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Business and Enterprise - Part A

Task 1 – Financial Task

Ratios

Formula

2020 (£m)

2019 (£m)

Gross profit margin

Gross profit/ Total revenue

0.75

0.8

Operating profit margin

Operating profit / Total revenue

0.25

0.3

Profit after tax margin

Profit after tax / Total revenue

0

0.1

Return on equity

Net income / Shareholders' equity

0

500

Balance sheet gearing ratio

Total debt / Shareholders' equity

3000

2500

Debtor days

Debtors / Average daily sales

91.25

109.5

Creditor days

Creditors / Average daily purchases

121.666667

182.5

Current ratio

Current assets / Current liabilities

2

2

Acid test ratio

(Current assets - inventories - prepaid expenses) / current liabilities

2

2

Ratio analysis is considered as the major technique for undertaking financial analysis. It is basically used to analyse the information recorded in financial statements of the company (Appelbaum et al. 2018). It laid emphasis on several ratios that clearly reflects the efficiency, profitability, financial leverage and other relevant information regarding the business enterprise. It is helpful in conducting horizontal and vertical analysis to draw the comparison of performance in the previous year and current year. It is useful for both outsider analysts and internal management of the business enterprise as it fetches important insights obtained from financial statements. There has been a reduction in gross profit margin in 2020 to 0.75 as compared to 0.8 in 2019. This indicates that the company’s gross profit has reduced. Similarly, operating profit margin has also reduced due to fall in operating profits in the current year. Net profit for the year 2020 is 0, thereby leading to 0 profit after tax margin and 0 return on equity. Gearing ratio indicates the total debt borrowed by the company to shareholders’ equity (Herciu and Ogrean 2017). This has been increased by £500 million which shows that the company has borrowed more amount. The debtor days ratio helps in knowing the number of days that the customers are going to take to pay the debt amount. There is a reduction in debtor days from 109.5 days to 91.25 days in 2020. This indicates that debtors will take less time in current year to pay their respective amounts as compared to previous year. Creditor days helps in knowing the period or number of days that the company might take to pay off the amount due to the creditors. This has also reduced to 121.67 days from 182.5 days. This indicates that the company will pay off the amount in less days in the current year. Current ratio is considered as a liquidity ratio that helps in measuring the ability of the company to fulfil or pay off its short term obligations that are due in one year. For both the years, this ratio is consistent and stands as an ideal ratio at 2:1. This indicates that the company’s current assets are sufficient to pay off its current liabilities. With regard to dividend cover, dividend cannot be paid as suggest by Spencer as the company’s net profit are zero for the current year. Dividend can only be paid if the business enterprise has earned enough net profits. However, there are various limitations of ratio analysis.

Limitations of ratio analysis are as follows:

  • Based on historical data: The data or information which is analysed under the ratio analysis is based on past real outcomes that were being released by the business enterprise (Appelbaum et al. 2017). Thus, there are chances that the ratio analysis may not significantly represent the performance of the business enterprise for future time period.
  • Effects of inflation: The financial statements of the company are released on periodic basis and thereby, there are time difference among each of those release. However, if the inflation has arisen in between those periods, then the real prices are not replicated in the mentioned financial statements (Karabarbounis and Nieman 2019). Therefore, the figures across various periods cannot be compared effectively until the inflation is adjusted.
  • Manipulation of financial statements: The information contained in the financial statements can be easily manipulated by the management of the company to produce better results as compared to its actual performance. Therefore, the ratio analysis might not reflect the true performance of the business due to misrepresentation.
  • Operational changes: The business enterprise may change the operational structure, everything from its supply value chain to the products and services that it is selling (Bhuiyan and Nguyen 2019). The comparison of financial results before and after changing the operational structure may produce misleading conclusions about the performance of the company and its future related growth prospects, in case any significant operational changes were occurred.

Terms that Are Usually Found in Company Accounts

Window dressing: This is concerned with actions that are taken to enhance the financial statements of the company. It is usually done to impress the lenders in order to acquire loan of a huge amount. It is considered as an unethical practice as it may produce misleading results (Chen et al. 2016). For example: postponing the payment to suppliers, so that end cash balance appears to be higher than it should be.

