The Furniture Industry and Finance

From the last many years globalization has caused a vast impact on many industries. UK furniture industry also changed a lot with such a globalization trend. The addition of the technology and the changes in interior designing boosted the furniture business to a greater degree. Moreover, the globalization increased the choice for a consumer and the market started to be more competitive as earlier. (Drayse 2008)

Jools Furniture Industries Ltd

The overall growth rate and the position in market seem to be of a reputable level. The company's overall performance regarding business growth gives a positive impression. But on the other hand the vision of the chair person appears to be much conservative. The chair person is much interested in profitability rather then expansion and the quality and the scenario show that his emphasis on ROI is much more than any other thing.

The group structure

The company owns different divisions. According to the case study, the head office holds the control of the business. The centralized policy of the business has some favorable and some inauspicious effects on business activates. Some of these are pointed out as follow.

Advantages

As all the major decisions take place from head office so in such a way polices and strategies can be followed more strongly. Supplies can be purchased in bulk to cut down the overall cost. Work will be carried in best interest of the business rather then a department. Much effective control can be implemented. No need to employ professionals for every department in every division.

Disadvantages

Contrary to above advantages there are also many disadvantages. Employee's motivational level suffers a lot. Specialties regarding different fields and division are over looked. Communication differences cause a great hurdle in the business development and will lead to sub-optimization. There will also be a lack of understanding the needs of different departments/divisions. (Ebig 2004)

The Financial Fact

It's true that the financial statements are fully loaded with lot of numbers. It is quite difficult to get the performance review in a glance over different statements. Different ratios are the major tools to get more information about the business' efficiency and to evaluate different scenarios. (Tracy 2008) Many different ratios can be used to assess overall business performance. Some of them are as follow; I have split Profit or Loss Statement and Statement of Financial Position (Balance Sheet) into two parts for better understanding and making relation between different ratios.

The Revenue Growth

It has been seen that a business needs some time to get consistency and gain market share. The performance of the overall business can be judged by its sales growth. As time passes organization tries to make much good relations with its customers, which causes sales growth. (Coker 2000)  The department wise %age of overall sales growth as compare to previous years is as follow.

Division/Year

2008

2009

Quality Product Increase of 12.62% Increase of 9.78 Kitchen Increase of 10.45% Decrease of 3.98 Bedrooms Decrease of 7.5% Decrease of 6.16% Office Increase of 11.71% Increase of 12.44% The quality product division's consistency seems down in 2009 as compared to year 2008. There may be a number of reasons behind such consistency decline. Export is also a major part of total sales revenue which remained low in 2009 as was in 2008. That may be the major reason in departmental sales decline. The Kitchen's division sale is showing some adverse affects in 2009. As per case study the division is maintained under an old mill which may not be able to fulfill the market's requirements. The investment proposal by managing director of kitchen department may contribute up to some extent to generate some great business. Technology always adds some value to overall business performance. The constant decline in the sales turnover may be because of lacking of technological expertise. Turnover from office division is rising consistently. There may be number of reasons behind it. The managing director seems to be a sharp shooter of sales. Even not having any share in export, the department's overall performance regarding sales turnover is remarkable.

COGS/Revenue Ratio and Other Expense

Cost of goods sale is the direct cost incurred by a business to make sales. Higher the cost of the material, the larger will be the sales turnover required to meet the business activities. The cost also changes with the adopted method to mange the inventory system. (Clyde, Stickney, Roman, Schipper 2009) The ratios between COGS and Revenue are as follow.

