CASE STUDY

SWAN REHABILATION COMPANY: A GREAT SUCCESS STORY

Question 1Capital budgeting can be defined as making an investment decision involving fixed assets. It is referring to a long term asset used in production which plan the best way how to fully utilize it and it is basically just a summary of planned investment. We believe in making capital budgeting decision, one should follow these steps:(i) Step 1:

The first step is to develop and formulate of a capital budget that outlines company long term strategic goal. This main goal will make the company to focus on their objective of what the company want to achieve. This will be a framework that help drives the performance of company and without a proper goals, the company cannot go further.

(ii) Step 2:

Step two is search out new opportunity investment project or new ideas. New ideas can come from all levels within an organization and may include things like more land, new equipment, and new lines of business that involve different processes. See which opportunities are actually realistic at the present time and which ones should be put off for later. See which opportunities are actually realistic at the present time and which ones should be apply later.

(iii) Step 3:

Step three review existing projects and facilities. This is the time where assets and resources been evaluated to determine how they are currently being used. If there is an asset that has not yet being fully utilizes, perhaps company can reduce cost to buy new machinery for new project.

(iv) Step 4:

Step four determines how much cash flow it would take to implement a given project and estimate how much cash would be brought in by such a project. (v) Step 5:

Step five evaluates proposed projects and creating the capital budget. Decision makers determine the risk and value associated with investing in the proposed projects.

(vi) Step 6:

Final step is implementation once the decisions have been made. Monitor everything to be sure it is done correctly. After the project gets started, review everything to make sure the finances still make sense.

Meanwhile on Kays case, the steps taken in making capital budgeting decisions were as follows:(i) First Step-Long term goalswere clearly identified where Kay outlined an ambition to become an entrepreneur conducting a clinical practice for stroke survivors based on up to date research while using an intensive treatment approach. Kay was very clear of what she wants. She had her own personal goal to achieve her mission for the next five to ten years. This idea was inspired by some barriers that she had, such as when she was attempting to introduce her own therapy programme while working in a rehab facility. (ii) Second Step-Kay saw an opportunity in a niche market specifically for stroke patient where the number of patients keeps on increasing. In fact, she realized a gap where every other disease in the United States had a treatment camp, but stroke, with the largest population of disabled people, did not. Moreover, she foreseen her vast experience in her own subject matter as an advantage for her in the ventured business area.(iii) Third Step- Kay utilized her vast knowledge and working experienceas a head of therapy in several hospitals to manage her own business in various aspects, including budgeting, purchasing of equipment and so on. By using her own seed money, she started venturing into the business on a small scale basis as a starting point before planning for expansion.(iv) Fourth StepAs a main strategy to reduce operation costs that is crucial in the initial stage of operation, Kay utilized her good relationship with suppliers which helpful in bargaining a good price (value for money) in purchasing clinical equipment.(v) Fifth Step- Kay used pricing strategy to keep their pricing structure within community standard through collaboration with her accountant. The accountant did the calculation and set the pricing of each treatment according to its treatment level. By doing so, the treatment price seen as affordable and at the same time Kay knew the performance of her company.(vi) Sixth StepIn the implementation/monitoring the project, a thorough monitoring mechanism was put in place to ensure the companys survival in a long run. An micro analysis was properly done before moving from another premise to another, additional workforce, introducing new practise and so on. Moreover, the selling of her business to another party will be done in a proper manner so as to ensure the current SWANs image to be maintained. Question 2In the case of purchasing of equipment for SWAN, it is viewed that the most appropriate capital budgeting method to be used is a Net Present Value (NPV).

NPV method is essential for financial appraisal of long-term projects and it measures the excess or shortfall of cash flows. Other than that, NPV model is assumed to be reinvested at the discount rate used. These are somejustification of choosing the NPV method:

(i) Time Value

The NPV method allows the company to consider the value of the money on the day the company pays it out and the value of the money on the day the company receives it. It means because the value of money changes over time specifically during inflation and deflation so company cannot rely on money being worth the same amount in the future as it is today. As this will help Kay in preparing budgeting as Kay can determine what investment should she prioritize and which should bethe later.(ii) ValueThe NPV reflects the amount of income that the project will produce at a determined rate of return and in the same time NPV method is able to determine whether the project will increase your firm's value. The NPV calculation reveals the dollar amount that the project will produce. Example, Kay wants to invest to purchase equipment for a five year project with an NPV of $100,000 will increase profits by $100,000. Projects with a negative NPV will decrease a firm's profitability.(iii) Ranking Capability

NPV method can be used to compare projects. NPV calculates current total value of the project. This method considers each of the expected cash receipts and cash payments and the value of the money at the time of the transaction. Kay can use NPV to calculate which equipment is most likely can bring the highest value to the company in term of save cost of purchasing, maintenance cost but can be used for a long time and effective in treat patients. The company may then pursue those projects that bring the most value to the organization.(iv) Cash Flow

The NPV method can determine when the project can gain income as The NPV method reveals how soon a project will start producing income and how significant that income will be. SWAN maybe cannot it profit in year one, Kay can use NPV to calculate when will she get margin profit or supernormal profit. By doing this, SWAN should not be panic if they cannot generate profit in short term period as it is expected.(v) Return Percentage

The NPV is expressed in rate of return as some business managers would rather see a percentage. Higher dollar amounts do not necessarily translate into higher returns. SWANs management can easily understand how to read the result of the NPV calculation without having so much knowledge of finance. In buying equipment, SWAN can know how many percentage point of return they can obtain based on per use of equipment per day. This then can be accumulated to get projection of 1 year sales service.Question 3

