Current Financial Practices of GHC - Research Paper Example

? Can you please amend the references? Because my lecturer place a great emphasis on references that he requires us to avoid using website as references. And I found that the WEBSITE references in the report are not ACADEMIC website even some of the links cannot open. I will get low mark even fail if the report still use those website references. So can you please use book or journal references instead of those highlighted website references below. Thank you so much. Table of Contents Introduction 3 Current Financial Practices of GHC 3 Profitability position 3 Analysis and Measurement of Political and Country Risk 3 Threats, Shortcomings and Inefficiencies 5 Recommendations 5 Recent Development and Opportunities 5 Expectation of Government from GHC 6 Benefits Expected by GHC 6 Accessing Risk Associated With Inward Investment 7 Responsibilities of Chief Accountant and Group Treasurer 10 Conclusion 12 Reference 13 15 Introduction Global Hardwood Corporation (GHC) is a United Kingdom based Multinational Company which sources variety of decorative hardwoods from countries around the world. These hardwoods are then processed into products that are used in the construction and furniture industries. It imports hardwoods in a raw, unfinished state which are then processed in its own sawmills and finishing plants. The Chairman of GHC decided to diversify GHC’s business and therefore established Real Furniture Company (RFC) as a subsidiary company to develop these markets. RFC imports a range of hardwood and cane furniture, which is manufactured in overseas location. Current Financial Practices of GHC Profitability position The financial position of Global Hardwood Corporation states that the turnover as a whole has been increasing on an ongoing basis. If we focus on the turnover by product wise then it can be noticed that construction division has shown a continuous decrease, furniture division has shown a continuous increase and the Real Furniture Company has also shown a continuous increase in terms of sales revenue. The earnings before interest and tax has shown a continuous increase since five years, profit before tax and profit after tax has also resulted in tremendous increase since the five year period ranging from 2003 to 2007. Analysis and Measurement of Political and Country Risk The risk which Global Hardwood Corporation may be facing is political and country risk. Political risk is the events that can negatively affect doing business (Jakobsen p.3). The country risk includes the possibility of losses due to country specific political, economic and social events (Levi, 2009, p.463). Nationalization may be the most excessive form of political risk which the company is facing. The other forms of political risk are currency and trade control, regulatory restrictions, changes in tax or labour laws and requirement for additional local production. It also includes macro and micro issues associated with political decisions, social and cultural issues and financial and economic risks. Political risk can be measured from a country risk analysis perspective. GHC may be facing country risk due to the following reasons: regional politics, currency stability, trade alliances, legal and regulatory system and home-host country relations (Shong, 2008, p.22). Political risk can be accessed through protecting new and existing global investment and operations and capitalizing on opportunities resulting from political change. Careful assessment is to be done by avoiding investment in those areas that are too risky and pulling money out of the areas when they become too risky. The managers should evaluate alternative investment options on a continual basis. Micro level political risk can be assessed by shifting the investment to different industries and firm can also file an insurance claim (Rajwani, 2013, p.1). Ratio analysis is used for measuring country risk. The ratio of gross domestic fixed investment to GDP measures the economic propensity to invest. The net capital imports over gross domestic fixed investment signify the extent to which the GDP growth is dependent on goods from abroad. The higher the ratio, economy is more dependent upon overseas imports (Buckley, 2004, p.486). The other services that measure country risk for example Moody’s Investor Services, Standard and Poor’s Rating Group and Institutional Investor (Erb, Harvey and Viskanta, 1996, p.1). Apart from this, Delphi technique, quantitative analysis and checklist approach is also used to access country risk (Madura, 2010, p.482). Threats, Shortcomings and Inefficiencies The threats, shortcomings and inefficiencies of GHC are poor physical communications, poor messaging, different culture, different language, and different laws of other nations. It also involves risky and expensive cost of expatriate staff and availability of suitable local staff. Other factor which leads to the shortcomings and inefficiencies are different taxation system, different taxation rates and different currencies. It can be also due to the barriers to entry of markets, difference in national growth rates and difference in cost structure. Recommendations Political and country risk analysis can help the company to uncover highlight incomprehensible risk such as discriminatory taxation. With this information the company can make decision about how to configure their investment if they decide to enter a market. They can also realize further gains by identifying risk that could cause considerable losses and monitoring triggers that would lead to political disruptions. GHC can also recognize social-economic forces that could lead to labour unrest and establish political risk insurance requirement for FDI project (Glancy, 2012, p.6). Recent Development and Opportunities The two issues regarding recent development and opportunities are firstly on a number of recent occasions, the Governments of individual supplier countries i.e. Western Europe, North America, Middle East and Australia / New Zealand has approached the Global Hardwood Corporation, thereby offering incentives to the company in order to source the majority of its hardwood from their country. Secondly, it has also been approached by the Governments of individual supplier countries with a view to encouraging Global Hardwood Corporation in order to establish manufacturing, processing and finishing facilities in those countries. Foreign Direct Investment (FDI) has taken place. The Chairman decided to establish a new business that would be