Business Analysis - BUNGE - Essay Example

Business Analysis-BUNGE [Pick the Business Analysis-BUNGE of the of the of the Table of Contents Executive Summary-Bunge 3 Problem Statement 3 Bunge’s financial picture business expansion plan 4 Financial Risk Mitigation 1 Ratio Analysis 1 History tells the future 3 Improvement in Cost Controls 4 Internal and external Risks 5 Strategies to mitigate risks 6 Potential returns of procuring a new plant 8 Recommendations 8 External Environment/Situational Analysis 9 Conclusion 10 Works Cited 1 Executive Summary-Bunge Bunge is operating currently in more than 40 countries and in giving very diversified portfolio of food products and short portfolio of non food items. It is expected that Techshield would acquire Bunge. Techshield is already operating in European market however, Bunge is striving to develop in European market. The Problem which currently Bunge is facing contains how to develop non food product portfolio to diversify business and financial risks. While, Techshield is also striving to expand business risks and profitability. In this document an analysis has been made of Bunge to realize the company’s existing business and financial position and business expansion viability imagined by Bunge. For The Growth of company has been in growing shape in Europe. However, in this document we will strive for better option of expansion such as merger viability or acquisition of an existing corporation or developing its own plant in UK to start operations in paint technology. Strategic viability has also been assessed about expansion plan. Problem Statement Our company needs a strong investment to protect its future positions. For The Growth of company has been in growing shape in Europe. However, in this document we will strive for better option of expansion such as merger viability or acquisition of an existing corporation or developing its own plant in UK to start operations in paint technology. Strategic viability has also been assessed about expansion plan. Bunge’s financial picture business expansion plan Expansion decision sourced by bank loan brings up several questions regarding financial health of an organization seeking loan by a bank officer’s end. The bank officer will be thinking at the bank’s end, i.e. how smooth benefit does this loan will give to bank (Prompt interest payments + Principle recovery). In addition before approving loan, the respective officer will ensure how to secure its loan, for example the use of collateral or security. The bank officer will also show his willingness in analyzing the credit rating of the concerned company, if done by registered agency, or any similar previous loan availed and paid-back by the company. The financial picture of Bunge shows a picture which could raise several questions. The total operating expenses for the year (before interest payments) shows a 6.5% increase since year 12. The rising operating expenses of the company (excluding financial charges) may worry the bank officer for the Bunge’s ability to control operating expenses which may also lead to effect the company’s ability to settle its financial obligation if the rise continues for the coming years. Financial Risk Mitigation Every organization needs to develop and expand its operations regionally and globally. To achieve this purpose, they apply to identify future demands and apply strategies and pour funds into new areas of expansion. Thus, there are several hurdles which need to overcome. As it is said that, we cannot predict future, but we can create it. (Jim Collins, 2011). To reduce financial risk, the basic requirement is one must learn how to manage you risks coming in your way. Such as in this case, the financial risk lies in all the above examples outlined as the expansion is sought in Europe this brings the risk of rising interest rate, inflation rate or adverse currency movement and soon. Risks outlined by the bank loan officer can be mitigated by putting following questions on oneself: 1. The level of risk you are interested to face 2. Controlling costs either by cost cutting techniques, however considering the quality element 3. Does there need of advanced hedging techniques 4. Any opportunity to diversify 5. Does the market exist which channels the Bunge’s products to Europe 6. How realistic is the plan 7. Any options exist in case of failure Ratio Analysis The company envisions maintaining valuable position by its customers, community they serve and committed staff and shareholders. Company aims to transform itself into innovative organization and serve with up to date infrastructure support. Starting the liquidity ratios which covers the company’s capacity to fund its short term debts. It is very essential for the firm’s stake of survival that they are liquidate enough to meet their shortcomings; as inability to meet short term debts may force the company out of business. There are facts about several profitable businesses which were forced to shut down just because of their inability to meet their short term obligations. Bunge’s Current ratio shows an excessive ability which turns unutilized sum rests with the company. Result over 2 is often thought to be un-availed benefit as for any $1 shortcoming company has $2 to offset it. Here the result over 2 means that company have unoccupied sums which it better can invest in profitable source. Acid test ratio however excludes the stock as stock cannot be quickly converted into cash. The result of acid test ratio also gives a favorable signal of snowboard’s short term financial capacity. The result of inventory turnover ratio is also acceptable, i.e. 33.3 times which shows how quickly stocks are converted to sales. Average collection period, i.e. receiving sums from receivables is also seem to have well managed as it have remained constant at 11 days comparison with since last year despite the fact of