Discuss on Financial Report …………………..
TABLE OF CONTENTS PAGE
- 1. INTRODUCTION…………………………………………………………………………3
- 2. COMPANY INTRODUCTION…………………….……………………………………..3
- 3. FINANCIAL STATUS…………………………………………………………………….4
- 4. INTERNATIONAL TRADING STRATEGY…………………………………………………….6
- 5. EXCHANGE RATE RISK MANAGEMENT AND RECCOMENDATION……………..8
- 6. COUNTRY OR POLITICAL RISK MANAGEMENT AND RECCOMENDATION…..9
- 7. CONCLUSION……………………………………………………………………………10
- 8. REFERENCES…………………………………………………………………………..13
The growth and expansion of any company is the best reward and it is mainly one of the main objectives of a firm at inception. However for a company to attain this it must employ good analytical methods of the financial data at the preparation stage and also at the reporting stage. Good data preparation skills and knowledge are essential so as to ensure the inferences drawn from such data is true and can be used by analysts in their forecasts and predictions of future performance. The analysis and conclusions drawn from any set of data from the company will assist the management in formulating policies and procedures that will optimize the operations and production processes in a company. It is therefore imperative for the management of a company to invest in good data collection and analytical techniques in order to arrive at logical conclusions.
Berendsenplc is a company in the textile service business and operates in fifteen countries in Europe. It was formed following the acquisition of the SophusBerendsen by The Davis Service Group in 2002 and its headquarters are in London.It is dominant in its markets of operation especially in linen rentals, work wear rentals and laundry services. It had a turnover of 992 million pounds as at December 2011 (Peter, n.d). It is listed in the London stock exchange and had a market capitalisation value of 909 million pounds as at December 2011.Their main brands include berendsen, sunlight, and spring grove which have more than 100 years of experience each. They provide service solutions in sourcing, cleaning and maintaining textiles required by their customers. Their business is divided into three main lines; Workwear, facility and linen (Grens ,n.d).
The company has been stable financially since 2007 as shown by key variables summarised in table1.
|EPS(EARNINGS PER SHARE(pence)||38.4||39.3||39.4||41.7||48.4|
Table1 (All figures are in millions of pounds unless stated)
Quality products and services ensure that a company is able to maintain and increase its customer base and also the market share (Collins, 1993). Its products remain relevant and competitive when compared with those of competitors. However many of the subsidiaries experienced financial shifts mainly due to changes in exchange rates in their markets of operation and this affects the consolidated figures.
Risks: The Company will need to monitor the commodity price changes of their raw materials because an increase in the price of raw materials will require the company to increase commodity prices so that they can realise set targets on revenue and profits.
The net profit for the period has reduced especially in 2010. This is because from 2007 the company has carried out an ambitious expansion strategy which includes acquisition of Permaclean Group in Germany and also acquisition of UK clinical solutions and decontamination business in 2007, entry into the Baltic States in 2008 and there was also the opening of a processing plant in Czech Republic in 2008. These are projects that involved large capital outlays and many operational expenses which usually eat (Berger, 2008) into the company’s profitability. The company also experienced several transactional risks due to various currency exchanges regimes it had to encounter.
Risks: The Company must operate optimally because any failure to realise net profits will create panic among the shareholders and other stakeholders.
Earnings per share
These have continued to increase over the years. This is because the company has continued to make profits over the years and the confidence of the investors has been high. The continued expansion of the company especially in overseas markets promises a bright future to the investors who have continued to hold on to their shares as they expect higher returns in the future.
Risks: The continued retention of earnings may make the investors dispose their shares and seek other stocks of companies that pay more dividends. This is especially to the short term investors.
The company has been paying dividends to the shareholders every year. This is because the company has been making profits in every year. However most of the earnings from the shares have been retained by the company to finance its expansionist strategy. These retained earnings have also been used to hedge against the exchange rate risks that the company has been exposed to during expansion (Howard, 2007).
Risks: The Company’s dividend policy should be enhanced to benefit the short term investors. But this will require the company to reduce their retained earnings which may affect the firm’s expansion strategy.
These represent the assets of the company less the liabilities. They have experienced some decline due to the increase in liabilities. The firm’s expansion has made it incur many liabilities but in the long run the full benefits of the expansion will be realised.
INTERNATIONAL TRADING STRATEGY
The firm’s management has resolved to trade through wholly owned subsidiaries in the foreign markets. Each of these subsidiaries has its own Board of Directors and management team that is answerable to the overall Chairman in the UK. The firm wants to be strategically placed and be a global leader in the textile industry. Through its wholly owned subsidiaries the company will incur low per unit costs of production.The company will do most of its production locally through the use of local suppliers and subcontractors. This will help the company hedge against import tariff shifts (Michael, 2004). The elimination of importation costs, transport and warehouse charges that the company would incur if it was relying on imports will improve the profitability of the company. This is because the company will own the premises and the production process. The company will also able to centralise all its operations and be able to cut on the lead time (Sergio, 2000) required for planning and strategising for production processes to start. There will also be higher sales volumes of its productsandhigh market penetration. Due to low production costs the company will have enough capital to invest in aggressive marketing of its products in the new markets through sales promotions, branding and audio adverts. The company will also have great potential to grow both in market share and profitability in the long run. This is because it will enjoy economies of scale in the production and distribution of its products. The company should also negotiate an investment agreement with the host government. This agreement will help the company to know the policies of the host government on matters concerning payment of remittances like royalties, dividends and also its stand on the company’s bid to export to other markets.According to Fred (2003) the company will also be able to know from such an agreement the taxation methods and rates that will be applicable to its operations and how they are determined. This is important for the forward planning in the company’s business. The firm will also state its corporate social responsibility and its obligation in provision of social amenities like schools, health centres and public toilets.
