Analysis

Although the cash flow position improved in the second quarter (from 2011), the third and fourth quarters saw a sharp decrease in the cash flow for the company. This indicates that the business does not have a healthy cash flow, which implies that it may not have sufficient funds to pay for its daily expenses (e.g. wages for employees, lenders, suppliers, and other creditors). There are three possible causes for this trend in the companys cash flow statement: overborrowing, poor credit control, and overtrading. The last possible reason, and the most feasible, is the possibility of overtrading. As I found out in my interview with the CEO of the company, the firm aspires to achieve long-term growth, and has been employing aggressive growth tactics, such as attempting to widen its consumer base, especially through further investments in marketing. Overtrading is caused when a firm attempts to fill more orders than it has the capacity for, which may cause dramatic increases in outflows, especially in wages and variable costs. This is supported by the cash flow statement because of the steady increase in outflows such as wages and transportation. Three possible solutions to NeoClarus financial problem are increasing inflows, decreasing outflows, or seeking alternative sources of finance. Increasing inflows can be done by employing tighter credit control. However, since NeoClarus already employs tight credit control (its credit terms allow payments only within one month), it may encourage its regular clients to switch to its competitors products that offer more lenient credit terms. Also, NeoClarus may consider diversifying its product portfolio, an alternative to moving operations into India that will help in increasing inflows, that will subsequently improve cash flow. I will consider this alternative in more depth later on in my analysis. Another alternative that I will consider later in my analysis is the possibility of considering alternative sources of finance. This may consist of strategies such as taking out short term loans, or overdrafts, until the firm finds itself in a more favorable financial position. Also, it can employ more efficient growth strategies, such as becoming a public limited company, which would allow it to seek finance in the form of issuing shares in its company. The solution that seems to be most effective, considering the dramatic increase in NeoClaruss costs, seems to be reducing cash outflows. In order to do this, the companys best approach is cutting the one area of expense that has been rising and is consistently the most prominent cost for the company: wages and salaries. Over the last 5 years, wages and salaries have increased by almost 5 times the wages in 2009. This is caused by overtrading, as discussed before, primarily because of the firms rapid growth in operations. In order to effectively cut salaries, the most viable option is to move operations to a country that has lower labor costs, such as India. This would help in reducing the expenses faced by the company and improve its cash flow position. However, moving operations to India has many implications, primarily on the stakeholders of NeoClarus. A business move like this would require large scale retrenchment, resulting in the dismissal of the majority of its software engineers, though high ranking managers would still hold a place in the company (it is important to note, however, that a portion of these managers would be required to move to India in order to oversee the process of setting up operations there). As the survey shows, the majority of employees at NeoClarus chose between 8 and 10 on a scale of 1 to 10 when asked about the level of apprehension to a large-scale change in operations in the company. This implies that there will be large amounts in resistance to change, as well as stakeholder conflict, and I will deal with that now. The first issue is the negative reaction to change, in particular the possible stakeholder conflict. There may be a strong resistance to the companys move to India, and in order to analyze this, I will use Lewins force field analysis1.

Weightings provided by the CEO of NeoClarus

5- Reduced labor costs 2- Reduced cost of machinery 2- Increased competitiveness 5- Better Cash flow position Driving Forces Change: Moving Operations into India

4- Redundancies 2- Costs of recruitment 2- Costs of training 3- Decrease in employee morale 4- Customer uncertainty 4- Worse brand image Restraining Forces

As we can see from Lewins force field analysis, the restraining forces far outnumber the driving forces (19 to 14). The primary reason for NeoClarus considering the option of moving operations abroad is the reduced labor costs, however a large number of disadvantages are caused by this decision, in particular the stakeholder conflict between the directors (the CEO and other high ranking officials) and three other stakeholder groups (employees, managers, and customers). This will be discussed in the next section.

In order to effectively analyze the effect that the stakeholder conflict will have on the company, I have used a stakeholder map that will diagram the relative importance of each stakeholder that will be affected by the business decision to move operations into India.

