Finance Statement of Jools Furniture Industries Ltd - Assignment Example

Finance For Managers Jools Furniture Industries Ltd Table of Contents Introduction: 2 Overview of Company: 2 Jool’s Current Financial Condition: 3 Recommendations 10 Critical Points from Ratio Analysis 10 Analysis of Results and Suggestions: 11 Kitchen Division New Project Proposal: 12 Financial Director’s Role: 12 Role of Director: 12 Recommendations: 15 Investment Proposal – Loans 18 Bibliography 21 Introduction: This case is of a company that was started in 1990 by Julius Smith – Brown in West Yorkshire – Jool’s Furniture Industries Ltd. The main purpose of this report is to identify and analyse the current position of the company and to develop possible solutions that the company can adopt to improve the current position. Here the study also involves a detailed insight into the duties of the financial manager in the company and again recommendations have been developed on the basis of three main factors, i.e. aid planning, control and performance management in the future. The report also discusses the possible source of finance for the recent investment proposal that the company is currently considering. Here the main focus is on loans as a source of finance; however two more sources of finance have also been included as alternatives for the company. Before moving into the current financial condition of the company and analysis of the company, it is crucial to discuss in brief the overview of the company. Overview of Company: Jool’s Furniture was started twenty one years ago and in 1995, the company went on to becoming manufacturers of kitchen and bedroom furniture and within ten years since then, the company went on to expand and have almost 150 different furniture products. The company has grown since then and now it majorly consists of four main divisions, i.e. Kitchen, Bedroom, Quality and Office departments. The company employs as many as over 500 employees. Although the company has received a number of options to go public, the owner Smith – Brown prefers to keep the company under his complete control hence the public offers have been declined. The next section will detail an analysis of the current financial condition based on which recommendations have been developed for the company. Jool’s Current Financial Condition: In order to conduct an analysis of the company’s financial position, ratio analysis has been adopted here. The ratios analysis has been conducted in four main types, i.e. profitability ratios, efficiency, liquidity, and financial structure. Each of these has been discussed in detail below. Profitability: Considering the net profit margin of the divisions, it has been noted that each of the divisions has shown immense difference. The table below provides a clear insight into three main ratios here, i.e. gross profit margin, net profit margin, and return on equity (Broadbent & Cullen, 2003). Profitability Ratios Year 2009 2008 2007   Quality Products Division Gross Profit Margin 41.37% 40.45% 38.91% Net Profit Margin 3.36% 1.98% -9.90% Return on Equity 9.99% 5.63% -26.30%   Kitchen Division Gross Profit Margin 37.61% 36.20% 39.22% Net Profit Margin 3.51% 3.27% 4.97% Return on Equity 11.54% 11.65% 16.73%   Bedroom Division Gross Profit Margin 29.78% 31.44% 26.37% Net Profit Margin 3.22% 3.27% 2.48% Return on Equity 11.86% 13.35% 12.85%   Office Supplies Division Gross Profit Margin 36.97% 33.64% 38.90% Net Profit Margin 4.86% 4.64% 5.53% Return on Equity 13.38% 12.05% 13.55% Considering the return on equity, it is evident from the results that the Quality products division has seen an improvement as compared to 2007 (-26.30%), the division seems to be stabilising itself currently. The Kitchens Division on the other hand has been facing a decline in all of the ratios which does not provide a good insight into the performance of the division (Brooks, 2009). The bedrooms division and the office supplies have been found to be constant with very slight variations over the three years. Considering the net profit margin it is clear that the office supplies have been one of the most constant and stable. The quality products division has seen a major improvement from 2007 and the division seems to be stabilising itself in the markets (Brooks, 2009). The Kitchens Division has seen a drop in the net profit margins and has moved down from 4.97 % in 2007 to 3.27 % on 2008 and 3.51 % in 2009. The division seems to be tring to stablise itself if not reach back to the same level as of 2007. The bedroom division has shown a stable result over the three years. The graph above provides a clear view of the results of each of these divisions. Efficiency: The two ratios that have been considered here for the efficiency include the return on assets and the asset turnover (Collier, 2009). The table below provides a detailed view of the ratios of the divisions. A detailed discussion also follows. Efficiency Ratios Year 2009 2008 2007   Quality Products Division Return on Assets 13.33% 12.58% 1.83% Asset Turnover 1.03 x 0.99 x 0.87 x   Kitchen Division Return on Assets 16.15% 16.10% 20.60% Asset Turnover 2.19 x 2.29 x 2.14 x   Bedroom Division Return on Assets 8.49% 9.28% 9.12% Asset Turnover 1.66 x 1.78 x 2.09 x   Office Supplies Division Return on Assets 24.42% 23.90% 25.99% Asset Turnover 2.10 x 1.90 x 1.68 x The graph below provides a clear view of the return on assets for each of the four divisions. It is evident from the ratios that the quality department has seen a steep increase in terms of the return on assets from 2007 to 2008. The Kitchen division on the other hand has found to have a decline in the return on assets however, the use of the assets is clearly much better and this is evident from the asset turnover of the division (Brooks, 2009). In terms of the bedrooms and the office supplies it is evident that the two divisions have maintained their asset returns at a constant and the divisions have also seen an improvement in