Introduction - Finance For Strategic Managers Assignment
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Strategic decisions are very significant in a business and therefore it shall be taken after analysing various factors that may be affecting the decision. This report will shed light on the financial analysis of Samsung PLC and evaluation of various factors which affects the strategic management in a company for Pietro Yon. It will also include a capital project appraisal of the given project of Pietro Yon.
Task 1 – Financial Data and Strategic Decision Making
Sources of financial data:
Financial data is used to analyse the performance of the business in terms of money. The monetary or the pecuniary results of the company are very important to be analysed as these are the most reliable parameters to check the performance of the business. The information used in the analyses shall be genuine and to procure this information following sources are used (Alexander et al. 2017).
Balance Sheet:
The summary of what the business owns (Assets) and the what the business obligates (Liabilities) are said a s the balance sheet of the business. It is prepared at the end of the year and states all the assets and liabilities of the business with their value at last date of the financial year of the business. Assets may be defined as the things on which the company has its right, for example – the business owns a land and it has tittle of the land, so there is a right of the company on that land. Assets further are classified in current assets and non-current assets. Current assets are those which are realisable within a short period of time say 1 year, it includes debtors, cash, stock, etc. On the other hand, non-current assets are those which are used by the company in its production or operations and are not subject to be realised in near future, for example – land, building, machinery and plant.
Liabilities can be defined as the obligation of the company. It means the amount of money which the company is liable to pay in near future or otherwise. Current liabilities are to be paid in the near future such as creditors, bank OD, etc. Non-current liabilities are those which are to be paid by the company in the log run. These include the term loans, debentures, etc (Tirumalsety and Gurtoo 2021).
Income Statement:
Income statement can also be called as the profit and loss statement as it shows the final profit earned or loss which is incurred by the company. To arrive at the final result, the expenses incurred for generating the revenues are deducted from the amount of revenue generated by the company. This is very helpful in calculating profit margin ratios (Groot 2017).
Cash Flow Statement:
Cash is the blood of every business and to track the inflow and outflow of the cash, cash flow statement is prepared. It provides us with the knowledge of cash expenses only. In the income statement, some expenses are included which are not actual cash outflow, such as depreciation. Cash flow statement is used to identify only cash results of the company.
Need for Financial Data
Financial information or data is needed by the business to formulate different strategies for the different departments. Some of the use of the financial data in formulation of business strategies is as follows:
Revenue Growth:
Revenue is the amount of money which is generated by the business from various sources. Income statement informs the business about the generation of revenues from several sources and the growth of the revenue can be calculated. By analysing the areas with high revenue growth, the management of the company can formulate more sustainable business strategies (Voss 2019).
Ratios of Profitability:
The margin of gross and net profit is being informed in the income statement of the company and with the help of this, the company analyse its direct and indirect expenses. The company can make strategies to lower its expenses only when the details of the expenses are available in the income statement of the company.
Economic value added:
Increasing the wealth of its shareholders is one of the main objectives of the business, and for this the management shall identify the areas in which more focus is required to add more value (Jankalová and Kurotová 2020).
Pricing and costs:
Price of a product is a very vital factor which is directly related to its sales. The price of the product sold by the company shall be lower than or equal to the products which are sold by the competitors of the business. For calculating the appropriate cost, the company shall analyse all the indirect and direct costs of the product.
Projecting the results:
Result forecasting is very helpful for making strategies. These forecasting or projection helps the business to make future strategies more effective. With the help of this, the business can avoid the events where the chances of loss are high and invest in the events which are more profitable.
Risk related to financial business decision
The financial risks are mainly of four types i.e., market, credit, liquidity and operational risks. These are discussed below in detail.
Market risk:
These types of risk can be arrived with the upward or downward movement of the financial instruments in the market. These risks are further divided in to absolute, relative, directional, non-directional, basis and volatility risk (Fedoryshyna and Todosiychuk 2019).The risk due to market also arises when the interest rate, inflation rate or the deflation rate in the prevailing market changes, any upward or downward change in these rates definitely changes the results which have been anticipated by the company.
Credit risk:
The risk which arrives in the case when the business is not able to fulfil its obligations is said to be credit risk. These are further divided in to sovereign risk which is related to the foreign exchange rates and settlement risk which arises due to non-payment of obligation by one party.This is the main reason due to which the business dilutes their equity shares to raise the funds for the business rather than taking the loan from a financial or banking institutions.
Liquidity risk:
When the business is unable to execute its business transactions, then the situation of liquidity risk arises. This risk is further classified as asset liquidity risk and funding liquidity risk (Alieva et al. 2020).Cash is very important for operating the day to day business operations of the business and therefore the condition of cash crunch is considered very risky for the company.
