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Managing Financial Performance 7AC006
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Managing Financial Performance 7AC006
Managing Financial Performance
7AC006
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Student Name:
Student ID:
Date of Submission: Dec 15,2020.
Table of Contents
Task 1: Financial Analysis of Imperial TobaccoGroup. 3
List of Abbreviations and Acronyms. 4
Introduction of Imperial Tobacco Group and Competitor companies. 5
Operating Profit Margin Ratio (OPMR) 10
Return on Capital Employed (ROCE) 13
Task 2: Budgetary techniques. 22
Budgeting Techniques in a Large Organization. 24
Position and Rationale of Budgeting Types…….…………………..…………………………25
Merits and Demerits of Annual Budgeting Exercise …………………………………………26
Implementing Annual Budgeting in Real Life Large Organization’s/ SME/ Private Entities ……………………………………………………………………………………………………. 27
Task 3: Performance measurement techniques. 32
BalancedScorecards -Current Scope………………………………………………………34
Merits and De Merits of using Balanced Scorecards ………………………………….35 Implementing Balanced Scorecards across Real Life Corporations………… ….36-37 Conclusion……………………………………………………………… 38
Task 4: Key Considerations on Financial Proposal for Significant Expenditure. 39
Internal Rate of Return (IRR) 43
Accounting Rate of Return (ARR) 45
Task 1: Financial Analysis of Imperial Tobacco (ITB) Group
Student Name: Write your name here
Student ID: please provide your student id?
List of Abbreviations and Acronyms
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Annual Report |
AR |
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Operating Profit Margin Ratio |
OPMR |
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Return on Capital Employed |
ROCE |
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Earnings Per Share |
EPS |
Introduction [100 words]– shall capture the essence of the overall assignment by providing a ‘summarized synopsis‘ for each of the four parts to meet the requirements and standards as laid down by the University.
Profiles of Chosen and Competitor Companies [ 150 words approx each for chosen and competitor company] –
Profile of the Chosen Organization – Data to capture management, financial and operational aspects that shall commence with – incorporation years, corporate headquarters, stock exchange listings, geographical footprint, employee headcount, financial performances[ revenues, profits, cash flows recorded as at FY 2018], popular brands, next generation products, investments in R&D, strategic acquisitions, dividends paid-out. – Say NO to Wikipedia. Collect Information from 2018 Annual Reports.
Images are allowed.
Profile of Competitor Organization – [To be built on similar lines as indicated above for the chosen organization] – Data to capture management, financial and operational aspects that shall commence with – incorporation years, corporate headquarters, stock exchange listings, geographical footprint, employee headcount, financial performances[ revenues, profits, cash flows recorded as at FY 2018], popular brands, next generation products, investments in R&D, strategic acquisitions, dividends paid-out. – Say NO to Wikipedia. Collect Information from 2018 Annual Reports.
Images are allowed.
Part 1 – Ratio Analysis – Word Count commences from this section 4000 +[ 10% leverage ] – 25%
( 1000 words)
Academically explain why Ratio Analysis is an effective quantitative financial tool in financial decision-making and measuring liquidity, solvency, profitability, gearing. How does is support in decision-making, assess economic and business conditions, qualify fool-proof judgements, rationalize the impact of currency exchange volatility, and draw on lessons learnt from past financial periods to arrive at remedial strategies and create successful ‘future-ready’ robust business plans?.
Currency Conversion Table
To conduct a thorough analysis of financial and performance aspects, financial statements of Imperial Tobacco Group must be compared to ‘direct competitor from the Tobacco Manufacturing Industry’ and if the financial statements expressed in different currencies, then must be converted to common currency ($, £ , €) for the purpose of standardizing the financial outcomes. The conversion sources are listed as follows:
Example of an Actual Currency Conversion Table.
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Years |
£ = US$ |
Source for Conversion Exchange Rate
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2018 |
1.3033 |
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2017 |
1.3404 |
Operating Profit Margin Ratio (OPMR)
Description: Place the definition, meaning and significance of this ratio.
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Operating Profit Margin Ratio = |
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X 100 |
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Operating Profit |
Formulae:
Graphical Representation: develop a graph and excel sheet based on application of formula for the Operating Margin Ratio by selecting numerator and denominator values from the Income Statement across FY 2018/2017 for both the chosen and competitor organization to arrive at the Operating Profit Margin Ratio.
Interpretation: In this ratio there is a relationship between the numerator and denominator component…so please examine the factors that affected ‘topline or sales growth/decline’ in FY 2018/ 2017 versus operating profit [growth/decline] for the same period between the chosen and competitor organizations. Industry Standard on Operating Profit Margins generally ranges between 18 to 20%.