Goodwill: This is considered as an intangible asset concerned with the purchase of one company by another company (Sacui 2016). It is recorded at the time when the purchase price id higher than the sum of fair value of all solid assets and liabilities that are purchased in the process. Goodwill is calculated by subtracting fair value of assets and liabilities from the purchase price of the target company. For example: company XYZ purchased ABC company whose assets minus liabilities is recorded as $10 and it is purchased for $15. Here, the difference of $5 is goodwill.

Provisions: It is considered as the amount which is set aside to effectively cover the probable future expenses or significant reduction in the asset’s value. Examples of provisions include asset impairments, depreciation, pension, etc.

Exceptional items: These are considered as a charge that is being incurred by the company. This must be noted separately in the financial statements in accordance with GAAP. Example: legal settlement.

Impairment: It is defined as a significant reduction in the recoverable amount of a fixed asset or any intangible asset. This usually occurs because of unusual event like change in economic or legal conditions, modifications in consumer demand or any significant damage to the asset of the company (Schwarzbichler et al. 2018).

Negative goodwill: It refers to the difference between the purchase price paid for a company or its assets and the fair market value of the company. This is also known as bargain purchase amount. This goodwill favours the buyer as it acts as a discount (Izmaylov 2017). For instance, the company was sold for $288000 whose market value was $323000. Here, the purchase value is lower than the fair market value.

Minority interests: It is defined as the interest of less than 50% of the business enterprise. This is held by any investors or other company which is not a parent company. This usually come with several rights meant for the stakeholders like certain audit rights and participation in sales or other decisions.

The size of the company BIMCO is large as the total revenue of the company is above £10 million for the current year. Therefore, it will be considered necessary for the company to undertake the auditing process. Auditing is defined as the process of inspecting the financial statements of the company to enhance their reliability and accuracy (Maroun 2017). It is considered as an essential process for the government, investors, shareholders, creditors and for the company itself as they all rely on the audited financial statements for undertaking effective decision making process. However, auditing may not necessarily produce true results and therefore cannot be relied on by the purchase or the investor of the company as there are certain limitations of auditing process. These are as follows:

  • High rely on experts: The auditor of the company relies on several experts like valuers, lawyers and engineers to estimate the value of various fixed assets and liabilities held by the company (Bulkan 2016). These experts can easily manipulate those values.
  • Efficiency of management: No comment is passed by the auditor on the management efficiency. Also, he does not make any comment with regard to future performance of the company with the help of audited financial statements.
  • Checking of all transactions: An auditor cannot check each and every business transaction and has to rely on some sample transactions.
  • Not easy to detect fraud: It is not considered easy for the auditor to detect fraud like misstatement or omission of some transactions from record (Majumdar et al. 2017).

There are basically three valuation methods that can be used to value BIMCO, namely, DCF analysis, precedent transactions and comparable company analysis. These are discussed below:

  • Comparable analysis: In this method, current value of the company is compared to other identical businesses by analysing trading multiples such as EV/ EBITDA, P/E or various other ratios (Vidal – Garcia and Ribal 2019).
  • Precedent transactions: Under this method of valuation, the value of the company is compared with other businesses that are currently being acquired or sold in the same industry. The value of transactions may include take over premium included in the price.
  • DCF analysis: In this method, unlevered free cash flow of the business is forecasted into the future and discounted at the weighted average cost of capital.

Task 2 - Acquisition and Merger

Merger is defined as a transaction where two companies are agreed to integrate their operations on comparatively coequal basis.

Acquisition is defined as a transaction where one company buy another company (Fuad and Gaur 2019).

Advantages of mergers and acquisitions are as follows:

  • Research and development: It is considered necessary for some business organizations to invest heavily in research and development to generate new technology or products. Mergers and acquisitions help the firm to achieve higher profits and generate larger funds to carry out research and development activities in an effective and efficient manner (Haeruddin 2017). For example: it is helpful for drug industry where a firm has to afford many failures while developing drug.
  • Avoid duplication of work: Mergers and acquisitions helps in avoiding duplication of work. For instance, when the similar business carrying out companies are competing over each other then they can merge to provide benefit to the consumers. This will help in achieving competitive advantage.

There are various disadvantages of mergers and acquisitions.