terms of the asset turnover. Liquidity: The following table provides a clear view of the liquidity ratios of the various divisions of the company. From the table below it is evident that the Quality divisions have shown intense improvements in the ratios specifically the acid test and current ratio. However in terms of the other aspects the division has seen a decline. The Kitchens division on the other hand has seen an increase in the current ratio and the acid test ratios (Brigham & Houston, 2009). The division has also seen an increase and improvement in terms of the debtor and stock turnover as well. The bedrooms division has also seen an increase in the current ratio and the acid test ratios however has been found to see a decline in the debtors and stock turnover (Gitman, Principles of Managerial Finance, 2008). Finally, the office supplies have been noted to be the best performing among the divisions and have shown intense improvements and stable performance. This division has proved to be the most liquid and the best among the other divisions. Liquidity Ratios Year 2009 2008 2007   Quality Products Division Current Ratio 1.33 x 1.09 x 1.13 x Acid Test Ratio 0.63 x 0.47 x 0.59 x Stock Turnover 113.84 days 99.51 days 104.85 days Debtor Days 42.69 days 27.58 days 43.54 days Creditor Days 36.09 days 47.25 days -   Kitchen Division Current Ratio 2.02 x 1.56 x 1.52 x Acid Test Ratio 0.99 x 0.78 x 0.83 x Stock Turnover 70.97 days 59.08 days 63.11 days Debtor Days 37.89 days 31.82 days 30.14 days Creditor Days 24.35 days 28.12 days -   Bedroom Division Current Ratio 1.27 x 1.22 x 1.17 x Acid Test Ratio 0.59 x 0.50 x 0.53 x Stock Turnover 117.27 days 121.02 days 91.19 days Debtor Days 61.63 days 51.37 days 45.75 days Creditor Days 92.45 days 65.52 days -   Office Supplies Division Current Ratio 1.49 x 1.44 x 1.31 x Acid Test Ratio 0.69 x 0.71 x 0.73 x Stock Turnover 39.77 days 42.64 days 50.16 days Debtor Days 18.17 days 21.14 days 29.91 days Creditor Days 49.35 days 44.76 days - Financial Structure: The financial structure of the company plays a major role in the overall effectiveness and success of the company. Here the financial structure of the various divisions has been computed as in the table below. Here for the two main ratios that have been discussed include the gearing ratio and the interest cover (Collier, 2009). A detailed discussion of these in terms of each division has been provided after the table and the graph. Financial Structure Ratios Year 2009 2008 2007   Quality Products Division Gearing 61.91 % 60.83 % 62.24 % Interest Cover 2.11 x 1.53 x -1.32 x   Kitchen Division Gearing 8.63 % 10.93 % 7.77 % Interest Cover 10.48 x 10.54 x 14.42 x   Bedroom Division Gearing 23.45 % 29.56 % 35.13 % Interest Cover 5.30 x 5.08 x 3.41 x   Office Supplies Division Gearing 0.33 % 1.12 % 14.99 % Interest Cover 135.13 x 64.37 x 7.01 x Based on the results of the financial structure ratios it is clear that the Quality Products Division is among the highest geared companies. The divisions secures almost 62 per cent of its capital from the borrowings (Gapenski, 2007). Here the division has also seen to be most constant over the three years in terms of the gearing. However in terms of the interst cover, the division has seen a major increase in the past two years, i.e. 2008 and 2009. The Kitchen division has shown impressive results in terms of the financial struture. The division has reduced the borrowing to a great extent over the three years and the division has also been noted to have very low interest payables. The financial leverage of the company is lesser than 10 % which clearly is a sign of a healthy and well performing division. Considering the bedroom division, the division has a gearing ratio of 23.45 % as of 2009. The results show that the division does not have long term loans debts. The division however is focused more on the short term loans (Ryan, 2008). This in turn leads the company to pay higher levels of interest for the short term loans. This leads the interest cover of the division to be low although the long terms debts are minimal. Finally in terms of the office supplies, the division has shown a major decline in terms of gearing ratio from 14.99 % in 2007, to 1.12 % on 2008 and 0.33 % in 2009. The division is newly formed and is the youngest among the group. Keeping this in mind, the debts for the division are higher and this leads to high levels of interest cover and low gearing. The interest cover of the division has increased from 7.01 x in 2007, to 64.37 x as of 2008 and 135.13 x as of 2009. The division yet has to develop and improvise on the processes and the overall borrowing to improve their position (Samuels, Wilkes, & Brayshaw, 1995). Recommendations Based on the above ratio analysis, the recommendations have been divided into the following three heads: Critical Points from Ratio Analysis It is evident from the ratios that one of the most efficient divisions among the four is the Office Supplies. The division has had the highest revenue as on 2009 - £ 6.2 million. Based on the performance of the division it is clear that the directors and the staff of this division are relatively stronger in sales as well as in development of the processes. Also this division has found to be expanding at rapid pace. Here the only drawback of the division is that the incentives are given to the directors in terms of the return on equities which in turn has led to dissatisfaction among the directors and is also headed toward attrition among the directors. Hence in order to keep up the position it will be best for the company to improvise the strategy in terms of incentives and to focus on the financial performance, employee needs apart from the returns. Analysis of Results and Suggestions: After analyzing the ratios to a deeper extent, it has been found that the company’s current method for the management fee allocation on assets is outdated and requires urgent up gradation. An excellent example here