Research Topics: Corporate Finance Examples

Procurement Function

Procurement Function   Introduction             Business firms or companies have internal organizations, which perform different functions. Separate functions are being executed for the efficiency of the company for faster production, for easier dissipation of information, for clear evaluation of the employees, for implementation of projects, and for the development of the whole company. The establishment of different organizations with various functions enables the companies or business firms to effectively penetrate the market for faster trade and relations with the consumers or with other business firms as well. This is even more evident when the company decides to expand, having more organizations and an increase in the workload.             Business firms are consumers as well, so as consumers, they are also entitled to purchase good and services. Constant participation in trade and relations enables business firms to have reliable contacts and suppliers for better quality of goods and services, which helps the company in efficient production, and in turn, serve their customers better. With this kind of chain of reaction, companies continuously develop and improve their internal organizations in generating success. One of the vital organizations, which a business firm must thoroughly develop, is its procurement or purchasing division. The procurement function has a crucial role in the success of a company, and somehow dictates the rising or the downfall of a company in the market.             This paper discusses the procurement or purchasing function of a business firm, its importance in its internal organization, and the interrelation of organizations. It also emphasizes on the value-added elements of the procurement function, and its significance to the company.   Business Organizations and Their Functions             It has been reported that business enterprises perform certain functions, which are separated in nature but are closely linked to each other (2006). These business organizations perform eight basic functions, namely, the management function, the production function, the human resource function, the finance function, the marketing function, the communication function, the information function, and the procurement or purchasing function. The management function is broadly concerned with planning, organizing, directing, staffing, controlling, and communicating for business operations, and each businessperson must understand the importance of these managerial functions for purposes of effective operations (2006). The production function is concerned with transformation or changing raw materials into finished goods and services needed by customers (2006)., along with other organizations, which are also engaged in transformation of inputs. Another function is the human resource function, which is concerned with managing the people as an important business resource. The finance function is involved with the budget and allocation of resources of the company, while the communication function and the information function focus on the dissipation of information. The marketing function is concerned with ensuring that goods that have been transformed reach the final customers (2006).             The procurement or purchasing function, which is the focus of this paper, influences other functions of the organization and success of the business. It has been reported that for businesses to operate successfully, they need an uninterrupted supply and flow of requirements to perform all their business activities (2006). This situation can be compared to the acquisition of raw materials of the right quality and quantity, at the right time and cost or price from the right sources, for the interruption of the supply of the required materials could also interrupt the operation of the business.             In relation to other departments or organizations, good procurement practices will ensure the efficient running of the operations department, influences production, and marketing. Marketing depends on efficient procurement practices, and facilitates procurement as well. The procurement division contact with suppliers and enables them to identify products with good market potential, and provide this information to the marketing department, and in turn, the marketing department will require these products, which have to be produced by the operations department (2006). Additionally, the personnel or human resource department also depends on efficient purchase or procurement requirements, as it cuts across the rest of function. In each of the functions, the value of the people cannot be overstated, for each function in the business firm requires the use of the human resource and their potential has to be harnessed to get the best out of them (2006). Similarly, the finance and the administration departments require services of efficient procurement, and cut across the variety of business functions. However, it can be deduced that the procurement department links the business firms with the external environment, and the perception created by the procurement department can either improve or damage the image of the business enterprise (2006).   Elements of the Procurement Function              (2005) reports that procurement is the common point of contact for departments in an organization, a central repository for corporate knowledge of acquisition of goods and services (). Moreover, the author adds that effective procurement departments operate on a corporate oversight perspective, evaluating the total cost of ownership of products, providing a durable product while minimizing operational support costs, and provide assistance in determining alternative acquisition and payment methods ( 2005, ). In this light, procurement functions compile and analyze historical data to identify opportunities for cost avoidance, standardization of goods and services and implement pricing agreements for goods and services based on volume or critically, and corporate-wide services contracts, consider issues such as longevity of items and future redeployment of assets, and bring consistency to due diligence aspects and legal compliance for procurements and reporting requirements ( 2005, ).             The effectivity of the procurement function depends on its key elements, namely, customer service, supplier performance, people capabilities, cost performance, and future direction setting. <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Customer Service</li> Procurement will not be as effective without a good quality of customer service. Customer service determines the sales of the company from outside suppliers, and its success in the market by adequate interaction with the consumers and with the employees as well. (1998) reports that in the process of developing customer needs, it would be extremely beneficial to evaluate the key processes used to complete purchase transactions. This means some level of continuous improvement and flowcharting of the procurement flow, perhaps with user assistance. In addition, similarly, the supplier is also a customer of procurement, and provides ideas and suggestions for improvement. One of the ways to determine the extent to which customer needs are satisfied is to conduct a user and supplier satisfaction survey on a periodic basis, which provide an independent and regular way to receive customer input so that improvement can occur ( 1998). <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Supplier Performance</li> It has been reported that the procurement makes the buying decision on selected suppliers and must ensure that the suppliers meet the user requirements, so the crucial step is to align the actual measures with those requirements (1998). This could lead the procurement to evaluate the cause and effect of customer satisfaction, and ensure that supplier improvement occurs in the key measures. <li class="MsoNormal" style="text-align: justify; line-height: 200%"> People Capabilities</li> Without the right skill sets and competencies, procurement departments will be unable to participate in the key activities of the organization and satisfy the needs of users ( 1998). The quality of the employees has a great impact with the effectivity of the decision, so assessments must also be done. This assessment can be accomplished by employing a matrix defining the position and the skills required, which can also be used to define training and development requirements, job descriptions, making hiring or promotion decisions, or developing appropriate training ( 1998). <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Cost Performance</li> Cost performance must be tracked and measured to evaluate the total cost of the company. These procurement organizations have found that although total cost measures are difficult to establish and maintain, they are a true measure of overall supplier and procurement performance taking into consideration the supplier quality and delivery performance, the payment terms, the freight and packaging, tooling, the warranty costs, and the currency ( 1998). <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Future Direction Selling</li> It has been reported that the selection of a future direction will govern the organization, the competencies, the measures, and the performance of the organization ( 1998). Some procurement departments can develop the direction from the ground-up using the data gathered from the other parts of the organization, while others can use their organization to set up the future direction, and definitely need both elements to achieve both. Measurement of the Elements              (2006) reports that one of the most important issues in procurement is the need to prove the business value of its products and services using more effective performance measurement practices (). This feedback is essential to demonstrate that procurement is indeed providing the needed goods and services at the best prices, in a reasonable period of time, and with a high degree of compliance to procurement regulations (2006). However, measures that exist are also plagued with problems, such as technical, financial and institutional obstacles, which make the measurement of procurement function difficult, expensive to develop and maintain. Nevertheless,  (2006) points out that experience shows that it can be accomplished with dramatic results, for as benefits, by reduction in the cost of goods and services, it radically improved throughput times, increased compliance, and improved client and supplier relations (). Despite this situation, a few effective procurement performance measures that are valid, reliable, timely, and comprehensive are existent, including the PMI or the Performance Management Index. The PMI is an integrated and index-based performance measure comprised of component performance measures, which allows the combination of qualitative and quantitative information yet provides the ability to quantify both so that all component measures become output or results-oriented (2006, ). In addition, it is used to provide the strategic, tactical or operational feedbacks at all levels, and provides the essential feedback to improve procurement decision-making within the organization by enabling proactive problem solving, and by institutionalizing continuous improvement (2006, ). It has been reported that the Procurement Management Index (PMI) has been used successfully to provide a balanced or systematic assessment of the public sector procurement function from multiple points of view, which include the challenge function, cost of goods and services, throughput time, internal procurement costs, compliance to procurement regulations, issue management and client education, and overall effectiveness (2006). <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Challenge Function. This is used to challenge the necessity of any goods procurement or large-scale projects, which aims to provide checks and balances in purchasing to ensure that the client organization receives value for the funds expended prior to contracting (Shane and Lafferty 2006, ). The results of the formal or informal diagnostics determine whether the procurement would be approved, amended or disapproved, for less complex and costly goods and services. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Service Delivery Measures. This consists of three components:</li> </ul> 1. Cost of Goods and Services, which refers to the volume change and cost savings obtained through the centralized and standardized purchase of goods and services. 2. Throughput Time to Acquire Goods and Services, which refers to the changes in the average throughput time it takes to conduct a procurement, where throughput time is measured for different types of commodities and procurement vehicles. 3. Internal Procurement Costs, which refers to the internal procurement organization costs of acquiring goods and services and includes staff and operations managing costs. <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Compliance. This component refers to the role of protecting the interests of the government and the taxpayer, while facilitating the delivery of quality procurement services. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Issue Management. This consists of the identification, analysis and resolution of strategic issues that can impede the functioning of procurement operations when dealing with clients or suppliers on short, medium or long-term basis, and include internal organizational issues and those related to client satisfaction and supplier performance. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Client Education. This refers to educating and communicating the latest procurement policies, strategies, new approaches or success stories to clients in an attempt to anticipate non-compliance by increasing awareness, understanding and effective use of existing and new procurement rules and regulations. </li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> Overall Effectiveness of Procurement Operations. This component is determined by examining the degree of success of each sub-components of the PMI and making a judgment as to its overall effectiveness on the procurement function at any point in time. </li> </ul>   Conclusion             The procurement function is an essential and crucial element in the performance of business organizations or firms. It has been reported that no business can survive without a heavy investment in under-studying skills of procurement and the benefits of efficient procurement practices (2006). Procurement function, along with the other functions of the different organizations in a business firm determines the company’s success in penetrating the market. It has several elements, which can help in the development of action plans for improvement, to communicate current and future goals to the organization, measure their performance and satisfy the goals of their users (1998).                In spite of the importance of the procurement function, many business enterprises do not consider its importance, having little realization, appreciation and acknowledgement of the value an efficient procurement scheme can have on the performance of the business (2006). However, in reality, business firms must give importance to procurement function. When compared with other business organizations, business people somehow neglect the procurement function but this will be at their own expense (2006).             Business people thus need to have a clear understanding of the procurement processes and procedures first, if they are to benefit when doing their procurements, and second, if they are to get business with other companies ( 2006). In this way, the company can enjoy its benefits and advantages, and ensure the existence of the company in the market, continuing to provide sustenance to its employees and its consumers.                Credit:ivythesis.typepad.com