Kay faced several entry barriers when she started SWANs entity as follows:

(i) Capital Requirement

At that point of time, Kay does not have enough capital to start up SWAN.With her own seed money, she started the SWANs operation in a warehouse owned by a vendor who was developing a piece of equipment for stroke rehab includingutilizing the vendors equipment to treat her patients at no cost. At the beginning, due to lack of capital, Kay does not employed workers because she could not afford to pay for labour cost and advertising the SWANs operation.(ii) StiffCompetitionsWhen she begunthe SWAN project, Kay at that time was facingwith a stiff competitionfromseveral hospitals that providing treatments for the stroke survivors. SWAN at the earlier stage was not yet recognized famously by the stroke patients due to stroke survivorspreference on treatments provided by those hospitals. This could be due to a perceived perception that those hospitalshad more experience and ableto provide better quality of services via itsefficient equipment when dealing with stroke illness. (iii) Strong Brand Name and Customer LoyaltyDue to the competition with several big hospitals, it was hard for Kay to switch the stroke survivor mentality to trust her own treatment programme.It took some time for SWAN to break the tradition where some of them were loyal to big hospital such as the Phoenix health care.(iv) Lack of Business KnowledgeKay does not have sufficient knowledge and expertise on how to run a proper business model. With a focused expertise in her own subject matter plus some relevant management knowledge, she refused to take a risk when she only used her seed money to start her venture. However, it is viewed that these are not sufficient enough to nurture the companys growth. With a sufficient and up to date knowledge about the current business environment, she should be able to start her business in a more spacious premise without using her seed money. It could be in the form of Governments grant/soft loan provided by the US Government.(v) Uncomfortable PremiseAt the early stage of SWANs operation, she only rented a small warehouse to conduct her rehab programme. With a limited space for patients treatment, her premise could only accommodate a small number of patients at one time. This has delayed the companys growth where the patients who felt discomfort tend to return back to the traditional way of treatment provided by the competitors.

(vi) High Switching CostSWAN at the early stage of operation might facewith high switching cost because of SWANs unrecognized brand name, small location of business operation and low trust from the eyes of the publics. Stroke victims who aimed for fast result might go to hospitals. Question 4

SWOT analysis of SWAN RehabilitationStrengthsWeaknesses

(i) Experience in Intensive Therapy for Neurological DiseasesVast working experience in a rehab facility and knowledge on intensive therapy for neurological diseases. This includes experience in budgeting, purchasing of equipment, designing and implementing new programming, and supervising employees. Moreover, Kay is well-known through her tremendous CVs as follows:(ii) Strong Business NetworkingKay has a strong business network with companies that develop and sell therapy equipment. This benefited SWAN in terms of opportunity to test newly developed therapy equipment produced by the companies prior to commercialization.

(iii) Well-Established Brand Name

SWAN is well recognized as rehab center for stroke victims. SWANs brand name often used by the manufacturers as a marketing tool to promote their equipment that was tested/used by SWAN.

(iv) Pricing Strategy

Proper surveys to keep their pricing equal to community standard.

(v) Friendly, Feel Good Atmosphere to Clients and EmployeesThe best quality that attracts and maintain clients, the patients feel SWAN care for them and feel appreciated:

a. Clients

subsequent services after service were taken care where SWAN contact patients and family members after discharge to update, send get-well card, sympathy card, flowers if there is a death in family

free trial and re-fitting of therapy equipment to patient;

concern on knowledge sharing about stroke, brain injuries and other neurological diseases among patients and patient families through free seminar, lending library and during therapysession.

b. Employees

Maintain well educated employees through continuous education including education funding. If there is new equipment, Kay makes sure her staff get educated on how to use the equipment.(i) Insufficient Knowledge and Fund for Business Start-Up/Expansion

SWAN is just a medium company that provides reasonable price to community. SWAN emphasizes on quality of treatment to patients at affordable price. Being a pioneer in the new treatment method, with a strong capital, SWAN should be able to set a higher introductory price. However, SWAN couldnt do so due to limited source of funds available during the planning stage. The same problem occurs during the planning stage of expansion project which resulted to the hiring ofexternal experts.

(ii) Availability of Other Customer Support Services

SWAN has no patient van as a mode to transportation their clients to the rehab clinic. The clients have to go there by themselves.

(iii) Health Insurance to Employees

SWAN is just a small growing business, at this stage SWAN cannot afford to provide good health insurance. At this stage SWAN provides monthly insurance allotment to its employees.

OpportunitiesThreats

(i) Increasing Number of Stroke Victims

There are more than 700,000 new stroke victims every year and most of whom do not get proper therapy.

(ii) Position/Engagement in Related Organization Kays engagement in areas related to her subject matter can be seen as a platform to further expand the SWANs image. Her current involvements include:

speaker on courses to physical and occupational therapists on therapeutic intervention

president cum speaker at the Arizona Physical Therapy Association

presented proposals that were accepted at national conventions

active in professional associations

engagement with the Arizona State University on the usage of SWANs clinic for students projects involving stroke survivors.(i) CompetitionEmergences of new clinics claim to be just like SWAN. As the number of stroke victim increase every year, other clinics that provide same services like SWAN also increasing.(ii) Governments Rules and Regulation

The enforcement of the Balanced Budget Act in 1997 is a clear example of the Governments intervention which had dampened the US healthcare industry. Hence, it is not possible that the same kind of regulation be introduced by the Government to regulate the industry.

(iii) Economic StabilityInflation, availability of labor, increasing costs of equipment may implicate the SWANs operation in a long run.

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