Risks Faced by Buzzard Ltd Internally and Externally - Essay Example

Analysis for Buzzard Ltd Table of Content Introduction SWOT Analysis Risks faced by Buzzard Internally & Externally Buzzard 's performance report for Shareholders Profitability Efficiency Liquidity Investment Ratio Assessment as a Shareholder Introduction The automobile industry is one of the largest industries in the world. It is estimated that about 523 million cars on Earth, and their number may rise to about 1 billion units within 20 years. The wholesale changes in the policies of industrialized countries and because of cuts in production costs, and market saturation, the major automobile companies of the world are expanding into emerging economies. The trend in the car chain has few suppliers providing systems or modules, instead of many suppliers furnishing components. Thus for car manufacturers, this means a transfer of responsibility and change of focus, obtaining services on a global scale. (Champagne R. 1998) Supplier firms play a very important role in the development and performance of automobile industry world over. Analysts observed that there had been drastic shift in the organization of automobile production across firms in the automobile industry. This shift has further increased the role and importance of supplier firms. The importance at lower levels of the supply chain required many firms to meet new standards of product quality. Buzzard Ltd is also a first-tier supplier automobile industry. Keeping in view the demands of market Buzzard made investment in R&D and technology in 1990s. Because of its investment in R&D Buzzard is regarded as one of the World's leaders in design, manufacture and supply of innovative automotive systems. SWOT Analysis For assessing the position of the company SWOT model could be ideal. It gives a clear view of Strengths, Weaknesses, Opportunities and Threats faced by the company. Strengths The investment in R&D is a great advantage. It helps in expanding to overseas markets by researching their requirements. Investment of Because of its policies and strategies Buzzard Ltd had achieved the status of established supplier of high quality. Weaknesses Buzzard is doing its business in UK so higher rates of Pound can restrict its overseas ventures. Buzzard performance is not upto the mark recently. Opportunities Investment of 30m to relocate from Gentbridge to a new fully-equipped 15,000 square metre purpose-built factory on a 20-acre greenfield provides new opportunities for expansion. Acquisition of the business of Firefly from the Stonehead Group provides a good opportunity to use the client base technological know how of the company for expansion. The planned change to transform its culture and implement the operating strategies is also a great opportunity to boost its performance. The new strategies can help Buzzard in achieving its aim of being a World class supplier of innovative automotive systems. The bank loan also provides opportunity to finance its new venture for growth and expansion Threats Acquisition of Firefly can also damage the reputation of Buzzard itself as Firefly had pursued short-term profit, and had a poor image with both its customers and suppliers. If not properly utilized the bank loan may prove a threat for viability of the company. Risks faced by Buzzard Internally & Externally Buzzard is passing through a transition phase. After planning and implementation of new business strategy company needs some time to start functioning at its full capacity. During this transitional phase company needs to be careful as it is facing various internal and external threats or risks. Some of the threats have been discussed above some internal and external risks faced by the company during its transitional phase are given as under: 1. As discussed earlier company is little over burdened because of the loan taken by the company for its needs. It is quite likely that burden of this loan may de-stabilize the company. It is therefore quite necessary that management of company should consider all the aspects related to loan matter. 2. Foreign currency losses are also increasing it is a great hindrance in the growth of company. Buzzard 's performance report for Shareholders While attempting to understand the performance of a firm one faces a number of interesting contradiction. The concept of firm performance is quite complex in nature yet it is often reported in a short index of financial ratios and results. But these numbers do not really portray a full picture about the firm's overall performance. It is necessary to understand these financial figures in correct perspective. The balance sheet and a profit and loss statement are snapshots of the firm's finances at a given moment in time, and the current reality can in fact be completely different. As far as prediction about the future of the firm is concerned, it also very tricky. There are many examples of firms showing excellent performance in the numbers in one year and then encounter great difficulty the following year. It can be safely said that the firm's financial performance as the firm's overall performance could be misleading. But it does not happen in every case. Sometimes the reports indicate correct picture also. Over all performance of company mainly depends on various factors for instance technological, social, organizational factors. Investment stakeholders often believe in short term performance. It is therefore recommended that performance of Buzzard should not be viewed in narrow perspective. A brief analysis of Buzzard 's performance in the year 2003-2004 is given here. Profitability The performance of Buzzard in the year 2003-2004 was not very encouraging. As there was no increase in the profit of company. However one thing is quite encouraging that sales of company has increased about 20%. This shows that company is performing well. But due to other expenses there is no increase in the profit margins. It can be hoped that there would be increase in profit margins in coming years. Consolidated profit and loss report is given as under: Profit and loss account for the year ended 31 December 2004 2004 0 000 2003 000 Turnover 115,554 95,766 Cost of sales (100,444) (80,632) Gross profit 15,110 15,134 Distribution costs (724) (324) Administrative expenses (12,348) (10,894) Operating profit 2,038 3,916 Net interest (868) (972) Profit on ordinary