Procurement Function

Procurement Function Introduction Business firms or companies have internal organizations, which perform different functi...

INSURANCE BROKER ENTRY STRATEGIES AND RECRUITMENT

Insurance Broker Entry Strategies and Recruitment   Introduction               There has been a refocusing of attention on the insurance industry in recent times. A number of global events bring about this refocusing. For example, unanticipated claims encircled the insurance industry and adversely affected their bottom lines ( 2005). It is also the case that unabated calls for improving the services of insurance companies have been prevalent in the industry that it drove insurance companies to reorganize their ranks in order to provide the kind of service that their clients demands.               It is important to note that the insurance industry is complex. There are many branches in the insurance industry including general insurance, life insurance and insurance brokerage. In order for this complexity to be understood, one must invest time, effort and resources in understanding the nature of the businesses involved (). Therefore, working closely with clients, while utilizing domain expertise and perceptive technological comprehension is essential. These are important in insurance company if they want to formulate a solution that is customized.   Customized insurance solutions can be more beneficial to businesses since they will be able to provide action plans that will target specific problems of the company and are of measurable benefits. As such, the complexity of the insurance industry can be countered by insurance company’s ability to deconstruct their clients’ businesses and then construct the best possible solutions based on the results of the deconstruction.               In addition, the significance to provide customized solutions for business is highlighted by the fact that the face of  many businesses in today’s context is complex. This means that risks and challenges in workplaces are also becoming more difficult. This difficulty is intensified by the intricately woven connections of various company departments such as finance, sales, customer service, technology and human resource. This means that the problems being experience by one department can be felt by the other departments and as such, the performance of other departments can be affected by the problems of others. This means that the profitability of a company is partly dependent on the smooth working relations and operations of all departments.               Moreover, both internal and external factors are persistently threatening to offset the balance that ensures the profitability of companies. As the dependence of internal company department’s increase, so does the interdependence of companies, both within and outside, the same industries.  As such, many companies are turning to external sources that will help them in developing and managing applications that will enable them to have an edge over the competition. The edge comes from being able to differentiate themselves from other companies in the same industry.               In the case of the insurance industry, insurance and risk management is important since it identifies, evaluates, reduces and manages the risk in all the locations or countries that one specific business operates in. It is the case that experts in the insurance industry put their experiences and knowledge to work in order to help companies standardize as well as alleviate exposures that are distinctive to the sector of their business. It is also their responsibility to ensure that strategies and insurance programs are being implemented constantly in all the departments of the company. It is also crucial that local gaps are filled. Overall, as well as globally, insurance brokers play a crucial role in all of the processes abovementioned.               This means that insurance firms must ensure that employees who will represent their firms will have the adequate skills and knowledge to aid companies in reaching their goals. Numerous companies know that a larger degree of risk retention could mean more benefits for them. Premium rates are also increasing. In addition, achieving and maintaining most favorable balance between transferred and referred risk for every specific client are reliant to the skills of brokers to obtain and design market support.               These factors contribute to the attitudes of insurers towards availing of the services of insurance firms. Premium rates and selectiveness of insurers are the factors that directly affect the insurance industry. This means that the choice to insure the risks will be less popular or perceived a not so important process to undertake especially in large cases. As such, insurance firms must ensure the quality of their insurance brokers.   Insurance firms are now, more than ever, focused in hiring the best of the best to ensure that they will not fail the demands of their clients. Recruitment processes and requirements are stricter so that insurance firms will be able to screen the best possible candidate for the job.               In the same way, would-be insurance brokers must feel the pressure of the industry. They know that the industry is getting more and more competitive. For that reason, they would have to strive harder in order to be noticed by any insurance firm. In addition, they must be able to utilize effectively entry strategies. This means that would-be insurance brokers must be well aware of the changes that occurred and that are still occurring in and around the insurance industry. Familiarization to the changes within the industry will allow would-be applicants to better position as well as their skills to which they will be best noticed.               With this in mind, it is important to determine the entry strategies as well as the recruitment process within the insurance industry. This will allow would-be brokers to prepare themselves for the challenges of attempting to enter the industry. In the same way, this will also be beneficial to insurance firms since the chances of hiring highly qualified applicants may increase. The following sections of the paper will be discussing the various entry strategies available to insurance brokers as well as the recruitment process generally being used within the insurance industry.   Entry Requirements and Recruitment               As stated earlier, insurance brokers apply their knowledge and skills in identifying and arranging suitable insurance coverage for both individuals and organizations. Actually, they work as mediators between individuals or companies and insurance firms. As such, it is the responsibility of insurance brokers to assess accurately the risks of clients’. After which, they will look for the most appropriate policies to recommend to the insurance firms.               This means that insurance brokers must be client-centric, even though, the insurance firm that they work for pays their commissions. This is the case since they must be able to precisely identify the risks of their clients and not their firms. Therefore, the profitability and integrity of their firm depends upon their handling of client needs and not necessarily their firms. The roles that insurance brokers play vary from firm to firm. In the case of large insurance firms who provide services to major clients, career development is mainly focused on financial spots. In the commercialized side of the insurance industry, career developments can also include those in areas of client development and even marketing.               This means that insurance brokers are specialize in core areas. This most is evident in larger companies. On the other hand, insurance brokers employed in smaller companies tend to be involved in most functions, performing tasks of placing brokers, insurance account executive and technical broker. The client-colleague liaison often involves:   -          client communication  regarding requirements and technical staff -          identification and comprehension of the individual needs of the clients -          understanding clearly the business and risk profiles of clients -          development of a relationship with clients, which allows for the prompt response to requests of the clients -          discussion of future insurance needs with clients as well as maintaining business contact -          liaison with professional staff including photographers, surveyors and structural engineers -          organize and attend meetings -          representing clients in negotiation with insurers  -          premiums collection -          develop new business -          market brokerage services   Knowledge and information management is also important in an insurance broker’s job. This is the case since ensuring that work requests are carried out promptly in order to keep up with the demands of the clients. Therefore, it is essential that detailed records be kept for analyzing and collating numerously information. The information that were collated and analyzed will be the one sent to underwriters for preparing reports and presentations. This means that it is crucial for insurance brokers to keep up to date with paper works as well as correspondence. New industry tends to develop and play an important role in the analysis of information pertaining to the risks involved in company operations. As such, insurance brokers must continuously study the developments that occur within their industries to ensure that their recommendations will still be able to resolve the changing problems of companies. Therefore, undertaking researches regarding the availability of insurance policies and products is vital. The outline of the job description of insurance brokers brings about the requirements the employers look for when filing a post.  