Now bring in justified impact of broader macro-economic and macro-business conditions affecting the business and financial performance of both the chosen and competitor organizations in FY 2018/2017 in the wake of volatile demand/supply conditions, extremely tough social, political and taxation regulations, price wars, Brexit issues, increased demands to manage changing consumer behavior and habit, control operating costs leading to restructuring and brand/asset disposals, added impairment & amortization charges. Both organizations also are increasing investments in R&D for improving vertical / product level performance to justify and protect business rankings/ credit ratings.
Student are advised to refer the “Management Discussion & Analysis’ or “Financial Review” sections from the respective 2018/2017 Annual Reports for mentioning accurate management commentary which must be supported with intext citations to contain page numbers , for example – [page no. 75 of the Financial Statement (FS) for Imperial Tobacco as well as the competitor organization] when interpreting ratio performance for both organizations across FY 2018/17. Should you wish to refer any other additional credible consultancy reports it can be allowed as long as intext citations and references are placed.
Each Interpretation must be balanced enough to cover justify the analysis of both organizations.
Return on Capital Employed (ROCE) : Place the academic definition, meaning and significance of this ratio.
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ROCE = |
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X 100 |
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Earnings before Interest & Tax |
Formulae:
Graphical Representation: develop a graph and excel sheet based on selecting the ‘numerator value’ from the Income Statement and the ‘denominator value’ from the Balance Sheet for the period FY 2018/2017 to arrive at the Return on Capital Employed Ratio for the chosen and competitor organization.
Interpretation: In this ratio there is a relationship between the numerator and denominator component…so please examine the business and operational factors that was responsible for growth/ decline in EBIT values across FY 2018/17 for both organizations. What has been the impact of economic slowdown, increased regulation on tobacco manufacturing companies in general affecting their operating efficiency and business sustainability.
Likewise, do analyze if there has been any specific growth in Total Asset/ Current Liability positions. ROCE typically informs profits which can be reinvested to benefit investor interests.
Once again examine the relevant sections in the “Management Discussions and Analysis” or “Financial Review” sections of both organizations 2018/17 Annual Reports to review the following – has there been any significant and noteworthy investments in technology, upgrades in equipment and assets to address efficiency improvements. Support the discussion with relevant intext citations.
Did both organizations consider increasing their Capital Expenditure or consider joint venture/partnership or plan to penetrate new markets can be added …also commentary to support noteworthy increases in current liability positions of both organizations needs to be discussed on whether it be considered as a cost of undertaking future business growth.
Each Interpretation must be balanced enough to cover justify the analysis of both organizations.
Earnings Per Share (EPS) – Place the academic definition, meaning and significance of this ratio.
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Formulae: Profit Attributable to Equity Shareholders /Average Number of Shares Outstanding |
Graphical Representation: develop a graph and excel sheet based on application of the above formula.
Interpretations- As you can imagine this is the most defining value that analyzes the complete management and business potential from an investor and analyst perspective. So, without a doubt EPS is a symbol of strong financial position and students are required to review the analysis and interpretations by discussing the macro-economic and macro-business reasons which affected business growth rates, profitability, ability to pay dividends for both organizations during FY 2018/17. Are there any forward-looking guidance based on divisional / product level performances that would be responsible for driving future profitability and improved stock valuation.
Each Interpretation must be balanced enough to cover justify the analysis of both organizations.
Conclusion
Based on the inferences above, to win back stakeholders – suggest how should Imperial Tobacco can employ measures to improve OPMR, ROCE & EPS ratios. Likewise competitors shall need to strengthen…………………………….
Task 2: Budgetary techniques
1000 words – 25%
Introduction
Guidelines for Writing Part 2. [ Note this section has nothing to do with Imperial Tobacco’s Performance whatsoever, but a conceptual and academic argument on ZBB]
· Academically explain the utility and importance of Annual Budgeting in larger corporations as a management exercise?
· How is it useful, relevant and important is it for management teams to achieve focus and attention to ‘cost control’, ‘drive prudent ‘cost savings’, eliminate redundancies/non-value add tasks/activities and control wastages within public corporations, private firms and government entities?
· Why has Activity Based Budgeting, Flexible Budgeting & Zero-Based Budgeting been consistently ‘ignored’ to accommodate regressive backward-looking Traditional Budgeting practices within larger organizations? Students need to refer various literary resources apart from the reading materials provided by the University.
· How has alternative budgeting practices such as:- Activity Based Costing (ABC), Flexible Budgeting (FB), Contribution Analysis (CA), Zero Based Budgeting (ZBB)) found its relevance and significance all of a sudden to be embraced by CEO’s and CFO’s globally while addressing efficiency, net revenue management to improve cash flows & shareholder value.?
- Academically debate to compare the ‘benefits’ and ‘drawbacks’ of the annual budget setting exercise practiced within public corporations, private entities and government bodies.
- How easy or difficult would be to implement or abandon the annual (traditional) budgeting technique? Can it be replaced it with CA, FB, ZBB or ABC by providing real life examples of companies that have found new budgeting techniques more effective enough to improve profitability and efficiencies.