would be of the bedrooms division which has the most employees and is the largest scale division. Here the use of 3 % as the management fee does not do justice to the division and it is crucial that all aspects of the management are well considered while determining the annual management fee. In the case of the quality division it is evident that the division has been able to meet the minimum required rate of 10 % , however considering the overall investments that have been poured into this division, the returns are not best. It is crucial here to optimize the processes of all the divisions to reduce the overall expenses and improvise on the returns. Here the inventory levels can also be reduced which in turn will permit better generation of sales and will also help in better use of the resources. Considering the Bedroom division, it has been found that the division was performing well as per the management. Here however several crucial factors have not been included like the obsolete equipments and also the maintenance. Here due to the old machinery, the company has lower deprecation however, the current condition and age of machine calls for a new investment in assets for this department. Finally, in terms of the quality division, most of the income is found to be from the overseas revenue and this indicates a high potential for growth. The exports area is a rather promising area for almost all divisions of the company. Kitchen Division New Project Proposal: In terms of the Kitchen’s division, it is clear that the division requires a loan of £ 1.8 million. In this case the overall gearing ratio of the company will see a major increase and will reach to approximately 59 %. The project also has a high chance to realise the profits considering the net present value is at £ 500,000 and the profitability index is 27.77 %. Also expanding the business will help in increasing the overseas operations and the overall profitability as well. Financial Director’s Role: This section focuses on the role of the Financial Director, i.e. David Green. Here recommendations have been developed based on the current position. Role of Director: The main role of David Green is to manage the financial aspects of the business. Green unlike Smith – Brown lacks a flair and vision in business. David Green presently is in charge of the day to day activities of the business since Smith – Brown the owner of the business tends to be on a number of vacations on a regular basis due to inherited wealth. David Green has been able to achieve a strong position in the company due to the availability and knowledge of the financing which he has effectively designed in the company’s complex financing. As discussed earlier, Jool’s Furniture is divided into four main divisions. Here the company has been found to be focusing on each of these divisions individually with little link among the divisions. The company has set down a similar aim and target for all the divisions within the company, i.e. achieving 10 % of the return on investments. The overall management of the company follows a laissez-faire form of management where each of the division heads are given the freedom to make decisions for the divisions without the need for consultation with the other departments. This has to a great extent left a number of loop holes in the overall management control and also performance management. The role of the financial director includes not only focusing on the financial needs of the company but also the overall performance of the divisions likewise. Here it is crucial to note that Jool’s furniture although uses a laissez-faire form of management, in terms of financial management, in the event that any of the divisions need to take up a long term loan, the divisions need authorization from the head office. Here the decisions made are final and are based on the performance and financial condition of the other divisions as well. Here David Green is responsible for the decision making. In the current times, David Green’s role in the company is more than a financial director. One of the major concerns of the business is the lack of integrated systems for control and performance and also a lack of well managed inventories. Although David Green has been able to set down a strong financial management program, there is clearly a lack in terms of the other elements of the business. A few aspects of the business clearly lack the right management style which in turn has led the company to be faced with high competition as well. Firstly, the company’s current style of weighing the performance is incorrect, i.e. 10 % of the return on investments. This factor cannot be considered to be fair to the newer divisions and is more bias towards the divisions which have been functioning for a longer period (Brooks, 2009). Also, the company presently requires an integrated system where the group works together towards the overall objectives of the group. David is also responsible to ensure that the inventories are in place. This however is found to have a number of issues and the almost all departments have been found to have thefts and loss of inventories. David’s role is vast within the company and it can be found that his performance is not as effective as can be possible. There is a high scope for David Green to perform better within the company in terms of the aid planning, control and performance management in the future (Abraham, Glynn, Murphy, & Wilkinson, 2008). Based on the above discussion and from the case, it is evident that the company’s major issue is based on the lacking of effective management and also good business skills. As the case study explains, “David’s strength is seen as reliability and solidity. He does not have the business flair or vision of Julius, but has successfully organised the complex financing for the product expansion that Julius has developed” (Jools Furniture, 2011). The lacking sense of business skills and also business strategic planning