slight increase in total sales of Bunge. The above liquidity ratio signals a positive signs of Bunge to repay the loan in 5 years’ time. The profitability ratio, however, raises concern as both the operating profit margin and Net profit Margin have deteriorated when its present rations were lower than average, i.e. only 1.5% and 0.5% only. The lower profitability shows a negative control of costs, as the fact shows that Gross Profit percentage have remain constant at a good 40%,therefore a result of only 0.5% Net profit gives a poor performance of Snowboard and its likely ability to repay loan. Return on Total Assets also shows a decline of 4.4% since previous year which indicates that assets of the company requires replacement as they might have cover most of its life. This result also gives an additional concern of collateral to loan officer as the assets which are old cannot cover the security requirement to backup loan. Coming to the Investment ratios, the return on equity shows a decline of 9.5%. However, the price earnings ratio shows a higher figure for this year. The base of this rise might be due to improving price of share associated with increasing confidence of shareholders due to foreseeing the expansionary plans of the company. History tells the future The historical performance of any company is many times seem to continuing in future. Until the strategies are revised and innovation is introduced in working pattern, the unfortunate patterns of past could not be get rid of. Though there are some very good points of Bunge, such as quality and its demand. The product itself is successful but the high cost incurred makes it less profitable than it actually could be. Improvement in Cost Controls There fall two main categories of cost. Internal cost and External Cost. Out of these two, internal cost is one of the major costs which companies suffer, such as Bunge’s internal cost sums to 1,097,000 this year. The concern element with internal cost is that it is a cost which brings no direct ‘fortune’ to the business. In simple words it is a supporting cost to the business to generate income. Controlling and managing this (internal) cost could improve the current operation as the major portion of earned revenue is gone in settling costs. Once these costs are controlled, the benefit of the savings could be realized in terms of improving profitability and company’s ability to meet finance cost and so on. Cost control is a persistent process. Other Cost control methods: 1. Cost efficient utilities 2. Utilizing full production capacity so to spread fixed cost 3. Department targets to reduce costs 4. Corrective actions for adverse variance in budgets 5. Purchasing raw materials in bulk (Economies of scale) 6. Reduced wastage 7. Half yearly meetings and orientations to communicate how to reduce cost all across the company. 8. Circulate standard cost control reports Internal and external Risks Expansion other than in European market will bring both internal and external risks to Bunge. The major risk associated with expansion other then Europe will include risk of failure of Bunge product, i.e. either the absence of demand or existence of established suppliers of the similar product which makes it difficult for Bunge to make its place. The risk of failure cannot be discounted when considering financial risk factors relating expansion. Similarly barriers to entry will also avoid Bunge to successfully launch in new market region. The risk of unavailability of land (for factory) and equipment also surround, as per research Europe have both increasing growth and availability of manufacturing facility along with further options of sale and lease back or a purchase ownership. Bunge will also be exposed to financial risk from various aspects of the overall economy. Economic risk is usually uncontrollable from within a company. Whether it relates to product development, marketing and promotion or staff welfare, innovation is what keeps a business one step ahead of its rivals.  A lack of innovation, therefore, can pose a risk to business success as a company becomes staid, stagnant and irrelevant in a changing marketplace. Therefore, creativity, innovation and flexibility of revising strategies will allow Bunge to avoid this external risk. Being aware of external and internal factors of financial risk is vital to mastering the art and science of financial risk management. Strategies to mitigate risks Research makes things clear in advance and make the need of requirements visible. Three basic risk mitigation hits 1. Planning: Risk management planning should be an ongoing effort. Risk mitigation strategies and specific action plans should be incorporated in the project execution plan.   2. Implementation: Identify alternative mitigation strategies, methods, and tools for each major risk, implementing from a proper channel after assess and prioritize mitigation alternatives. 3. Review: Reviewing action plans and results continually Potential returns of procuring a new plant Bunge have two options to expand by procuring a building and equipment in Europe and or lease and sale back. Despite of purchase comparison of Cashflows, the procurement options seems viable and enduring. But it needs restructuring in terms of capital. Stock purchase will be a good option for acquisition –Although merger will be a good strategy as it not only about financial investments but it also requires geographical footings which must be strengthened. Recommendations Acquiring company needs to identify major areas of strategic concern keeping in view 5-10 years plan. which mainly comprises business expansion, new market development, and innovative trends, that supports company’s brand beyond the regions. capital restructuring is crucial for lowering cost of capital and avoiding business solvency. The good idea could be venture capital investment or individual