Wetherspoon Pubs to Ban Smoking - Case Study Example

STRATEGIC FINANCIAL MANAGEMENT Part One Introduction Wetherspoons refers to the pub chain that operates in the United Kingdom, having its headquarters in the town of Watford Hertfordshire. The company was founded by Martin Tim in 1979, and has enjoyed success since its inception managing to grow and expand in many other cities and towns in the United Kingdom. Currently, the company has managed to establish approximately 950 outlets (Tran 2005, 6), making one of the fastest growing businesses of its kind. In addition to this chain of pubs, the company also owns and operates Llodys No. 1 chain, as well various Wetherspoons Hotels located at different places in the United Kingdom. In the recent past, Wetherspoons plc has become famous in converting the large and unconventional residential premises into pubs. According to the set pub standards in Britain, premises often tend to be large, using open plan layouts, which Wetherspoons has devoted to follow. The success of the company has seen it being quoted on the Stock Exchange in London becoming an active component of FTSE 250 index on the stock exchange. In the recent past, Wetherspoons has started giving support to cask ale at the time it has deemed it unfashionable to do it, something that has established it as the largest in terms being the single purchaser from the microbreweries in the United Kingdom (Martin 2012, 8). This paper examines the financial performance of Wetherspoons Company, analyzing its rations from the perspective of the investor. Business performance One of the things that make most companies successful is the fact that they have effective and successful financial management platform. Proper financial management is very important to companies and other kinds of business organisations as it helps to illustrate the accountability plans that the business soften has. It is this kind of accountability which financiers and other investors use in determining the net worth of the business for additional investments. For this reason, any business that is determined to make profits and expand its boundaries has to ensure that it creates sound financial management systems. This is actually one of the things that have Wetherspoons Company manage its growth and expansion, reaching its current form, having almost a thousand outlets with plans to increase its market share (Woodger 2010, 9). Investors are the most important people in the growth and success of any business; they always give their money and resources to the business in the expectation that the business will be profitable for them to get their expected returns in terms of dividends on their share capital. For this reason, the business is expected to ensure that they provide all the information relating to its performance in order to satisfy investors that the business is profitable and worth investing. Wetherspoons makes financial statements at the end of every financial year, making them available for all its investors and any interested party to examine them. The financial information revealed including the financial ratios are significant towards gauging the success of Wetherspoons Company. Some of them are illustrated below. Profitability Ratios Profitability ratios are important because they enable investors in a company to examine its profitability with respect to asset levels in the company and other kinds of investments. It is general knowledge that without any profits, attracting external capital for any company is pretty hard (Farrell 2010, 21). Activity Ratio The Return on Capital employed measures the performance of a company in terms of how its capital employed is being used. In the case of Wetherspoons, its return on capital employed increased in 2012 compared to 2011. This means that the company had a slight improvement in the way it utilized its capital employed. Gross profit margin refers to the ratio between the gross profit and company’s net sales. Gross profit refers to the capital earned before exception items and other kinds of taxes are deducted (Bull 2008, 17). An increase in gross profits indicates that the company’s profits realized in its net sales are increasing, an indication of its progression. At Wetherspoons, net profit margin refers to the ration of the company’s net income and its net sales. Just like gross profit, net income refers to the profit realized after deducting taxes and other exceptional items. The decrease of the net profit margin at Wetherspoons may have been attributed to various external forces like taxes, which keep changing depending on the state of the economic environment in the country. Investor Ratios Another kind of ratio essential in determining the net worth of a company is the Asset Turnover. This is the ration sales revenue in the company over its total assets. This ratio is used to indicate how well the assets of a company are being utilized for its growth and success. According to the financial information from Wetherspoons Company, its asset turnover went up in 2012, compared to that of 2011 (Kepos 2007, 64). This indicates that the company’s utilization of assets has been steadily improving. This can be attributed to the company’s growth and expansion strategies, which have seen it create other outlets in a bid to increase its market share. Liquidity Ratio In a business, the current ration refers to the ratio between a company’s current assets and its current liabilities. When the ratio is very high, the company is thought to be more liquid. A firm that has its liabilities expanding faster that its liabilities is bound to face financial challenges. at Wetherspoons, the liquidity ratio has been increasing, meaning that the firm has been becoming more liquid, this can be attributed to the expansion efforts the company has been undertaking in the recent past. The company has been on a growth and expansion mission, with an objective of increasing its market share. Gearing Ratio Other kinds of profitability ratios significant in analyzing the profitability of Wetherspoons Company include the Gearing ratio, which refers to the ration between a company’s total debts and its shareholders equity (Wiehle 2005, 65). The ratio is essential in determining the overall contribution of a company’s shareholders against its portion of capital, which is funded by debts. At Wetherspoons Company, gearing ratio has been decreasing, indicating that the company has been reducing its debt (English 2006, 23). This is a very good indication of a positive trend in the company’s growth because it is reducing its liabilities. This is an important move because investors often have confidence in investing in companies that look profitable in the present and future. Additionally, it is important to realize that the growth in the company’s profitability in the last five years have been essential in increasing the number of investors. The company’s stocks have also been performing well on the stock market, something that has also added impetus to its growth and expansion strategies. The analysis of the company’s financial ratios indicate that it looks forward to a bright