Areas of Responsibility of Qantas Airways Limited CFO - Case Study Example

FIN200 ASSIGNMENT, T22014 By (Author) Name of the Class (Course) Professor (Tutor) Name of the School (University) City Date 1. Areas of responsibility of Qantas Airways Limited CFO On 16th June, 2010, The Chief Executive Officer of Qantas Airways Limited, Mr Alan Joyce, made public the appointment of Mr Gareth Evans as the Chief Financial Officer (CFO) of the company. As a Chief Financial Officer, Mr Gareth Evans, has very many general areas of responsibility for the company. These diverse and dynamic responsibilities can be generalised into three major components (Quinn, 2007). a) Controllership duties This category of duties holds Mr Gareth Evans responsible for the presentations and reporting of timely and accurate historical financial information of Qantas Airways Limited. In doing this, the CFO need to control the cash flow position throughout the company, have a good understanding of sources and uses of cash and be able to maintain the integrity of securities, funds and other valuable documents. The CFO receives keeps and disburses the monies and securities of the company (Lapovsky & Mckeown-Moak, 2009). In addition, the CFO has the authority to establish accounting procedures and policies regarding credit and collections, payment of bills, purchasing and other financial obligations. Cash being king in any organization; the CFO has to control its flow and report it in an accurate and timely manner for stakeholders to facilitate their decision-making process (Quinn, 2007). The CFO must have a good understanding of all the liabilities of the company. These liabilities may be in the form of many legal contracts of the company, statutory and tax obligations, other hidden liabilities which may be in the form of leases, contingencies, and expectations from the board of directors and loan covenants. Under this category, the CFO is also required to understand business model used in generating customer value. He is also responsible for translating the company’s operational metrics into measures for company’s performance. Mr Gareth is, therefore, responsible for the communication of the expected and actual financial performance of the company to the stakeholders because they rely on the timeliness and accuracy of this information. The CFO should, therefore, ensure that this information is accurate since many decisions of the stakeholders are based on it (Besley & Brigham, 2008). b) Treasury duties Mr. Gareth is responsible for the present financial condition of Qantas Airways Limited. He decides how the money of the company is invested taking into consideration liquidity and financial risks of the corporation (Quinn, 2007). Additionally, he oversees the company’s capital structure, determining the best and appropriate mix of equity, debt and internal financing. This is the most important area of responsibility of Mr. Gareth for the Qantas Airways Limited. In performing these duties, the CFO is required to establish and maintain communication lines with shareholders, the President, financial analysts and investment banks. A good financial relationship enables the CFO to administer loan agreements and banking arrangements thus maintaining adequate sources of capital for Qantas Airline Limited. Mr. Gareth is responsible for coordination of the company’s long-range plans, assessment of financial requirements that is implicit in these plans and development of alternative ways to satisfy these financial requirements (Lapovsky & Mckeown-Moak, 2009). For instance, he is responsible for the readiness activities for the arrival of the A380. In addition, Mr. Gareth is responsible for the financial operations of Qantas Airline limited, the implementation of the company’s business change initiatives, commercial analytics as well as business analytics. Further, Mr. Gareth manages the revenue of the company, prices the tickets manages airline operations and schedules both domestic and international network (Quinn, 2007). c) Economic strategy and forecasting Mr. Gareth is not only responsible for the past financial position and present financial situation of the company but also the integral part of a financial future of a company. Mr Gareth is responsible for the identification and reporting of the most efficient areas of the Qantas Airways Limited and how the corporation can capitalize on such information. This area of responsibility is addressed by his management of airline operations and scheduling of both domestic and international network (Hirschey, 2009). For instance, Mr. Gareth, the CFO of an airline company, should be able to pinpoint the routes that are making lots of money and the models that are cost-effective to operate and how best this particular information can be used in improving the airline in the future. For instance, he is responsible for the readiness activities for the arrival of the A380 that is very cost-effective