  • High prices: As a result of merger, competition in the market may get reduced and may provide monopoly power to the new firm. With greater market share and less competition, there are chances that the new firm may increase the prices for the customers. Under this situation, the merger tuned out to be as bad merger.
  • Loss of jobs: An acquisition or merger may significantly lead to the loss of jobs for many people. This will impact the livelihood of employees.

After critically reviewing the advantages and disadvantages of mergers and acquisitions, it would be better for the company to grow internally. There are two ways of raising financial capital that can be used to fund various operations of the company, namely debt and equity (Pilbeam 2018).

  • Debt capital: It is concerned with borrowing of money by the company and agreeing on terms and conditions to pay back the principal amount on maturity along with interest at regular intervals of time. The types of debt capital include bonds and loans. However, the company has to bear the burden of interest payments that are to be made irrespective of the performance of business.
  • Equity capital: Equity capital is generated by selling the shares of the company stock in the form of preference shares or equity shares. Under this, the company is not required to pay back the amount invested by the shareholders. However, ownership of the company gets diluted as each shareholder acquires a small piece of company.

Business and Enterprise - Part B

Task 3 Project Work

The capability to collaborate with a number of people working in the organization is considered as an essential part of the communication process in the workplace in the toady’s interconnected world scenario. The main purpose of SCARF model is to interact with people in a suitable manner that will help in minimising the threats and maximising the rewards taking into consideration five major areas, namely, status, certainty, autonomy, relatedness and fairness (Gopal 2017). Effective understanding of approach-avoid response will definitely help in enhancing collaborations and thus, will influence the manner in which people behave. The above mentioned five domains are considered as a crucial part behind this approach-avoid response. Each of these domains will be looked out separately in order to identify the ways that will help in empowering Emily to accomplish her responsibilities in a productive manner. It is possible to decrease the threat reaction and instead establish a reward response.

  • Status: This is related to the sense of worth of the individual. Every person has internal status structures that helps them in modelling the workplace in organizational and social context. This is considered as the key driver in relation to the workplace behaviour. Strong threat reaction can be generated due to the threat of reducing status. The organization must design everyday conservations in a such a way that they can be turned into a measurement of status in order to make Emily ensure that she is not being perceived as any less valued person than others. The things like performance feedback may cause avoid-response. Instead of performance feedback, Emily must be allowed to provide feedback on the project or herself. The organization must disclose the rewarding approach to her in the form of promotions, learnings, improvements, etc. This will help her in performing her work in an effective and efficient manner.
  • Certainty: Certainty is another essential factor as it ensures security to people. If the surroundings of the organization are uncertain, then the brain activity of the person increases and may create a stress response. This may further lead to the inability of the person to make balanced and effective decisions. Sudden changes may significantly lead to threat reaction and must be avoided. The organization must lay emphasis on planning and strategizing to decrease the uncertainty level.
  • Autonomy: This domain establishes a sense of control among the individuals. Group collaboration may often produce challenges to autonomy as hierarchical structures are not evitable (Reynolds et al. 2017). Management is required to ensure that the objectives are achieved and collaboration is effectively organized. Emily must be provided with adequate autonomy by providing her choices between different projects rather than telling her to do a particular project. Levels of certainty can be improved by establishing rules and objectives that are similar for everyone.
  • Relatedness: The sense of relation that a person feel with other people affects the decision making process. High sense of relatedness and group activity affects the productivity of brain. Therefore, it becomes necessary to introduce a new member with other team members. Emily must be properly introduced with people with whom she has to carry out her tasks and must be given sufficient time in creating the connection with the help of group activities.
  • Fairness: The brain of the person reacts with avoid-response when he/she thinks that the things are unfair and may go in a defensive stance. People cannot empathize with those whom they think are performing unfairly. Whereas, when the person is treated fairly then the reward structures turned on automatically. To remove unfairness, greater level of transparency must be introduced. People will experience unfairness when all the processes are being understood by them. Emily must be provided with all the rules and guidelines that are same for everyone working in the organization.

