Analysis for Burberry Plc as a Manager Finance Essay

Most well- run companies make extensive use of ratios internally, to monitor and to ensure efficient running of the organisation. To analyse Burberry plc on manager’s perspective, first of all explain the role of the managers. Managers are people in charge of the day to day running of the business for maximum profitability and efficient use of Capital and human labour.The following ratios for Burberry will be analysed to ascertain the strengths and weaknesses of Burberry plc and if changes ought to be made by the management for growth ,survival and stability of the organisation. Managers will perhaps be concern with all the ratios but the following are most relevant to the managers.

Profitability, Efficiency, Liquidity, Gearing and Investment ratios. My ratios may not differ from members of my group simple because management take into account all ratios. (1) Return on capital employed (ROCE); this is a very important ratio to the management when establishing targets for profitability .It measure the performance and return of profit on all the capital invested in the business including long-term loans 

[3] . The ratio will show the link between the profit generated during the financial year and the average long -term capital invested in the same financial year 

[4] . In the financial year to end of March 2009, the ratio was -1.7%, and in 2008 was 39%. There is a huge decline and management will be much concern with the figure in 2009. (2) The second ratio relevant to the management is gross profit margin ratio, this ratio relates to the gross profit of the business to sales revenue of the business in the same period 

[5] .Gross profit represents the difference between sales revenue and the cost of sales 

[6] The gross profit margin ratio measures profitability in buying and selling of goods and services before any expenditure is considered. Burberry plc gross profit margin for 2009 is 55.4 percent decrease from the 2008 figure of 62 percent. There is decrease of 6.6%, which means that the gross profit is lower relative to sales revenue in 2009 than it was in 2008.Management could take a number of measures to increase gross profit , they can reduce the purchase cost of goods sold and increase sales by given incentives such as discounts or buy one get one free. (3) Another useful ratio to the managers is operating profit. Operating profit margin measures how effective a company can control the costs and expenses associated with their normal business operations 

[7] . Operating profit margin represents the profit from trading operations after paying all variable costs of production. There is high decline in operating profit margin for Burberry plc in 2009, the figure was -0.8% and in the year ended 2008, and the operating profit margin was 20.2%. The figure for 2009 is not healthy operating profit margin and the management of Burberry plc will have to take stringent actions to bring the operating profit margin to positive figures. (4) The fourth ratio to analyse is current ratio.

This type of ratio compares the liquid assets that are cash and those assets held that will soon be turned into cash of the business against the current liabilities 

[8] . A retail business will normally prefer low current ratio because it can hold fast moving inventories of finish goods that can be turned quickly into cash when sold. Burberry plc current ratio for 2009 was 1.4 times and that of 2008 was 1.3 times.

The figure for 2008 was slightly lower than that of 2009 ,this will mean that inventories in 2008 was relatively sold for cash thereby given rise to trade receivables than in 2009. (5) Another important ratio to the managers is average settlement period for trade receivables ratio. A business will normally prefer a shorter average settlement period for trade receivables than a longer period 

[9] . This is because a business will have more funds to invest for more profitable purposes than when average settlement period is longer 

[10] . In this instance the funds are tied up on credit sales. The settlement period in 2008 for Burberry plc was 62 days and that of 2009 slightly increase to 69 days. The management should endeavour to encourage their creditors to make prompt payment, so that when cash is received on time for example within 30 days cash can be use to invest in other areas in the business for profit. (6) Another useful ratio to the managers is average settlement period for trade payables ratio. This type of ratio measure how long on average the business takes to pay those who have supplied goods and services on credit to the organisation. 

[11] A business will prefer longer time to pay all goods supplied to them, so that the funds can be diverted to invest on different ventures for profit before making payment to the suppliers of goods and services. In 2009 the average trade payables for Burberry plc was 12days an improvement from the previous year of 13days.The management of Burberry can negotiate longer trade payables so that funds can be use to invest on other business activities.

