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CHAPTER 36 - FINANCE AND ACCOUNTING STRATEGY - Coggle Diagram

- - - - 01 - CURRENT PROFITABILITY AND BUSINESS PERFORMANCE OF THE BUSINESS ARE ANALYSED
      - 02 - THE AVAILABLE OF SOURCES OF FINANCE IS ASSESSED (explaining gearing ratio could help in finance decisions)
      - 03 - THE RELATIVE SUCCESS OF THE COMPANY'S CURRENT STRATEGIES COMPARED WITH THE COMPETITORS STRATEGIES FROM THE SAME INDUSTRY
  - - - Statement of profit or loss and statement of financial position
    - - General report of the major achievements of the company in the past years and how political and economic environment affects the company's prospects in the future
    - - A more detailed analysis of the last financial year, broken down by area or main product divisions. major new projects are explain and any mergers/takeovers closers or rationalisation that have occurred during the year is briefly mentioned
    - - audit by independent firm of accountants on the accuracy of the accounts and the validity of the accounting methods used. if there are no problems with the accounts then its classified as fair and true view of the accounts, if they are real concerns then the auditors include it in the report details of disagreement between themselves and the management over the reliability of the accounts.
    - - contain basic information needed to assess the position of the company.
- - - - 01 - RATIOS FOR PREVIOUS TIME PERIODS
        ALSO CALLED AS TREND ANALYSIS THAT ALLOWS MANAGERS AND OTHER STAKEHOLDERS TO ASSESS:
        01 -is profitability rising over time or falling ?
        02 - is the business in a more liquid position than last year ?
        03 - are financial efficiency and gearing falling over time ?
        04 - do investor ratios indicate buying shares is a better investment now than in previous time periods?
      - 02 - RATIOS FROM OTHER COMPANIES IN A SIMILAR INDUSTRY
        ALSO KNOWN AS INTER-FIRM COMPARISON WHICH ALLOWS MANAGERS AND OTHER STAKEHOLDERS TO ASSESS:
        01 -is the company profitability better or worse than its competitors
        02 - is there a greater risk of low liquidity than other business
        03 - is the business more efficient in managing it finances and is it highly geared more than it competitors
        04 - would it be a better investment to buy shares from competitors companies ?
  - - - EXAMPLE 01 - COMPANY A - PROFITABILITY/ FINANCE EFFICIENCY/GEARING/LIQUIDITY/ INVESTMENT RATIOS - TREND AND INTER- FIRM ANALYSIS
        GROSS PROFIT MARGIN =
        2019 = 23%
        2020 = 18.5%
        2021 = 18%
        OPERATING PROFIT MARGIN =
        2019 = 7.8%
        2020 = 5%
        2021 = 3.5%
        ROCE =
        2019 = 8%
        2020 = 6%
        2021 = 4%
        
        01 - Ratio analysis over time has indicated the problem of declining profitability for company A
        02 - directors of the business have also made ratio comparisons with competitors
        03 - company A is the only large business in the industry with declining profitability
        THE NEW STRATEGIES THE BUSINESS COULD ADOPT =
        01 - REDUCE OVERHEAD EXPENSES BY DELAYERING THE ORGANISATION
        02 - INCREASE PROMOTIONAL SPENDING TO IMPROVE BRAND IDENTY AND CUSTOMER LOYALTY OR INCREASE PRICES
        
        EXAMPLE 03 - COMPANY C - FINANCE EFFICIENCY TREND AND INTER- FIRM ANALYSIS
        RATE OF INVENTORY TURNOVER =
        2019 = 8.5
        2020 = 7
        2021 = 6.5
        TRADE RECEIVABLES TURNOVER (DAYS)
        2019 = 34
        2020 = 32
        2021 = 35
        TRADE PAYABLES TURNOVER (DAYS)
        2019 = 9
        2020 = 12
        2021 = 10
        
        EXAMPLE 02 - COMPANY B - GEARING RATIO AND TREND AND INTER- FIRM ANALYSIS
        GEARING RATIO =
        2019 = 45%
        2020 = 50%
        2021 = 60 %
        DIVIDEND PER SHARE =
        2019 = $0.50
        2020 = $0.60
        2021 = $0.65
        TRADE PAYABLES TURNOVER (DAYS =
        2019 = 10
        2020 = 10
        2021 = 8
        
        Directors of company B are worried about the high gearing ratio. this is higher than most of its competitors.
        THE STRATEGIES THE BUSINESS CAN USE TO LOWER GEARING RATIO =
        1 - reduce dividend payments next year to retain more profit, the reduced cash outflow can be used to repay more debt
        2 - delay payment to some suppliers as 8 days is a short credit period offered by suppliers. this will slow down cash outflows and may allow some repayment of debt
        
        01- company C manufactures home office furniture and sells to retailers. the directors want to take action to improve financial efficiency, the have identified two strategies the business could adapt:
        a - introduce a JIT system and only order supplies from businesses prepared to guarantee small shipments of supplies
        b - only sell products online so that consumers have to pay goods beforehand they are distributed
        
        three examples illustrate that accounting data and ratio results can help managers identify future strategic strategies decisions.
        
