Financial Statements of G4S Security - Research Paper Example

Critical evaluation of why G4S Security failed in the London Olympic Executive Summary Purpose: The purpose of this project is to elaborate on achosen decision and the impact of this discussion on the financial performance of G4S security. The chosen decision in this case is new market opportunity. G4S accepted the contract for providing security services for the 2014 London Olympics. The researcher endeavours to explain the impact of this decision on the performance of the company. Approach: In order to conduct this research in a proper manner, the financials of G4S security during and around the period of 2012 London Olympics have been analysed extensively. The analysis was done in accordance with the learning outcomes that had to be achieved. Findings: The researcher emphasized on the financial statements of G4S security in order to have a holistic view of the impact of accepting the London Olympics 2012 contract. However the analysis did which did not reflect the loss encountered due to failure of the contract. Nonetheless, the study suggested that the company was financially as well as operationally unstable while accepting this contract. Limitation: The time limitation was one of the major barriers in this particular project which restricted the researcher from analysing various aspects and resultant impacts of this decision. Moreover, simple ratio analysis was used in order to determine the financial performance of the company. In this context it can be said that a thorough primary research would have given the researcher with a detailed view of the actual situation. Implication: This study attempts to explain the importance of implementing appropriate strategies in order to manage financial resource as well as performance. Keywords: G4S Security, London Olympics, financial performance, learning outcome, new market opportunity. Table of Contents Introduction 5 Learning outcome 1 5 Financial ratio analysis 5 Liquidity ratio analysis 6 Gearing ratio 7 Debt to Asset ratio 8 Interest Coverage Ratio 9 Earnings per share 10 Dividends per share 11 Learning outcome 2 12 Budgeting 12 Functional budgeting 12 Alternatives to functional budgeting 13 Learning outcome 3 14 Management accounting 14 Role of management accounting in strategic decision making 14 Learning outcome 4 15 Benchmarking 15 Best in class benchmarking 16 Pros and Cons of Benchmarking 17 Inappropriate benchmarking in G4S Security 18 Learning outcome 5 19 19 Reference List 20 Introduction In the contemporary business environment the intensity of competition between companies has increased by an unprecedented margin. Such a level of completion has driven organizational managers to look for opportunities that serve as a sustainable source of competitive advantage. As a consequence, organizations are thriving to look for opportunities new markets with the underlying aim of achieving success. No objective is more important for an organization than to search for and exploit the resources available in a relatively unexplored market. This is precisely because even if an organization is firmly established, they would still require a new market in order to expand their business options. However, looking for new market opportunities and subsequently accepting the same does not always yield god results for a company. It is with regards to this fact that the researcher endeavours to conduct a thorough analysis of G4S Security’s acceptance of a new market opportunity in the form of a contract for providing security services during the London Olympics 2012 (G4S, 2010). The purpose of this research is to assess the impact of this decision to accept a new market opportunity on the financial performance of the company. The followings sections in this report will involve in-depth analysis of G4S’s financial performance over the past three years in order for the researcher to be able to evaluate the financial effect of this major strategic decision. Learning outcome 1 Financial ratio analysis This section is relevant to learning outcome 1 where the researcher attempts to conduct a thorough analysis of the financial performance of G4S Security over the last four years. This will help the researcher to identify the effects that a strategic decision may have on the overall financial performance of an organization. Liquidity ratio analysis Liquidity Ratio 2013 2012 2011 2010 Current ratio 1.40 1.68 1.50 1.29 Quick Ratio 1.33 1.39 1.34 1.18 (Source: G4S, 2013; 2011) As far as the current ratio of G4S security is concerned, it has increased from 1.29 in 2010 to 1.50 in 2011. Thereafter, the current ratio increased to 1.68 in 2012 and subsequently decreased to 1.40 in 2013. An increasing current ratio indicates that the company has been maintaining a financial healthy position between 2010 and 2012. However, in 2013 the current ratio decreased by a certain level precisely because of the company’s increased exposure to current liabilities with respect to its acquisition of current assets. The main reason behind increased concentration of current liabilities can be attributed to the fact that G4S security had to look for external source of finance in order to pay off the penalties levied on the company by The London