to operate. The CFO is, therefore, responsible for economic forecasting and modelling, for example, he predicts the best way for the future success of the company (Quinn, 2007). The role of the CFO has currently expanded and evolved to an advisor and strategic partner to the CEO. They are required to be more active and stronger participants in shaping the organization’s strategies. Serving as a financial authority in the company, MR. Gareth should model transparency and accountability and ensure the integrity of financial data (Lapovsky & Mckeown-Moak, 2009). How the responsibilities can affect ultimate objective of the company. Economic strategy and forecasting responsibility ensures that the future viability of the business by identifying more profitable options for the business. Failure by the Chief Financial Officer to carry out this role effectively may lead to losses (Baker & Powell, 2005). This will result to the failure of the company in the future. The ultimate objective of the company to succeed and improve in the future is, therefore, jeopardized. The CFO should, therefore, carry out all his roles for the company to realise it ultimate objective (Lapovsky & Mckeown-Moak, 2009). Conclusion The areas of responsibility of the Company’s CFO have broadened over the past decade. Apart from the core responsibilities such as capital structure, planning, audit and compliance, treasury, financial reporting and capital structure, Many Chief Financial Officers now play a stronger and active role in capital allocation and corporate portfolio managemen (Khan & Jain, 2004)t. Mr. Gareth oversees the financial risks of Qantas Airways Limited. He pursues positive business ventures for the company aimed at expanding their network across the globe in order to achieve maximum growth. He is required to become a prominent voice of the company in communicating with the board and also in investor relations because he is a leader in performance management (Khan & Jain, 2004). 2. Incremental cash computation Investment outlays at t=0 0 1 2 3 4 5 Machine -5,500 Additional NWC required -200 operating cash flows over the life of the project Sales revenue 1,500 2,500 3,500 4,500 5,500 Less: operating costs (30% of sales revenue) 450 750 1050 1350 1650 less: depreciation 1000 1000 1000 1000 1000 advertising expense (1300000/5) 260 260 260 260 260 total operating costs 1710 2010 2310 2610 2910 EBIT -210 490 1190 1890 2590 Less: interest expense -500 -500 -500 -500 -500 EBT -710 -10 690 1390 2090 Less taxes (30%) -213 -3 207 417 627 After tax income -923 -13 483 973 1463 add back depreciation 1000 1000 1000 1000 1000 add after tax increase in sales of other ice 500 500 500 500 500 577 1487 1983 2473 2963 Terminal cash flows at t=5 salvage value 500 tax on salvage value -150 after tax salvage value 350 recovery of NOWC 200 project free cash flow -5700 577 1487 1983 2473 3513 a) Payback period 3+ (1653/2473) = 3.6684 years b) Discounted payback period Cash flows PVIF PVs 577000 0.9091 524,550.70 1487000 0.8264 1,228,856.80 1983000 0.7513 1,489,827.90 2473000 0.6830 1,689,059 3513000 0.6209 2,181,221.70 4 + (767705.6/2181221.7)= 4.352 years c) Net present value Cash flows PVIF PVs 577000 0.9091 524,550.70 1487000 0.8264 1,228,856.80 1983000 0.7513 1,489,827.90 2473000 0.6830 1,689,059 3513000 0.6209 2,181,221.70 Total present value 7,113,516.10 NPV= -5700000+7113516.10= $1413516.10 d) Internal rate of return Cash flows PVIF, 30% PVs 577000 0.7692 443828.4 1487000 0.5917 879857.9 1983000 0.4552 902661.6 2473000 0.3501 865797.3 3513000 0.2693 946050.9 4038196.1 NPV30%= -1661803.9 NPV10%= 1413516.10 IRR= 10% + (1413516.1/3075320)*(30-10) IRR= 17.24% e) Profitability index= total discounted cash flow/ initial investment =7113516.1/5700000= 1.24798 =1.25 Decision: Based on the analysis, the project should be accepted because it has a PI of more than one; its IRR is more than its WACC hence promising more return, it has a positive NPV implying more returns. Further, the project is capable of recovering the initial outlays before its useful life lapses (Khan & Jain, 2004). References Top of Form Bottom of Form Top of Form Top of Form Top of Form Top of Form Baker, H. K., & Powell, G. E. (2005). Understanding Financial Management a Practical Guide. Oxford, Blackwell Pub. Pg. 200 Besley, S., & Brigham, E. F. (2008). Essentials of managerial finance. Mason, OH, Thomson/South-western. Pg. 401-407 Hirschey, M. (2009). Managerial economics. Mason, OH, South-Western Cengage Learning. Pg. 673-680 Khan, M. Y., & Jain, P. K. (2004). Financial management ; Text, problems and cases. New Delhi, Tata McGraw-Hill. Pg. 10-7 Lapovsky, L., & Mckeown-Moak, M. P. (2009). Roles and responsibilities of the chief financial officer. San Francisco, CA, Jossey-Bass. Pg. 110- 112  Quinn, J. P., & Quinn, J. P. (2007). Law firm accounting and financial management. New York, Law Journal Press. 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