- Comment on how accepting change can impact ‘organizational culture’, ‘employee mindset’ and ‘leadership attitudes/approaches’ as a price to be paid in the bargain. Now, also think about companies which adopted ZBB or ABC, but gave it mid-way as it did not make any sense?].
Having presented your viewpoints supported with academic references and citations kindly share your independent opinion if Annual Budgeting as an activity should be continued or abandoned in the years ahead.
If you strongly believe ‘budgeting’ as an exercise must continue, then accordingly recommend how ZBB or ABC or FB shall remain useful in the current uncertain and volatile market & economic conditions that cannot be ignored by any large corporation.
Provide your final verdict if there is any ‘one-size-fits-all budgeting technique’ can support management decision-making, regardless of size, type and nature of business practice.
References
Task 3: Performance measurement techniques
1000 words – 25%
Again Part 3 section has to be academically cited, discussed and referenced.
Introduction
Note– [This section again has nothing to do with Imperial Tobacco’s Performance, but a pure academic debate on the concept of Balanced Scorecards]
How does budgeting influence the aspect of Performance Management, and why is that BSC assumed tremendous significance to draw the attention of non-financial managers seeking to understand the interconnectedness between financial and non-financial variables.
Guideline to write Part 3 – Balance Scorecards (BSC)
- Academically Debate the strengths and weaknesses of the Balanced Score Card form of performance measurement standpoint by discussing each of the four aspects [1. Customer. 2. Internal Process 3. Finance and 4. Learning and Innovation] in the process of developing a strong perspective on ‘lagged’ and ‘leading indicators’ affecting performance and overall sustainability.
- In particular, critically discuss the extent to which BSC has been successfully adopted in professional practice by large global companies, public and private entities and what the draw backs have been.
- Refer to the three University Articles titled Kaplan Nortan Balanced Scorecard to discuss real-life success stories of corporations that have adopted this performance-measurement technique while balancing customer perceptions, process competencies, innovative capabilities and financial stability as part of a continuous improvement process to earn a strong and sustanined leadership across each of the four categories forming an integral part of the Balanced Scorecard.
Conclusion – Despite all the benefits associated with Balanced Scorecards, why do organizations hesitate in implementing Balanced Scorecards? What the real challenges in implementing and monitoring the assumptions that underpins the success of a Balanced Scorecard.
References
Task 4: Key Considerations on Financial Proposal for Significant Expenditure
1000 words. – 25%
Capital Budgeting (CB)
What combination of factors should a senior manager consider, when embarking on a capital expenditure? How would factors such as taxation, inflation, demand-supply scenarios, interest rates fluctuations and economic conditions (demand/supply) affect cash flows and overall profitability of the organization? Are there any inherent risks and challenges when raising capital towards meeting shareholder and stakeholder demands.?.
Net Present Value (NPV) – Place the formula and explain the significance of deploying this DCF technique In assessment of cash flows and considerations to approve/ reject a project. Can time value of money remain a conditional factor when factoring consistency of cash flows? Which kind of organizations use NPV and why?
Internal Rate of Return (IRR) – Explain the significance of IRR and how does it help large organizations to identify better rates of returns/ cost of capital necessary to assess cash flows ‘consistency’ across projects to support decision-making? Is this technique better than NPV? Support your discussion with formulas.
Payback Period Model (PBP) – Place the formula and explain the significance of this Non-DCF method. Under what circumstance would this method be considered as useful tool in decision-making while pursuing or discontinuing project’s?. Why does this technique ignore the ‘time value of money concept’…in reality, what type of organization’s use this kind of technique? Support this discussion with its relevant formula.
Accounting Rate of Return (ARR) – Explain the significance of Accounting Profits, when assessing potential investment opportunities to examine the impact of cash flows and support decision-making. Why does this technique ignore the concept of ‘time value of money’….and where are so many definitions for the term ‘profit’ affecting the outcome and adding subjectivity to this technique? Support this discussion with its relevant formula.
Conclusion
Of the four popular investment appraisal technique, recommend either one or two techniques that shall remain most useful when examining the current expectations of shareholders particularly when reviewing ROI impact surrounding capital investments?
Is it really essential to consider economic factors and business conditions apart from following changes in social, environmental and political uncertainties, apart from factoring ‘time value of money’ considerations’, when estimating FV of ‘cash flows’, analyze ‘opportunity costs’ and the ‘eventual financial health of the organization’ to support a risk free judgement for backing capital investment decision-making?.
Let’s say if we are ignore these factors….would organizational leaders run the risk of bankruptcy or worse still a financial irreversible calamity?…
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# FV = Future Value
References
Appendix
- Ratio Workings and Excel Sheets
- Income Statement and Balance Sheet [ FY 2018, FY 2017] – Chosen Company.
- Income Statement and Balance Sheet [ FY 2018, FY 2017] – Competitor Company.