shareholders both can serve the cause of business expansion. External Environment/Situational Analysis Environmental scan is important for any organization on the basis of which a strategic plan is proposed. Following is the PEST analysis: Political Factors Political environment of any country is important for strategic direction of any organization. without analyzing it, it would create lapses in running successful operations. Many countries encourage foreign direct investment in different sectors. So, it is important to know the government policy for the development of successful operations. Environmental Factors Company strictly follows corporate Governance code for smooth flow of operations. It focuses on delivering community in the form of corporate social responsibility (Tonchia, 2003). Ethical performance is the responsibility of every corporation. Strategic Plan implementation requires huge investment in the start and encompasses infrastructure cost, skilled labor, maintenance cost and marketing cost. All this requires cost benefit analysis. The proposed plan should be developed in line with existing market trends such as projected financial management plan, payback period, ROE and Net present value of the project needs to be calculated using existing market data for viability of project. Nonetheless, we cannot say straight forwardly, the project is ensured with success. It depends on implementation process and `political factor at the time of implementation. Conclusion If new product line is started on the basis of debt financing, in case of failure it may become burden on company’s growth and performance. As already company’s sales are good in Europe.The equity finance may increase cost of capital to some extent but it will lower the risk of solvency and shareholders will stay long with the existing structure. The exact weighted average cost of capital can be calculated for new project’s evaluation. The primary need is to identify that which sort of business expansion is suited to Bunge Inc. Growth at this time. Would it be innovative or expansion of similar products but new market or wider geographical area. In any case, company’s performance will be reliant on maintaining existing clientele base by improving quality of products and services. And second element would be to launching new business plan but with proper selection of financing tool that may lower risk factor. Three main lines will develop over the time which includes strategic repositioning of entire business operations. Repositioning of business expansion along new product line and last, working capital management. (Equity prices and financial globalization, 2013). Working capital may be financed through short term loans which may not be a burden in terms of finance costs. It will also help to maintain liquidity positions of company. Another way out could be availability of Overdraft from bank on negotiable terms. The merger will be a good strategy through stock purchase in exchange of share with European company . As company currently share statistics, Return on Total Assets also shows a decline of 4.4% since previous year which indicates that assets of the company requires replacement as they might have covered most of its life. This result also gives an additional concern of collateral to loan officer as the assets which are old cannot cover the security requirement to backup loan. Economic factors are the major driver of business growth and expansion and an analyst (Veliyath and Fitzgerald, 2000) says Bunge is more influenced by economic dynamics. In recession times, unemployment rate increased and therefore, Snowboard Inc. also so reduced workers but still International market expansion may improve the overall capacity of Snowboard Inc. keeping going in recession times. The company uses a 10% cost of capital (hurdle rate) for the expansion analysis. The company can also continue to operate in Europe without an expansion and can continue to license the European painting technology. The Bunge‘s operational capacity and sales base is strong which is proving any way in favor of Bunge and this decision can partially be supported but in future, how conflicts may arise must be determined now so that terms would be clear enough for growth and services. The economically organization would be at stake if it behaves immaturely like financing working capital with high finance costs. Such as it is expected that long term debt would be used finance working capital. However, merger may have cons such as sharing management that may give rise to conflicts over the time and it requires extra courage and time to resolve disputes between two different management. All legal disputes must be assessed and contingency plans should be reviewed by expert lawyers team to analyze which sort of threats company can face. A due diligence should be reviewed by auditors for assessing originality of financial statements. In many merger, cases, once merger has taken place the originality of financial statements becomes question mark for parent organizations. Such as, High debt/equity structure with huge cost of capital that engulf major after tax profits. It is not viable any way. So, merger decision would be good once all okay reports have been received from lawyers, auditors and business consultants about merging organization. Works Cited Hopfl, H. M. (2000). Ordered Passions: Commitment and Hierarchy in the Organizational Ideas of the Jesuit Founders. Management Learning, 31(3), 313-329. Summer, M. (2013). Financial Contagion and Network Analysis. Annual Review of Financial Economics, 5(1), 277-297. Cascio, W. F. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Marts Sams Club.. Academy of Management Perspectives, 20(3), 26-37. Chamberlain, K. A. (2011). “Lawfully Made Under This Title”: The Implications of Costco v. 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