Decision and Accounting Making on Waldrons Divisions - Example

Decision and Accounting Making on Waldron’s Divisions BOARD OF DIRECTORS RE: Decision and Accounting Making on Waldron’s Divisions Introduction After the board meeting, calculations of financial analysis of Waldron for financial year 2013/2014 have been achieved based on prepared financial statements as stipulated in the appendix. The following is an analysis of the company’s performance between 2012 and 2013. Waldron operating performance 2012 2013 Sales increase from £7003 in 2012 to £11,205 in 2013 by £4,202= 60%. Cost of goods sold increase by £2490 (£3747 to £6237) = 66% From 2012 and 2013 Profitability Gross profit margin 2012 (3256/7003) 2013 (4968/11205) 46% 44% Gross profit growth 3256 to 4968 53% Operating profit growth 1050 to 2205 110% ROCE 2012 20% 4300+1973-1036/7003 2013 8035+3705-3618/11,205 27% 20% 27% Operating profit margin (1050/7003) 2012 14.9% 2013 (2209/11205)15% 20% Net profit growth (324 to 885) by 561 173% Net profit margin 2012(324/7003) 2103(885/11205 5% 8% Overhead trends—operating expenses growth 2206 in 2012 to 2759 in 2013 25% Operating expenses margin 2012 (2206/7003) 2013(2759/11205) 32% 23% General overhead increases by (915 to 944) 3.2% Distribution costs up by 48 (199 to 247) 24% Sales and Marketing costs up by 350(495 to 845) 71% Administrative costs increases by 126 (597 to 723) 21%. Trends in Sales, Costs, Overheads and Profitability during 2013 Relative to the 2012 Waldron’s sales have been rising almost in all of it product four categories; however, Durafit experienced slight decline in 2013 as compared to 2012 with sales estimation of 1,332 million euros. Decline in sales was 1,214 million euros. Waldron has been experiencing significance financial growth according to its summary report. Current issues are mainly in Durant’s division. Despite the increase in profits in 2013, the division is ensuring that dwindling of sales is not realized in 2014. The company’s cash flow has been recording negative results, with significant increases in overdraft balance, and indebtness; particularly in dividend payouts. Stellex division worries the management because the projected business returns did not meet the targets of 2013. The schedule of sales in Stellex division is also behind schedule. The budgets for February 2014 and January 2014 are 30% below the estimates for the new financial year. Durafit Durafit has been hit with several market challenges including stiff competition from foreign markets. Sales drop from 1, 332 million euros in the year 2012 to 1,214 million euros in the year 2012. The reduction in Durafit also reflected low profit margin for the year ending 2013 as compared to end year 2012. Profit margin = gross income/sales = (1.214 – 1.332)/sales = -0.118/2.0 = -0.059 Durafit’s main challenge is the nature of its products versus customers’ taste. Durafit took time in adjusting to modern construction techniques which gave its major competitors time to adjust and conquer the market with modern building techniques. Contracts Contracts at one time experienced downfall in the U.K market that posed a threat in attaining its profits. With opening of its branch outside the U.K and completion of major projects ahead of schedule, Contracts has won the trust of major clients. Contracts’ sales improved greatly from 1,949 million euros to 1,214 million euros in the year 2012 to 2013 respectively. The gross profit margin = gross income / sales revenue = (1.9-1.2)/2.0 = 0.35 This was as a result of opening up for new markets outside the U.K. Elite Elite is one of the divisions that has showed excellent performance since its acquisition. With just three years after its establishment, the division added £3.7 billion more than all other divisions. In 2013, it experienced 56% increase in sales as compared to 2012. Even though there has been a fruitful trading outcome, the division director notes that it has to stay ahead of competition. He recommends an upgrade and introduction of new technologies to keep up with the pace in the market. Stellex Engineering Stellex, with almost £1 billion worth price of Stellex, has not gained most of the market share as expected. It recorded £1.9 billion in terms of sales in 2012. The growth was anticipated to grow because of the number of pipeline orders. The division as well projected a growth of £2.5 billion in 2013 only to capture £2.0 billion. However, it still needs time to adjust to the market while coming up with new ways to coup with business environment. The variance of it budget follows a saving and overuse of the money budgeted. It total revenue varies as £2,488 budgeted to £1,987 actual budgets for the year 2013. For the first month of the year 2014, it budgeted for £417 but did spend £291. 2,488 – 1,987 = £501 that varies as 417 – 291 = £126. Other than analyzing from the individual budget to another, the Stellex Engineering’s budget indicates that this sector as no stable or focused projection of growth. Nonetheless, for these budget figures, it apparent that Stellex Engineering is on the right track to expansion and meeting its challenges, since it usually has extra money for such emergencies. The company has realized a huge profit and this shows the kind of commitment members are entitled to in order achieve their goals. Gross profit margin 40% in 2013(795/1987) and nil in 2012 40% There are few recommendations that the board should consider. Recommendations will entirely depend on the continuous rising cost of production and other expenses. Stellex’s Current Approach to Calculating Tender Bid Prices Stellex Engineering has had significant growth since its acquisition, even though the targeted growth might have not been achieved. Integration plays a greater role in the success of acquisition (Whitaker, 2012; Pg. 75). According to Helmut Schlang, the division still needs time to adjust in the markets. Generally, Northern Europe needs close attention due to decline in budget versus actual revenue. February 2014 revenue was projected