future, with expansion that will see it reaching to many other countries across Europe and the entire world at large. Part Two Introduction In many instances, the financial decisions of a business and any other corporate entity are not always arrived at from a vacuum. A decision that may seem to be very obvious in the business can sometimes be affected by an appreciation of the kinds of restrictions being imposed by the business environment prevailing (Hill 2008, 67). However, it is essential that business managers strive at achieving the vision and mission of the business through attaining the set goals and objectives. Generally, firms often have various kinds of objectives that they always look forward to achieve. However, among all these objectives, the main one for business organisations is supposed to be increasing the value that its shareholders often have towards it. In this case, the bid to maximize the wealth of its shareholders becomes the fundamental goal of firms. It is important to note that investors often anticipate earning satisfactory returns from the investments they establish in the firm. Shareholders are the actual owners of the business from their investments, which means that business managers are supposed have a responsibility to ensure that the maximize this wealth, not just for the success of the business, but also for continued investments, thus gaining the ability to increase its market share and financial position. Maximizing this wealth can be determined by the payout of dividends as well as capital gains through increasing market value for the particular share price of the business. In the process of achieving this objective, conflicts can sometimes arise in the business; in this case, business managers may end up making decisions based on their interests and not achieving the investors’ wealth. Therefore, profit maximization needs to be made the ultimate goal and objective for the business. The theory of profit maximization and the investors’ wealth In the modern business world, while individual seem to be corporate ownership and control seem to be standing miles apart, with most individuals seemingly actively concerned with managing their cash flows (Paramasivan & Subramanian 2009, 32). Financial managers are often involved in managing cash flows on behalf of companies they work for as well as their respective owners. In any firm, financial management is often concerned with the process of making decisions in three main areas, which include; investing, financing as well as dividend policy. In all these, wealth maximization always remains to be the fundamental goal for the firm. At the same time, taking care of the welfare of other interested groups in the business like employees, creditors, customers and the larger community are also importantly affected when it comes to adapting to corporate goals (Hilb 2005, 71). However, it is important to note that the firm can adopt one or more objectives in the short term while taking necessary steps to maximize the wealth of its shareholders. In this case, it is important that the company considers other important objectives both in the short and long term simultaneously. It is important to understand that profit maximization as well as wealth maximization are both essential in the process of creating ethical analyses for the wealth maximization process of its shareholders. However, some people have often said that business firms are not to show and give all their resources towards achievement of the objective of maximizing shareholders at the expense of social responsibility (Brigham & Houston 2004, 44), which is equally important towards ensuring the growth and success of the business. These divergent views emphasize that the success of the business is not just depended on the process of increasing its profits alone. It is a process that comprises of various factors, which are essential towards sustaining these profits. In this case, investing in activities like social responsibility are helpful towards ensuring that the business creates a good image for itself (Jakhotiya 2003, 43). Businesses are expected to ensure that they divide their efforts and actions equally towards achieving the profit maximization objective and maximizing the wealth of its shareholders as well as growing and sustaining the business brand name. Some similarities and consistencies often exist in these two objectives because of the fact that both are of prime importance to a business (Solomon & Solomon 2004, 54). Business managers are expected to sure that they effectively manage the stock prices for the benefit of their respective shareholders since they are needed towards increasing the financial muscles for the company so that it can achieve its other objectives (Kaen 2003, 87). In this case, the criticisms raised against this approach by managers may seem understandable; this means that in terms of prioritization, maximizing the value of its shareholders wealth is very essential towards ensuring that is profitable in the short and long term. The conflict of ownership and control Generally, it is not possible to expect that company managers and directors can protect their money in the same way they protect that of the businesses they have. In this case, the conflict of control and ownership in the business is bound to happen at all times in the course of its existence (Monks & Minow 2004, 41). In large corporate organizations, this conflict may sometimes be rare considering the fact that the system of corporate governance is sometimes actively involved in the actual management of the corporative. In this case, the main goal of maximizing wealth and profits in the business appears to be in tandem with the businesses’ ethical theory of utilitarianism while allocating the business resources under various circumstances (Kim & Nofsinger 2007, 28). In order not to affect the performance and success of the business towards achieving its set objectives, it is important that the separation of ownership exists, this is in terms of decision makers, owners as well as other stakeholders actively involved in the business. Despite these factors, the main objectives for the business are supposed to remain to be increasing the value of value of its shareholders wealth in order to attract additional investors as well as ensuring that the business creates and sustains its social responsibility programs. Bibliography Bull, R. 2008. Financial ratios: How to use financial ratios to maximise value and success for your business. CIMA, Oxford. Brigham, E., & Houston, J. 2004. Fundamentals of financial management (10th ed.). Thomson/South-Western, Mason, Ohio. English, J. 2006. A concise companion to contemporary British fiction. Blackwell Pub, Malden, MA. Farrell, C. 2010. Your money ratios: 8 simple tools for financial security. Avery, New York. Hilb, M. 2005. New corporate governance successful board management tools. Springer-Verlag, Berlin. Hill, R. 2008. Strategic Financial Management. [S.n.], S.l. Jakhotiya, G. 2003. Strategic financial management. Vikas Pub. House Pvt, New Delhi. 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