However the strategy of trading with these wholly owned subsidiaries has its pitfalls of risksand obligations that the company will be required to adhere to. The Company will spend a lot of capital in the acquisition and setting up of the business. These set up costs may take a long time to recover and the subsidiaries could go for long periods without realising profits( Davies,2007). This will mean low returns to the shareholders and this may lead to panic selling in the stock market. This will eventually reduce the market capitalisation of the company and also reduce the capital available for investment activities. This strategy also calls for high level of commitment by the firm’s management in implementing decisions. The management will have to come up with very efficient management models and procedures. The company will also face stiff competition from the established operators in the foreign markets who will guard against their market share. Berendsenplc will therefore have to invest a lot in advertising and marketing activities to be able to penetrate the market.
EXCHANGE RATE RISK MANAGEMENT AND RECOMMENDATION
The company will be required to devise good tactics because most of the buyers prefer trading in their local currencies even though most of the raw materials were purchased using hard currency. This calls for efficient market studies to analyze the volatility of the market in order to minimize any potential losses that may stem from use of currency.The company in its pursuit of foreign markets will encounter various exchange rates because the currencies involved in the various jurisdictions are different (Richard, n.d). The company will identify whether the country of operation uses hard or soft currency. Hard currencies like the dollar, pound and euro are widely acknowledged internationally and can be used to perform transactions across boarders. But where the country’s local currency is not recognised internationally, the company will be exposed to transaction risks as any changes in exchange rates will affect receivables, payables and even repatriation of profits (Horcher, 2005). The firm will also be exposed to translation risks that will affect the valuation of subsidiaries and eventually the consolidated balance sheet of the organization. During the end of a trading period consolidation can be done at the prevailing exchange rate at the time or at the average rate for the period. Translation risks of the foreign subsidiaries are measured by the level of exposure of the net assets (assets less liabilities) to any potential exchange rate shifts. In dealing with exports, the company can solve the problem of exchange rates by pricing the export goods using the current exchange rate. The recipients of the goods will be required to pay spot on for the goods and the company will be sure there are no losses that stem from exchange rate shifts. The company can also decide to net all foreign exchange receipts with foreign exchange payments so that if they export to a particular country and also import may be raw materials from the same country, all those transactions can be conducted using one currency.
In countries where the local currency is not recognised internationally, the company will be required to negotiate a Futures contract with local financial institutions in the country of operation (Zhao, 2005). This contract will guarantee the supply of a specific amount of foreign currency at a known exchange rate in the future. The company should factor in the time-value of money when it is assessing the risk of currency exchange fluctuations. It can then consider insuring against losses that may be incurred later when buying the futures. The company can also sign a forward contract with a financial institution which will assure the supply of any amount of foreign currency in the future at a known rate. The company can also hedge against currency fluctuations by opening a local bank account in the country of operation. All the revenues that will be earned in that country should be banked in that account. All the purchases that are made in that country should be paid through that account. If there are any foreign payments, the company can make the transfers through the account and this will minimise the exchange fees to the company. The company can also acquire a loan in the currency which it mostly uses; the interest paid on that loan can cancel out with the returns it will get from not being affected by the daily shifts. This is because it will no longer be required to buy these hard currencies on a daily basis as it will have enough in stock. The company can also negotiate fixed rate exchange contracts and then all the income can be priced at an exchange rate equal to or greater than the fixed rate. The country can also guard against potential exchange risks by providing a line item in its financial reports of maybe 10% of overall expenses. This will always check any shifts that will occur on the financial statements and the shareholders and other interest groups should be notified on this.