activities before taxation 1,170 2,944 Profit for the financial year 1,170 2,944 Source (Case Study) Balance sheet as at 31 December 2004 2004 000 2003 000 Fixed assets Tangible assets 42,200 29,522 Current assets Stocks 5,702 4,144 Debtors 18,202 16,634 Cash at bank and in hand 4 12 23,908 20,790 Creditors: amounts falling due within one year (23,274) (14,380) Net current assets 634 6,410 Total assets less current liabilities 42,834 35,932 Creditors: amounts falling due after more than one year Borrowings and finance leases (6,000) - Provisions for liabilities and charges (1,356) (1,508) Accruals and deferred income (1,264) (1,380) Net assets 34,214 33,044 Capital and reserves Share capital 22,714 22,714 Profit and loss account 11,500 10,330 Shareholders' funds 34,214 33,044 Source (Case Study) Efficiency The management of Buzzard is trying to improve the efficiency and performance of the company. For this purpose they have taken various steps. They have shifted to a bigger and better location. They have invested in R&D for coping with the changing trends of the market. They have also invested in infrastructure. All these factors can improve and enhance efficiency of the company. In the financial data available although it is quite hard to pinpoint the performance efficiency yet there are some encouraging indicators. Some of them are given below. There is 20% increase in sales. Cash flows have increased considerably Business to Japan and rest of Europe has increased considerably and it is very encouraging sign. Some parts of cash flow statement are reproduced here to show the efficiency in performance Cash flow statement for the year ended 31 December 2004 2004 2003 000 000 Net cash inflow from operating activities 12,962 3,622 Returns on investments and servicing of finance Interest received 268 76 Interest paid (1,174) (1,044) Net cash outflow from returns on Investments and servicing of finance (906) (968) Capital expenditure Purchase of tangible fixed assets (20,490) (14,006) Sale of tangible fixed assets 12 30 Government grants received 1,060 1,900 Net cash outflow from investing activities (19,418) (12,076) Net cash inflow/(outflow) before financing (7,362) (9,422) [Hint: 12,962 - 906 - 19,418] Financing Issue of ordinary share capital - 8,000 Increase in borrowings 6,000 - Net cash (outflow)/inflow from financing 6,000 8,000 Source (Case Study) Liquidity Fixed assets in terms of plant machinery has almost doubled. Liquidity ratio of company assets is quite satisfactory The table taken from case study data shows the details of Tangible fixed assets of company Tangible fixed assets Office Freehold Plant, equipment, land and Motor machinery fixtures and Buildings Vehicles and tooling fittings Total 000 000 000 000 000 Cost At 1 January 2004 15,450 114 20,648 4,600 40,812 Additions 20 28 19,808 634 20,490 Disposals - - (80) (10) (90) At 31 December 2004 15,470 142 40,376 5,224 61,212 Depreciation At 1 January 2004 834 54 7,932 2,470 11,290 Charge for year 734 22 6,226 800 7,782 Eliminated in respect of disposals - - (58) (2) (60) At 31 December 2004 1,568 76 14,100 3,268 19,012 Net book value at 31 December 2004 13,902 66 26,276 1,956 42,200 Net book value at 31 December 2003 14,616 60 12,716 2,130 29,522 Source (Case Study) Stocks 2004 2003 000 000 Raw materials and consumables 4,572 3,274 Work in progress 528 360 Finished goods and goods for resale 602 510 5,702 4,144 Source (Case Study) Investment ratios Investment ratio has increased. It is quite evident from some parts of the financial report taken from case study data. Bank borrowing and amount of trade creditors also increased. It can be considered as a positive point in the balance sheet of the company. Debtors 2004 2003 000 000 Amounts falling due within one year Trade debtors 13,364 8,302 Other debtors 4,276 7,678 Prepayments and accrued income 562 654 18,202 16,634 Source (Case Study) Creditors: amounts falling due within one year 2004 2003 000 000 Overdraft 3,340 1,986 Trade creditors 13,806 8,646 Other taxation and social security payable 2,334 1,412 Other creditors 122 350 Accruals and deferred income 3,672 1,986 23,274 14,380 Source (Case Study) Borrowings 2004 2003 000 000 Bank and other loans repayable otherwise than by installments Over five years 6,000 - Source (Case Study) Assessment as a Shareholder After going through SWOT analysis and financial data the shareholder can conclude that company has potential for growth. It is growing positively and soon it will achieve its full potential. Although there are some negative indicators which can undermine shareholders confidence. But if a shareholder is planning to invest for long term then Buzzard is an ideal company to invest. But there is not charm for those who want short term gains. Capital commitments 2004 2003 000 000 Capital expenditure that has been contracted for but Has not been provided for in the financial Statements 1,506 162 Capital expenditure that has been authorized by the directors But has not yet been contracted for 6,768 5,404 Source (Case Study) Share capital 2004 2003 000 000 Authorized 28,000,000 (2003: 28,000,000) ordinary shares of 1 each 28,000 28,000 Issued and fully paid 22,714,000 (2003: 22,714,000) ordinary shares of 1 each 22,714 22,714 Source (Case Study) Reconciliation of movements in shareholders' funds 2004 2003 000 000 Opening shareholders' funds 33,044 22,100 Issue of ordinary share capital - 8,000 Profit for the financial year 1,170 2,944 Closing shareholders' funds 34,214 33,044 Source (Case Study) Acknowledgement It is hereby acknowledged that the financial data of Buzzard Ltd used in this paper was taken from case study data. References/Bibliography Caves, R.E. (1974) 'Multinational firms, competition and productivity in host country markets', Economica 41: 176-193. Champagne R. Worldwide automobile production. Automotive Eng Int June, 1998;43-6 Davies, T., and Boczko, T., (2005) Business Accounting and Finance, McGraw Hill Education, Maidenhead Glautier, M.,W.,E., and Underdown, B., (2001) Accounting Theory and Practice, (7th Edition) FT/Prentice Hall, London Gowthorpe, C., (2005) Business Accounting and Finance, (2nd Edition) Thomson Learning, London McLaney, E., and Atrill, P., (2005) Accounting: An Introduction, (3rd Edition) FT/Prentice Hall, London Weetman, P., (2003) Financial and Management Accounting, (3nd Edition), FT/Prentice Hall, London Read More