Ensuring that candidates for employment posses the traits needed to,  successful insurance brokers will be crucial in selecting the best possible employee. In the preceding sections of this paper, the requirements of most companies looking for insurance brokers will be presented. This presentation will serve as the platform in launching the discussion of the entry requirements and recruitment process within the insurance industry. A case study will also be presented to show how the people are able to meet the requirements and thus get the job as insurance brokers. Being an insurance broker is open to all graduates. However, applicants with a degree in the following have more chances of getting short-listed – accounting, finance, business management, mathematics, statistics, economics and businesses with languages. Theoretically, being an insurance broker is open to all Diplomates. However, companies, especially larger ones, tend not to hire applicants who are not Higher National Diploma holders. Nevertheless, applicants without HND still have the chance to enter the insurance industry. In case like this, applicants can start off at junior or in administrative level. In this entry method, the employees would have to make it up the corporate ladder. Entering the insurance industry without a HND will give the employee the needed training to face the demands of being an insurance broker. In addition, a higher degree in risk management will give an applicant the advantage needed over others. In the same light, pre-entry experience is not a requirement but experiences in banking and insurance sales can come in handy during training and actual performances. Usually, employers are looking for the combination of qualities that they believe will help candidates in actually performing well in their jobs. These qualities include strong interpersonal skills as well as communication skills. These are needed since insurance brokers are expected to develop and maintain relationships with their clients. It is also the case that they would have to gather information about the companies and pass them on to underwriter. Strong communication skills are needed to ensure the fluidity of information transfer from one medium to another. Confidence is also important if the tasks mentioned earlier are to be performed with the best possible results. Negotiation skills are also important since they will be dealing with various people who are driven by different motivations. As such, they as insurance brokers must find the middle ground where all of the parties involved will be willing to compromise. In addition, a person’s ability to manage numerous projects at the same time will give the employer the impression that the applicant will be able to handle different projects at the same and thus give the insurance company the ability to handle as many cases as possible.                Other important personal qualities that employers are looking for in an insurance broker are good utilization of analytical skills, understanding of legal issues, integrity and attention to details. All of these qualities are important since they ensure that insurance brokers will not make wrong interpretations of data needed to make the best possible recommendations regarding insurance policies and products. Otherwise, more risks may develop instead of helping wipe them out.             In order to maximize the potentials of new hires, insurance companies hold trainings. Different areas are included in the training schemes. This allows new hire especially fresh graduates to experience works in different areas for a period of eighteen months to two years. In addition, training covers technical aspects of broking, management development and other general skills.             The process of recruitment starts with examinations. During this time, applicants study for the Chartered Insurance Institute examination, which is a structured qualification examination that aims to meet the needs of insurance professionals. Applicants who take the Chartered Insurance Institute examination have the chance of being awarded various recognitions ranging from Award in Insurance to Diploma in Insurance. The latter is awarded to practitioners who are able to exhibit professional qualifications. In turn, Advanced Diploma could lead to Associate membership in Chartered Insurance Institute, which is open to all who are able to obtain A-level education or above. It takes two to three years to obtain Associate membership. Nowadays, an associate membership to Chartered Insurance Institute is being seen as an essential rather than a luxury. This is the case since associate membership status ensures that they will be recognized in a professional status. In addition, appropriate qualifications are needed to continue professional development, which is stated in the regulations of the Financial Services Authority. This is the reason why, new entrants to the insurance industry are encouraged to take the examination despite the difficulty of juggling work and studies. Case Studies Insurance Broker Trainee             The insurance broker in training graduated from a reputable university with a degree in accounting. He started his career with a popular bank. This was in relation to his plan of gaining experience and being able to apply the theories that he learned into practice. After two years, he decided that it was time to further his experience in the industry and thus he started to look for a job that would better suit his career interests. Not long after, he secured a position with another company that offered training scheme. The training scheme of the new company included risks management, reinsurance, special risks and programs and facilities. Aside form the training scheme being offered by the new company, the trainee also took up courses on soft skills and theoretical background.             Due to the various exposures to the theories involved in the insurance industry, the trainee was able to apply different approaches to the insurance needs of their clients. This allowed him to better understand the theories since he knows how they actually work in real life situations. As such, the simultaneous education and practice being undertaken by the trainee prepared him for the Chartered Insurance Institute examination. In addition, it paved the way for the trainee to develop further his communication and interpersonal skills. As a result, the trainee was able to perform his duties more efficiently. With this, he concluded that he must continue on developing his skills and gain more experiences to further his career growth.   Conclusion             The case study presented above as well as the entry requirements and recruitment shows that insurance brokers must be versatile and trainable if they want to succeed in the insurance industry. The combination of the right and appropriate characteristics will allows an applicant to show employers that he or she will be able to complete the tasks presented with efficiency and thus satisfy the needs of the clients.             Even the regulations of the financial services authority support the need for continuous education among insurance professionals. This means that entrant to the insurance industry must be able to recognize the importance and the role that education play in professional or career development within the insurance industry. Doing so will allow insurance brokers to prioritize their actions and as such they will be able to device programs that will help them to juggle everyday work and studies.             In any job, it is important to take note of the lessons that experiences teach us. This will ensure that the same mistakes will not be repeated and as such, essential time and resources will be saved. Career development within the insurance industry is also dependent on the ability of employees to learn new things. However, it must not stop with acquiring theories. Success lays at being able to apply theories into practice.             Reference             Credit:ivythesis.typepad.com

INSURANCE BROKER ENTRY STRATEGIES AND RECRUITMENT

Insurance Broker Entry Strategies and Recruitment Introduction There has been a refocusing of attention on the insura...

