“Financial Structure” is simply the Liabilities and Owner’s Equity side of the balance sheet expressed in percentages. Given your performance measures, what should your financial structure be? Why?
Accounts Payable
What should your accounts payable policy be? Accounts payable (AP) is debt. You are leveraging your vendor’s money. However, at 30 days they withhold deliveries and production falls by 1%. Your production costs go up as workers stand idle during parts shortages. At a 60 day policy production falls by 8%. At a zero day policy there are no shortages. Given your measures, what should your AP policy be?
Current Debt
Current debt is typically used to fund inventory and accounts receivable (AR) . However, those accounts could also be backed by retained earnings. Given your measures, what should be your policy towards current debt?
Long Term Debt
Long term debt is used to fund plant and equipment. However, you could use equity (common stock plus retained earnings) . If you eliminate long term debt, its interest payment will disappear, and earnings will go up. However, the profits used to pay off the debt could have been invested in new plant and equipment, or you could have paid dividends to shareholders.
The Market Continues to Grow
The market continues to grow. Chances are you will make significant investments in new plant and equipment. What mix of long term debt, stock issues, and retained earnings will you use to fund investments? Why your particular mix?
List your performance ratios and the priority weights that you want to give to them. The most you can weight each measure is 40%. Your weights must ad up to 100%. Therefore, you must select at least three measures.
Predict the effect your performance measures will have on these tactics: