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Management And Information Systems

Contents

Introduction.

The Management Information System at Woolworths.

Organizational Structure at Woolworths.

Information Technology.

Analysis of Ratios.

Profitability Ratios.

Efficiency Ratios.

Woolworths: Financial Health.

Competitive Advantage.

Control Problems and Fraud in the System..

Challenges Experienced due to hierarchical system at Woolworths.

Suggestions and Recommendations.

Conclusion.

Reference.

Introduction to Woolworths Group Financial Analysis

Woolworths Group is one of the largest companies by market capitalization in Australia. It is also one of the top 50 companies and an ASX-50 constituent. Woolworths is listed on ASX with the code of WOW and is conducting the retailing business within the territories of Australia and New Zealand. It is also the 2nd largest Australia Company by revenue following Wesfarmers and the largest retailer of liquor products and other beverages in Australia. The main business of Woolworths is to operate and manage supermarkets, procurement of liquor, food and other edible products and consumer stores for general merchandise. The company is also engaged in operating and managing chains of hotels which facilitate both accommodation and entertainment in the form of pubs and gaming. WOW is a big retail brand, and the company owns other multiple as well which includes well known names like BWS, BIG W, Dan Murphy's, etc. (Woolworth, 2020). The company Woolworths Group was incorporated during the year 1924 and the first time listing of the shares of the company held during the year 1993. This indicates that brand WOW has a legacy of decades and it has shown tremendous growth during this period.

The equity stocks of WOW are typically considered as protective investment, the reason is that the prices of this stocks has shown significant shield against the past recorded times of economic depression. The nature of WOW’s primary business which mainly includes essential items and products can be considered to be the main reason. And therefore, even in an economic downturn of Corona Pandemic through which the world is going through, there will be a demand (in fact increased) for essentials like food products, and other essentials.

In this report, the financial analysis of Woolworths will be conducted for determining the financial health of the company and includes the management information systems and information technologies currently used by the company. A detailed ratio analysis will be performed which measures the liquidity, profitability and efficiency of the company.

The Management Information System at Woolworths

The management information system (MIS) is basically an information system that is being used in business (and other) organizations for decision making process. It is also used for the control and coordination, visualization and analysis of the information that is related to the organization. The study of the MIS includes people, technology and processes in an organizational context

Organizational Structure at Woolworths

The organizational structure is a flow of authority and power in an entity. Basically two types of organizational structures are generally observed in the business entities including hierarchical structure and flat structure. In Woolworths Group a hierarchical structure has been implemented and followed. Under a hierarchical structure, the entity contains various layers of management which includes personnel at specific designations. At Woolworths, the chairman and the non-executive directors are at the top of the governance structure. The next level includes the Chief Executive Officer (CEO) followed by other executives. The middle level includes functional or divisional managers, and at last the bottom of the hierarchical structure includes the heads of the departments. This is the system of communication at Woolworths that follows top to bottom route. The organizational structure (Last update May 29, 2020) of Woolworths is given as below:

Information Technology

Woolworths is an entity that is engaged in the business of retail, and therefore it requires a customized system of accounting information that can suits the ongoing retail activities which are frequent and with larger volumes. The retail activities include ordering and purchasing of goods, management of inventory, sales and receipt of cash (Woolworths, 2020). As per the above mentioned requirements, Woolworth has employed Xero and Myob as its accounting software and it use both custom software and commercially available software. The company as mentioned uses both software including Myob and Xero based on the specific purpose. Both of these software offer different benefits, for example Xero is better than Myob cost wise as it avails up-front pricing strategies but Myob provide larger options than Xero in order to deal different situations.

Financial Analysis

Financial analysis is an important process to determine the financial health and position of a company and can form the basis of an investment decision. It will help an investor to evaluate the possible returns that a company is able to generate against the capital invested into its business. It also helps in determining the risk levels for the potential investors. That means, financial analysis acknowledges the stakeholders about the risk and return measures of a company and help them in making beneficial investment decisions.