Organizing Committee of the Olympic and Paralympics Games (LOCOG). Regardless of this, the current ratio indicates that the company is financially stable and is in a relatively good position to pay off its short term liabilities without many difficulties. The quick ratio of G4S has also followed a similar pattern to that of the current ratio. The ratio in 2010 and 2011 is 1.18 and 1.34 respectively whereas in 2012 and 2013 the ratio is 1.39 and 1.33. This ratio measures a company’s ability to meet its short term liabilities with its most liquid assets (De Franco, Kothari and Verdi, 2011). The increases value of quick ratio indicates that G4S had adequate reserve of liquid assets at its disposal which could be used in order to meet the short term liabilities. The managers have adopted an effective strategy in order to keep the company highly liquid so as to shield the company from any uncertain impact. G4S exhibited a fairly stable performance by not letting its quick ratio decrease by an unprecedented level when the company failed in executing its strategies during the London Olympics 2012. Even though the company was penalized with a huge fine, the company managed to access to good mix of debt capital and cash assets to pay off the obligations. Gearing ratio G4S Security 2013 2012 2011 2010 LT debt 2749 2971 2604 2274 Equity 919 1231 1544 1623 (Source: G4S, 2013; 2011) As far as the debt to equity ratio is concerned, the values increased gradually from 1.21 in 2010 to 1.44 in 2011. Thereafter G4S’s leverage ratio increased to 2.00 and 2.45 in 2012 and 2013 respectively. An increasing debt to equity ratio implies that the company’s exposure to external debt increased over the last four years (Wahlen and Wieland, 2011). This in turn increases the company’s exposure to interest rate risk should the interest rate starts fluctuating in the market. The increasing proportion of debt in 2012 suggests that the company had to borrow money from external sources in order to fund the services that had to be provided during the London Olympics in 2012. Following the company’s failure to provide proper services during the London Olympics in 2012 the leverage ratio of G4S increased even more in 2013. One of the major reasons behind this drastic increase is that the company incurred huge losses when the Olympic committee in London stopped making any further payments the company. Therefore in order to pay off its existing obligations as well as fund the internal operations of the company G4S had to opt for external source of financing as they are relatively cheaper source of capital when compared to equity. Debt to Asset ratio G4S Security 2013 2012 2011 2010 Total debt 4433 4375 4071 3754 Total Asset 5352 5610 5615 5377 (Source: G4S, 2013; 2011) As is evident from the table given above, G4S security’s level of debt increased drastically over the past four years. On the contrary, the value of the company’s assets has been following a decreasing pattern. This puts the company in a risky position as an improper asset liability management strategy may deteriorate the company’s ability to pay off its obligations (Fridson and Alvarez, 2011). However, debt to asset ratio of G4S security has increased over the past few years, but the increase has not been significant. This was because of the increase in the proportion of debt which in turn was largely due to the amplifying amount of G4S’s external borrowings. Such values imply a relatively weaker financial infrastructure of the company as a result of which the company may incur significant losses. Interest Coverage Ratio G4S Security 2013 2012 2011 2010 EBIT 42 278 375 438 interest expense 143 132 207 201 (Source: G4S, 2013; 2011) The interest coverage ratio of G4S security reveals a somewhat similar picture. The ratio has fluctuated considerably over the past few years and has reached a lowest value of 0.29 in the year 2013. An interest coverage ratio of less than one indicates the company is not being able to generate sufficient cash flows in order to pay off its interest expenses. The drastic decrease in the company’s interest coverage ratio is largely due to the sweeping reduction in the company’s earnings before interest and tax. G4S’s amplifying exposure to debt increased the company’s interest expenses. However, the earnings before interest and tax were not adequate enough to compensate the expenses incurred by the company. The company’s expenditure increased a lot while they were preparing for the operations to be conducted during the London Olympics in 2012. This increased in expenditure reduced the company’s margin of profit. This factor combined with the increase in the company’s interest expenses decreased their interest coverage ratio by a significant margin. This indicates a relatively perilous situation that G4S is in given the fact that the company’s capability to pay off its obligations has decreased. Therefore it can be said that G4S’s strategic decision to seek opportunity in a new market deteriorated the company’s financial performance significantly over the recent past. Earnings per share 2013 2012 2011 2010 -2.25 0.30 1.15 1.40 (Source: G4S, 2013; 2011) As far as the earnings per share of a company is concerned, it is a determinant of the amount of profit that is allocated