Essay on Corporate Finance

Corporate Finance   Business enterprises have various areas of responsibilities, and one area that considered    a major key in running the business smoothly is the   This area of Corporate Finance Department is dealing with the monetary decisions  that the organization make; as well as  to support financially  whatever marketing tools and analysis  that are appropriate for the more effective operation and production of the entire company.    In fact, the primary goal of corporate finance is to maximize shareholder value  while managing the firm’s financial risks.  The principal role of corporate finance is to solve any financial problems of all types of organizations.  Additionally, the discipline is divided into long-term, as to short-term decisions and techniques.  The capital investment decisions are considered  long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders.  On the other side, a  short term decision  deal with the short-term balance of current assets and current liabilities;  it  focuses  on managing cash, inventories, and short-term  financial borrowing and lending  from financial institutions. (http://en.wikipedia.org/wiki/Corporate_finance)  Furthermore, corporate finance as well as the corporate financier are both related to investment banking.  The normal role of investment banking is to assess the company’s financial needs and raise the appropriate type of capital that best fits those needs. Therefore, the terms “corporate finance” and “corporate financier” may be related to the transactions in which capital is provided in order to create, develop, grow, acquire or expand businesses. Specifically, capital investment decisions are considered long term finance decisions which are connected to fixed assets and capital structure of the business. Business decisions are based on several inter-related criteria.   First,  corporate management  should seek to maximize the value of the firm by investing in projects which provides  a positive net present value when valued using an appropriate discount rate in consideration of  certain risks. Second, these projects must also be financed appropriately.  Third, if no such opportunities available, maximizing shareholder value dictates that management must return excess cash to shareholders like distribution through dividends. Also, capital investment decisions, hence, must comprise an investment decision, a financing decision, and a dividend decision. (http://en.wikipedia.org/wiki/Corporate_finance) Correspondingly, the corporate finance should allocate budget for the potential projects, and this financial process is otherwise known as “capital budgeting”.  In making this kind of financial investment, the decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows.  Typically, every project costs will be calculated by the use of a discounted cash flow (DCF) valuation; and the opportunity with the highest value as measured by the Net Present Value (NPV).  And, this needs to be estimated through the size and timing of all the incremental cash flows from the project. All those future cash flows will be then discounted in order to determine their present value. Then, these present values will be totaled, whatever the net amount of the initial investment is the Net Present Value (NPV). On the other hand, to be able to achieve the goals of corporate finance, it must require corporate investment that can be financed properly by the company. The sources of financing are, usually the capital self-generated by the company.  In the same way, the debt and equity financing sources have both higher rate and cash flows, this financing combination will give significant impact on the valuation of the firm as well as long-term financial management decisions. In this event, there are two interrelated decisions that are very important to take into account in corporate finance.  Foremost is the management should identify the maximum   financial emergence.  Next, equity financing is less risky with respect to cash flow commitments, but results in a dilution of share ownership, control and earnings.  Aside from that, the cost of equity is also typically higher compared the cost of debt and so equity financing may result to an increased rate which may offset any reduction in cash flow risks.  (http://www.economywatch.com/finance/corporate-finance/) In the final event, corporate finance is also in charge of deciding on the dividend distributions among the stockholders of the company.  There are varied factors that   must be taken into consideration such as shareholders must shoulder their own taxes on the dividends.  In the same way, companies have an option to retain earnings or to perform a stock buy back.  Alternatively, some companies will pay dividends from stock than in cash.  Usually, it is accepted that dividend policy is value neutral; meaning, the value of the firm will be the same, whether it is issued cash dividends or repurchased it. (http://www.economywatch.com/finance/corporate-finance/)  References: http://en.wikipedia.org/wiki/Corporate_finance http://www.economywatch.com/finance/corporate-finance/     Credit:ivythesis.typepad.com

Essay on Corporate Finance

Corporate Finance Business enterprises have various areas of responsibilities, and one area that considered a major key in running...

