Applied Financial Mangment: TAYIN plc - Assignment Example

Topic: TAYIN plc Introduction: This paper seeks to answer given questions relating to performance measures and the development of a balanced score card where conflicting objectives of Tayin plc may be valid negotiated upon, combined and implemented for the growth of the business entity. Questions and Answers 1. Do the store managers’ apprehensions have any justification? Discuss, showing appropriate calculations. (20%) No, the store managers’ apprehension have no justification because the computation of their salary will not be affected even if the increase in capital investment is made for expansion purposes as a result of proposed extension to the store. This is true even if said expansion may not be matched with higher profit. Mathematically speaking, all other part of the formula remaining constant, increase in divisor will result to a lower rate than with out the increase in the divisor. If we add the capital cost of £ 750,750 to the total assets of £ 1,031,919 and with the decrease from profit from next year’s profit of £ 89,580, plus interest of £137,045 in all probability the rate will decrease from current rate of 18% to 12.7% return on capital employed (ROCE). But because of the increase in revenues from £1,338,363 to £1,841,000, then multiplying the difference to .025 (current rates for sales incentive bonus), then the apprehension has no basis. The feared decrease in profit resulting to lower rate ROCE for computing the bonus is more than offset and exceeded by the sales incentive bonus assuming the same rate for computing the sales incentive bonus. 2. Do you consider the proposed extension to make commercial sense on the basis of (a) The extension having a positive net present value of £15,704 when discounted at the cost of capital (10%) Yes, I consider the proposed extension making a commercial sense on the basis of having net present value of £ 15,704 when discounted at the cost of capital. Discounting cash flows for any project proposal at the company’s cost of capital and yielding positive net present value (Holmes, 1998) means that there is a net advantage for choosing the project. Financially speaking the project or proposal must be accepted. b) Outline qualitative factors that should be considered by businesses, such as Tayin plc, when making capital investment appraisal decisions. (10%) The qualitative factors that should be considered by the Tayin plc, when making capital investment appraisal decisions may include the following: The increase in number of more loyal customers as a result of offering customer better products and services is one qualitative factor that should be considered. Case facts say that the company’s philosophy is to provide a comfortable but not luxurious shopping environment. Making extension to a store leads to fulfilment of such philosophy and the increase patronage should be one of the qualitative factors. Another qualitative factor is the possibility that any proposed capital investment will affect the moral of the managers. Will it motivate the managers or will it create conflict between managers’ personal goals and the goals of the business? Still another factor is stability of its business operation and security of the jobs of company’s employees. With increased competition of producing products to be able to sell at low prices, Tayin plc may be concerned with how it will sustain the jobs of its present workforce. Case facts say that Tayin is considered by the Stock exchange to be an aggressive retailer. To its being an aggressive retailer it must also consider the maintaining the momentum of increasing sales by insuring that it has goods to produce for the market. 3. What problems would be associated with rewarding each manager on the basis of this current type of remuneration package? Suggest, and discuss an alternative approach to rewarding and motivating managers. (20%) The problems that would be associated with rewarding each manager on the basis of this current type of remuneration package may include any or a combination of the following: a. How if the targeted level of sales will not materialize? The formula in the computation of remuneration package calls for salary incentive bonus of a certain percentage of the increase in revenues. If the revenues will decrease, will it result to decrease also in the salary of the managers? How if the decline is too big that it could erode the present basic salary? The case facts seem to be unclear on what will happen if there will be decrease. In the nature of things when the manager benefits in case of increase sales will he suffer also a reduction of his or salary in revenues fall.’ b. As to the return on Capital Employed Bonus, a percentage or rate is also being generated on net profit before interest and taxes divided by the total assets. How if the result will not be profit but loss? Will it also decrease the salary of the manager? Again the case facts seem to be silent on the matter. c. Another problem is how if turn out that the company suffered net loss after interest but when before interest there is income? Will he be entitled to return on capital employed bonus? Giving the manager a bonus in such situation would mean that the store for which the store manager manages the business did not benefit from the use of resources for which the interest expense was incurred but which is not true. There is no logical reason to make the basis of computing the return on capital employed bonus before interest. Hence it if could not be explained if profits and revenues are increasing, more problems will come out if expectations will not come out. 4. The Regional Directors Performance Evaluation Report (table 6) is highly subjective but yet offers a sound modified performance evaluation scheme. Drury (1997) says “The need to link financial and non financial measures of performance and to identify the key performance measures provided the impetus for Kaplan and Norton (1992) to devise the balanced scorecard.” Discuss the above approach, with reference to Tayin plc (20%) Drury’s statement that “the need to link financial and non financial measures of performance and to identify the key performance measures provided the impetus for Kaplan and Norton (1992) to devise the balance score board” has basis in the case of Tayin plc. It is a fact that business entities need to be profitable in order to stay in business. It is also true that a business need to be liquid to be able to pay its liabilities. These