to each every outstanding shares of the common stock. This factor indicates the profitability of a company (McCrary, 2010). Therefore, considering this fact it can be said that G4S’s profit allocation decreased gradually from £1.40 in 2010 to £1.15 in 2011. Thereafter the earnings per share decreased further to £0.30 in 2012. Following the G4S’s Olympic debacle, the company earnings per share became negative. This is precisely because the company incurred huge losses following the failure of their operations during the London Olympics 2012. As is evident from the income statement, G4S’s profit for 2010 was £245 million. Since then it kept on decreasing gradually and came down to a meagre value of £62 million in the year 2012. This was a drastic fall in terms of the company’s profit margin considering the fact that G4S has proven to be very profitable over the due course of its operational life. Dividends per share 2013 2012 2011 2010 0.79 0.30 0.54 0.71 (Source: G4S, 2013; 2011) As is evident from the figures given above, G4S’s dividend per share decreased between 2010 and 2012. The dividend per share in 2010 was £0.71 and thereafter it decreased to £0.54 in 2011. The company chose to reduce the amount of dividends distributed per share in order to retain a major proportion of its earnings. The underlying reason behind this strategy was to have adequate funds at disposal in order to make sure that they are readily available when they venture into a new project. Another reason behind reducing the amounts of dividends issues per share can be the fact that the organizational managers thought they would not be able to sustain this level of growth if they increase the dividends per share. This is precisely because a failure to maintain the growth would trigger a negative effect within the market following which the company’s share price could plummet by a sweeping margin. However, following the company’s failure during the London Olympics 2012, the managers thought of increasing the dividends issued per share. This decision was put into practice and the company reported dividend per share of £0.79 in 2013. The dividend per share in 2013 was the highest of the last four years. The underlying reason behind this increase in the dividend per share can be attributed to the fact that G4S’s managers wanted to restore the confidence of their shareholders after the Olympics debacle in 2012. The company wanted to convey that despite the failure they had the potential to recover very quickly and sustain the growth rate that the company has achieving during the late 2000s. Learning outcome 2 Budgeting Budgeting involves a detailed preparation of financial outcome that is anticipated during a period of time in the future. This enables companies to identify of their budget plans have been met or not. Budgeting is a company’s initial step towards making financial predictions which involves a careful preparation of forward looking cash flow statements and balance sheets. Business organizations such as G4S Security use their budget plans in order to have an idea about incomes and expenses. Therefore, it becomes extremely crucial for financial managers to prepare a proper budget plan so as to make sure that they are achievable. Functional budgeting Functional budget, unlike master budget, is a document that is specific to a limited division of the company. In other words it applies to certain departments within a company such as research and development, information technology and so on and so forth (Ashe-Edmunds, 2014). Functional budgets are extremely important when managers seek a broken down analysis of the budgets for individual departments which in turn proves to be beneficial when it comes to preparation of the master budget which involves consolidation of functional budgets of each and every individual departments. G4S security failed to prepare an appropriate functional budget for its individual operational departments. As a result of this the managers were not able to review the cost within each operational area. Failing to do so also restricted the HR managers of the company from comparing the employee wages or charges to be paid to vendors for similar products and services. This is why the managers were also not in a position to determine the total cost for a specific function which in turn restricted them to making a decision on whether or not to outsource the operation. However, G4S Security chose to outsource its security services when the company was not being able to provide adequate security staffs during the London Olympics in 2012 (Hopkins, 2012). The company incurred additional cost when they had to pay soldiers and officials who filled in for the inadequate number of security personnel promised by the company itself (Sparrow, 2012). This was a cost that had not been taken into account and therefore this fact can be attributed to one of the major reasons behind the loss incurred by the company during the Olympics 2012 (King, 2012). Alternatives to functional budgeting As an alternative to functional budgeting there are several other budgeting models such as the zero based budgeting and activity based budgeting. Unlike traditional budgeting formats where financial managers only consider the variations in the past