When the employees are asked to change then resistance to change comes as a natural reaction. Change is considered not comfortable and need different ways to manage the work. Resistance to this change must be viewed as a normal sign and must be introduced with a positive spirit. The management must always believe that the other team members will cooperate and will produce effective results out of every work situation. Changes must be communicated effectively with the other team members in order to obtain their trust and reduce the level of resistance. A leadership team can be established to lead the organizational changes in an effective and efficient manner. Communication strategy is considered as the key to overcome the resistance (Akbar 2017). Other team members must be provided with a chance to raise their opinions over the specified situation. A communication plan must be developed that will target each and every member of team also mention the benefits that the employees will achieve after the change. Team member can also be given training to perform their task in an appropriate manner. The management must prepare itself for the change and produce anticipated points of resistance in order to manage them effectively. Right resistance managers such as senior leaders, frontline supervisors and middle managers must be engaged (Radaellli and Sitton – Kent 2016). These managers can effectively mitigate the resistance by making a persuading case for the requirement to change. Team members generally listen with great attention to the senior leaders and managers in the organization.

Task 4 - International Considerations

Hofstede’s cultural dimensions theory is defined as a framework that can be used to understand the differences among the cultural differences across various countries and assess its influence on the business performance and structure. In this model, various dimensions of the organizational cultures are studied comprising of large versus small power distance that helps in analysing the degree to which less powerful members of the organization view distribution of power as not equal. Collectivism versus individualism are also studied that will help in assessing capability of members in defining individual culture away from the group culture (Beugelsdijk et al. 2017). This dimension undertakes the level to which the different societies are united in groups and the obligations and dependence perceived by them. Other aspect examined by Hofstede is masculinity versus femininity that will help in assessing the values attached to females and males. The other dimension, namely, long term orientation versus short term orientation has also been studied which takes into consideration the degree to which time horizon is viewed by the society. Long term orientation indicates that the society laid greater emphasis on future prospects, long term perseverance and growth whereas short term orientation indicates that the society lay emphasis on the very near future. Power distance dimension takes into consideration the level to which power and inequality are tolerated by the society. One of the major weaknesses of Hofstede model is that it is based on inconclusive approach. Sample size has been drawn from one company that makes the overall research with low validity and less accurate levels.

Global markets are changing rapidly and rising international competition makes it essential for the management of the organization to draw understanding with regard to domestic as well host country’ culture. Successful cross cultural management is now gaining importance because of globalisation (Thomas and Peterson 2016). Hofstede has discussed the topic of vanishing of boundaries by establishing a notion of the global village where the world seems smaller because of the presence of World Wide Web and rapid development of technologies. The awareness with regard to cultural differences are becoming more important in the today’s global market and are influencing cross-cultural management (Tjosvold 2017). Thus, it becomes for the multinational corporations and their respective managers to establish cultural awareness to effectively sustain management across cultural borders. Moreover, managers of the organizations are required to develop multicultural interactive skills in order to raise their ability to understand the variations between the domestic culture and the culture of the economy in which they are likely to carry out their operations (Santoro et al. 2020). They must be provided with adequate training and teaching in order to prepare them to deal with the cultural differences.

Hofstede theory has shaped the guidelines and foundations for understanding cultural differences and developed a driving force for various other researchers to continue the same study. However, this study has been criticised on the grounds of outdated and old fashioned theory. Thus, it has been found that there is a requirement to complement the study conducted by Hofstede with the contemporary approach. Hofstede claimed that there is stability in the culture and changes slowly but many other researchers have disagreed to this fact and stated that the culture changes over time. Other dimension that can be added to the model to address the national cultural differences in a more comprehensive manner is indulgence versus restraint (Vitolla et al. 2019). This is considered as the sixth dimension in Hofstede model that has been developed with Michael Minkov. Indulgence is concerned with the society that consents comparatively free gratification of natural and basic human drives in relation to enjoyment and fun in life. Restraint is concerned with the society that defeats gratification of desires and regulates the society by implementing strict and unfavourable social norms and values. The countries in which the score of indulgence versus restraint is high normally permits and encourage the society to live the way they want and enjoy their life fully. However, in countries where the score of indulgence versus restraint is low tends to exercise regulations with regard to conduct of people and behaviour. High indulgence economies tend to be optimistic and know the significance of freedom of speech. They laid emphasis on the personal happiness of individuals. On the other hand, high restraint economies are tended to be pessimistic and are considered to be of rigid and controlled behavioural patterns.

