashford.trisimulation.com/canvas)

Jin, Y. (2017). DuPont analysis, earnings persistence, and return on equity: Evidence from mandatory IFRS adoption in Canada. Accounting Perspectives, 16(3), 205-235.

Jing, B. (2016). Lowering customer evaluation costs, product differentiation, and price competition. Marketing Science, 35(1), 113-127.

Kharub, M., Mor, R. S., & Sharma, R. (2019). The relationship between cost leadership competitive strategy and firm performance. Journal of Manufacturing Technology Management.

Korkmaz, Ö. (2016). The effects of profitability ratios on debt ratio: The sample of the best manufacturing industry. Financial Studies, 20(2).

Melati, M., & Slamet, A. (2019). Application Economic Order Quantity (EOQ) for Control of Raw Material Inventory. Management Analysis Journal, 8(4), 453-462.

Mukhametzyanov, R. Z., & Nugaev, F. S. (2016). Financial statements as an information base for the analysis and management decisions. Journal of Economics and Economic Education Research, 17, 47.

Robison, L. J., & Barry, P. J. (2020). Accrual income statements and present value models. Agricultural Finance Review.

Serfling, M. (2016). Firing costs and capital structure decisions. The Journal of Finance, 71(5), 2239-2286.

TriCorporation. (n.d.). Preparing your financial commitments: Guide to developing a budget as the leader of HISCO [Video file]. Retrieved from https://qa.trisimulation.com/Simulation

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2021 Hisco Summary Annual Report

Week 6 – Final Paper

HISCO Summary Annual Report

Prior to gaining access to the Summary Annual Report through the Growing Your Business simulation, all previously assigned simulation work must be completed. After all previously assigned simulation work has been completed, the Summary Annual Report Template will be accessible through the Annual Report tab.

The summary annual report is a scaled down version of a full annual report. You will simply not have enough detail to complete the typical nine sections. For example, you are not responsible for the Auditor’s Report. Naturally, you are encouraged to review real world annual reports which can be used as a strawman in preparation. Your recently completed Annual Operating Review in Week 5 should be aligned with your Annual Report.

Preparing your HISCO summary annual report will be one of the most comprehensive assignments you will have completed during your MBA. You will gain an appreciation for the complexity and responsibility the senior executives continually face. Hopefully, you have experienced the holistic and competitive environment from the simulation. Your recently completed Annual Operating Review will provide the basics.

The information, qualitative and quantitative, in an annual report should provide current and prospective

investors (as well as any stakeholder) a complete insight into the company’s historic performance and its plans for growth and improvement over the next few years as defined by its strategy. Publicly traded companies are required by law to prepare and submit to many constituencies a variety of filings.  The most well-known is the Annual Report to Shareholders and related Form 10-K. An annual report is technically an unofficial document. The Form 10-K will typically provide the most comprehensive summary of the company’s history, financials, risks and opportunities, and current operations. The Form 10-K is submitted annually to the U.S. Securities and Exchange Commission (SEC).  Technically, HISCO is a private company (you may have sold equity to the venture capitalist) and only if it had publicly trades debt would be required to file a Form 10K.

As a future leader of a public or private company, you will learn the integrative nature of any business while you complete the HISCO summary annual report.  This document can become an important part of your e-portfolio in the program.  Your owner, Stanley Sloane, looks forward to reading your HISCO summary annual report.  While details may vary state by state, even if your career leads to growing a small private business, you will need to file an annual report with The Secretary of State in your jurisdiction, another benefit to learning from our final activity.

The following identifies specifics instructions for preparation of each required section.  The required sections to be completed will be found the word document from the model. Please remember to periodically save your work.  An online search will reveal innumerable sites devoted to annual reports.

The HISCO Summary Annual Report

• Must be completed using the template provided through the Growing Your Business
• For technical help with the simulation, please email HelpDesk@tri-sim.com
• Follow the Summary Annual Report Template as a guide to formatting your work. Standard APA formatting will not apply to this assignment.
• Must include the following:
  • Cover Page
    • You can design your own cover page. Should be reflective of your corporate image and may include a picture and/or logo. At a minimum, it will include the name, [simulation year] HISCO Summary Annual Report, as well as your name and date. The cover page can only be 1 page.
  • CEO Letter
    • The CEO Letter is designed to share the Strategy, Financial Highlight Summary, and Business Overview of the past year. Evaluate quantitative and qualitative techniques for business analysis and decision-making. It will typically also include the future growth outlook for the business (detailed in the Sales, Marketing and Industry pages below). The CEO Letter can be a maximum of 3 pages. 
  • The “Stan Sloane Letter”
    • HISCO’s owner, Stan Sloane, is very happy that he decided to hire you to help turn the company around. He is interested in having you stay on with the company. However, he will need assurance from you that you are committed to continuing to grow HISCO. Explain to Stan how you plan on running the company over the next two years. You should discuss the majority of the items you developed when you first came on with the company, including: whether you would make any changes to the SWOT analysis, whether you would change the company strategy, negotiations you would make with company stakeholders, future technology suggestions, growth expectations in general for the industry and specifically for HISCO over the next two years, any concerns that occurred in the past year that you would address, and any other information you believe would be relevant in order to reassure Stan that he has placed the company in the right hands. You will add this letter at the end of the standard Annual Report. This letter is not part of a traditional Annual Report. The “Stan Sloane Letter” can be 3-4 pages.
  • Sales, Marketing, & Industry
    • This section should detail all aspects of HISCO’s Value Chain, from supplier to manufacturing to the customer. Products, NPIs, Pricing, in an industry perspective of competition should be elaborated on. Utilize tools from marketing to manage the profitability of overall business operations. A review of your SWOT would probably help as well as your recently completed Annual Operating Review. An essential element is for current and prospective investors to understand how HISCO makes money and will be able to create growth and deal with risks. The Sales, Marketing & Industry section can be a maximum of 5 pages.
  • Financial Statements
    • Financial statements are the heart and soul of the annual report. This is a quantitative section that provides current and prospective investors a look into HISCOs financial performance. The financial statements consist of the Income Statement, Balance Sheet, and Cash Flow. We suggest you show a minimum of 4 Qtrs. for each of the past two years for the Income Statement, Balance Sheet, and Cash Flow. Utilize tools from finance management to manage the profitability of overall business operations. Consider expanding the lines within each statement in the model. You will need to provide details on the Credit Line. The Financial Statements section can be a maximum of 6 pages.
  • Management Discussion and Analysis (MD&A)
    • The Management Discussion and Analysis section provides the real detail on year to year performance. In your case, this will be simulation year vs. prior simulation year. Topics will be both qualitative and quantitative in all aspects of simulation year relative to prior simulation year. MD&A will certainly include a complete variance analysis of performance and the successes and failures of your decisions for the year.  It is the time you will delve into the details of your operating decisions. The MD&A section is typically devoted to the past (your future was described in prior sections). Reference to the Financial Statements is crucial as well as your recently completed Annual Operating Review. Graphics from your Business Intelligence Dashboard and your Variance walks on Income and Cash can provide visual insight into your performance. The Management Discussion and Analysis (MD&A) can be a maximum of 6 pages.
  • Notes, Appendices, and References
    • Any supporting documents, comments, information, a glossary of terminology, and/or clarifications you deem relevant to your annual report to assist current and prospective investors. The Notes, Appendices, and References are required and can be a minimum of 1 page and a maximum of 2 pages.  References can be in a bulleted or numbered format.