Operational Risk:
In case of operational failures such as technical failures or the mismanagement, the situation of operational risk arises. Operational risk can be classified as fraud risk and model risk. These types of risk can be avoided, the company shall implement a good internal control system in its operations, also periodic audits of different types must be done by the company to check weather the operations are being executed in the right manner or not.
Appraising strategic capital expenditure
The capital expenditure appraisal technique is also known as capital budgeting techniques are divided in to two categories i.e., traditional and modern, these techniques are discussed below:
Traditional techniques:
These do not consider the time value of money; it means the discounting of cash flows is not done in the traditional techniques of appraisal. Some of the techniques are as follows (Siziba and Hall 2021).
Accounting rate of return – This is calculated by using the Profit After Tax ÷ Average Investment. This is the only technique in which the net profit is used rather than cash inflows (Sarwary 2019).
Benefits:
The understanding is simple.The company which needs to make the decision can use the formula to decide weather the project shall be selected or not, the result provided by technique is so easy that it is can be understood by a person who is not from the finance background.
The calculation is easy and the operation is not also very complex.For calculating the ARR, the calculation is quite easy, only one formula is to be used to get the answer, hence, the calculation becomes easy.
The income generated throughout the life of the project is considered. When this method is used the income or revenue which is generated by the project in its whole life is considered and therefore the company gets better results and can make effective decisions.
Limitations
It does not consider time vale of money. The value of money do not remain same, it keeps fluctuating from time to time due to the various economic factors, this technique do not consider the present or future value of the money, therefore the decisions might be ineffective.
It does not consider Cash inflows.In this method, for calculating the ARR, accounting profit is used and the cash flows from the projects are ignored, this results in ineffective decisions sometimes, if the accounting profit is not realisable in the form of cash.
Payback period –It represents the period of time which is required by the project to recover the initial investment of the project.
Benefits:
Suitable for industry where the technological obsolescence is very high.When this method is used, the decision is made regarding the life of the period in which the company will get back the invested amount, it helps the company to analyse weather the project will be fruitful in case there is a possibility that the project will become obsolete before completion of its life.
Promotes liquidity by focusing on projects with earlier cashflows.It gives the result about the period; hence the company can select a project which have more liquidity in the initial years and can extract the money invested in the project earlier.
Limitations:
It focuses on recovery rather than profitability.In this technique, the results regarding the profitability is not very much provided.
Ignores the time value of money.As discussed in the above section, the traditional techniques do not provide the consideration of time value of money in their calculation, hence, the decision making might get hampered.
Modern techniques:
These techniques take into the consideration, time value of money and therefore these are used more commonly for making decisions (Kengatharan 2018).
Net Present value – NPV of a project is defined as the sum of all the future inflows in term of its present value less the sum of all cash outflows in terms of their present value.
Benefits:
Considers the time value of money.This is the most important benefit of the modern techniques that it takes in to the consideration value of money which is fluctuated due to the time.
Cash flows arising throughout the life cycle are considered in this. In this technique all the cash inflows as well as outflows are considered and the decision is made after that only.
Limitations:
Involves the calculation of present value which are complex.Calculating the present value factor is quite a task, only the person who is having enough knowledge of finance and mathematics can find the present value factor.
Determination of the discounting rate is a subjective thing. Discounting rate keeps changing from time to time, also there is no fixed formula to calculate the discounting rate.
Internal rate of return – It is the rate at which the NPV of the project becomes Nil. In other words, it is the discounting rate at which the outflows and the inflows will be equal.
Benefits:
Considers the time value of money.As discussed in the above section also, this technique also considers the time value of money, it means that the decisions made by using this technique will be more effective comparing to the traditional techniques.
Decision making is easy as it involves only comparison of IRR with the cost of capital.When the IRR is calculated for a project, a person from non-finance background can also make the decision.
Limitations:
It involves tedious calculations. For calculating the IRR, higher and lower rate is required, which is calculated from hit and trial method, hence, it takes time and it is a lengthy process.
In case of multiple IRR’s, the decision making become difficult.When the company have multiple IRR’s,the decision making becomes very difficult, in that situation modified IRR can be calculated by the company.
Task 2 – Discussion Paper
Interpretation of the financial statements:
The financial statement of a company can be interpreted by using the variables which are directly related to the performance of the company, these variables include net profit, dividend distributed, cash flows, debts, etc. The financial statement of the Samsung PLC is interpreted below (Elly 2018).
Profit and Loss statement:
The profit and loss statement informs about the profit earned by the company from different activities. To arrive at the final result of profit or loss, following items of the statement are considered (Osadchy et al. 2018).
Revenue – Revenue is the amount of money generated through business activities. The revenue of the company for the year 2020 is $ 200,606,179 and for year 2019 it is $ 195,179,376; this shows that the company is able to increase its revenue in year 2020.
Cost of sales – This includes direct cost attributable to the products of the company. In year 2019 it was 124,730,961 but in year 2020 it reduced to 122,400,294. This simply means that the company has been successful in cost control in year 2020.
Gross profit – To arrive at the gross profit, the cost of sales is deducted from the revenue generated by the company. As the revenue generated in year 2020 is higher and the cost of sales in 2020 is lower than of the year 2019. The gross profit of the company has also increased.
Selling and administrative expenses – These are the indirect expenses of the company which are allocated to the product. They are to be deducted from the gross profit to arrive at the operating profit. In year 2019 these expenses were 46,924,893 and in year 2020 it is increased to 47,714,412. Unlike the cost of sales, the company was not able to minimize these expenses in year 2020, but still the increase is not very much high.
Operating Profit –To arrive at the operating profit of the company the selling and administrative expenses are deducted from the gross profit. In year 2019 the operating profit of the company was $ 23,523,522 and in year 2020 it rises to $ 30,491,473. It is due to the increase in gross profit as well as decrease in the cost of sales.
Net Profit – Net profit is the net amount which is available for the company after deducting all the direct and indirect expenses. It is the amount of money which is available for the distribution for the shareholders. In year 2019, the net profit of the company was $ 18,415,633 and in the year 2020 it increased to $ 22,370,853 as the revenue has increased, net profit is directly related to the revenue of the company.
Cash flow statement:
In cash flow statement, all the details of cash inflows and outflows from different activities are recorded, it does not contain any non-cash item.
Operating activities –Cash flow from operating activities informs about the cash generated by conducting the operating activities which includes selling of goods or provision of services to its customers. In year 2019, the cash flow from operating activities was $ 38,445,205 and in year 2020 it rises to $ 55,306,549.
Investing Activities – It involves all the investment which is done by the company or which are disinvested by the company during the financial year. In the year 2019, it was $ (33,841,273) and in year 2020 it is $ (45,430,360). It means that the company has made more investment in year 2020. The cash flow is negative it means that the cash is not generated and it is being used.
Financing Activities – Financing activities includes procurement of funds through issuing share or debentures or by taking a loan and disbursement of funds through repayment of loans, buy back of shares and securities and redemption of debentures. In year 2019, the cash used was $ 80,34,608 and in year 2020 it was $ 70,54,759. It is a good sign as the company is repaying its debt and distributing the dividends to the shareholders.
Financial Ratios of Samsung PLC
The ratios of the company are calculated in the table given below:
Samsung Plc (AMOUNT in $)
2020
2019
2018
2017
Ratios
Formula
1. Profitability Ratios
Gross Profit Margin
Gross profit / sales*100
38.98%
36.09%
45.69%
46.03%
Gross Profit (in million)
78205885
70448415
101232635
100239833
Sales (in million)
200606179
195179376
221568382
217754524
Operating Profit Margin
operating profit / sales*100
15.20%
12.05%
24.16%
22.39%
Operating Profit
30491473
23523522
53523191
48758975
Sales
200606179
195179376
221568382
217754524
Net profit margin
Net profit /sales*100
11.15%
9.44%
18.19%
17.61%
Net profit
22370853
18415633
40305867
38344321
Sales
200606179
195179376
221568382
217754524
Return on Total assets
Net profit / Total assets*100
6.98%
6.17%
13.07%
13.98%
Net Profit
22370853
18415633
40305867
38344321
Total assets
320414624
298667777
308448123
274268098
2. Liquidity ratios
Liquidity Ratios
Current Ratio ( In Times)
Current assets / Current Liabilities
2.62
2.84
2.53
2.19
Current Assets
167914259
153656801
158785744
133595101
Current Liabilities
64046674
54032260
62789472
61056713
Quick Ratio ( In Times)
Quick asset/ current liability
2.20
2.42
2.11
1.82
Current Assets
167914259
153656801
158785744
133595101
Inventory
27144693
22674661
26344738
22707837
Quick assets
140769566
130982140
132441006
110887264
Current Liabilities
64046674
54032260
62789472
61056713
3. Efficiency Ratios
Inventory Turnover ( In Times)
Cost of sales/ Inventory
4.51
5.50
4.57
5.18
Inventory
27144693
22674661
26344738
22707837
Cost of Sales
122400294
124730961
120335747
117514691
Trade Receivables collection Period (In days )
No. of Days/ Debtor turnover ratio
47.73
55.65
50.71
42.20
No. of days
365.00
365.00
365.00
365.00
Debtor turnover ratio
7.65
6.56
7.20
8.65
Debtors Turnover ratio ( In Times)
Net Credit sales/Average receivables
7.65
6.56
7.20
8.65
Net credit sales
200606179
195179376
221568382
217754524
average receivables
26231413
29760796
30783014
25173406
Total assets turnover ratio ( In Times)
Cogs /Total assets
0.38
0.42
0.39