years by assuming that the baseline will be automatically approved, in zero based budgeting each and every line item of the budget has to be approved regardless of their variations. In this model the budget request has to be re-evaluated thoroughly and has to be initiated from the zero-base. Therefore, in other words this budgeting model is independent of the fact that whether the overall budget or particular line items within the budget are increasing or decreasing. G4S Security could have implemented this model as application of this model would have allowed the company managers to allocate resources efficiently. This is precisely because of the fact that this model is completely based on requirements and benefits instead of history. It would also have enabled the managers to identify the most cost effective way of improving operations which in turn would have prevented the company from incurring such mammoth loss. In addition, the managers would also have been able to detect any inflated budgets. On the contrary, application of this model is very consuming when compared to incremental budgeting. Learning outcome 3 Management accounting Strategic management accounting is arguable the most instrumental tool that facilitates managerial decision making. Managers access critical accounting information so as to be able to have a holistic view of the each and every factor associated with the organization’s accounts before making any strategic decisions. Moreover, with the help of management accounting techniques managers are able to manage as well as perform control functions efficiently and effectively. Management accounting approach involve application of techniques such as activity based costing, lean accounting, throughput accounting, transfer pricing, break even analysis, expense budgeting, capital budgeting. The application of these models depends upon the factor that needs to be analysed within a particular organization. Role of management accounting in strategic decision making Having mentioned the above mentioned facts it can be said that the London Olympics debacle 2012 can be largely attributed to the improper management accounting techniques implemented by the organization managers. The managers failed to make a proper estimation of the number of officials that would be required to provide security services during the main events. However, a correct estimation of the same could have been possible had the company implemented proper budgeting techniques. Application of proper management accounting techniques would also have enabled the managers to have a precise idea of the expenses that had to be incurred behind the allocation of security services. Moreover, they would also have been able to have a proper contingency plan in place in case if they fail to provide the required number of security personnel. Failing to do so lead the company to incur considerable expenses as they had to outsource the services to soldiers and polices who had to be compensated for their service. Given the fact that an appropriate management accounting model was not implemented, G4S Security’s managers were not able to identify the need for having additional finances in places should they fail in providing optimum services. Following that when the LOCOG ceased to make further payments to the company, it incurred unprecedented loss in the subsequent financial year. Learning outcome 4 Benchmarking Benchmarking involves the process of measuring services, products and performance of one organization with that of organizations that are perceived to be the leaders in one or may aspects of the operations that they are engaged in. This process enables organizational managers to identify the strengths and weaknesses that exist within their organization as well as to identify the areas of improvement within every functional department. Figure 1: Types of benchmarking (Source: Best Practices PLC, 2014) The process of benchmarking or instead the approach that is taken towards benchmarking is very crucial when it comes to assessing the quality, efficiency and performance of a product or service. This is one factor that has long been known a sustainable source of competitive advantage for companies. That is why companies often resort to the application of various benchmarking techniques in order to answer that their product and service delivery is the best in class. Best in class benchmarking As the term in itself suggests best in class, this form of benchmarking involves the assessment of a leading and renowned company who is best known for delivering the best out of a particular operation. This enables organizational managers to improve their operational effectiveness and efficiency throughout the enterprise. Benchmarking can be carried out on different factors which in turn yield different insights. Figure 2: Benchmarking factors (Source: Best Practices PLC, 2014) Pros and Cons of Benchmarking The figure given above suggests that benchmarking approaches offer a holistic view of each and every factor thereby enabling managers to identify the areas of efficiency as well as the areas of improvement. Not only does it help to improve performance but also enables companies to create new paradigms whereby officials can compels organizations to work out