Nov 20, 2020 in Case Studies

Assuming Control of Air Tex Aviation
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Assuming Control of Air Tex Aviation

Question 1 a

 

The main challenge Ted and Frank faced was that the bills payable by Air Tex Aviation were so high that they consumed almost all the bank balance. Air Tex had $515,000 in the bank while the bills payable amounted to $510,000. This meant that the working capital would be rather low to pull the company out of its financial conundrum.

The company had previously been so centralized that one person, accountant Sarah, ran all the companys operations. Ted and Frank favored a decentralized system; this would be a difficult task to implement without employee resistance and bearing in mind that most of the employees in the company possessed no managerial skills or past experience in administrative functions. The challenge was training the employees, especially the department managers, so that they could instill the skills that they thought were necessary to run the company. Additionally, with the myriad of duties on their shoulders in the first few months, little time was available to perform all these activities.

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Decentralization of authority would be the precursor to the establishment of various departments, each under a department manager who would have authority to set policies, give credit, make purchases and collect debts. With no competent managers to run these departments and with little time to decentralize all the operations, Frank and Ted would be at the helm of the company for at least two months, literary making all the operations decisions. This was a challenge since none of them had prior aviation experience, even though they were shrewd managers.

All the departments were making losses and the company was even unable to inventory the required number of aircraft. This had collapsed the companys relationship with the chief dealers. Ted and Frank would be required to marshal enough revenue to convince the dealers that they could inventory enough aircraft to uphold dealer status. In addition, the short term bank notes posed a major threat if they were called. They would have significantly reduced the working capital that was vital at the beginning of their era at the company.

Question 1 b

When Ted and Frank acquired the ownership of Air Tex Aviation, the financial position of the company was very shaky. With a loss of $500,000, it was important that they maintained the short term notes to maintain enough fleet in the company to run daily operations. The risk was that the bank notes had been outstanding for a reasonably long time and it was likely that the bank would call the notes worth $300,000. This would throw Air Tex Aviation into a financial dilemma and bankruptcy. Even though Frank was able to negotiate with the branch manager of the Center National Bank to convert the note into a 24 month note, effectively removing it from the category of short term credit was a huge risk that could have easily led to a financial disaster. It would have wiped all the operating capital and halted the company operations.

There were various opportunities for Air Tex Aviation to exploit. Air Tex Aviation served the Center County in Texas. This is one of the fastest growing communities in the United States. A growing population meant that the demand for air travel would also substantially increase; Air Tex Aviation stood to benefit from this growth.

Prior to the financial problems that Air Tex Aviation was encountering at the time Frank and Ted took over the ownership of the company, it had been the largest supplier of aircraft to Piper Dealers. The department of aircraft sales had collapsed when the company was unable to finance the minimum number of aircraft that Piper dealers considered mandatory to be carried in inventory. Revivification of this moribund department presented a good opportunity for the company to make a lot of revenue.

Question 2

It was evident that the informal departments were making loses because they were not organized properly and were given little power to run their affairs. Sara Arthur, who served as the head accountant, was in charge of practically all the financial activities of the company. Even though she had worked for 20 years in the company, she possessed no accounting qualifications. It became necessary to establish a formal department under a manager with enough powers to run all the operations of that department. The departments head had little knowledge of the profitability of their activities since the accountant micro-managed the company. The creation of the profit center under a profit centre manager was important to manage the expenses and revenues of the departments. The profit center worked hand in hand with the department of daily report to ensure the finance activities of the department were in line with that of the company. This brought harmony in Air Tex Aviation that had been lost before Ted and Frank became owners of the company.

 
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The immense losses that had been recorded prior to the takeover were as a result of inefficiency and incompetence in running of some of the departments. The centralized system had especially made it difficult for the department heads to control and run their affairs smoothly. With no control of the funds coming in or going out, and with no authority to make decision and policies that would streamline activities in their dockets, these departments heads had been left toothless and their department moribund. Ted and Frank reversed the situation and gave authority to department managers over all the operations of the department. Evidently, it would be easier to make policies on the apt direction that each department felt was the most appropriate for it.

Establishment of the control center was also very necessary as this would provide the requisite support to the management and information to the department managers to make decisions. These changes in the management were important and necessary since Ted and Frank did not have enough time to train all the employees on the management approach they wanted them to adopt. Additionally, the two owners did not feel it was appropriate to inject new blood into the company and fire the old guards. Consequently, decentralization was an important aspect as it would empower the department managers and provide a framework that did not limit their activities but that supported them to do the right thing.

Question 3

The new system can allow the company to grow very successfully. Decentralization of authority has empowered the department managers to carry out their operations freely and without limit. As a result, they will be able to make policies that are geared towards improving departmental success. The task guidance system is especially very crucial in successful operation of the company. It will serve to educate department managers on the best approach and management of their activities. This system will ensure departments operations are in the best interest of the company and that there is harmony in the company.

The profit center in each department will also serve to align the financial activities of the department in such a way that priority in purchases is given to the most deserving item. The new system gives authority to department managers to manage their accounts receivables. They also possess power to grant credit and task for collections. This move is likely to motivate managers to take charge of their accounts receivables.

Question 4

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It is evident that poor management was the factor behind the dismal performance of Air Tex Aviation. Evidently, a chain of shrewd and appropriate decision making has transformed the stakes of the company and brought it back to its feet. Decentralization of authority and establishment of various departments have improved its operations; by August 1990, all departments had positive returns with the exceptions of aircraft sales department.

Ted and Frank shared responsibilities based on their skills and qualification. Ted took charge of educating the departmental mangers, handling creditors and implementing various control systems; Frank, in his turn, was handling the sales of aircraft and reestablishing sound relationship with suppliers. Their managerial skills are conspicuous in the way they handle employees, suppliers, the bank and Piper Dealers. They managed to negotiate for the conversion of the bank notes from short term debt to long term debt to maintain enough operating capital to run the company. Additionally, Frank was able to reestablish relationship with Piper dealers for the sale of aircrafts, which had collapsed due to financial difficulties. It is, therefore, clear that what was ailing Air Tex Aviation was lack of managerial skills that Ted and Frank possess and that served to transform it into a successful venture.

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