has been an underlying reason for the company facing high levels of competition (Brigham & Houston, 2009). Based on the above discussions, a number of recommendations can be drawn out to help improve the current position of the company and also the working of the company in terms of aid planning, control and performance management in the future. Each of these elements has been discussed in detailed below. Recommendations: Based on the current role of the Financial Director, David Green, a set of recommendations can be made to Jool’s Furniture to help improvise on the current position of the company. These recommendations have been developed keeping in mind the four divisions of the company as well as the overall objectives of Jools Furniture as well. Here the aim is to divide these recommendations into three main areas, i.e. aid planning, control and performance management in the future. Aid Planning: For smooth functioning of companies, it is crucial that all the divisions work together towards the same goals of the group (Broadbent & Cullen, 2003). Here it is crucial that the divisions are aligned together and the financials of all the divisions are designed in a manner where each division is integrated to the other and in the event that one of the divisions is unable to perform to the expected levels, the other divisions help in compensating and keeping the overall profitability of the organisation high (Gitman, Principles of Managerial Finance, 2007). Here the financial director needs to take the appropriate steps including meetings with the heads of each division and Smith – Brown and develop a new financial system where the heads of each division will report to the head quarters on a weekly basis. Here the divisions can discuss the financial positions as well as consul each other for advise to work together to achieve the main goals and objectives of the company (Label, 2010). This will assist in better overall aids planning as well. Use of better sources of finance as well as developing ways and means to invest into the business from the profits will help the group grow and earn to a greater extent. An integrated approach here will prove to be most beneficial and also helps in better and more precise aid planning as well (Johnson, Scholes, & Whittington, 2006). Control: Jool’s Furniture presently is governed by the laissez-faire form of management and this has a major impact on the overall working of the company. Here the management is not integrated and the each division head has their own ways of building the company’s position. Here the lack of integration among the divisions leads the company to work as four different entities with four different work cultures and different leadership altogether. This has a major impact on the control aspect of the business and also leads to the control being spread out with no focus on the head office. (Gitman, Principles of Managerial Finance, 2007) As the financial director of the company as well as with the responsibility of managing the day to day activities, it is crucial that Green is able to develop a plan where the four division heads, Green and Smith - Brown meet every week as a routine to discuss the events and happenings within the divisions. These are not only financial aspects but also other elements including sales, purchases, inventory management and other elements of the business. This will allow the top management to be in link with the divisions and will also permit a chance to contribute to the possible steps that that division heads can take (Atrill, 2009). This will help gain a clearer perspective of the company as a whole and permits a chance to analyse the growth of all departments together towards the main goals and objectives of the group as a whole. In terms of control, it is also important to note here that the company has been faced with the issue of robberies as well as loss of inventories. Hence to develop better control and in order not to lose the company inventories, it is suggested to implement inventory management systems which need to be updated on a daily basis and the managers need to keep track of the records and ensure that no inventory is unaccounted for (Johnson, Scholes, & Whittington, 2006). Performance Management: Performance management is a crucial element of business and this has a major impact on the overall success of the business. As has been discussed previously, the company follows a laissez-faire form of management and here the performance of the employees is not focused on by the top management (Besley & Brigham, 2007). The setting up of performance management systems within the company will prove to be very beneficial for Jools Furniture. Here the financial director along with the division heads need to work together towards accomplishing four main areas, i.e. the job expectations, providing feedback to the employees regarding their performance, providing employees with steps to improve their performance and also fair and accurate reward systems based on the performance of the employees. Including a performance management system within the company will not only help in better performance of the employees but will also lead to higher levels of motivation and morale among the employees (Abraham, Glynn, Murphy, & Wilkinson, 2008). Also, it has been noted that the company has been paying salaries to a number of employees who have already retired. Hence here it is important that the company adopts a new system where the payrolls of the company are in place and also that employee details are all accurate. This is crucial for the company and will assist the company benefit to a great extent (Johnson, Scholes, & Whittington, 2006). The performance of a company is based on the level of satisfaction and motivation of employees working within the organisation hence, for better performance management in the future, it is important that the financial director works with the heads of each division to meet the needs of the