EMERSON PERFORMANCE BUDGET SYSTEM

EMERSON: THE QUEST TO IMPROVE THE BUDGET SYSTEM    Introduction             Emerson can be considered as a cost-averse firm due to its historic reservation and cultural infusion of continuous cost-effectiveness activities in its operations.  However, without an effective budget system, the culture could draw them into the pit of zero-innovation and sub-optimal value-adding activities.  They perform industry scanning before budgeting so it is helpful to implement a certain method that can maximize the environmental information and its relative impacts to internal operations.  Thus, the introduction of performance-based budgeting is suggested to this end.  Presented in the paper is the description and evaluation of Emerson budget system and the beneficial contribution of performance budget not only to its financial but also business performance.      The Firm and its Budgeting System             Emerson Electric Company is a US-based manufacturer that produces electric motors and computer support systems.  It gained prominence due to  30-years continuous growth in profit and stock value.  The key exists in goal-orientation is when the business managers presented at least 40 divisions plans and executes independently, while the headquarters serve as the monitoring administrator of key result areas.  In 1998, the B firm showed business simplicity is truly beauty in empirical sense primarily which attributed to its financial track-record.  CEO  believed that providing the environment for unit managers to plan their own group’s targets and its concurrent budget line will lead to responsibility and accountability that makes smooth implementation and result-based approach to execution.               Planning is decentralized to general managers of each division including strategy formulation and operations.  They set their own targets together with other subordinates.  They work for months initially determining SWOT in the external environment and capital expenditure required to exploit or mitigate them.  Afterwards, the 50-year old ideology of cost-reduction goals, a way of life in the firm is formulated and gave managers the pro-active view of what activities should be done in the coming year to align in this firm culture.                Strategic guidelines in planning and budgeting are followed.  First, employee involvement is aimed for managers to get useful information from different sources and at the same time create a mechanism wherein resistance to change could be minimized.  Second, competitive position is protected through continuous improvement in the value chain, assessing their resources and capabilities with rivals and product innovation.  Finally, prudence in capital expenditure would give the planners rationalized trade-offs between investments (improvement) and accompanying costs (departure to cost-reduction culture).                Crucial to the firm is to achieve the designed results through rigorous planning and tight control.  With this, they can shape the future as they have intended while profitability is considered merely a state of mind and not a chance.  Also, how they will determine the results is largely dependent on operational level where long-run performance is deemed to stem.  While the firm does not have complex business papers to reflect their plans, simplicity would fill the gap as it will foster discipline to employees driving them to pre-determined objectives and work practicality.         System Evaluation             As observed, Emerson has been able to minimize complexity of planning and remain objective in installing goals.  The most knowledgeable, proximate and concerned people relative to resource and capabilities are the one who will allocate resources.  These results to less effort and time devoted to arrive at reasonable forecast of results.  Whatever the information they would use (cash, accrual or modified accrual) and template or software to be utilized, operating budget emerged through the minds of those who experienced budget shortage/ surpluses and who applied certain contingencies on emergency situations.  Thus, only objective matters rather subjective or gut-feel are inputted to determine financial results.  With this, determining the reserve budget need not be outsourced to an engineering firm while future revenues/ expenses are easily deciphered from the past year.  As a result, there will be optimal resolution to avoid revamping that could arise in special assessments.                   However, there are also loopholes in simplicity and cost-reduction scheme of the firm.  First, since their major concern is scanning the industry and competitive environment, decentralization may increase research and monitoring costs for detriment of consolidated efficiency.  Second, cost-reduction culture and emphasis on short-term gains could impede innovation and value-adding activities that could result in imitable competitive advantage as cost-cutting and price based competition have lower switching costs than value based ones.  Lastly, oversimplification of setting annual budget would shift the manager strategies towards practical approach to recognize contingency opportunities/ threats that is risky for the division’s contribution for the whole organization.                Of course, the headquarters (HQ) is there to signal and apprehend the concerned division about symptoms of departing to activities determined in budget planning to arrive at results so these loopholes can be easily resolved.  However, it is questionable that they can always decode what is in each manager’s heads.  As a result, the picture seen by the HQ could be myopic that instead of enhancing the focus of the division to its goals, it would rather annoy and confused managers.  It is not disclosed how strict is the monitoring of HQ and what disciplinary actions would be resorted, but our concern is a definitive structure that would lessen incidence of failure notification from HQ to division managers.  With short-term operational lens applied, increase reliance to financial assets would undermine intangible resources such as human capital, innovation and reputation.                   Apparently, the CEO’s belief to natural efficiency across the firm’s divisions has its trade-offs.  Without caution, competitive advantage can only be sub-optimal.  It is also observable that some of its planning guidelines are in conflict like being competitive with financial prudence and decentralization initially, but party centralization in execution as HQ monitors the implementation of each division.  As a result, there is a need to fill these gaps by providing a clearer border line between HQ oversight and managerial flexibility using budgeting techniques from academic sources and best practices.   The Technique and Tools for Analysis                      Performance-based budgeting is mission-driven, result-oriented budgeting that can clearly explain how Emerson would achieve cost-effectiveness in a consistent and sustained way.  This form of budgeting details the cost of each activity- a certain organizational unit will perform that is tied with specific goal or performance level.  For Emerson, efficient allocation of resources is a culture so the analysis would involve the economic aim of budgeting which is to achieve the best use of resources wherein benefits from expenditures are worth of their costs in terms of the sacrificed or displaced alternatives.  Using this lens at the fore requires measurement of activities according to their incremental values and relative effectiveness although we should not hesitate to suggest modification and enhancement in its view on making annual budget to maximize the discussion.        Emerson Annual Budget: From Bad to Good             It can be argued that Emerson would likely use the line item budget to adhere in its simplicity.  However, it does not show what key activities or programs of the firm will undertake that makes the HQ monitoring of division operations more unpredictable since both units do not have the map to guide their actions (divisions) and reactions (HQ).  Aggravatingly, performance evaluation would highly depend on the level of periodical expenses since results in the annual budget for a specific activity is not indicated.  Uncertainty of number results would basically make the budget yardstick futile.               Performance budget can ease the pressure of HQ to invest in monitoring mechanisms and to safeguard division’s adherence to their determined budget and results.  The system will highlight key activities or those with relatively higher investment and crucial results providing the HQ key areas to look at.  This could finally infuse strategic planning to the firm in order for specific steps back-up the objectivity of a certain project.  Day-to-day operations oversight will be minimized instead diverting monitoring endeavors to the long-range actions and responses of division managers including their contingency decisions.  Also, indirect cost of follow-up by HQ will be prevented like managerial demoralization leading to decrease in productivity due to frequent inquiry of HQ officials when an activity is done (incurring cost) without its presence in the determined annual budget.                As divisions can overcome cost-reduction culture through research supported activities, innovation will not be neglected primarily because of supply-side cognition of making budget.  They can also transfer the additional or increased financing of a major activity like product development against trade-off in minor activity like firm funded parties.  Priority areas are highlighted due to the existence of target outputs and their costs.  As a result, managers can easily evaluate possible manipulation of operational areas financing for firm to bear the value-adding and sustainable feature of strategic planning.  In effect, cost-reduction would not limit growth of the firm, instead, it will provide the platform to efficiently use its resources and improve its capabilities in view of its valuable contribution in allowing them to manipulate the flexibility of internal activities in favor of exploiting opportunities from the environment.               Contingency decisions during the operational year of division managers could also be limited and rationalized by the system.  The budget ceiling implored in contingency account and its desired results will possibly mitigate the effects of an abrupt competitive wide-scale advertisement, will give the HQ and division managers the objective benchmark in which to base their actions-reactions.  Of course, the HQ wants to protect shareholders and long-term stability of the whole organization.  On the other hand, divisions intend to show performance that can differentiate them from other division and possibly get a higher budget for the succeeding fiscal year.  The system will enable HQ and divisions to lobby their oftentimes conflicting goals of agency relationship in financial terms, thus, preventing them to argue in objective terms in case one request departure to the original budget due to unforeseen events (failure to reach quarterly sales quota due to increase in imported raw material costs).   Emerson Annual Budget: From Good to Better                    Although the firm is successful in bridging simplicity of operations to reduce complexity and objectivity of planning, it does not have the budget database for all divisions to figure-out possible integration of individually determined activities.  Division 1 would implement a strategy which is partly  or the same  as Division 4.  With measurable results opposite to investment needed in performance budget, the HQ can identify possible synergy between two or more division having the same level of significance tied to a certain project.  This can enhance the lobbying power of divisions to demand higher annual budget since they exhibit similar decision and priority patterns.                In addition, it can promote harmony across the divisions including HQ relations.  Decentralization somewhat bring competitive tendencies between divisions to prove their worth of the annual budget and other division benefits.  When they are aware that their projects are compared with others especially those that require large amount of investment, it would suggest teamwork and platform to remind them that they are working for one company.  Also, HQ would have better company-wide planning as inputs from divisions who examined and looked for a possible joint project or intensive sharing of resources.  As a result, the supposedly determinant of strategic direction of the whole firm would have greater inclination to leverage individual division’s operations intended to reach corporate long-term goals.                Further, using the system will strengthen the firm’s SWOT analysis because it requires substantial data, in this case, both external and internal data.  Each division would then give ample effort to study the general environment on top of competitor and internal analysis.  Of course, major activities would delimit their research endeavors since it needs huge organizational resource than minor and regular activities.  This will not only build a bounded budget that is within achievable and calculated risk framework, but also stimulates human resources reception to both internal and external updates.  In effect, they can argue their ideas during planning that will be the source of confidence to discuss the matter in front of the managers.  This will support employee participation in decision making.               Finally, the supply-side stance of the firm could appreciate the importance of result-based approach to planning.  This will minimize the tendency of the firm to be cost-averse despite of strong value chain and determined opportunities.  It will provide the backbone to believe that budgeting is the means to an end and not simply awarding a budget to the end skipping the value-adding capability of improving the execution of the means.  With two lenses at hand, Emerson would simply use the one appropriate to a divisional activity balancing the long-term and short-term prospects including accompanying costs and benefits.  This will support entrepreneurial tendencies and creativity that is crucial to a globalized firm’s survival and profitability.    Conclusion                    As said, using cost-leadership strategy is ineffective when the firm is unable to meet the acceptable level of goods and services it offers to customers relative to competitors.  As a result, performance based budgeting could drive the organization to maximize the purpose of competitor and internal analysis by inputting activities that will respond to the finding through exposing them in the annual budget.  Supposed that the competitor decided to directly compete in the market of Emerson, a large and innovative firm could drive it away in the industry due to its capability to absorb looses due to liquidity.  It can indicate clear distinction and functionality of several major activities while testing cost-reduction regimes employable to them and would be set-aside as to give way to full divisional accountability to meet results.                Even though the system has benefits, it should be cautioned that extensive research is required to arrive at objective activities.  Also, minor activities or those that are done every year are impractical to provide neither varying results nor extensive research as this would depart to simplicity culture of Emerson.  In aggregate, what the system aspires to the firm is to adhere to their begging-of-the-year promises (divisions) wherein HQ has invested scarce resources to finance.  It is an effective tool to promote responsible and accountable decentralized divisions, supportive and firm HQ and efficient allocation of resource in case of meeting the intended result or extending it.  It will also measure the credibility of managers and financial tolerance of HQ concretizing the learning curve in budgeting and testing effectiveness of cost-reduction culture at the same time.        Bibliography Book Periodicals   Electronic Sources                   Credit:ivythesis.typepad.com

EMERSON PERFORMANCE BUDGET SYSTEM

EMERSON: THE QUEST TO IMPROVE THE BUDGET SYSTEM Introduction Emerson can be considered as a cost-averse firm due to its...