        In each case though, the final strategic decisions could not be made before:
        
        01 - further analysis of the problems that ratios have highlighted
        
        02 - assessment of the resources available to pay for a new strategy
        
        03 - the likely impact of the strategy on achieving the objectives of the business is evaluated
  - - - example information about company D =
        
        company D plans to build an additional factory making wind turbines
        
        demand for renewable energy is rising
        
        the economy is growing rapidly with high rates of inflation
        
        the new factory will use latest technology to achieve high labour productivity
        
        this strategy will cost them 14 million dollars
        
        EXAMPLE OF COMPANY D =
        NON CURRENT LIABILITIES =
        $65M
        CAPITAL EMPLOYED =
        $120M
        SHAREHOLDERS EQUITY
        $55M
        
        we calculate the gearing ratio to understand the where the company is currently at without this strategy being implemented
        
        = 65m / 120 = 54.2%
        
        next if the additional 14million is borrowed then the new ratio becomes
        
        =65m + 14m = 79m
        = 120m + 14m = 134m
        79/134 x 100 = 59%
        
        now if the 14m was raised through sales of share the gearing ratio becomes:
        
        = 65/134 x 100 - 48.5%
        
        01 - higher debts raises gearing but incresing shareholders equity reduces it
        02 - high interest rates make a high geared strategy costs and risky
        03 - if the new factory is profitable, shareholders would benefits froom high gearing as profit of the factors does not have to distributed to an even greater amount of shareholders
  - - - KEY INFORMATION ABOUT EXAMPLE OF COMPANY E -
        
        The directors of company E have paid high dividends in recent years
        
        they did not want the share price to fall as they have issued new shares over this period to raise finance
        
        profit after tax has fallen for each of the last 3 years
        
        EXAMPLE OF COMPANY E =
        DIVIDEND PER SHARE = $0.50
        MARKET SHARE PRICE = $12
        P/E = 6
        DIVIDEND YIELD =
        4.17%
        EARNINGS PER SHARE =
        $2
        
        01 - 12 months ago, the P/E ratio was 9 and the dividend yield was 3.5%
        02 - the directors predict that the earnings per share will fall to $1 next year
        03 - they plan to reduce dividend next year to $0.35 per share (as a strategy)
        01 - if the share remains unchanged, this will result in a dividend yield of 2.9%
        02 - if the share prices remain unchanged, the P/E ratio would become 12
  - - - EXAMPLE OF COMPANY F =
        01 - the directors of company F have a growth objective for the business
        02 - they plan to take over another business which also produces recyclable plastic
        03 - the acquistion would nearly double the size of company F
        04 - the would be great economies of scale
        05 - some factories will be closed to rationalised production
        06 - reducing operating expenses in this way will result in lower fixed cost per unit
        07 - the redundant assets of the factory would be sold off
        08 - some of the money raised will be used to pay back a proportion of debt that was used to finance the takeover
  - - - BUSINESS STRATEGY 01 - RATIONALISATION
        
        Reductions in operating expenses should increase the operating profit margin and ROCE
      - BUSINESS STRATEGY 02 - NEW PRODUCT DEVELOPMENT
        
        SHORT TERM =
        
        profit and liquidity may fall due to the increase expenses and cash need for R&D for the development of the new product
        
        LONG TERM =
        
        if the product is successful, higher profit margins, higher ROCE and improved liquidity ratios can result. returns to shareholders should also increase
      - BUSINESS STRATEGY 03 - MARKET DEVELOPMENT
        
        SHORT TERM =
        
        costs of entering the new market can be high, reducing the operating profit and ROCE
        
        cash outflows for developing the new market could reduce liquidity
        
        -LONG TERM =
        
        if a new market leads to higher sales, especially at high prices, then profit margins should increase, and ROCE should increase, as well as increase returns to shareholders
      - BUSINESS STRATEGY 04 - LOW PRICE STRATEGY
        
        this reduces gross profit and operating profit margins unless higher output reduces fixed costs per unit and leads to greater economies of scale
        
        these cost reduction could increase profit margins and ROCE