Level of Interest Low High Competitors Employees Suppliers

Local community

Level of Power

Low

Government

Managers Consumers Shareholders Investors

The main stakeholder conflict lies with the stakeholders in the right two boxes of the matrix. The most prominent in the upper right section of the matrix is the employees of NeoClarus. Although they do not hold much power in the organization, they are most affected by a decision made by the company to move operations to India. Since the purpose of this move is to reduce wages and salaries by employing labor in a region with lower cost labor, major employee restructuring (i.e. employee redundancies) will be made by the firm. This may cause NeoClaruss brand image to worsen, causing less customer loyalty to the firm. In fact, the CEO of NeoClarus estimates that around 30% of his repeat customers are loyal to the company because of NeoClaruss image as a trustworthy, good quality, and friendly firm. Therefore, negative publicity due to large-scale retrenchment may be detrimental to the number of sales made by the company, which will only serve to worsen its cash flow position. Managers, who have greater power in the firms activities, may be demotivated by the sudden change in business culture. This may cause inefficiency in NeoClaruss production of the service, which may lead to higher costs. Another important stakeholder to consider is the consumers for the company. The majority of the customers of NeoClarus are repeat customers; since the company specializes in helping these firms with their annual taxes, it reduces costs for NeoClarus if they do business together every year. However, my questionnaire shows that the primary reason the customers stay loyal to NeoClarus is the quality of the service (as well as the brand image) of the firm, and that a fall in the quality of the service would cause the client to switch to one of NeoClaruss competitors. Shareholders will have to be kept informed as well; since this is one of the primary sources of revenue for NeoClarus, the firm will have to ensure that shareholders will be willing to continue investing in the company after a large-scale change such as this one.

High

Therefore, moving operations into India will have a negative impact on the majority of involved stakeholders in NeoClarus, an aspect to this potential decision that will have to be handled very carefully; the firm must resolve any stakeholder conflict effectively in order to keep efficiency, morale, and optimism for the companys future outlook high. The second issue is the fear of lower quality services provided by the new production method. Not only will the employees of the company be affected, but the clients of the company will face a decision to make; whether or not to continue business with NeoClarus after the bulk of its operations are moved to India. Through my questionnaire, as I summarized in the previous section, I have found that the majority of the sample firms have strong suspicion over NeoClarus undergoing major change in its operations, especially in moving its entire production process to another country. The main point of uncertainty was shown to be regarding the quality of the product, a point that the CEO brought up himself. Since he wouldnt be able to oversee operations in India, he would have to put into place an effective form of quality management. In order to do this, NeoClarus must implement a system of quality assurance in the new center of operations in India. One major advantage NeoClarus will get from this system being in place is the involvement of the employees of the company; since the majority of them are already demotivated and unsure about the companys change, involving them in the companys quality assurance process will improve their efficiency and help boost staff morale. However, the most important outcome of using a quality assurance system is the effect it will have on NeoClaruss clients. Since many of them indicated in the questionnaire that upon seeing even the slightest discrepancy in quality of NeoClaruss service, they would switch to using competitors services; a factor that would impede on NeoClaruss sales, which may serve to negatively impact their cash flow position. To successfully maintain quality of the service using quality assurance, NeoClarus can use quality methods suggested by Professor Deming, who suggested that using a quality assurance system that improves, rather than inspects, the production process would be the most effective way to ensure that the service stays at the same quality through the change. The system that would be used here would include careful planning carried out by all of the employees in the company, which may involve Kaizen groups (small groups of employees who aim to continually improve the way the firm operates). Once this plan is formulated, all thats left for the manager to do is carry out the plan and monitor progress in the company, while possibly informing clients about the sustained level of quality in the firm. However, this method may have an initial cost to implement, as employees may have to be trained, and quality professionals will have to be employed. Also, NeoClarus will encounter costs in terms of initial asset purchases in India, as well as recruitment costs (in terms of time and money; the recruitment process may take a considerable amount of time, also it may be expensive to find skilled labor). In addition, employees may have to be trained using on the job and off the job training, which will reduce productivity during that time.

NeoClaruss second option involves the company raising more capital. This can be done by increasing share capital, primarily by becoming a public limited company. A public limited company is a form of business that has the benefits of limited liability, and offers the general public the chance to buy their shares.