of their comfort zone in order to navigate a new opportunity to prosper. On the flip side one of the major drawbacks of benchmarking the scale of comparison itself. For example by adopting benchmarking approaches organizations compares the products, services and performance of a leading organization with that of their organization. However, this process fails to consider the circumstances under which those products, services and performance were delivered. Therefore, the parameter itself is not robust enough which in turn renders the entire approach of benchmarking meaningless or flawed (Nayab, 2010). Moreover benchmarking is often associated with the danger of arrogance and complacency. It has often been seen that organizations tend to become either arrogant or complacent when they excel beyond competitive standards. They feel that they have reached the pinnacle and there is no requirement for further improvement. They also believe that there is no need for modifying strategies or having contingency plans (Nayab, 2010). Inappropriate benchmarking in G4S Security Such was the same in case of G4S Security as well. The company failed to adopt appropriate benchmarking strategies for its services. Given the fact that the company was enormously successful in its operations before 2012 London Olympics they thought that they had optimal strategies in place and that they were capable enough to provide services to such a magnanimous event. The company perceived that it had adequate resources in place that is required to provide services to an event of the stature of London Olympics. This is where the benchmarking strategy fell flat. The company compared London Olympics to many of its previous assignments thinking that they are of scale and therefore the company failed to make appropriate budget plans as well as failed to implement proper resource allocation strategies. This is what resulted in deteriorating quality services provided by the company during the London Olympics. Given the fact that G4S Security is the biggest security services firm by revenue, its performance during the London Olympics were nowhere close to the benchmark that the company had set during its golden period. Learning outcome 5 Given the fact that Treasurers are financial risk managers of a company whose fundamental responsibility is to protect the company’s value from the risk exposures of business activities, there verdict about the company’s risk exposure and financial position is of extreme importance when it comes to strategic decision making (Polak, Robertson and Lind, 2011; Kain, et al., 2013). Provided that risk may arise from various factors or sources within the company itself, free flow of information between the treasurer and other department is of extreme importance as it facilitates effective treasury management (Chhaba, et al., 2013). It is very important that treasurers support a particular decision before the organization gives its verdict in favour of the decision (Barth and Eisenhuth, 2011; Brooks and Mukherjee, 2013). The situation has been the same for G4S Security as well. The company’s financial position was extremely healthy prior to the exploration of a new market in the form of the London Olympics 2012 assignment. The liquidity ratios, gearing ratios and other financial ratios indicated that the company was capable enough to provide effective and efficient services during the prestigious sport event. That is why the corporate treasurer gave the verdict in favour of opting for new opportunity which is as big as the London Olympics 2012. However, the area where the company failed was the development of an appropriate budget plan as well as improper financial forecasting. Reference List Ashe-Edmunds, S., 2014. Functional Budget Requirements. [online] Available at: [Accessed 6 October 2014]. Barth, A. and Eisenhuth, T., 2011. Cash Management Transformation at Orsay. TMI-Treasury Management International, 81, pp. 26. Best Practices PLC, 2014. About Benchmarking. [online] Available at: [Accessed 6 October 2014]. Brooks, R. and Mukherjee, A. K., 2013. Financial management: core concepts. New York: Pearson. Chhaba, R., Dhalia, P., Mathur, P. and Das, I., 2013. Financial Aspects of Domestic Treasury Management in Non-Financial Corporates. [pdf] SSRN. Available at: [Accessed 6 October 2014]. De Franco, G., Kothari, S. P. and Verdi, R. S. 2011. The benefits of financial statement comparability. Journal of Accounting Research, 49(4), pp. 895-931. Fridson, M. 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Financial Statement Analysis. Mastering Financial Accounting Essentials: The Critical Nuts and Bolts, pp. 89-99. Nayab, N., 2010. Pros and Cons of Benchmarking. [online] Available at: [Accessed 6 October 2014]. Polak, P., Robertson, D. C. and Lind, M., 2011. The new role of the corporate treasurer: Emerging trends in response to the financial crisis. International Research Journal of Finance and Economics, 78, pp. 48-69. Sparrow, A., 2012. G4S boss questioned by MPs over Olympic security: Politics live blog. [online] Available at: [Accessed 6 October 2014]. Wahlen, J. M. and Wieland, M. M., 2011. Can financial statement analysis beat consensus analysts’ recommendations?. Review of Accounting Studies, 16(1), pp. 89-115. Read More