are so called financial objectives that may otherwise keep the company in business but there are also non financial objectives which must be attained by the business. Moreover in organisations there is the so called hierarchy of objectives. Massie (1987) said: “Organisational objectives give direction to the activities of the group and serve as media which multiple interests are channelled into joint effort. Some are ultimate and broad objectives of the firm as a whole; some serve as intermediate goals or sub-goals for the entire organisation…” It is a fact according to Massie (1987) that “some of these objectives form hierarchies for cooperative action; yet organizational goals often tend to conflict.” (p.39). In the case of Talin plc, does the company limit itself on profitability? Does it mean profitability at all costs or profitability with sustainability? To put it simply, a business may have the option the option of producing one (1) million pounds in the next five years and after which the business is gone because the managers might have gone because they felt that what the business wants from them is how they will be used. Or the same business may plan to earn just 500 thousand pounds per year but sustainable for the next 30 years or more. Under the second option the level of profitability may be smaller but the sustainability is assured. The concept of balance score card will therefore put a link between financial and non financial objectives and will also cause the identification of the key performance measures. Key performance measure will of course depend of what the business entity values in business. To apply the concept in the Performance Evaluation Report (Table 6) , it is necessary that some non financial performance measures need to be part balanced score board for Tayin plc. Under the category of store environment, exterior appearance, maintenance of work, cleanliness spot check and staff attitudes values are being defined by Tayin. Classifying exterior appearance further in moderate excellent and poor sub categories would create a way of measuring non financial performance factors. Good exterior appearance may be sacrificed by the manager if not being part of the criteria of evaluating the manager. Such appearance may actually be very important to customers hence financial objectives must be met with due consideration of non-financial objectives. 5. Design an appropriate Balanced Scorecard for Tayin plc. (20%) A good balance score board for Tayin plc must include the following categories: Profitability, Liquidity, Increased Market share, Safe and Comfortable Store, Accuracy of Returns to Head Office, Low Personnel Turnover and Manageable Inventory Stock levels. As general guide, managers must be rewarded if they deliver beyond expectations. Before any manager may be entitled to bonus, for example, he must have met minimum requirements as set pursuant to performance evaluation criteria as introduced in the last preceding paragraph. For profitability, return on capital should at least be above the cost of capital (Barber, 2004). For liquidity, the cut should a least one. The case of Talin, plc a bulk of its assets is fixed assets but despite that previous and present years show current ratios of above one (1). See Appendix A for the graphical design of the Balance Scorecard Increased market share, although non-financial, is a desirable objective since the industry players may make more profits with a broader customer based upon which customer patronage (Griffin, 2002) may be validly built over time. In other words, its being non-financial objective is a good ground to make linkage with the financial strategies (Mikdashi, 2001). Safe and comfortable store may not be also financial objective but it could be linked with financial objective. Customers would value safety and comfort in the age where an act of terrorism is always a possibility. For example to entitle manager to incentive, there should be than twice less or zero reported case of victims of snatching inside the store or lack of any damaging news stories about the store for given periods of time. Low personnel turnover coupled with profitability may indicate a loyal and efficient workforce producing value to the customers and producing value also to the company Manageable inventory stock level may include compliance with the model of the economic order quantity formula where only the right level of inventory is maintained. This is also done to promote good business discretion on the part of the store managers since storage costs and ordering costs are part of decisions to be in minimizing their incurrence. Conclusion: Performance measures are needed in business. They are indispensable to managing the business so as to attain corporate objectives by minimizing or eliminating any possible conflict that may be created as a result of conflict between managers’ personal goal the company goals. Business objectives are not limited to financial ones. Non financial objectives must therefore be linked with financial ones. Although every business entity need to be profitable, it must also value its customers by providing better needs and wants through safer and more comfortable store experience. It must also value its employees since as part of the human resource; it is the people who will keep the business afloat and alive. It must promote loyalty my minimizing employee turnover while providing value to customers. Bibliography: 1. Barber, J. (2004), Cost of Capital with Flotation Costs, Quarterly Journal of Business and Economics, Vol. 43, 2004 2. Griffin, J. (2002), Customer Loyalty: How to Earn It, How to Keep It, Jossey-Bass, 2002 3. Holmes (1998), Investment appraisal, International Thomson Business Press, London, U.K. 4. Massie, J. (1987), Essentials of Management, Prentice-Hall International (UK) 5. Mikdashi, Z. (2001) , Financial Intermediation in the 21st Century, Palgrave Appendix A- Design of Tayin’s Balanced Scoreboard Return on Assets Current Ratio/ Total Market Share within a given jurisdiction Reported case of victims of snatching inside the store Number of complaints Number of resignations every 3 years Inventory Turnover Profitability at least 5% per annum Liquidity At least 1 Increased/ Maintained Market Share At least 30% Safe and Comfortable Store Should be less than twice or zero Accuracy of Returns to Head Office Not more than 3 errors per year Low Personnel Turnover Not more than 2 except on justifiable grounds Manageable Inventory Level At least 200% Read More