However, such a policy can result on loss of suppliers or goodwill. (7) Seventh ratio is sales revenue to capital employed. This examines how effective the assets of the business are being used to generate sales revenue. Higher sales revenue to capital employed is preferred to a lower one. This means the business is using its assets more productively to generate revenue. Burberry asset turnover ratio for 2009 was 2 times an improvement from 2008 ratio of 1.9 times.

The management will be concern that assets are not been use productively to generate revenue. (8) Sales revenue per employee ratio relates to sales revenue generated to a particular business resource such as labour. The ratio provides a measure of the productivity of the workforce 

[12] Burberry employee’s sales revenue for 2009 amounted to £193,541 an improvement from the figures from 2008 of £175,866. (9) Another useful ratio is average inventories turnover period .The ratio measure the average period inventories been held. A business will prefer shorter average inventories period to a longer one .However, a business will take into account demand for inventories and price rises or decline. The management of Burberry will have to consider all that before judging the amount of inventories to carry. In 2009 average inventories held was 180days compare to 2008 figure of 259days, this is not very good for Burberry and management have to find ways to reduce the number of days inventories are held. (10) Finally, Interest cover ratio measures the amount of operating profit available to cover interest payable. Operating profit level must be high to meet interest payable, otherwise the management will not be able to secure loans from lenders because there will be considered high risk. In 2009 Burberry interest cover ratio was -0.7 times and that of 2008 was 17 times .The management will be very much worried about the figure in 2009 because they will not be able to meet their interest payment commitment. EVALUATION AND RECOMMENDATIONS Financial ratios, based on current or past performance are very important to the management and are often use to help predict the future and to assess performance and exercise control.

The management should be more particular with ratios relating to profit margins, sales revenue, trade receivables, and inventories turnover. However, management must be aware about the limitations of ratios. Considering the business of Burberry plc trading period for 2008/9, it is very clear that the business had not performed well in those financial years. Comparing the trading periods to other businesses in the same line of trading during the same financial years. Next plc for example had performed just a little better for the years 2008/9 than Burberry. The turnover for Next plc for the year ended 31/3/ 2009 was £3, 271500 and in 2008 the figure was £ 3,329100 which was higher than that of 2009. While as in Burberry the turnover for the same period amounted to £1201500 in 2009 and £995400 in 2008, however Next plc average employees are 36973 in 2009 and Burberry had 6208 employees.

Turnover per employee is much lower for Next at £88483 in 2009 and Burberry turnover per employee stood at £193, 541, this figure is very good employee efficiency and management can be satisfied with that. Burberry operating profit for the year to 31st march, 2008 included a net profit of £15.1m relating to group’s relocation of the global headquarters. In the year to 31st march 2009 the group had increased the provision for onerous leases in relation to this relocation by £7.9m. There were a lot of ongoing operating costs and capital expenditure due to the relocation and deployment .This has affected their overall profit margin and can be a good investment in the long run. Analysis in manager’s perspective must focus in reducing the risk associated with capital, so that the company can continue as going concern in order to provide returns to shareholders and benefit to other stakeholders, while maintaining strong credit rating. Liquidity risk can also be reduce by ensure that sufficient cash is maintained to meet foreseeable needs.

The management can put more resources to products that have higher sales revenue, for example, in 2009, womenswear revenue was £412.8m more than other groups such as menswear revenue amounted to £298.4m, and in these instances the management should move resources to products that give them high revenue. In conclusion, the management should not only rely on ratios to make decisions, but to take into account the current economic conditions. They recent credit crunch which was the cause of most companies’ downturn in the past two financial years is easing and management should be aware of that. Looking at the ratios analysed above for Burberry plc, it appears that the loss in profit in 2009 was as results of credit crunch and the relocation of the headquarters’ which give rise to future prospects for the company and my advice to the management to be cautious and optimistic. Words 1750 .

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