Corporate Finance

Corporate Finance Introduction Because of the previous experience of the organization from the past years’ declination of sales, it is natural for the organization to take precautions in the next business venture. The aim for corporate social responsibility, increase in return of investments and sustainable development will remain a dream if Mineral Plc. will not create the appropriate approach for their current situation. The aim of the paper is to investigate and measure the effectiveness of corporate finance as well as the governance of the organization. Through dealing with the appropriate methods, such as computation and analysis, the paper can answer the requirements according to the needs of the organization.    Discussion The proposed investment in Medco Republic (MR) is viable depending of the used methods. In the comparison of NPV and IRR, the first method is recognized to be better than of IRR. However, in financing, the corporate executives are more familiar in IRR because they provide useful information and this is used as a method for the proposed projects. But since there is an investment, it is therefore important to look for the benefits for its return. The NPV creates a significant result because it gives a direct measure on the dollar benefits or the foreign currency benefits, based on the present value, of the project to the firm’s shareholders. In this way, most of the finance managers preferred to use the NPV as the best single measure of profitability. On the other hand, IRR also measures profitability but it is expressed in the percentage rate of return. Many decision makers like the nonfinancial managers, prefer to reference the result of IRR because of the emphasis the method gives on the return of investment of the shareholders. NPV has a direct relationship with the Economic Value Added (EVA) which means that, when the project during the year indicated a positive NPV then over time its cumulative EVA should rise to the by the sum of the projects’ NPVs. Things will never work out this way because investors cannot determine the expected NPVs all of the firm’s projects. Still, over time positive NPVs should translate into positive EVAs, and to a positive market value added (MVA), or the access of the firm’s market value over its book value (Brigham & Gapenski, 1997). The issues that need to cover in Corporate Social Responsibility (CSR) are the moral and ethical concerns such as the code of conduct and good governance. The company should aim for corporate social responsibility is to have an overall positive impact on society and for the sustainable development (Fonteneau, 2003). Corporate social responsibility is an essential element of present and future social policies. The strategy is to develop the multinational economic and financial groups that is needed in global market economy or firms that going through serious of internal crisis. The strategy is a replacement for many socially and ethically irresponsible practices to avoid or lessen the possibilities of bankruptcies, fraudulent actions, legal obligations that involves the issues of health and safety in the workplace, employment policies and environmental protection (Noon, 2008). Risks are always present in dealing with business transactions. The exposure of the organization in the foreign currency risk is very evident in the international corporation because of their participation in the international trade. The impact of movements of foreign exchange rates may result to the fluctuations in exchange rates. The risk may arise from a variety of sources such as foreign currency retail accounts and retail cash transactions and services, foreign exchange trading, investments denominated in foreign currencies and investments in foreign companies. In order to reduce the risk in business transactions there should be policies that can effectively manage and control the foreign currency risks (Bank of Jamaica, 2005). This includes: 1.      Statement of risk principles and objectives governing the extent to which the institution is willing to assume foreign exchange risk; 2.      Explicit and prudent limits on the institutions’ exposure to foreign exchange risk; and 3.      Clearly defined levels of delegation of trading authorities. Conclusion Due to the growth of globalization and impact of technologies and economic uncertainties, the proposals for the organization are weighed. The supporting views of the leaders in the responsive approach of increasing the profitability and increase the return to their shareholders is a great indication that the organization starts to recover. In order to gain such benefit, the organization should take advantage of the new initiatives that can support and promote the business towards achieving the corporate social responsibility.   References: Bank of Jamaica, (2005) Standards of Sound Business Practices: Foreign Exchange Risk Management [Online] Available at: http://www.boj.org.jm/pdf/Standards-Foreign%20Exchange%20Risk%20Management.pdf [Accessed 12 August 2010]. Brigham, E., & Gapenski, L., (1997) Financial Management: Theory and Practice. The Dryden Press, 8th Ed.  Fonteneau, G., (2003) Corporate Social Responsibility: Envisioning its Social Implications, The Jus Semper Global Alliance, Living Wages North and South [Online] Available at: http://www.jussemper.org/Resources/CSRsocialimplications.pdf [Accessed 12 August 2010]. Noon, P., (2008) Corporate Social Responsibility, Negotiator’s Guide [Online] Available at: http://www.world-psi.org/ [Accessed 12 August 2010].   Credit:ivythesis.typepad.com

Corporate Finance

Corporate Finance Introduction Because of the previous experience of the organization from the past years’ declination of sales, it is ...