employees as well as to keep a more accurate record of all employees. Investment Proposal – Loans Every company’s financing needs are different. The sources of finance used by companies are correlated to a number of different elements and aspects of the business. One of the many important elements that companies need to consider while choosing their source of finance is the capital structure of the company (Brooks, 2009). There are a number of different sources of finance that companies can adopt to fund their projects and investment proposals. Here the main focus of the company is on loans. Loans are of many different types which include short term as well as long term loans. Loans can be very helpful for companies and can help companies meet their working capital requirements as well as their investment proposals likewise. Businesses have three main types of loans that they can apply for, these include, a) term loans, b) short terms loans, and c) equipment financing (Gitman, Principles of Managerial Finance, 2008). These loans have different impacts on the business. For instance, the term loans are mostly the used for working capital requirements. These loans are the most general loans and these can be used for a variety of purposes, i.e. like working capital, expansions, acquisitions and also refinancing. These loans generally have a set term within which the company needs to repay the loans (Samuels, Wilkes, & Brayshaw, 1995). The short term loans are generally below $100,000 and these range for a period of one year or less. These loans are most beneficial for the seasonal changes and need for investments where the returns are quick. The final types of loans are the equipment financing loans, which as the name suggests are loans used for investments in to equipments as well as new projects (Ryan, 2008). These are generally longer term and have lower levels of interest rates as compared to the previous two types of loans. All loans are non ownership in nature however using loans as a source of financing has its own advantages and disadvantages. In the case of Jools, the biggest advantage of loans is that it will not impact the ownership and the overall functioning of the company (Rees, 1995). Also, the stakeholders of the company will only be impacted in terms of the level of interest that the company needs to pay for the loan. In most cases these do not have a major impact on the stakeholders as the interest is like any other expense that the company would spend on other forms of financing (Mott, 2005). The major disadvantage of the loans for Jools is the high level of interest that it might attract keeping in mind the high level of financing required for the proposed project. However an important aspect that needs to be considered here is that with an increase in the long terms liabilities, there will also be an increase in the gearing ratio of the company. Considering this and the company’s high interest will provide a better view of the long term growth and expansion of the company (Tennent, 2008). A loan is also beneficial as it is simpler to administer and is also relatively a simpler method of dealing without any complex reports or complications. Here in the case of the company, considering the age of the company, it is clear that taking a loan can impact the company in terms of need for monthly interest. This can prove to be quite expensive in the short term. Another major drawback for the company is the need for collateral for the loans (McLaney & Atrill, 2010). Considering these aspects, two alternative options have been chosen and recommended. The two recommended approaches are very different from each other and this allows the company to gain a chance to opt for one which is best suited based on the decision of the financial director and division heads (Shim & Siegel, 2008). The first option is to choose a venture capital as a source of finance for the company. This will prove to be very beneficial for Jools as it will permit the company to gain investments with little interference in the business. Here the venture capitalist will be focused more on the overall returns on the investments and Smith – Brown can have complete control over the business and management (McLaney & Atrill, 2010). The main benefit of this form of capital investments is that the company gains the financing from willing investors as well as advice in a few cases to help develop the company (Ryan, 2008). This is a win – win situation for both the investors as well as the company. The second option that the company can adopt here is commercial loans. Jools has a strong financial background and has been recognised in the markets (Broadbent & Cullen, 2003). Hence here the company can opt for commercial loans from banks like HSBC and Barclays. The choice of loans available for businesses is vast and this is a relatively a lower costing method of generating finances for the business (Collier, 2009). Again here the company will need to pay interest for the finance however this is relatively a flexible option as it allows the company to repay as and when the needs are met and also permits a chance to have the financing without any obligation to the bank (Shim & Siegel, 2008). The company also has a chance to pay back in instalments which will prove to be beneficial for the company. Both these alternate choices are equally preferred for the company and can both prove to meet the needs of the company. Here the choice is for the financial directors and the division heads to make the decision based on their discretion (Titman, Martin, & Keown, 2010). Considering both the choices, venture capital will prove to be very beneficial for Jools however the discretion is based on the top management of the company. Bibliography Abraham, A., Glynn, J., Murphy, M., & Wilkinson, B. (2008). Accounting for Managers . Thomson Learning. Atrill, P. (2009). Management Accounting for Decision Makers. 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