different from Global Hardwood Corporation, and therefore established Real Furniture Company as a subsidiary company to develop the markets of hardwood and furniture. Global Hardwood Corporation owns 100% of the Real Furniture Company. Expectation of Government from GHC The governments of host countries might be expecting from Global Hardwood Corporations basically two things. They want GHC to source the majority of the hardwoods from their country and to establish manufacturing, processing and finishing facilities in those countries. The benefits to the host country from these activities are that there will be improvement in the balance of payment, accessibility of the scarce foreign exchange, accelerated rate of economic development through the creation of economic linkage and through warranted rate of investment (Sharan, 2008, p.126). By establishing manufacturing and production facilities in those countries, host countries government will prefer local production which in turn has benefits for trade balance and also for their labour markets. In return, they are willing to provide incentives for locating manufacturing facilities in their countries. Locating manufacturing facilities in the target market leads to better sensitivity for local market needs (Morschett, Klein and Zentes, 2010, p.324). Benefits Expected by GHC The benefits which Global Hardwood Corporation may request from host government are circumvention of trade barriers, easier adaption to local markets and may get advantages in distribution logistic. If Global Hardwood Corporation would establish its manufacturing processing and finishing facilities in those countries then production will take place in those regions only. The benefit which the company will get is that it can save custom tariffs and beat non-tariff barriers by locating its manufacturing and production facilities in the target market. Locating manufacturing, processing and finishing facilities in target market will lead to increased sensitivity to local market needs. By locating production nearer to the market, the company can reduce delivery costs to their foreign customers and reduces delivery times. This practice shortens their time-to-market. The other benefits which GHC might be expecting are increased flexibility by having manufacturing and production capacity in different countries in spite of one single location. By this practice the company can reduce their risk exposure. They can also utilize arbitrage advantage and market imperfections by using cheap labour in one country. The company can have better access to local inputs and can also have better relations with local suppliers. In addition, for the Global Hardwood Corporation, relocating manufacturing to different countries will give them access to lower input prices and a labour force with a low wage level (Morschett, Klein and Zentes, 2010, pp.324-325). In order to gain acceptance of host country about its operations, GHC may attempt to promote host country objectives through promoting exports of their own products (Goddard, 2006, pp232-233). Accessing Risk Associated With Inward Investment Direct inward investment can introduce foreign technology and foreign capital and may bring more resources to the country. The macroeconomic effect is that it generates additional demand for capital goods and can result in high level of domestic fixed capital formation. The microeconomic effect includes trade and employment effects, spill over effects, resource transfer effects and competitive effects (Brech and Sharp, 1984, pp.26-33). Most often host countries impose exchange controls that limit the holding of assets denominated in foreign currency and residents’ foreign exchange transactions as they affect the holding, earning and spending of foreign currencies or the retention or acquisition of assets and liabilities situated abroad. When faced with problems like recurring deficits on balance of payments, governments take exchange control as an alternative. Faced with growing liquid liabilities to foreigners on a scale that intimidate to create future difficulties if recovery of these liabilities are requested; exchange control are most frequently raised to prevent problems becoming worse. The host government generally keeps its exchange rate at that level at which it is overvalued, even if this means that the demands for exports become less profitable and more difficult and that of imports increases. This means that the demand for foreign currency is more than the supply. Therefore, who wish to buy foreign exchange cannot be allowed to do so. Exchange rate control takes three forms: One is prohibition of free movement of cash without permission from local central bank. Second is forcing non-approved movements to second market. And third is discouragement to free movement of cash. Exchange controls limit imports to a level fewer than under free-market conditions. When a country which is maintaining exchange controls undervalues its currency, imports increase; if permitted. Usually, exchange controls are applied to residents of a country. The applicability of exchange control rules is administered by the type of transaction involved, but such rules generally hold: exports and the nature of foreign exchange proceeds; imports including acquiring the foreign currency required and licences, if any; investment abroad, including portfolio investment; operation of various currency rates; borrowing abroad by residents; permission for residents in order to hold foreign currency accounts; permissions for non residents in order to open bank accounts in the host country; restriction on the use of some foreign exchange management techniques; and profit repatriation out of the host country. Free repatriation of all profits and capital are allowed by many countries at any time. Under exchange control regulations, capital which is put into a country may be repatriated but the return of profits is stringently limited. International company like GHC have wanted to avoid the profits repatriation constraint by the use of research and development, billing for loyalties, consultancy fees and the use of transfer pricing alteration. For avoiding profit repatriation restrictions, various alternatives are available to the Global Hardwood Corporation for moving funds and profits from one country to another. These includes transfer pricing, leading and lagging, fees and royalty agreements, loans, dividends, equity verses debt considerations, and currency invoicing. There are also four other techniques used for avoiding