COUNTRY OR POLITICAL RISKS MANAGEMENT AND RECCOMMENDATION
These are risks of loss that the company is exposed to when investing in a country due to changes in the political structure or the policies of the country (Beulig, 2006). These include internal conflicts, business setbacks like contract renegotiation or cancellation by host country, terrorism, restrictions on repatriation of profits and politically driven increases in taxation. The company needs to assess carefully the government’s attitude towards foreign investors in the countries they seek to invest. This can be done by carrying out surveys of the foreign investors operating in those jurisdictions. Also before the signing of the investment agreement the management should ensure it has engaged all the relevant government departments so that they can get assurances on the part of government. This is essential so that when there are acts of for example civil disobedience the government can have a responsibility on protecting the premises of the company from damage and vandalism. This is in recognition of the advantages the foreign investor brings to the country such as employment of locals, payment of tax and also the potential of encouraging other foreign investors to come. The company can use integrative techniques to become like one of the indigenous firms. This can be done by cultivating good relations with the host government through corporate social responsibility initiatives like building schools, health centres and other social amenities. The company should also undertake to adhere to the set labour regulations to avoid being blamed for abuse because this will give it a negative publicity which can affect its future engagements with the state especially on license renewals.Also most of the products can be produced locally as much as possible using local suppliers and subcontractors. Also any capital required should be raised through the local financial institutions. The company can also diversify the production of its goods in a number of countries so that if there is political turmoil in one its operations do not become grounded. It will be easy to direct its activities to the other without suffering stock outs. Country and political risks should be managed from the top of the organization (Class notes on slide). The board and management should communicate the firms risk tolerance levels to the other employees and it should also be known which business unit will handle those risks. This is because managing political risks will directly impact on the company’s performance both in the short and long run. Managing political risks can make the company analyse the impact of impending social, regulatory and economic changes (Brenson, n.d). This will especially be of great importance if the company is in a highly regularized business zones. The company can rely on the prevailing political environment to make crucial decisions of expansion and more investment in their production processes. In many business environments political risks usually have a very big impact on the supply chain, their reputation and this can even affect their market share. The evaluation of political risks by the firm’s management will help optimize decision making. High political tensions in a country will put away investors and also reduce productivity. Insurance companies will price their policies very highly due to the high chances of unrest. This eventually makes business undesirable and very expensive. The portfolio view of these risks will assist the management in viewing their risks globally and assess their relationship. This will help them view whether the risks in one geographical region cancel out with those in another. This can help in making decisions that help the company maximise operations in those areas that are seen to be favourable to the business. The analysis of these risks has a very big impact on the continuity of operations in one region as compared to another. Business investment decisions heavily rely on the analysis of how friendly the policies of a country are when compared with the operational procedures of the company. The There should therefore be an established framework in the company for reporting political risks because they will affect future operating and investment decisions of the firm.
The procedures adopted by a company to deal with the various risks in its business are very vital in the realisation of its profits and other strategies like expansion into other countries. During establishment, the company must identify all the risks that it will be exposed to and come up with ways of combating them. The risks must be tackled like any other management issue and structures must be put in place to mitigate their occurrence and there should be known methods that the company will adopt in solving them. The company should provide relevant insurance covers for the various risk levels. Such levels include firm specific risks like inconvertibility of the host currency to hard currency and expropriation risks involved in transfer of assets to home countries.
The identity of all these and ensuring the firm is adequately covered will be of utmost importance(Kennedy, 2009). The risks that the company is exposed to should also be prioritized. Those that seem very likely to occur should definitely be given priority. The choice of stake holders that the company will do business with is also very important. The choice of local suppliers and other service providers in the host market should be done competitively to avoid obstacles. The company should enter into clear contracts that have exit clauses to avoid any legal collisions with locals. However risk management is not a one off exercise, there must be continuous review and monitoring of the review management policy the company will adopt. This will ensure the correct identity and assessment of risks to ensure appropriate controls are put in place.Failure to identify the risks face a firm will be very detrimental to the business. The company will face enormous challenges that may even cripple its operations. The formulation of the risk management policy should be done in the initial stages when the company is being set up or when it is setting up the subsidiaries. This will enhance quick response to the challenges that will need immediate address and the company will not suffer much losses. Also the risk management policy will ensure the reports the company gives to its shareholders are accurate and can be relied upon in making future investment decisions.
Berger, K (2008) Elements of Financial Reviews. London: Pittman Books Ltd, P.56
Beulig, N (2006) General Economics. Mexico: Welsh Publishers Ltd,P.41
Brenson, H (n.d) “ Risk Management Standards” (Online ). Available from http://www.businessrisks.org/ (Accessed on 20th April 2012)
Collins, D (1993) Financial Reporting and Analysis. California: John Wiley and Sons, P.21
Davies, W (2007) Overview of Financial Risks. Sydney: Patmore Books Ltd, P.9
Fred , A (2003) Mitigating Financial Risks. New York: Keranson Publishers ltd, P.53
Grens, V (n.d) “ Berendsen Product lines” (Online ). Available from http://www.berendsenplc.com/ (Accessed on 20th April 2012)
Horcher, K (2005) Essentials of Financial Risk Management. London: Holmes Ltd, P.5
Howard , S (2007) Fundamentals of Financial Management. Stuttgart: Desarc Printers, P.33
Kennedy, D (2009) Essentials of Risk. London: Cambridge Press, P.77
Michael, K (2004) Managing and Measuring Risks.Warwick: Vantage Books Ltd, P.52
Peter, D (n.d) “Berendsenplc Performance” ( Online). Available from http://www.businesslink.gov.uk/ (Accessed on 20th April 2012)
Richard, N (n.d) “International Trading Strategy” (Online). Available from http://www.businessstrategies.com/ (Accessed on 20th April 2012)
Sergio , S (2000) Business Risks and Management. Edinburgh: Groag Educational Books, P.6
Zhao, X (2005) Credit Risk Management.Leeds: Khan Books Ltd, P.27
Class Notes on the slides
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