at 250,000 euros only to realize net 121,000 in actual incomes. Even though the rest of the world does not believe in anticipated revenue, it is important that several measures be taken to ensure revenue growth. The year 2013 did not present a good business environment for Stellex operations; a result of the decline in construction production by 2.7% in Western Europe. In the year 2012, it rose to 6% as a result of the initiation of new projects in Northern Europe and the United Kingdom. Markets are likely to grow in the near future since most construction works are shifting from the traditional methods to modern methods. The division is hopeful in continuing to be in the market as a major player in the areas of its operations. As per the projection of trends, numbers of submitted tenders increase annually, but it is unfortunate that the number of accepted tenders is declining. Absorption costing is the most appropriate for Stellex since it is appropriate for external reporting and is viable for stock valuation reasons. Absorption costing as well takes care of as separation of costs into variable and fixed elements (Phillips, 2013; Pg. 87). The allocations of fixed company overheads to cost points make the person in charge to be aware and responsible to the kind of expenditure made on others. The year 2014 might turn out to be fruitful in case various measures are put in place to take care of minor setbacks that have seen Stellex limp in the market (Phillips, 2013; Pg. 91). According to the trends: i. Investors should give Stellex little more time to adjust to the market to allow for integration. ii. Since Northern Europe has not given the projected revenue stream, it is advisable to have a branch in the region to ensure that there is reduction in cost of operation. iii. Stellex should involve young innovators in the steel sector to come up with products that are more competitive. iv. The division should take advantage of trendy growth in the construction and building industry by establishing a mechanism to track clients who are in need of quality products. v. The number of submitted tenders should not decline at all costs, instead, they need to compare pricing with other competitors in the market. The division should consider low pricing strategies in regions with low bidding to lure clients. Limitations of Stellex’s Current Approach to Calculating Tender Bid Prices The division’s structure exhibits a high proportion of fixed costs. This causes the management to be left with no option but to allocate high fixed cost for each tender they bid. The division’s fixed cost system poses a major threat to the attainment of its 2014 goals. Apart from costing and pricing policies as factors in the loss of sales, impact of supporting a cost structure designed for sales of £2.5 billion when sales are sub £2 billion will be a direct hit to the reported PBIT for this division in the year 2014. As much as the division might be targeting specific clients, the management should consider accommodating all its clients in a better business environment. It is not logical for a company that is still facing challenges to come into the market with high prices (Watson, 2005; Pg. 241). This might be the reason why most tenders are not awarded to them. Even though fixed prices may give room for predictability, the benefits may come with some price (Newell 2005; Pg. 149). Instead of bidding tenders under fixed price, the division should opt for other approaches that would see it sail through. This can also be supported by the fact that contracts, under tender, decrease annually. The division may decide to settle on Dutch auction process. Dutch auction provides ranging shares under or over which the shares will be purchased (Milgrom 2003; Pg. 68). The division may as well may settle on negotiated contracts. Contracts may be evaluated and an agreement reached based on a benchmark price that had earlier on been taken from previous tenders. It is possible to select for the most suitable and attractive type of tender offers while adhering to the most competitive procurement policies. Durafit Joint Venture with Industrias Tenas Durafit has been performing well more especially in areas that t operates. A joint venture that would see Waldron benefit as well as Indusrtias Tenas should not be left unattended to. Currently there is high cost of production experienced in areas where Durafit operates especially in South America. There is need to calculate the cash flow and payback period on this case. Payback period = cost of the project / annual cash inflows Cost of the project = £160 million (the total funding required) Annual cash inflows = 1712 Pp = 160/1712 = 1 month A decision benefiting both parties should be welcomed and taken serious. From the look of the trends that Durafit has been posting, it shows that Durafit has a strong market acquisition. Establishing a company in a region that takes a lot of resources for products and services to reach will help sort out this menace. After evaluation by the company top officials, there is hope the transaction is likely to be fruitful. Waldron will still be holding greater shares even if the industry is located in a cheap manufacturing country. Even though selling of Durafit stake may turn to be advantageous, it should be undertaken with a lot of care. Durafit will still give good results while in Mexico as agreed since no products or services would be supplied outside Mexico. Causes of Cash Flow Issues in 2013 and Specific Recommendation Generally, the cash flow and operating costs were experienced as a result of introducing new product in the company’s menu list as well as increased cost of production. Firstly, the inventories have to be determined to help in understanding the company’s performance. Number of days of inventory = inventory / average day cost of goods sold = inventory / cost of sold goods÷365 Thus, Inventory days 2013 was 135days 2012 was 118 Number of days of recievables = accounts receivable / average day’s sales on credit = accounts