exchange controls. These involve: purchase of local services with obstruct funds when such services are for use throughout the group, purchase of capital goods with obstruct currency where the equipment is for corporate use, hosting corporate meetings, vacations and other expenses in the host country and in return paying for them with blocked currency and accomplishing and paying for research and development in the host country when the benefits accumulate throughout the group. These techniques include purchasing goods and services locally which may assist the company in other countries, thereby achieving some measures of unblocking (Buckley, 2004, pp.396-402). However, originally exchange controls were avoided by the Currency Swap Market in UK (Taylor, 2011, p.194). Responsibilities of Chief Accountant and Group Treasurer There is a vast difference between the responsibilities of Chief Accountant and the Group Treasurer because the Chief Accountant of the company has been with the company since thirty years and has immense experience in the hardwood industry whereas the Group Treasurer has been appointed recently by the recommendation of Group Finance Director who himself was appointed a few months ago without any prior experience of the hardwood industry. All the financial aspects of the Global Hardwood Corporation have been developed by the Company’s Chief Accountant. He is responsible to the Group Finance Director and ultimately to the Board of Directors. According to him, the appointment of Group Treasurer was not necessary. He sees this as an unnecessary expense to Global Hardwood Corporation. The Chief Accountant of GHC ensures compliance with all processes, policies, procedures and standards pertaining to accounts and finance processing. The duties and responsibilities of Chief Accountant of GHC in longer terms are as follows: He plans, manages and implements accounting operations and objectives, and integrates all activities towards achievement of ascertained goals and objectives, oversees cost control and participates in product pricing and credit decision (Broyles, 2007, p.9). He also recommends and implements improvements to budgeting procedures and also directs and control all routine and non-routine accounting matters. He supervises the Grant Accountant and Senior Accountant, if applicable. He also generates various system reports and ensures accuracy such as for payroll processing, billing, accounts payable. He is responsible for cost accounting, capital budgeting and coordination with internal and external auditors (Vallabhaneni, 2008, p.251). He is responsible for maintaining and reconciliation of balance sheet accounts for all funds with the help of accounting support personnel. He has responsibility for taxes, maintenance of cost and other accounting record, financial statement and also for system accounting (Hoque, 2005, p.5). He is responsible for ensuring maintenance of proper audit tracks and reconciliation performance for all processed work. Whenever needed, coordinates activities with work groups and other departments. He is responsible for preparing annual reports and monthly management reports and journal transfer at the yearend (Jones, 2004, p.177). The position of Group Treasurer is also the most responsible position in the group and it requires accuracy and accountability towards the group as a whole. The duties and responsibilities of a Group Treasurer are as follows: Safeguarding: The group treasurer takes sensible precautions to protect the group’s fund. Many groups keep the treasury of the group in a bank checking account in the name of the group, frequently requiring at least to signatures on all cheques. This provides ease of payment, security against accidental loss and continuing record of income and expenses. Group treasurer receives the monthly bank statements and bring them to the group as needed. Disbursement: The group treasurer is responsible for paying the routine bills of the group and for keeping correct records of the group’s funds. He should be well informed about how the group’s money is spent and should have mailing information for all the entities that the group contributes to. Reporting: Report and relevant documentation of group treasurers are needed at regularly scheduled business meetings. In this way, all group members are kept informed about the financial health of the group and make group decisions about how the funds should be spent He is also responsible for dealing with the bank and arranging the payments of salaries and bills (Cammack, 2003, pp.1-2). In order to influence the tactical direction of balance sheet, they weigh and measures activities and sometimes re-orient the direction of business (Cox, 2007, p.52). So, as a whole, the responsibility of a group treasurer is that he is responsible for running the treasury of the company, hold the money with high standards and set a tone of integrity, invest surplus funds daily and should maintain effectual business relationship with firm’s commercial and investment bankers (Broyles, 2007, p.9). Conclusion This report addresses the current financial practices of Global Hardwood Corporation, identifying risks, threats, inefficiencies and shortcomings and thus making recommendations for improvements where necessary. It also reports on each of the two issues mentioned in “recent developments and opportunities” and indicates what the government might be expecting from Global Hardwood Corporation and in return, what benefits GHC might request from governments. It also focused on risk assessment related with any inward investment which might follow the discussions with the host governments. And at last it takes into consideration the difference in the responsibilities between the chief accountant and the group treasurer. Reference Brech, M. and Sharp, M., 1984. Inward Investment: Policy Options for the United Kingdom. Issue 21. United Kingdom: Taylor & Francis. Broyles, J., 2007. Financial Management and Real Options: The Chief Accountant Responsibility. New Jersey: John Wiley & Sons. Broyles, J., 2007. Financial Management and Real Options: The Treasurer Responsibility. New Jersey: John Wiley & Sons. Buckley, A., 2004. Multinational Finance: Measuring Country Risk. 5th Edn. England: Pearson Education Limited. Buckley, A., 2004. Multinational Finance:Exchange Controls. 5th Edn. England: Pearson Education Limited. Cammack, J., 2003. Basic Accounting for Small Groups: With Exercises for Individual anf Groups Learning. 2nd Edn. 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