Strategic Financial Management - Marks and Spencer - Essay Example

? Strategic Financial Management - Marks and Spencer Marks and Spencer is a brand of retailer group in the United Kingdom leading among several companies. The company provides its customers with clothing and other home products that are superior in quality and provide high value for money to the customers. The company is into the businesses of clothing, home products as well as food. It is also presently known for its environmental friendly activities (Company Overview, 2011). A study of the financial status of the company also reflects a sound business performance of the company with satisfactory revenue through its sales and this status has been maintained inspite of several challenges and difficulties that the company had to face in the light of changing economic conditions in the business world. The company focuses on maintaining its position in the industry and develops its business with increasing the revenue more than before (Financial Review, 2011). The human resources of the company are dedicated towards their performance and present innovative ideas to provide their customers with effective and efficient services and high quality of products. In the UK itself, around 78,000 employees are working for the company and the turnover rates of the company are also negligible (Our People, 2011). This report focuses on studying the strategic financial management of M&S that leads the company in its industry resulting in improved business outputs and financial results and a comparative study with Next Retail limited and Debenhams Plc. Stage One: a. Rationale for the company for considering non-financial objectives along with financial objectives: In the current business world, where customers are in demand for high quality products and expect to receive value for the price they pay for the product, it is necessary that a company focuses not only on its financial objectives, but on the non-financial objectives as well that includes the social and environmental objectives thus addressing more to the needs, expectations and satisfaction levels of the customers. A company having only financial objectives would have its focus only on the financial outcomes and performances of the company. However, non-financial objectives aid a company to realize the non-financial measures that too may have an impact on the financial results of the company. In other words, the strategy of a company may be just to make money or it may be to provide the customers with socially and environmentally beneficial products the society may demand (Henriques, 2010, p.17). A company may have its focus only on selling its products and generate revenues. However, in that case, the company may never realize how the money is made. On the other hand, focusing on social and environmental objectives of a firm enable the company to consider its responsibilities sincerely towards the society and the environment that may include increasing employments, having no discriminatory measures within the organizational activities, manufacturing products that are pollution free and hence eco-friendly in nature (Henriques, 2010, p.17). These factors enable a company to more effectively satisfy the needs and expectations of the customers which in turn is bound to positively impact the company’s sales and financial performances. Thus the rationale behind a company considering non-financial objectives like social and environment issues is primarily the fact that non-financial objectives enable a company to realize the measures it needs to consider along worth selling of products, to successfully and more satisfactorily fulfill the needs of their customer having concern and facilities for the society as a whole and the environment eventually reflecting desired financial results. b. Marks and Spencer: Reporting of its performances reflecting financial and non-financial objectives: The Marks and Spencer company leading in its market in providing its customers with high quality clothing and home products as well high value for the food products it sells. The reporting of the company on its performances reflect that the company not only focuses on selling products and generate revenues, but it also has social and environmental objectives that deal with serving the society and the environment as a whole. As the reporting of the company reflects, the company’s turnover has been recorded to be ?8.7 billion in the last year obtained from clothing, home and food products. The clothing and home products have been found to gain sales revenues of ?4.2 billion showing an increase of around 3.9 percent from the previous year. Food products have also reflected increase in sales from the previous year generating revenues of ?4.5 billion from sales. The company has around 700 stores that make the products of the company available to its customers (About M&S, 2011). The above mentioned results reflect the financial performances of the company that has shown highly improved and satisfactory results for the company implying the financial objectives of the company to be successful in its implementation. However the company’s reporting also reflects its focus on social and environmental issues considered significantly as non-financial objectives of the organization. Considering the retail stores of the company, the company focuses and has plans to take measures towards improvement of the stores and increase the variety of options “broadening the range of hospitality options” (About M&S, 2011). The company also has plans and programmes related to the environment and the ethical issues of the company. The reporting of the company talks about Plan A which is the “eco and ethical programme” of the company, the team of which is dedicated and committed to reduction of impacts on the environment (About M&S, 2011). The programme includes social services as well as it focuses on development of sustainable projects that can improve the living habits of the employees, customers, suppliers and other stakeholders of the company. Their values in commitments deal with involving their customers in the programme, associating the programme with the manner in which the company conducts its businesses, and also deals with changes in the climate, handling of wastes, proper utilization of available natural resources, thus in the process concerning about the welfare of the society and the environment (About M&S, 2011). M&S is also known for its social responsibilities and has particular focus on the employees, customers and the suppliers. Staff managers have special responsibilities to look after the wellbeing of the employees addressing their needs and problems and providing relevant solutions to them. Also, the company intends to generate employment opportunities whenever possible. The company also focuses on maintaining a good relation with its suppliers since the manufacturing and selling of the products is greatly