receivable / sales on credit÷365 Thus, Trade receivable days 2013 was 45 2012 was 33 Number of days of payables = accounts payable / average day’s purchases = accounts payable / purchases÷365 Thus, Payable days 2013 was 71 2012 was 71 For 2013, the total operating circles are 135 + 45 – 71 = 109 For 2012, the operating circles are 118 + 33 – 71 = 80 Cash flow was also steered by company’s sale of some of the Durafit offices and assets that were increasing the cost of operation with no much benefit. Paying of suppliers both oversees and internally also made the company to be active over the counter. The company should be aware that the longer the inventory accumulates the more it affects the company’s cash flow as well as the profit. In case inventory is held for long as in this case, there is the risk of obsolescence resulting to inventory that cannot be sold. The company should change its policy on inventory such that it does not take too long or too short but rather average. Recommendations Cut on administrative cost as much as possible. One way would be to reduce a lot of meetings that can either be done via Skyping or any other media to save on transport costs. The company should also consider locating most of its factories near suppliers and the raw materials that it uses for its productions. This can be felt since delivery and transportation costs can be greatly reduced. At some point, some suppliers might consider lowering the price just because there might be several suppliers in the same region who might want to offer stiff competition. The company should produce with consumer trends. This ensures that the company is in a position to determine consumer preferences and major specific products to such clients. This can be achieved by taking a step of establishing branches where consumer up take is demanding most of the time. Waldron’s Funding Sources and Procedures Waldron is on the verge of greatly expanding, hence, it needs funding. Any financing that has been acquired has to be refunded. Shareholders should take into account the fact that both modes of sourcing for funds have benefits accompanied by set-backs. Equity financing usually implies that additional shares of common stock are issued to investors (Benjamin, 2005; Pg. 409). When shares of common stock are given out or pending, the current shareholder percentage of ownership definitely has to decrease. Debt financing entails borrowing money and not giving out the shares; thus, shareholders still retain their shares. The pros and cons that come with the two models include: Pros of debt financing:- i. Retained Ownership. ii. Tax deduction - is a huge attraction for debt financing since the interest and principal payment on a debt are normally considered as business expenses, hence they can be deducted from business income tax. iii. There is lower interest rate. Cons of debt financing; i. The sole obligation to the lender is to make payments. Unfortunately, even if the business fails, the company has to make these payments ii. Even after having discounted interest rates as mentioned above, you are likely to be faced with high interest rates. iii. This mode normally impacts credit rating. The offer might seem attractive and the company may encourage more debts whenever it needs money, a practice referred to as ‘levering up.’ but do not forget that the loan is usually noted on the company’s credit rating. More borrowing will lead to higher risk to the lender hence higher interest rate paid back. Advantages of equity financing; i. The funding is usually committed to the company and the intended project. ii. The company shall not incur the cost of servicing bank loans or even debt finance; this allows the company to use capital for other business activities. iii. External investors will expect growth aiding the company to execute and explore ideas. Disadvantages i. Raising equity finance is time consuming, demanding and costly, this may take the management focus away from the usual business activities. ii. Legal and regulatory challenges may be faced when establishing the same. iii. Depending on the investor, the company is likely to lose certain authority over the business while making crucial management decisions. Waldron should proceed with both projects while ensuring account the risks associated with both. The two modes of financing can work well to regulate the downside of each project category (Madura, 2007; Pg. 76). Waldron still remains a major player in the construction industry. Even though there might be minor hitches in its division, shareholders should allow for necessary market adjustment in all segments to allow time for expansion. Waldron should focus on international markets rather than internal market due to its capacity to handle huge projects. This will enable the company to operate vastly depending on regions where marketing and operations are favorable. Bibliography BABAOGLU, O. (2005). Self-star Properties in Complex Information Systems: Conceptual and Practical Foundations. Berlin [etc.: Springer. BENJAMIN, G. A. (2005). Angel Capital: How to Raise Early-Stage Private Equity Financing. Hoboken: John Wiley & Sons. FLEMING, J. (2003). Profit at Any Cost? Why Business Ethics Makes Sense. Grand Rapids, Mich: Baker. MADURA, J. (2003). Introduction to Business. Mason, OH: Thompson/South-Western. MILGROM, P. R. (2003). Putting Auction Theory to Work. New York: Cambridge University Press. NEWELL, M. W. (2005). Preparing for the Project Management Professional (pmp) Certification Exam. New York; Toronto: Amacom. PEARSON, B. (1999). Successful Acquisition of Unquoted Companies: A Practical Guide. Aldershot, Hampshire [u.a.: Gower. PHILLIPS, J. (2013). PMP project management professional study guide. WATSON, D. (2005). Business Models: Investing in Companies and Sectors with Strong Competitive Advantage. Petersfield [England: Harriman House Pub. WHITAKER, S. C. (2012). Mergers & Acquisitions Integration Handbook: Helping Companies Realize the Full Value of Acquisitions. Hoboken, NJ: Wiley. Read More