Guillermo Furniture Concepts

Introduction

Guillermo Furniture is a manufacturing company specializing in hand-crafted furniture owned by Guillermo Navallez. Located in the vacation spot of Sonora, Mexico, business was thriving with abundant lumber and relatively inexpensive labor. However, the environment started changing in the late 1990s because of competition and rising labor costs (University of Phoenix, 2011). As a result, Guillermo Furniture started to experience a shrinking profit margin and began to recognize that changes would need to be made.

Finance Principles

The first step for Guillermo is to gain a clear picture of corporate finance principles as they relate to his operations. The principles of finance are the basis for which financial management and provide guidance in decision-making (Finnerty & Stowe, 2007). The finance concepts of self interest, behavioral, signaling, diversification, risk-return trade-off, and comparative advantage are seen in the Guillermo Furniture Store scenario (University of Phoenix, 2011).

The principle of self-interest is focused on the thought that people will operate in the most financially advantageous manner (Finnerty & Stowe, 2007). In the case of Guillermo Furniture, alternative production methods are considered so that Guillermo can continue to maximize his profits and avoid the rising labor costs.

The principle of signaling broadens the principle of self interest and the principle of behavioral is the application of signaling. Signaling means that actions express information. In the case of Guillermo Furniture, Guillermo’s interest in becoming a distributor for the competition has the potential to indicate many situations, possibly even that his business is becoming distressed. The behavioral principle is using the information conveyed in the signaling principle and is typically used when there is a limit to the level of knowledge or when its use is the most cost-effective method (Finnerty & Stowe, 2007). This is...