dependant on them. The expectations of the customer are also tried to be fulfilled to maintain its target market and attract more number of customers (Nahal, 1988, p.118). Thus M&S can be considered to be a company that that proves that there is a need for considering non-financial objectives along with financial ones. The company’s performance reporting also reflects their incorporation of non-financial objectives and programs and their intentions to involve their customers in the eco friendly projects of the company. The company can hence be said to understand the importance of social and environmental objectives in the accomplishment of the organizational goals and objectives and this has been presented in their reports. M&S can represent themselves as examples in this respect for other companies who might still not have the understanding of the requirement of non-financial objectives. While doing the comparative study, it has been observed that the Next Retail Company also has focus on social objectives along with the financial objectives of the firm. It maintains its corporate social responsibility focusing on the social, ethical and environmental issues and take measures to conduct their business in a responsible manner. The social and environmental issues are given significant importance by the company. It is believed by the company management that following these measures might satisfy the customers more. Thus, the company has its focus on the customers, suppliers, the employees, the community and the internal and external environment of the company (Corporate Responsibility, 2011). Quite similarly Debenhams Plc. also follows social and environmental objectives focusing on its employees and the customers. The trading policies of this company are completely based on ethical and environmental factors (Corporate Social Responsibility, 2011). Stage Two: Profitability of the Company: The profitability ratios of M&S Company for a period of t\last two years, 2009-2010 can be represented through the following Table 1: Ratio Year 2010 Year 2009 Net Profit Margin (in %) 8.01 7.37 Gross Profit Margin (in %) 38.24 37.94 Return on Capital Employed (in %) 15.77 13.35 Return on Total Assets (in %) 10.90 9.82 (ratio_profitability) The profitability ratios of M&S for the two years reflect that the company has improved in its profitability performance from year 2009 to year 2010. The net profit margin that gives the relationship between the net profits of the firm and the sales of the company (Khan & Jain, 2007, p.6.19) has been found to increase from 7.37 percent to 8.01 percent from 2009 to 2010 implying the increase in the company’s percentage of each sales rupee after all interests and taxes are paid. The gross profit margin presenting the relationship between gross profits and sales (Khan & Jain, 2007, p.6.19) has also shown increase from 37.94 percent to 38.24 percent from 2009 to 2010, implying that increase in the amounts of income after the company has cleared the costs of its products. The return on capital employed that relates the return of profits on the total amount of capital employed (Khan & Jain, 2007, p.6.22) increased from 13.35 percent to 15.77 percent from 2009 to 2011. This implies the efficiency of the company in utilizing its long-term funds provided by the owners and lenders. Increasing ration reflects improvement in the company’s efficiencies in this respect. Also the return on total assets that gives the relationship between the total assets of the firm and the profits earned (Khan & Jain, 2007, p.6.21) increased from 9.82 percent in 2009 to 10.90 in 2010. This again reflects the company’s efficiency in the optimal utilization of its available assets that has generated improved profits for the company. The profitability of Next Retail Company and Debenhams Plc can be represented in following Table 2 as follows: Ratio Next Retail Debenhams Plc Year 2010 Year 2009 Year 2010 Year 2009 Profit Margin (in %) 12.47 11.23 6.60 6.31 (ratio_profitability; Annual Report 2009, 2011; Annual Report and Accounts January 2010, 2011; Debenhams, 2010) The profitability ratio of Next Retail reflects that the company had performed satisfactorily in the last two years having positive percentages of profits. The company seems to improve from the stage since there is increase in the financials from 2009 to 2010, yet the results are highly dissatisfactory. However, Debenhams shows less satisfactory results and the profitability ratios are much lower than that of M&S and Next. From the point of view of an investor, the profitability results of M&S seem to be quite satisfactory. Although the net profit margins of the company have not reflected very high percentages, yet the results are satisfactory and increasing percentages in the profit margins as well as the returns on assets and capital employed give a positive feedback on the part of the company’s efficient performances over the years. An investor would be concerned with the profits of the company and the ability of the company to efficiently manage its resources. M&S has proved to be successful in this respect representing successful financial performances in the recent years. Hence, over viewing the profitability of the company, investors may be suggested to invest in the company whose reports reflect the improved performance of the company over the years and maintain its position at the top in the industry. Financial Gearing: Financial gearing ratios are capable of evaluating a company’s conditions in regard to its capital structure and the amounts of loans that it takes from outside the company. A company whose gearing ratio is high generally has to pay their interests even when the company may be going through a difficult phase of business. The ratio may be obtained by finding the relationship between the fixed cost of capital of the company and the long term loans or capital for the company (Hall, 2004, p.397). The gearing ratio of the company for 2009 has been found to be 164.95 and for 2010 it has been obtained as 107.73 percent (572185_ratio_strcture). From this information it can be understood that the gearing ratios for M&S for the last two have years have been very high reflecting that the company has borrowed huge amounts of capital from outside the company. The contribution of the owners seems to be much lower in this context. This may seem to be little concerning on the viewpoint of the investors since a company borrowing too much of capital from outside may pose threats of risks of not being able to repay the amounts. Such a situation may incur the company with huge losses. Thus looking at the high gearing ratio of the company in the recent years, the investors may have to think sincerely before investing in the company. However, it can also be observed that the ratio has declined greatly if compared between the two years, 2009 and 2010. This might again give a positive feeling about the company implying that the company is