0.43
Cogs/ sales
122400294
124730961
120335747
117514691
Total assets
320414624
298667777
308448123
274268098
Recommendations to Samsung PLC
The financial performance of the company is quite good in the year 2020, but when it is compared with the year 2017 and 2018, this is very clearly evident that the revenue of the company has been decreased. Decreased revenue is directly related to the profit and the profit of the company has also decreased. There are some suggestions and recommendations to the company as follows:
For increasing revenue:
The market in the industry in which Samsung PLC is operating have many sellers and therefore the competition is very high. The company shall focus on increasing the revenue of the company as it will take company to make more profits. For increasing the sales, the company shall follow more aggressive marketing techniques. The company can also consider about providing discounts to the customers, it will decrease the revenue per unit but ultimately the overall revenue of the company will be increased.Providing the discount is also a good strategy for increasing the revenue, customers like to purchase from the suppliers who provides discount and therefore, the revenue of the company will increase when the company will provide discount to its customers.
Controlling the cost:
Controlling the cost is a very important feature and use of the management accounting, therefore the cost of the products shall be controlled by the company, it will decrease the price of the product, customers will buy more when the price of the product is lower.The gross profit margin of the company has also decreased in year 2020 as compare to 2017, to cope up with this, the company shall focus on controlling the direct cost attributable to the product. It should be noted that the company shall follow cost control and not cost reduction, in simple words the abnormal or excess cost shall be eliminated without hampering the productivity of the company.
Better credit policy:
Credit is provided to the customers of the company, company to increase the sales revenue provide credit to the customer and in return do not charge any interest of discounting charges if the customer pay the amount of credit within a reasonable time.The debtor’s collection period of the company is 48 days. This means that the customers of the company payback their credit amount in 48 days. It must be noted that the amount which is stuck with the debtors during this period caries interest cost with it. And this interest cost can be minimized if the company is able to reduce its debtor’s collection period to 21 days. Company shall introduce credit policies which leads to better debtor collection period.
Task 3 – Information Leaflet
Impacts of Creative Accounting Techniques
In creative accounting, the financial information is recorder in a manner which is legal but which do not show the real situation of the company. It is done to show the company more successful than it is in reality. In this the company follows the required laws and regulations, but deviate from the intentions that are to be achieved by the standards. The impacts of the creative accounting are as follows:
Overestimated revenues – When the revenues of the company are overvalued, several other projections of the companies failed. For example – the company will estimate requirement of more resources and due to this there will be wastage of resources and money (Remenari?, Kenfelja and Mijo? 2018).
Lower depreciation – Sometimes the business charge lower depreciation and due to which the WDV of the asset remains overvalued, in case of making strategies, when the company expects that it will realise a particular amount of money from the sale of asset but the actual amount deviates from the expected, this will lead to miscalculations.
Inventory manipulation – The inventory management is very important in every company, and if the cost of the inventory is manipulated, there are chances that the decision taken by the management regarding the ordering quantity of the material might be unfavourable to the company.
Limitations of Ratio Analysis
The limitation of ratio analysis is discussed as below:
Window Dressing – Window dressing is a very serious issue, business use tis method to manipulate the accounts and to show an unfair image of the company.Thecompanies and the businesses can make changes in their financial statements and this will lead to window dressing.
Historical – The main factor of the data analysis is the data which is being used for the analysis, the data shall be up to date for better analysis of the results of the company.The ratios are calculated with the help of historical data and the ratios shall not be looked as an indicator that these results will be same or similar in the future.
Inflation – The inflation and deflation keep occurring in the market. The purchasing power of the money also keeps changing, in cases where the rate of inflation or deflation is very high, comparison of the ratios is not very effective.
Accounting policies – Different businesses and companies use different accounting policies as per their requirements, the financial position of the two companies which are using different accounting policies cannot be compared with the help of ratio analysis (Duklewski, Holdai and Wainwright 2018).The results and the projections which have been achieved through the data analysis between the two companies will not be as per projected when the analysis has been done when the accounting policies of the two different companies are different.