 Ratios

2015

2016

2017

2018

2019

Current Ratio

0.84

0.83

0.80

0.78

0.73

Acid Test Ratio

0.30

0.32

0.33

0.31

0.23

 Return on Assets %

8.66

-5.06

6.61

7.42

11.45

 Return on Equity %

20.35

-12.79

17.04

17.23

25.94

 Return on Invested Capital %

15.4

-7.63

13.14

14.18

20.83

Financial Leverage

2.34

2.77

2.41

2.25

2.28

 Gross Margin %

27.15

26.77

28.61

29.03

29.08

 Operating Margin %

5

2.28

3.74

3.68

3.44

 Net Margin %

3.53

-2.12

2.75

3.04

4.49

Days Sales Outstanding

1.66

1.38

0.84

0.8

0.79

Days Inventory

39.37

40.33

39.67

37.69

36.52

Days Payables

39.91

42.12

45.36

47.08

45.19

Receivables Turnover

219.58

263.57

434.4

453.99

459.65

Inventory Turnover

9.27

9.05

9.2

9.68

9.99

Fixed Asset Turnover

6.19

6.36

6.67

6.5

6.47

Total Asset Turnover

2.46

2.39

2.4

2.44

2.55

EBITDA Margin %

5.46

2.75

4.18

4.49

3.92

EBITDA (Bil)

3.32

1.61

2.33

2.55

2.35

Free Cash Flow/Net Income

0.55

0.79

0.63

0.36

Table 1: Woolworths: Ratio Analysis

Source: (Woolworths Annual Reports)

Analysis of Ratios

Based on the ratios calculated, an analysis is done to determine whether Woolworth’s performance is worsening or improving. The analysis has been made in the following points:-

Profitability Ratios

Profitability ratios measure the ability of a business to generate earnings. The different types of profitability ratios are NP & OP margin, ROA, ROE, etc.

Return on Assets: The returns on assets are substantially good and in an increasing trend. It was 4.72% in FY 2018 and increased to 6.91% in FY 2019. The ratio of ROA determines the earnings that have been generated by the company by employing its assets into use. The total assets of Woolworths are significantly similar throughout the previous few years; hence all the volatility in ROA is arising due to the heavy fluctuation in net income values. Where the industry ROA is negative, the ROA of the company is positive, high and increasing.

Return on Net Salesor Operating Profit Margin: It is used for the evaluation of the operational efficiency of the company. The operating profit margin is substantially stable at the levels of around 4% throughout the previous 3 financial years. The ratio of return on sales determines the efficiency of a company to generate profits from the top-line areas of revenue. It helps in measuring the performance of a company. The RONS is however stable but there is a steep fall in the margins during FY 2019 (3.9 %) as compared to FY 2018 (4.5 %). This is not a good indication as a decrease in profit margins indicates lower efficiency and with lower efficiency, the company will not be able to provide sufficient returns to its investor.

All other profitability measures including net profit (NP) margin and return on equity (ROE) of the company are in an increasing trend, only the operating profit (OP) margin is decreasing by a little margin of 0.5% YOY. Also, all the profitability industry averages show negative figures, while company profitability is positive and increasing.

Efficiency Ratios

Efficiency Ratios are important measures that determine the ability of a company in generating earnings using its various available resources. Common efficiency ratios include asset turnover ratio and inventory turnover ratio.

A higher ratio is always good for the company when the efficiency ratios of Woolworths are compared with industry, the company seems to be more efficient as compared to other major players of the industry. The ATO ratio of the company for FY 2019 is 2.54 which has increased YOY and greater than the industry average of 2.44. A similar fashion can be witnessed for the inventory TO ratio.

Woolworths: Financial Health

The market capital value of the company is whooping AU$ 46.51 billion and It is the second biggest company in Australia by revenue after Wesfarmers and the biggest liquor retailer in Australia and New Zealand. The below table demonstrates the top 5 Australian companies in the Fortune Global 500 list 2019. The list has ranked the largest companies of Australia and their world ranking by annual revenue (in US$) (Fortune, 2020).

Australian

World

Name

Industry

Revenue

Profits

Employees

Headquarters

 Rank

Rank

   

(USD millions)

(USD millions)

   

1

195

Wesfarmers

Conglomerate

53985

927

217000

Perth

2

233

Woolworths Group

Retail

47842

1336

201522

Sydney

3

246

BHP

Mining

45809

3705

27161

Melbourne

4

373

Commonwealth Bank

Banking

33186

7228

45753

Sydney

5

433

Westpac

Banking

29027

6151

35029

Sydney

Table 2: Financial Details of Top 5 Australian companies in the Fortune Global 500 list 2019

Source: (Fortune, 2020)

Competitive Advantage

Xero is a market giants and leader in the segment of accounting software (packages and services) in Australia and other countries. The causes of competitive advantage for this accounting software include Saas finance and technology, strategic partnerships, and management changes. Global accounting firms recognize Xero as the best accounting software for small and medium businesses. Examples of Xero's competitive advantage include third party solutions which integrate with business solutions, and this strategy enhances customization of the accounting package. Besides, Zero collaborates with other firms such as Zen Payroll, Receipt Bank, Vend, and Square to improve innovative solutions that allow Xero software to fulfill the needs of its users. QuickBooks online derives its competitive advantage from the newly developed user interface by Intuit called Harmony. The vendors of both service providers have been engaged in rigorous campaigns to attract small business entrepreneurs to implement their software in their respective entities.

