Accounting and Decision Making on Waldron Divisions - Case Study Example

Accounting and Decision Making on Waldron Divisions Board of Directors RE: Accounting and Decision Making on Waldron Divisions Memo Introduction After the board closed the meeting, calculations relating to the company’s (Waldron) financial analysis for the fiscal year 2013-2014 have been determined in accordance with the financial statements indicated in the appendix. Performance of Waldron between the fiscal years 2012 and 2013 is analyzed as follows: Waldron operating index Sales increase from £7003 in 2012 to 11,205 and in 2013 by 4,202 = 60%. Cost of goods sold rise by 2490 (£3747 to £6237) from 2012 and 2013 = 66% Profitability Gross profit margin in 2012 (3256/7003) and in 2013 (4968/11205)=46%(2012) and 44%(2013). Gross profit increases from 3256 to 4968=53% Operating profit grows from 1050 to 2205=110% ROCE 2012 20% 4300+1973-1036/7003 2013 8035+3705-3618/11,205 27% 20% 27% Operating profit margin is (1050/7003) 2012 and 14.9% 2013 (2209/11205)=15%(2012) and 20%(2013) Net profit growth is (324 to 885) by 561=173% Net profit margin in 2012(324/7003) and 2103(885/11205)=5%(2012) and 8%(2013) Overhead trends—Operating expenses growth 2206 in 2012 to 2759 in 2013=25% Operating expenses margin 2012 (2206/7003) 2013( 2759/11205)=32%(2012) and 23%(2013) General overhead increases from 915(2012) to 944(2013)=3.2% Distribution costs rises by (199-247) = 48 (24%) Marketing and sales costs increases by 350(495-845)=71% Administrative costs rises by 126 (597-723)=21%. Patterns of Profitability, Overheads, Costs, and Sales over 2013 relative to the previous financial year 2012 The product categories of the company have recorded an increase in revenues, save for Durafit Division, which reported a slight fall in s2013 sales compared to the reports in 2013. Revenue in 2012 reached £1,332 million, and the fall in sales accounted for £1,214 million. From Waldron’s report summary, the company has been growing financially. Current financial problems mainly arose form Durafit divisions. Following the trend of other divisions in increasing profits in 2013, Durafit is avoiding dwindling sales in the financial year 2014. Cash flow statements of the company indicate negative results, with major increases in debts, and overdraft balance; particularly in the payment of dividends. Stellex Division also poses threat to the company management since the projected returns on investment were below the targets of 2013 fiscal year. In addition, the sales are behind schedule. January and February budgets in 2014 indicate a 30% underestimation of expectations for the new financial year. Durafit Durafit division has faced several challenges in the market including stiff competition emerging from foreign and new markets. Revenues dropped to £1,214 million in 2013 financial year from £1,332 million in 2013 fiscal year. The reduction is a sign that the division reported a decline in profit margin between the two financial years. Profit margin = gross profit/revenue = (1.214 – 1.332)/sales = -0.118/2.0 = -0.059 The main challenge facing the company is taste of the customers in relation to the nature of products produced by the company. Durafit division spent a considerable amount of time trying to adjust to modern technological advancements. The company competitors adjusted quickly to the modern technological requirements, thus enabling them to establish their contemporary building techniques before Durafit launched its products. Contracts Division Contracts division went through a severe decline in sales, a factor that hugely affected its capacity to attain in the UK markets. Opening a new branch in the United Kingdom coupled with completion of a series of key projects before their schedules ran out of time enabled the division to win the trusts of several new and old clients. In the fiscal year 2013, the annual sales revenues that were realized were £1,949 million. This represented over £745 million increase in revenues compared to the values reported in 2012 (£1,214). Gross profit margin = gross income/revenue = (1.9-1.2)/2.0 = 0.35 The growth in this ratio (gross profit margin) was due to investing in new stores and markets located outside the United Kingdom. Elite Division From the time of its acquisition, Elite division has been performance according to the expectations of the company stakeholders. Within a span of three from the time it was established, Elite has increased the net value of Waldron to £3.7 billion. The other divisions report values way below the contributions of Elite. Sales increase in 2013 was 56% in relation to the values reported in 2012 fiscal year. Despite the growth in net profit and sales revenues, the division director notes that Elite has to initiate better strategies to enable it stay ahead of its competitors. The division director recommends the introduction or upgrade of newer technologies to counter the emerging versatilities in the modern market. Stellex Engineering With price worth £1 billion, Stellex Engineering division has acquired majority of the market as projected. The division reported £1.9 billion sales revenue in 2012 fiscal year. The directors anticipated the sales to grow considering the number of mainstream order made. Over £2.5 billion in was expected in 2013, however only £2.0 billion was realize. Notably, more time is needed to amend the strategies with the market while developing other approaches to allow it to exist in the current business environment. Budget variance of Stellex Engineering follows the trend of overuse and savings of budget projection. The division’s total sales cost varies at £2,488 as the total amount budgeted, while the actual budgets stand at £1,987 for 2013 financial year. In the beginning of the first month of 2014, the division spent £291 while it budgeted for £417. 