Corporate Finance: Business Valuation in Tomkins Plc

Corporate Finance: Business Valuation in Tomkins Plc   Introduction             There are different kinds of companies and businesses existing in the global market. There are companies which are owned solely by an individual and there are those companies owned by group of individuals or partners.  In this regard, the company is said to have obligations with the owners through the creation of business value. Business value is known as a collective growth in one or more of the following aspects in a business such as direct benefits which compromises the growth of revenue or reduces costs; indirect benefits like the client relationships; flexibility enhancement such as alertness in response to market changes and risk reduction (Aggarwal, 1997). These elements encompass the organizational value parameters such as quality, cost, speed, innovation and relationship.  In addition, business value are being created to the five different functions of a business such as the inbound logistics, operations, outbound logistics, marketing and sales and customer services.  Primarily, the main goal of this paper is to analyze how Tomkins Plc has created value for its owners in the last 10 years. In addition, this will also provide some recommendation on how the company can improve their wealth creation record.     Overview of the Company Tomkins Plc is a group of companies consisting of different subsidiaries which are presently organized into two larger segments: the Industrial & Automotive Segments and Building Products.  Consequently, both of these segments have a strong competitive position in the market environment as well as technical leadership. The company’s brands are well-recognized in the global market. Tomkins Plc is listed in both New York and London stock exchange with the revenue of  USD 2.9 m during the first half of 2008 with approximately 33,000 employees in the global scale which means they have 21, 635 employees in the 73 production facilities in the first segment and 11, 817 employees with 65 production facilities  for the latter segment. it can be said that the group revenue during those period is quite impressive considering that financial crisis is ongoing that affects most operations and financial performance of other industries. Tomkins plc is a company that is engaged in engineering and manufacturing business in the global market. Formerly, the company is known as F.H. Tomkins Buckle Company, which was established in 1925 and is headquartered in London, the United Kingdom. The company has grown to be a competitive industry in the market offering different products under various segments.  The company’s  Power Transmission segment has been able to provide V-belts, synchronous drive belts, tensioners, pulleys, electromechanical drive systems, engine modules, motion control components, polyurethane timing belts, powder metal power transmission, planetary carrier systems  and pump components, and engine and transmission oil pumps. On one hand, Tomkins Plc’s fluid Power segment are offering a line of hose and tubing for industrial and automotive customers, and it also provides ring cutting, flared coupling systems, sealing elements, weld nipples, and hydraulic systems solutions. The second segment of the company also offers remote tyre pressure monitoring approach; automotive thermostats, gas and closure caps, tire valves and gauges, refueling vapor recovery valves, air conditioning components, fuel delivery system components, air-conditioning and injection valves and connectors, automotive chassis components, industrial valves, tire repair pieces and inflating gauges. Tomkins Plc’s automotive and industrial segment are providing frames, trailers, axles and wheels, automotive accessories, power steering hose assemblies, grease guns, air line products, brass, tire repair products, and plastic fittings, brake lines, as well as oils and greases. While the company’s Air Systems Components segment provides the market air handling components for the ventilation, heating, and air conditioning markets. The other building products of the company offers whirlpool baths, steam baths, tub/showers, door enclosures, shower bases, aluminum and vinyl windows and doors, bathroom fans, exhaust hoods, roof vents, and monitoring systems.   Financial Analysis: Value Creation for Owners             Accordingly, business valuation is an approach or a set of procedures which are being used to estimate the economic value of the interest of owners in a business. Valuation is utilized by the participants in the financial market to identify the price they are willing to receive or pay to consummate a sale of a specific business. It can be said that the management of the company are interested in measuring the operating performance in terms of profitability and return on invested capital. If they are not owners, managers must still satisfy the same expectations of owners in this regard. As managers, they must focus themselves in measuring operating efficiency, asset turnover, and liquidity or solvency. These will help them manage everyday activities and evaluate potential credit customers and key suppliers. Manager ratios serve as cash management tools by focusing on the management of inventory, receivables and payables. Accordingly, these ratios tend to focus on operating data reflected on the profit and loss statement and on the current sections of the balance sheet. The value the can be provided to the owners and shareholders of the company are considered in the financial statement. Financial statements are annual statements that summarize a company’s activities for over the last year (Fried, Sondhi & White, 2003). They are audited by certified public accountants (CPAs), who interpret whether or not the firm’s financial conditions have been fairly presented in the statements.   Balance sheets provide the details of the company’s assets, liabilities and owner’s equity at a particular date, which is usually the last day of the accounting period.  Most people describe it as the “snapshot” of the financial condition of a company.             It is said that the shareholder is regarded as the central stakeholder of each industry. Placing the shareholder at the focal point of business activity is simply recognizing the fact that firms that do not satisfy shareholder requirements increase their risk of capital flight, higher interest rates and pressure from the board of directors, takeovers, and lower productivity. Organizations that create long-term shareholder value simultaneously create relatively greater value for all stakeholders. Thus, value-creating organizations appear to operate with the following objective function in mind: Maximize shareholder wealth subject to satisfying remaining stakeholder requirements. And in order for Tomkins to meet such requirement the company has been able to identify an effective way for this concept.             In the year in the initial years of this half decade operations, Tomkins had focused increasing the unrealized capital gains of its shareholders through buyback programs.  Especially in the years 2001 and 2002, this strategy was set to calm down shareholders amidst its disposal of some of its relatively unrelated subsidiaries like gardening products to concentrate in its core businesses and minimize its debts.  In effect, earnings per share increased that made its shares attractive for investors.  The buyback program suggested that the firm is confident in the future cash generating capability of a lean but mean business.              In 2002, a new CEO was promulgated.  This happening onwards started the abrupt acquisition strategies of Tomkins that was intended to purchase highly related companies to obtain synergy and strengthen available technology.  Year after year, earnings per share and share price increased beyond the level of disposal periods in 2001 and 2002.  Dividends that had remained flat at 12 pence from 2001-2003 had dramatically increased for the next two years.  This indicated that the less speculating shareholders were paid off in favor of long-term gains with the company.              Within this half decade, sales and profits remained constant.  This is rather atypical for a firm that had lost some of its good performing subsidiaries during the initial years of disposal.  However, as Tomkins ignored short-term attractiveness of a diversified and unrelated portfolio in favor of its core businesses, it exemplified an ongoing concern for shareholders to support its acquisitions.  It became long-term strategist wherein geographic expansion had not shaken its concentrated portfolio rather enforced its competencies by obtaining related businesses with technologies it can integrate to its existing businesses.              Shareholder returns at Tomkins surpassed the FTSE Engineering and Machinery sector by a huge margin.  It could be suspected that the success of the firm to protect the trust of its shareholder was derived early in its disposing tactics.  It had not only slashed the risks of its portfolio by doing this due to horizontal integration and economies of scale but also provide the cognition that it is focusing on long-term gains.  As a result, its return had also increased making its share more attractive year-after-year.              At the onset of 2003, the corporate scandal at Enron changed how Tomikins reported its annual performance.  Share price was not presented at single price rather a range of pricing for the past four quarters.  This can be translated as to discourage false financial promises for prospected investors.  However, even this lost opportunity for abrupt marketing of its share did not shaken the performance of the firm.  It even served as motivation to undermine financial for business strategies.  This situated Tomkins to create shareholder value within the veil of long-term relationship but with continuous (even increasing) dividend pay-outs.              However, this situation was far from the situation faced by the company after 10 years of operation. It can be said that for the last 10 years of operation, Tomkins, despite of major downturns has been able to progress and continue to emerge as competitive in the engineering and machinery industries.  In order to understand this more, financial analysis of the company for the last 10 years will be considered. Financial Analysis <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="line-height: 200%"> 	Dividends and Share Price</li> </ul> Table 1.  Dividend Information 		  		1997 		1998 		1999 		2000 		2001 		Apr-02 		Dec-02 		2003 		2004 		2005 		2006 		2007 		Interim (GBp per Share) 		3.06 		3.5 		4 		4.6 		4.6 		4.6 		8 		4.6 		4.83 		5.07 		5.32 		5.32 		Final (GBp per Share) 		8.39 		9.67 		11.15 		12.85 		7.4 		7.4 		0 		7.4 		7.77 		8.16 		8.57 		8.57 Source: http://www.tomkins.co.uk/tomk/ir/shservices/divinfo Figure 1 Source: http://www.tomkins.co.uk/tomk/ir/shservices/divinfo/ Based on the table and graph above, it shows that the dividend for Tomkins Plc’s shareholders reach their peak in year 2000-2002 and have been sustained throughout the years.  As can be seen in their financial status, the dividend can be considered to show positive future even if there are environmental factors that affect the business which include the financial crisis in the global market. Year 2007 was not a good year for Tomkins as compared to the half-decade years, but it still shows potentialities for the performance of the company. Figure 2. Share Price: Tomkins PLC 2009 Last Trade: 16:35  02/03/2009 In line with the share prices, Tomkins Plc is said to be experiencing the effect of the financial crisis due to subprime mortgage with a downfall of 1.5 in London Stock Exchange and 0.24 in New York Stock Exchange. This shows major effect in the performance of the company, hence, Tomkins group must be able to find ways in improving their sales and profits.   <ul style="margin-top: 0in; margin-bottom: 0in" type="disc"> <li class="MsoNormal" style="line-height: 200%"> 	Income Statements</li> </ul> As shown in Figure 3, the net profit margin of Tomkins fell .4% as of 2007.  It can be seen also that the sales of the company decreases as well as the administrative and generals costs. Basically, given the figures from the previous years, Tomkins Plc is not showing any progress.   Figure 3.  Summary of Revenue and Net Income of TOMKINS PLC Source: http://www.tomkins.co.uk/tomk/ir/finfactsheet/   Analysis shows that Tomkins Plc has been able to gain profitability 2005 and shows little and slower progress in the coming years. Although this is the trend, it is still safe to say that as of 2009, the company is still showing improvement despite of major economic downturn of various institutions in the global market. From this situation and with the result of the net income and revenue of the company, it can be said that the company is not performing well in the market. Hence, the management of Tomkins must be able to evaluate all their operations and market activities to know which factors affect their growth.   ·                                         Balance Sheet and Cash Flow             In accordance with the gathered financial information, it shows that the company has shown inconsistencies in their progress. The financial figures provided shows that the company, although, performed in 2005, are performing and progressing slowly for the next two years and this is forecasted to happen in 2009.  Looking at the company’s cash flow, we can conclude that Tomkins Plc is not performing well as compared to their great performance in 2005.  In which, part of their earnings have been used in development and expansion projects in 2006.  One of the attributed factors for their market fall is because of the current marketing approach of the company.   Figure 4.  Summary of Cash Flow of TOMKINS PLC Source: www.ft.com   Accordingly, one way of analysing a business is through their balance sheets. This includes the reports of the company in line with their financial ration.  The main purpose of financial rations is to determine the profitability of the company.   The calculation of this can also be used to know whether the company has enough liquid sources to pay their debts, finance charges and their employees. Likewise, it is useful for the owners or shareholders to know their shared values (Riahi-Belkaoui, A 1998). In the course of 10 years the company has incurred several changes in its financial profile. Based on the data presented, the company has incurred a higher state of liquidity as compared on its previous performance. This means that the company has a greater capacity to pay its debts when it comes due. This is shown in the increase in their current assets shown in the data presented in its deposited cash in the bank and its profit coming from the company’s operation. It could also be asserted that the company obtained a positive change in the profit and loss account. This presents the company’s stability in terms of it financial obligations.  However, it is also important to note that the increase in the company’s net current liabilities is very alarming. Likewise, the company’s payables and expenses have also increased dramatically providing over than half of the previous year’s liabilities. This shows that most of the company’s operation is financed predominantly        Figure 5.  Summary of Liquidity Ratios of TOMKINS PLC Source: www.ft.com   As can be seen in the figure above, Tomkins must be able to utilize their assets to grow and develop more in the future. The management must be very keen in observing their financial ratios and they must ensure that they do not experience too low financial returns in order to drive creditors away in line with the level of risk present. Based on the given financial statements, it shows that Tomkins Plc can still be considered to have stability when it comes to financial matters.     Other Extraneous Report Analysis             The company has been able to use different strategy in order to stay competitive and at the same time to maintain its performance for creating shareholder value. One of the strategies used is the process of acquisition. Herein, the company had acquired related businesses Selkirk, NGR and L.E. Technologies as well as sold its subsidiary that produces helmet (Gutter).  This strategy of Tomkins proved that it acquires for faster transfer of technology and to support its manufacturing/ supply chain.  Also, it is selling subsidiaries that are not within its core businesses like industrial, automotive and building materials.  It aimed for highly horizontally integrated business which makes investors minimized the risk of costly integration as Tomkins and the acquired firm resources are highly similar.  This cost savings will be allocated for geographical expansion instead.             As the CEO admitted, the firm is volatile in industrial developments like oil prices hikes and increase in metal prices.  As the business of the firm becomes concentrated in highly related businesses, the volatility increases as it cannot offset such input hikes in other unrelated businesses, say, in food products where the adverse effects of industry and general environment forces are low.  Although shareholders are confronted with greater returns and sustainable growth, it is offset by higher risk of the firm’s volatility.     Recommendation Since the company has been able to sustain its competitiveness and great performance, the company must continue its business strategy focus. Through this, the company may be ensured of having long-term relationship with their potential investors.  However, at times when strategies do not arrive at intended value creating results to shareholders, the 2001-2002 disposing regimes and buyback programs can serve as contingency actions.  In effect, balancing business and financial strategies attributable to shareholders should be maintained.  The need for this intensifies as Tomkins prefer a concentrated portfolio which means that it becomes volatile in every industrial bottleneck.  Hence, this means that in order to become successful in gaining shareholder value, the firm must be able to have the ability to think of effective ways to solve issues which cannot merely solve by focusing on their strategy.             In the last few years of decades of operations it deepened its acquisition with highly related businesses.  However, acquisition threats are just around the corner.  The risk of acquisition ended with integration difficulties and large debt must be taken in consideration.  As a result, diligent evaluation in the pre-acquisition stage becomes crucial.  At present, shareholders may exercise confidence in this expensive strategy, but if the firm fails to equate this sacrifice into profits at due time, it could threat the equity financing.              To minimize industry risk (like oil prices and metal material hikes), the firm should diversify, at least, in portfolio investments.  It could place a stake in other companies not with different environments and risks compared to its own.  Shareholders value can be created when their risk is carefully calculated and spread especially at times when the cost of inputs are extraordinary compared with previous operations.  Fund management should be obtained in order to provide shareholders the option to diversify their investments to companies in which Tomkins is spreading its own risk. It can be said that the gain to shareholders is based on achieving synergies from cost savings, revenue enhancement, process improvement and financial engineering. The revenue enhancement is the most important factor to create synergies in acquisition approach. However, the firm must not overly focus on acquisitions.  This may halt its innovative capabilities since research and development feats are waived through buying companies which had already made them.  Yes, transfer of technology would be fast but can be offset by stagnant learning curve and employee urge to internalize innovation.  This situation departs to the firm’s commitment on long-run shareholder value since the risk of leaking the knowledge and loosing the knowledgeable people in the acquired firm are not minimized.  The advantage would turn out to be only temporary and the company must realize this context.     Conclusion Financial evaluation is very vital to the development of a certain organisation since it is the distinction whether the certain organisation are growing or not (Atril & Mclaney, 2004). With these the management should have a good collaboration to their internal auditor.  In the case of auditing fraud, the management may conduct an investigation with the help of forensic accountant. Through this, the company may know how the company is doing and how it sustains its competitive advantage. One of the primary goals of every industry is to maximize shareholder wealth, by ensuring that the business is having good performance in the marketplace. At first, the shareholder value approach of Tomkins is noted to be financial focus. However, as the company realizes the value of having effective business performance in gaining efficient shareholder value, the company has changed its shareholder value creation strategy from financial to business focus.  It also diverted its concentration from short-term value creation to sustainable one.  This resulted to increase in dividend pay-outs in 2004 and 2005 despite acquisition regimes.  This means that Tomkins is capable to integrate its resources and its subsidiaries efficiently.  As a result, shareholders are granted with short-run benefits through dividend pay-outs and unrealized capital gains as Tomkins shares accelerate its market attractiveness.  However, despite this, it is recommended that the firm continuously evaluate its subsidiaries particularly in the areas of their debt.  Also, it must try to place investments (in portfolio form) on unrelated businesses to minimize industry risk coupled with investments in R&D to prevent risk of overly focus in acquisitions.                     As can be seen in the financial analysis, the Tomkins Plc is seen to have weaker performance in the last two years. In order to gain more effectiveness in terms of financial performance, the Tomkins Plc should be able to maximize its assets and profits and minimize its expenses.  In the financial statement presented it can be seen that the financial performance of the company is weaker compared to its financial stability on the previous years.  In this manner, the company should be able to provide certain ways in order to increase their profit and minimize their expenses. The provided recommendation can be used to ensure that shared values for owners or shareholders are provided efficiently.  The company must continue having efforts that will show that they value their shareholders.   By and large, it can be concluded that in the last 10 years, Tomkins have its ups and downs in terms of financial aspects, the only way to make it stable is to find strategic and effective ways to sustain competitive advantage.   Reference Aggarwal, S., 1997. Flexibility management: the ultimate strategy. Industrial             Management 39 (1), 26±31.   Atrill, P. & McLaney, E. (2004) Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.   Fried, D. Sondhi A. & White, G. (2003) The Analysis and Use of Financial Statements, 3rd edn, John Wiley & Sons Inc., New Jersey.   Neely, A. & Adams, C. (2000). Perspectives on Performance: The Performance Prism. Centre for Business Performance, Canfield Business School, UK.                                                                                                    Tomkins Plc (2009). Online available at http://www.tomkins.com.uk.  Retrieve March 5, 2009.   Credit:ivythesis.typepad.com

Corporate Finance: Business Valuation in Tomkins Plc

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