Scott Equipment Organization essay

Scott Equipment attempts to develop its business and to take a better position in the market. In this regard, the company has three options of its further marketing development, aggressive, moderate, and conservative. Each of the options has its own strengths and weaknesses. Therefore, it is necessary to analyze in details each option to understand the extent, to which they are applicable and worth implementing by Scott Equipment, taking into consideration strategic goals of the company and its intention to enhance its position in the market along with the increase of its profitability.

First of all, it is important to dwell upon the aggressive marketing strategy of the company that involves aggressive short-term debt policy. In this regard, it is necessary to define the rate of return, net working capital and current ration.

Rate of return = net income/total assets = 6 millions /60 millions = 9%
Net working capital = current assets – current liabilities = 30 millions – 24 millions = 6 millions
Current ratio = current assets/current liabilities = 30 millions/24 millions = 1,25

Therefore, the current ratio is 1,25 that means that the company can meet its debt obligations 1,25 times. At the same time, the company will have only 6 millions of net working capital. In such a way, the company may have difficulties with paying off its short-term debt and further business development but still the company can cope with the sort-term debt.

Furthermore, the moderate policy also needs the calculation of the rate of return, net working capital, and current ratio.

Rate of return = net income/total assets = 6 millions /60 millions = 9%
Net working capital = current assets – current liabilities = 30 millions – 18 millions = 12 millions
Current ratio = current assets/current liabilities = 30 millions/18 millions = 1,67
In this regard, the current ratio of the company indicates to its ability to pay off its short-term debt 1,67 times and, what is more, the company has 12 millions of net working capital that may be a solid ground for the further business development, even if the company pays off its short-term debt.
Finally, the conservative policy is the most conscious one but, to understand its effectiveness, it is still necessary to calculate the rate of return, net working capital, and current ration.
Rate of return = net income/total assets = 6 millions /60 millions = 9%
Net working capital = current assets – current liabilities = 30 millions – 12 millions = 18 millions
Current ratio = current assets/current liabilities = 30 millions/12 millions = 2,5

In fact, the conservative policy is the mildest in regard to finance of the company because it allows the company to hold a considerable net working capital, which the company can use for its further business development as well as for paying of its short-term and long-term debt (Heilbroner & Milberg 2000). At the same time, the company can pay off its short-term debt 2,5 times that is the high rate that normally indicates to a very stable position of the company and its stable financial performance.

On analyzing the three policies briefly discussed above, it is worth mentioning the fact that, at first glance, the conservative policy seems to be the most secure in regard to the financial position of the company. However, the secure policy does not necessarily mean profitable and prospective. What is meant here is the fact that the company will retain a large amount of capital that will not be invested in business directly but rather would stay aside. In addition, the conservative short-term debt policy will deprive the company of the possibility to obtain substantial financial resources, which the company can invest and increase its revenues and assets substantially in a short-run. Therefore, the company actually deprives itself of an opportunity to boost its business development using short-term debt more aggressively.

However, benefits of the conservative policy are also obvious for the company can secure its financial position. Potential investors can be certain in the reliability of the company, although competitors can outpace the company, if its business development turns out too slow because of conservative short-term debt policy.

In such a situation, the aggressive short-term debt policy can bring considerable benefits to the company. First of all, the aggressive short-term debt policy would help the company to raise funds fast and to invest money in the development of its business and assets (Holcombe, 2006). Therefore, the growth of short-term debt will provide the company with essential financial resources. This means that the company can boost its development at cost of increasing its short-term debt. At this point, it is worth mentioning the fact that the aggressive short-term debt policy allows the company to pay off its debt. Even though the net working capital of the company will drop to 6 million only, Scott Equipment still can use its financial resources borrowed for its business development.

On the other hand, the company will definitely face a problem of the lack of the further increase of its liabilities. What is meant here is the fact that the aggressive short-term debt policy will increase the debt of the company rapidly and the company will not be able to borrow as much in the future as it is going to do in case of the implementation of the aggressive short-term debt policy (Pine & Gilmore, 1999). Moreover, a considerable part of its revenues will be spent on paying off its short-term and long-term debts, if the company decides to conduct aggressive short-term debt policy. Hence, aggressive short-term debt policy is imperfect too.

In such a context, the moderate short-term debt policy seems to be the most reasonable policy because it provides the company with financial resources through borrowings but, at the same time, the company has relatively low short-term debt and 12 million of net working capital. Therefore, the company can use the moderate short-term debt policy, if Scott Equipment needs the steady business development and stable position in the market. In fact, the moderate policy will contribute to the balanced financial performance of the company and prevent the company from considerable downturns in its business development that may occur in case of the implementation of the aggressive policy. The conservative policy is also risky because there is a risk of being outpaced by major rivals. Consequently, the moderate short-term debt policy provides the company with the best balance of possible risks and expected return on investments.