Importance of cash flow management
Liquidity positions:
Management of cash flows helps the management of the company to ascertain the liquidity position of the business. And it is easy to review the liquidity position regularly with the help of cash flow management.
Profitability:
Profit is calculated by the profit and loss statement, but the calculation is done on accrual basis, hence some of the revenues which are not generated are also included in that. Cash flow management helps the business to identify the real cash profit which has realised to the company at a particular point of time.
Avoiding overspending:
The regular monitoring of expenses is being conducted in the cash flow management and due to this the areas where the cash is being overspending can be identified at an earlier stage. This will lead to elimination of overspending.
Optimum cash balance:
By the help of cash flow management, the company can review, monitor and control the cash expenses of the company. Due to this all the overspending and abnormal payments will be eliminated; this will ensure that the business have optimum cash balance.
Avoidance of frauds:
In case of cash, the chances of manipulations and frauds are higher, with the better cash flow management the company can easily track all the cash transactions which will ultimately lead to avoidance of frauds and manipulations.
Tools for financial data analysis
Cash Flow Analysis:
In this the cash flows of the company from operating, investing and financing activities are calculated and these are compared with the previous year results for making strategic decisions and policies.
Ratio analysis:
It includes calculating the different ratios and then comparing it with the company’s ratios from the previous year or with the companies of the same industry to analyse weather the performance of the company is satisfactory or not.
Benchmarking:
Benchmarking includes setting of standards of different variables such as cost, profit etc. at the initial stage and comparing these standards with the final results at the end stage. It helps the organization to analyse the weaker and stronger areas of the company.
Horizontal Analysis:
In horizontal analysis, the results each line item of different period of the same company are compared and it is checked that the company has improved its performance in comparison to the previous years or not.
Inter-company analysis:
In this technique, the analysis of the same period of the different companies of the same industry is done to check weather the performance of the company is consistent with the performance of the industry.
Task 4 – Capital Expenditure Appraisal
Assessment of the replacement decisions
Computation of annual cash inflows
Details
Old Machine
New Machine
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Sales revenue
450000
250000
150000
450000
250000
150000
Less: Expenses
Direct materials
162000
170100
178605
162000
170100
178605
Direct labour
67500
70875
74418.75
54000
56700
59535
Variable overheads
40500
42525
44651.25
27000
28350
29767.5
Repairs and maintenance
7000
7000
7000
1000
1000
1000
173000
-40500
-154675
206000
-6150
-118907.5
Add: Salvage value
0
75000
Cash inflows
173000
-40500
-154675
206000
-6150
-43907.5
PV Factor
0.87
0.756
0.658
0.87
0.756
0.658
Present value
150510
-30618
-101776.15
179220
-4649.4
-28891.135
Total
18115.85
145679.465
Initial investment for new machine
Cost of machine
220000
Part exchange allowance
120000
Net outflow
100000
NPV
Details
Current Machine
New Machine
Sum of Cash inflows
18115.85
145679.465
Less: outflow
0
100000
NPV
18115.85
45679.465
As the NPV of the new machine is more than the existing machine, the proposal shall be accepted. Payback period
Payback Period
Initial Investment
100000
Average cash inflow
51980.8
Payback period
1.92379
The payback period of the new project is also good, the company will be able to get the investment back in approximately 2 days. Accounting rate of return
Accounting rate of return
Initial Investment
100000
Average accounting profit
26980.8
ARR
26.98%
The accounting rate of return is also quite good, therefore it is considered that the project will be viable for the company.
Impact on the business proposal
If the proposal is selected the expenses done by the company on the labour and overheads will get lower.The cost related to direct labour, variable overheads will be lower and therefore there will be cost saving to the company.
As the new machine will be installed by the company, the company will not require to spent money on the repairs and maintenance of the machine. The cost of repairs and maintenance will also be lower, there will be cost saving also.
In the analysis, it is clearly evident that the revenue generated from the new machine is higher than of the old machine.The Cash inflows will be more than of the current machine, the business will be having more cash as the cost has been decreased.
Old machine which is currently used by the company requires regular repairs and maintenance, and the quality of the goods produced by it is also not very good.New machine will produce better quality of products; hence the brand value of the company will increase.
Conclusion
After analysing the financial data of the Samsung PLC, it is evident that the performance of the company shall be improved, however it is good in the current year, but it has decreased as compared to the year 2017 and 2018. Pietro Yon shall accept the proposal of the new machinery as it will give more NPV.
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