References for Business and Enterprise

Akbar, S.I. 2017. Business Process Reengineering and Change Management Strategy to Overcome the Resistance to Change. Available at SSRN 3502035.

Appelbaum, D., Kogan, A., Vasarhelyi, M. and Yan, Z. 2017. Impact of business analytics and enterprise systems on managerial accounting. International Journal of Accounting Information Systems25, pp.29-44.

Appelbaum, D.A., Kogan, A. and Vasarhelyi, M.A. 2018. Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics. Journal of Accounting Literature40, pp.83-101.

Beugelsdijk, S., Kostova, T. and Roth, K. 2017. An overview of Hofstede-inspired country-level culture research in international business since 2006. Journal of International Business Studies48(1), pp.30-47.

Bhuiyan, M.B.U. and Nguyen, T.H.N. 2019. Impact of CSR on cost of debt and cost of capital: Australian evidence. Social Responsibility Journal.

Bulkan, J. 2016. The limitations of international auditing. The Carbon Fix: Forest Carbon, Social Justice, and Environmental Governance, p.91.

Chen, H., Cohen, L. and Lou, D. 2016. Industry window dressing. The Review of Financial Studies29(12), pp.3354-3393.

Fuad, M. and Gaur, A.S. 2019. Merger waves, entry-timing, and cross-border acquisition completion: A frictional lens perspective. Journal of World Business54(2), pp.107-118.

Gopal, S. 2017. The human dimension of work place productivity. West Sussex, United Kingdom: ROFFEYPARK Institute. Retrieved March6, p.2019.

Haeruddin, M.I.M. 2017. Mergers and acquisitions: Quo vadis. Management7(2), pp.84-88.

Herciu, M. and Ogrean, C. 2017. Does Capital Structure Influence Company Profitability?. Studies in Business and Economics12(3), pp.50-62.

Izmaylov, Y. 2017. Substantiation of the procedure for the reflection of goodwill in the accounting system of national enterprises. Technology audit and production reserves, (2 (5)), pp.9-15.

Karabarbounis, L. and Neiman, B. 2019. Accounting for factorless income. NBER Macroeconomics Annual33(1), pp.167-228.

Majumdar, S., Jarraya, Y., Oqaily, M., Alimohammadifar, A., Pourzandi, M., Wang, L. and Debbabi, M. 2017, September. Leaps: Learning-based proactive security auditing for clouds. In European Symposium on Research in Computer Security (pp. 265-285). Springer, Cham.

Maroun, W. 2017. Assuring the integrated report: Insights and recommendations from auditors and preparers. The British Accounting Review49(3), pp.329-346.

Pilbeam, K. 2018. Finance & financial markets. Macmillan International Higher Education.

Radaelli, G. and Sitton‐Kent, L. 2016. Middle managers and the translation of new ideas in organizations: A review of micro‐practices and contingencies. International Journal of Management Reviews18(3), pp.311-332.

Reynolds, S., Tonks, A. and MacNeill, K. 2017. Collaborative leadership in the arts as a unique form of dual leadership. The Journal of Arts Management, Law, and Society47(2), pp.89-104.

Săcui, V. 2016. The Components of Purchased Goodwill in Businesses Combinations. Revista de Management Comparat Internațional17(1), pp.47-53.

Santoro, G., Bresciani, S. and Papa, A. 2020. Collaborative modes with cultural and creative industries and innovation performance: the moderating role of heterogeneous sources of knowledge and absorptive capacity. Technovation92, p.102040.

Schwarzbichler, M., Steiner, C. and Turnheim, D. 2018. Impairment of Assets (Fixed Assets and Goodwill). In Financial Steering (pp. 343-370). Springer, Cham.

Thomas, D.C. and Peterson, M.F., 2016. Cross-cultural management: Essential concepts. Sage Publications.

Tjosvold, D. 2017. Cross-cultural management: foundations and future. Routledge.

Vidal-Garcia, R. and Ribal, J., 2019. Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach. Journal of Business Valuation and Economic Loss Analysis14(1).

Vitolla, F., Raimo, N., Rubino, M. and Garzoni, A., 2019. The impact of national culture on integrated reporting quality. A stakeholder theory approach. Business Strategy and the Environment28(8), pp.1558-1571.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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