2,488 – 1,987 = £501 This value varies at 417 – 291 = £126 Other than looking at the division’s single budgets for every financial year, Stellex engineering shows that the engineering sector has no focused or steady growth projection. Nonetheless, it is evident that the budget defines a possible expansion and a better strategy to tackle the challenges that might arise in future since it has enough money reserves to cater for the emergencies. The company realized huge profits-a reflection of commitment of members towards the achieving company goals. The gross profit margin in 2013 is 795/1987 (40%) and nil 2012 financial year. Stellex Strategy for calculation of Tender Bids Despite the fact that Stellex division recorded significant development in its growth veer since it was acquired, the projected development in revenues have not been attained. The success of business and company acquisitions depends on how well the new division has been integrated with the existing branches of the parent company (Whitaker, 2012; Pg. 75). Helmut Schlang notes that Stellex division need more time allocation to adjust to the requirements of modern markets. North Europe markets require careful review because of the fall in budget in relation to actual revenue. Revenue projection for February 2014 was £250,000, but the realized incomes were a mere £121,000. As much as individuals do not believe in revenue estimates during revenue performance projections, it is vital to take note of crucial issues relating to future growth in revenue. The business environment of 2013 did not favor Stellex operations. This was a result of a fall of about 2.7% in Western Europe’s construction production. The 2012 recorded an increase of about 6% in the production of construction materials and products because of the rise in new products in the UK and Northern Europe. Future projections indicate that there is a possible growth of the construction industry since manufactures and companies are changing from the traditional to contemporary methods of construction. Stellex is hopeful that it will play its role in the market as one of the key participants in relation to the operations it is involved. According to the projection patterns, quantities of delivered tenders rise annually. However, it is emerges that the quantity of successful tenders have declined. Absorption costing strategy is the best approach for Stellex to ensure that it secures several tenders. Because of the company’s nature of operations, it is exposed to external reporting in addition to stock valuation. Absorption costing also caters for subdivision of costs into fixed and variable essentials (Phillips, 2013; Pg. 87). Assigning fixed overheads to company costs enables the responsible authority to take charge of types of expenditures made. Phillips (2013, 91) notes that negligible setbacks that affect the company such that its operations are paralyzed can be dealt with by applying appropriate measures. According to the patterns: Potential and old investors need to allocate more time for Stellex Engineering to adjust to the needs of the market for proper integration The company needs to incorporate young innovators in the steel industry to allow for competitive design and production of new products The division need to erect a branch in Northern Europe because the region has not indicated any projections in revenue stream. This will aid in cost reduction. To prevent the decline in the quantities of submitted proposals, proper comparison with other key players in the industry need to be conducted. To lure several clients, the division may initiate ways of lowering their bids while ensuring that they gain from the tenders Currently, it is possible to track the activities and preferences of new and old clients who are in constant need of improved products and services in the engineering industry Limitations of the division’s (Stellex) current strategy in determining bid prices The nature of Stellex structure indicates the presence of an elevated percentage of fixed cost. This forces the management to assign highly priced tender bids in accordance with the company’s high static costs. The high static cost model may prevent the company from realizing its 2014 targets. In addition to pricing and cost policies as elements important in determining losses in sales, effect of giving support to a cost model that is structured for sales exceeding £2.5 billion while actual sales are below £2 billion becomes a direct blow to the realized PBIT for Stellex in the financial year 2014. In the process of setting strategies for specific customers,, managers should consider catering for all its clientele in an improved corporate environment. It is recommended that a company facing challenges should avoid entering the market with prices that are extremely high (Watson, 2005; Pg. 241). For Stellex division, this is one o the proofs explaining its failure to secure tenders. Newell (2005, 149) notes that as much a as fixed prices dictate a definite predictability in revenue and overall performance, its benefits cannot be computed because of the costs incurred. To avoid the obstacles preventing the company from getting tender, the bids should be conducted using approaches different from the fixed price system. Optional approaches used in bidding tenders are reinforced by the circumstance that contracts tend to reduce annually, under tenders. Dutch auction procedure may provide one the best bidding techniques in the tender market. Dutch auction approach a series of shares below or above the prices that the shares will be bought (Milgrom 2003; Pg. 68). As well, Stellex may use negotiated contracts approach. After a contract has been identified, a consensus is reached according to the standard price borrowed from earlier tenders. It is easier to choose the most attractive and fitting tender offer while putting competitive procurement principles into practice. Joint venture of Indastrias Tenas and Durafit Division Durafit division records a good performance as per the reports from its different operations. In order to initiate a joint that would benefit both Indastrias and Waldron, careful procedure need to be conducted. Presently, there is high production costs in Durafit’s areas of operation (particularly in South America). In this case, the payback period and cash flows should be calculated. Cost of the joint venture (project) = £160 million (this is the required funding amount) Payback period = project cost/cash flows calculated annually Cash inflows (annual) = 1712 Payback period = 160/1712 = 1 month (30 days) It is important to take into consideration the decision that will yield positive results for both companies. Looking at the trends reported by Durafit division, the company has a sturdy market acquisition. To combat the challenges facing newly established companies in regions demanding huge resource allocations, market acquisition of the company needs to be large. The company managers have also reported that the joint venture will yield the projected yields. Incase Waldron has decided to establish in a manufacturing country known for cheap allocation of resources, it will still be in a position to record significant amounts of revenues. It is projected that Durafit is capable of giving the required results even if it will be operating from Mexico since the manufactured products will not be shipped outside the country. Sources of Cash Flow problems in 2013 and the Recommendations The operating costs and cash flow were realized due to the introduction of new products in Waldron’s menu. The rising product cost also contributed to the stated financial issues. To determine the company’s overall performance, it is vital to calculate the inventories. Inventory days = inventory/ average daily cost of sold goods = inventory/(cost of goods sold/365) Inventory days (2013) is 135 and 118 for 2012 financial year Receivable days = accounts recievable/average credit sales per day = accounts receivable/(credit sales/365) Trade receivable days is 45 in 2013 and 33 in 2012 financial year Payable days = accounts payable/daily average purchases = accounts payable/(average purchases/365) = payable days in 2013 is 71 and 71 in 2012 Total operating circles in 2013 is 135+45-71 = 109 Total operating circles in 2012 is 118+33-71 = 80 The sale of portions of Durafit’s assets and offices also aided in steering the company’s sales. The assets and offices sold followed their poor performance because of the rising operation costs to maintain. Improved activity of the company followed the constant pays made to the internal and external suppliers of the materials vital in business. Waldron need to understand that when inventories accumulate for long periods, profits and cash flows are greatly affected. In addition, holding inventories for longer periods triggers the risk of experiencing uselessness since they will not be sold to the potential buyers. Waldron need to consider changing its inventory policies to an average level to avoid low or long periods with which the inventories are held. Recommendations The first effective procedure is to reduce the accruing or allocated administrative costs. One of the best ways of cutting on administrative costs is to avoid physical meetings and conferences. Currently, video conferencing and other social media platforms provide better alternatives of saving on costs of transport or other meeting requirements. Waldron also need to locate its manufacturing with a proper consideration of the proximity to raw materials and suppliers. This move will aid in reducing transportation and delivery costs. Suppliers tend to lower their pricing in areas marked with huge numbers of other suppliers. These areas are characterized by stiff competition. Waldron should be at the forefront of setting consumer trends. The approach will ensure that all division are perfectly positioned in line with customer preferences and relevant products for potential clients. To achieve this objective, the company is expected to establish stores where consumer demands prove sophisticated. Procedures and sources for Waldron The company needs huge fund allocations because of its plans to expand. Plans to refund all borrowed amounts also need careful consideration. Company shareholders are also obliged to understand that loans have different results-they are characterized by losses or profits depending on the outlined utilization procedures. Benjamin (2005, 409) states that equity financing shows that extra shares of the available stock are assigned to the company investors. Pending or released shares of the common stock reduces the percentage ownership of the shareholders. Debt financing ensures that in the process of borrowing, shares are not given out since the shareholders have to retain their stakes in the company (Madura, 2007; Pg. 76). The two financing models have the following advantages and disadvantages: Merits of debt financing They are characterized by retained ownership Lower rates of interests Considerable tax reductions since principal and interest payments on debts are categorized under business expenses Limitations of debt financing The key requirement from the lender is to ensure debt is paid on time even if the business of reporting losses Discounted rates do not imply that the interest rates will be low It affects credit rating Merits of credit financing Commitment of the funds is directed towards the planned project and company Company is not entitled to servicing the bank loans and debt finance Since external investors are expecting significant growth, the company can explore and execute relevant ideas to realize profits Limitations of credit financing It takes a lot of effort and tie to raise equity finance Regulatory and legal frameworks pose challenges to the process of raising finance Different investors have their own ways of dictating authorities over the established business In conclusion, Waldron has the advantage of proceeding with the projects described in this report to avoid risks related to each project. The two financing models may perform well in combating the problems that might arise in each set (Madura, 2007; Pg. 76). The company still emerges as a key player in engineering and construction industry. As much as there are difficulties in every division, company shareholders and investors need to allow the company to adjust to different market segments for the company expansion. Major focus should be put on the international markets since it is capable of handling complex and more beneficial projects. Thus, Waldron will be in a better position to operate widely in the markets that favor developments. 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). 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