Control Problems and Fraud in the System

The system could either use passwords, codes or biometrics to recognize users. Each user must have a unique code or other modes of accessibility. This plan increases the security of the financial information. However, Intuit QuickBooks is an online platform and users could save their login details on the machines. When this happens, it means that even unauthorized personnel can gain access to the system and cause fraud or introduce malice. The system is prone to hacking. Hackers can enter non-exist transactions and cause the organization to fail to account for some of its financial operations, and this can lead to massive losses. Besides, unscrupulous users could enter false information on the system so that they benefit from illegal transactions.

Challenges Experienced due to Hierarchical System at Woolworths

The hierarchical structure is associated with several operational problems or efficiency errors. First, this structure makes communication across departments less efficient as compared to organizations that have a flat structure. Besides, this structure affects decision-making in Woolworths as departmental heads make decisions that benefit the interests of the department but not for the entire organization. As such, there is a rivalry between departments due to lack of coordination. This structure increase bureaucracy in the organization and this affects or hinders speed of changes in the company. Towards this end, bureaucracy might make clients shift to other retail businesses since the managers might take time to respond to clients owing to the bureaucratic structure. Arguably, organization costs increases since these several layers require several employees and consequently high salary expense. Regrettably, hierarchical structure demoralizes workers at the shop floor due to excess chain of command leading to unproductive teamwork since the organization lacks hybrid practices such as management by objectives (MBO). Newstrom & John (2015), note that MBO allows the management and the employees to come together to make decisions and to describe objectives for the whole organization and individual employees.

Suggestions and Recommendations on Woolworths Group Financial Analysis

Training sessions should be conducted after installation of new software package in the business. This makes staff ready to deal with the technicalities of the newly added software. They will easily understand the cloud based accounting software. It is very important in order to train employees the ways the data is added in the software and the way the software really works. They must be properly trained in dealing with all the aspects of the software. It is recommended for the business organization to buy and install anti-virus software on their systems and computers in order to reduce the risk of cybercrimes as accounting software are based on cloud computing which is internet based technology. This will make whole of the accounting process secured and free from the risk of loss of any important data. The costs associated with the purchase and installation of cloud based accounting software can be managed by the organization if they work strategically towards cost control and cost reduction. The business organizations should identify and remove the activities from the business model which are not creating any value for them.

Conclusion on Woolworths Group Financial Analysis

In the end we can conclude that Australian organizations are rapidly integrating cloud based accounting systems in their business model. It was being found that the implementation of cloud based accounting software has mainly increased among the medium and scale organization and large business organizations implement combination of traditional and modern accounting system. These software systems help in invoicing, inventory management, payroll management and online banking transactions. There are many risks of integrating the cloud based accounting system with the business model these risks should be mitigated by proper antivirus installation and the staff should also be properly trained so that they can efficiently use cloud based accounting software.

Reference for Woolworths Group Financial Analysis

Campbell, J. L., D'Adduzio, J., Downes, J., & Utke, S. 2019. Do Investors Adjust Financial Statement Ratios when Financial Statements Fail to Reflect Economic Substance? Evidence from Cash Flow Hedges. Evidence from Cash Flow Hedges (April 2019).

Cucchiella, F., D’Adamo, I., & Gastaldi, M. 2015. Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy, 17(4), 887-904.

Fortune. 2020. Fortune 500. Retrieved from https://fortune.com/fortune500/

Gabric, D. 2018. Determination of Accounting Manipulations in the Financial Statements Using Accrual Based Investment Ratios. Economic Review: Journal of Economics and Business16(1), 71-81.

Gürel, E., & Tat, M. 2017. SWOT analysis: a theoretical review. Journal of International Social Research10(51).

Jalbert, T. 2017. A Model for Forecasting Small Business Financial Statements and Firm Performance. Business Education & Accreditation9(2), 61-84.

Pierson, K., Hand, M. L., & Thompson, F. 2015. The government finance database: A common resource for quantitative research in public financial analysis. PloS one, 10(6).

Schroeder, R. G., Clark, M. W., & Cathey, J. M. 2019. Financial accounting theory and analysis: text and cases. New Jersey: John Wiley & Sons.

Woolworth (2020). Annual Report 2019. Retrieved from https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf

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