Widget Manufacturing

Affiliation Capital Management. a Case Conceptualization of Widget Manufacturing Is Arnold correct in his concerns? Will the cost of FX (Foreign Exchange) transaction expose management offset the potential profits from this opportunity in Mexico?

Yes, Arnold should be concerned with the foreign exchange rates of Mexico. it is a vital factor to consider before investing. In a highly unstable country, or a country experiencing high rates of globalization, there is high capital risks involved especially during currency exchange. Exchange rates volatility not only destabilizes big corporations and multinational firms but also directly affects the medium sized and smaller firms. (Sagner, 2011, p.&nbsp.83) In addition, Arnold’s analysis proved that some multinational firms have been making huge profits from investments in Mexico, but were affected by the global recession which reduced the Mexico GDP from an average of 2.3 percent to a – 6.5 percent. Despite the I.M assurance that the firm will have alternative methods to reduce the FX in expenses such as payroll, purchasing, and lease costs, there are major risks involved, which Arnold has to address. After investing in Mexico, the widget company will experience three types of currency volatility risks, which include transaction exposure, translation exposure and economic exposure. The three major risks are not covered in the IM assurance and hence Arnold’s concerns are logical and valid.

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Are there other working capital issues Arnold should consider in deciding on Mexican operation?

In prior to investing, the Widget Manufacturing capital management should analyze the capital investments involved in a larger perspective. The main aim of the capital management team is to ensure that the value of the firm increases gradually and to uphold profitability. Therefore, Arnold should consider several other factors other than the currency volatility (FX rates). the factors to be considered include, but not limited to, Support capital, liquefaction value, account receivables and payables, and general risks. Support capital is the supplementary resources that are required to enhance productivity of the mainstream capital. they include infrastructure, labor, management etc. Before investing, Arnold should consider the possibility, whether Widget Manufacturing will find the desired workers, management, and sufficient infrastructure network to support the proposed venture. Similarly, he should consider the liquefaction/resale value of the investment, following the thriving unstable economy at the time of decision-making. it is highly likely that the capital will depreciate after investment. The risk calls for an indepth analysis of Mexico market to ensure that the business withstands the competition and attracts a reasonable liquefaction value in case of collapse. In addition, account payable and account receivables are vital components, which require an empirical balance to support the operations of the business. With a great understanding of the ratio, the organization will be able to determine the appropriate budget, injections and withdraws. (Sagner, 2011, p.&nbsp.17)

Should Arnold seriously consider either the second Chicago bank technology (Called “Second Cash”) or an EPR program, such as those offered by SAP and oracle? What are the initial steps in deciding on an appropriate course of action?

Following the current trend of online banking, it is important that Arnold consider the possibility of adopting to replace the existing second cash banking. Online banking has a number of advantages as compared to second cash banking. For instance, online banking is fast, reliable and easy to follow and asses, unlike other form of banking where paper work is needed. Similarly, online banking simplifies data collection through quick analysis of customers’ feedbacks. However, before adopting the online banking, Arnold should embark on in-depth case study of the banking systems to identify whether the information he has been receiving is valid. (Sagner, 2011, p.&nbsp.91)


Retrieved from http://www.eldis.org/fulltext/kippra2.pdf

Sagner,&nbsp.J.&nbsp.S. (2011). Essentials of working capital management. Hoboken, NJ: Wiley.

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