Purpose of Report
BluJay Aviation Inc. has been a successful business and entering into a new business requires assessment of the impact that the decision can have on the existing business and future possibilities of business expansion. The following report contains important findings related to the potential retail business which can be acquired through lease transfer of a gift shop located at the airport.
Benefits of New Business
- The foremost advantage that BluJay Aviation Inc. can have is the diversification of business risks which implies if one business is not able to generate the desired returns then the company may be able to cover up from another business that it may be operating (Kenny, 2009). With a new retail business, the company can add a new business line and manage it independently.
- As the proposed business is located at the airport premises, therefore, it could be easier for owners of BluJay Aviation Inc. to oversight the operations of the new proposed business.
- The company can have increased profits if the new business yields a good return on investment.
Challenges of New Business
- Understanding the business and managing it would require BluJay Aviation Inc. to hire additional staff which could further increase the expenses of the new business.
- Currently, the gift shop is not able to post any profits for the last three years and if this situation continues then BluJay Aviation Inc. would have to pay for its business expenses from other earnings.
Financial Review of Proposed Business
Based on the unaudited financial statements of HNK Co., the following useful key performance indicators are obtained.
|Gross Profit Margin||43.86%||42.31%||45.00%|
|Operating Income Margin||-15.40%||-3.77%||1.83%|
|Times Interest Earned||–||–||0.825|
|Net Profit Margin||-15.40%||-3.77%||-0.39%|
|Accounts Payable Turnover||–||–||2.78|
|Accounts Payable Period||–||–||131.25|
Evaluation of financials indicates that the retail shop has been able to post high growth rates for its sales, gross profit and operating income over the last three years from 2008 to 2010. Gift Shop has been operating at high gross profit margins keeping in view the nature of the business which is reflected from above 40% gross profit margin. This suggests that the retail store at the airport charges a higher premium over the cost of goods sold as compared to retail stores at offsite locations. However, it is incurring very high operating expenses which have a significant impact on the business’s ability to generate sufficient operating income. From these operating expenses, it can be seen that rent payable under the lease agreement is quite high and if the company decides to go ahead with the possible expansion of the business then it is suggested that the rental terms should be renegotiated. It has also been able to reduce the net loss that it has been incurring. The company has an inventory valued at $89,000 which is on credit from suppliers however, the analysis suggests that the HNK Co. is taking a very long time to pay back its creditors i.e. accounts payable period of 131 days (Stickney, Weil, Schipper, & Francis, 2009)which is indicative of the slow product/shelf turnover of the gift shop. BluJay Aviation Inc. HNK Co. has not been able to post any profits in the last three years and therefore, it can be considered as a risky proposition to acquire the new business.
Based on the review of the historical financial position of HNK Co. it appears as a loss-making business unit however for providing solid findings regarding the market potential of the proposed business further investigation has to be carried out to understand the terms under which lease is arranged and employees are hired. Moreover, marketing research needs to be conducted to evaluate customer responses.
HNK Co. (2008-2010). HNK Co. Unaudited Financial Statements 2008-2010. Embry-Riddle Aeronautical University.
Kenny, G. (2009). Diversification Strategy: How to Grow a Business by Diversifying Successfully. London: Kogan Page Publishers.
Stickney, C. P., Weil, R. L., Schipper, K., & Francis, J. (2009). Financial accounting: an introduction to concepts, methods, and uses. New York: Cengage Learning.