improving its conditions with respect to borrowing huge amounts of funds from the outside of the company and increasing the level of loans over the owners’ contributions. The gearing ratio for Next Retail Company has been obtained to be as 28.9 in 2009 (Annual Report 2009, 2011) and for the year 2010 it was 31.8 (Annual Report and Accounts January 2010, 2011). The gearing ratio for Debenhams has been obtained to be 42.9 in 2009 and 37.4 in 2010 (Debenhams, 2010). These reflect that the management conditions of these companies in regard to the available resources are better than M&S. The gearing ratios are much lower in case of Next Retail and Debenhams reflecting that their borrowing from outside the company is less and much of the funds are made available from the owners of the company. This reflects a better scenario than the M&S Company. Thus considering both the profitability and the financial gearing of the M&S Company for the two years, it can be suggested to the investors that they make some thorough studies on the other financials of the company as well. Although the gearing ratios are too high and other companies present improved results than M&S, yet the company has also posted records of positive output and improved profitability of the firm. Also, the company’s high gearing ratio shows the trend of declining from one year to the other that may indicate the company’s efficiency to control the borrowing measures of the company. The company’s efficiency in using its resources are also reflected through the profitability ratios. Hence, over viewing the profitability and the gearing ratios, the investors may be recommended to invest in the company; however going through other financials of the company would also give a better understanding of the company’s financial status suggesting investors with better means. Stage Three: Assessment of Company through Financial Statements and Accounting Ratios: The Benefits: The financial statements and the computed accounting ratios of a company are of tremendous help in the evaluation of the financial status of the company. The financial statements are prepared by the finance department of an organization to have records of the financial data in relation to the assets and liabilities of the company, the costs and expenditure, the cash flows as well as the profits and losses that the company makes in a particular period of time. These data are important since they help to understand the current financial status of a company based on which the future planning may be done and financial budgets may be prepared. Financial ratios are also necessary since they provide the relationships between various financial data of the company’s performances based on which detailed financial analysis of the company may be done. Moreover, such information gives an opportunity to compare the results either between the different years or may be with other companies in the same industry. In the case of the companies chosen for the study, M&S, Debenhams and Next Retail, the financial reports of the companies giving the details of the performances of the companies and the resultant data on the sales, revenues, profits, costs, expenditure, assets, liabilities and every other detail of the finances of the companies help to find the business outcomes of the companies reflecting its strength and weaknesses. The availability of data over the years gives an idea of the firms’ performances over the years that provide an understanding on the improvement or deterioration of the companies. In case of M&S and Debenhams, the financial statements as well as the accounting ratios clearly reflect that the companies have been performing well and maintained their positions in the market. While in case of Next Retail, the financials have reflected negative performances. Moreover, the efficiency of the companies in utilizing its resources, as well as managing its assets and liabilities are also reflected through the use of financial statements and accounting ratios. For example, as discussed above the profitability of M&S has been found to be positive and improving from one year to another in the recent years. This provides a positive impression of the company to the investors as well as all the stakeholders of the company. Likewise, every other financial data of the company and the calculated accounting ratios give meaning to the actual performance of the company which can be analyzed before judging the company’s financial status. However, in order to evaluate a company, only the financial results may not be enough. It would be necessary to understand the other activities of the company as well to have a complete knowledge about the company. As in the case of M&S, it has been observed that the company has its focus on social and environment objectives that indicate that the company is not only selling their products, but are actually serving the society as a whole without harming the environment. These factors are also necessary in determining the overall objectives and performance of a company since these activities outside the perspectives of generation of revenues, actually impact the financial results of the firm. The corporate social responsibility is an essential factor to be analyzed in this respect. Also, the performance of a company should always be compared with other companies in the industry to have a clear picture of the position that the concerned company holds in its market. Thus, to have an analysis on a company and understand its real value, an overall study needs to be conducted on the financial as well as the non-financial objectives of the company that would give the learning of both as to what the company achieves and how they achieve it. Conclusion: To conclude the study, it can be said that the financial statements and the accounting ratios of M&S as well as Next Retail and Debenhams help to get the knowledge of the companies’ performances over the years. The M&S Company which is the main topic of study in this report has shown improved results based on which investors can plan their investments in the company. Also, the company through its financials has reflected its efficient management and control of its financial resources like the assets and liabilities that has contributed to the desired results. The company is at a top position in the market of giant retailers and having plans for further investments as well as improving the systems and operations of the company; it focuses to further improve its position in the future generating more profits and greater number of customers. At the same time, the company tends to maintain its social and environmental objectives that ultimately benefit the financial performances of the company. The entire study reflects M&S’ strategic financial management that has assisted the company to take the right measures and perform accordingly towards better results for the company. 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