Division/Year

2007

2008

2009

Quality Product 61.09% 59.55% 58.63% Kitchen 60.78% 63.80% 62.39% Bedrooms 73.63% 68.56% 70.22% Office 61.10% 66.36% 63.03% Except quality product division, there is no other division with uniform behaviors towards direct cost and sales ratio. If we compare the COGS and revenue ratios we come to know that the bedroom division, even with a consistency in its direct cost, makes unfavorable sales in last two years. All the other direct cost lies between 58 to 63 percent of their revenue. But the bedroom division is consuming more than the other divisions. Other expenses are the major cause behind decline in division's profitability. It consists of many different expenses of administrative and operational nature that affects the profitability of the organization. (Eisen 2007) It has been observed that in the office department, the expenses are more than 24% in 2009 as compare to previous year. On the other hand, the increase in sales revenue is about 12%. This shows twice the expense incurred as compared to the revenue. The amount of depreciation seems to be lower. Hence the expenses that incurred may be of administrative or marketing nature. Vice versa, the expenses in bedroom division fall by 11% approximately, but the sales revenue also suffered greatly. The non cash item like depreciation seems to be of constant value. In kitchen division, an almost constant expense with an even much less staff is quiet stunning. On the other hand the sales also decrease by approximately 4%, which may indicate cost cutting in the marketing side. No new fixed asset added up, hence depreciation is quiet lower then of previous year.

Revenue/Employee Ratio

The ratio will be a tool to determine the link between sales revenue and the staff acquired to incur that much revenue. It is the simplest tool to evaluate the performance of a department using men power. (OCED 2001) Each employee of Quality and Office division is earning more than 50k for the business. Whereas the kitchen department is going too good as the revenue earned is of about 89k per employee. The worst situation came to knowledge about bedroom department, the department has not only incurred a straight decline in sales revenue but its overall R/E ratio is also in its worst position. The division is earning 24k /employee. According to the audit management letter, it has been noticed that the department is also involved in releasing salaries of those who have been retired. The control objectives should be fulfilled to overcome such issues. It shows the carelessness of accounts department and the payroll (HR) department as well.

Interest/Profit Ratio

For the firms it is most important to cover the interest within its profits. If the company fails to pay the interest, it may endanger its further survival. Short term liabilities and paying off interest should be the top most priority of an organization. The interest/ profit seem to be of an acceptable level for all the divisions of Jools Furniture Ltd. The second major point to remember is that most of the time the divisions are financed internally. The level of interest is not of much considerable value in Jools Ltd, but the organization must utilize the financing facility to maximize its profitability. It has been notified that highly geared organizations earn more as compare to low gearing organizations; however, the risk involved to that organization is insolvency.

ROCE

Return on Capital employed is one of the most concerning ratio for a company from the shareholder's point of view. This ratio indicates the performance of a company with regard to converting the shareholders investment into profits for them. The ratio is calculated by diving the earning before interest and tax by the total equity of the company. This ratio is one of the most important indicator of profitability and the efficiency of a company to generate profits. (Sinha 2009). Jools Ltd's ROCE ratio has increased from 14% during the year 2008 to 15% in 2009. This increase in the ratio is mainly due to the increase in the return generated by the company which is greater in extent when compared with the increasing equity in the business. This is good sign but yet the return is only 15% which ca be improved by a better management of non performing sections of the company.

The Liquidity Ratios

These ratios can find the current position of any organization. The overall current holding which can be converted into cash at any time can be measure through these ratios. (Brigham2007) The two Current and Quick Acid Test ratios of the company are as follows. The over all current ratio of company seems to be very good. The ratio is about 1.5 which is satisfactory. The company should utilize the gearing facility to invest more to earn higher returns. The quick ratio for the organization is about 67%. The bedroom division and the kitchen division stocks too much inventory in WIP which should be well controlled. It can only be controlled by an efficient labor force when WIP is kept at its lowest level.

Conclusion

The ratios discussed above show an impact of weak financial management. The finance director must be much vigilant about investing the cash. The major point which has come to mind is the usage of gearing. Finance director should utilize the option of short term or even long term liabilities to get some better returns. The level of long term liability has remained at an almost constant level which indicates that the company has got a potential to generate funds through long term financing and solve some of the operational problems. Therefore the over all financial performance of the company is not quite satisfactory. There are also some incidents of fraud reported which further make the situation worse for the company. The divisional control over different aspects seems to be of low quality. The control regarding inventory should be improved. The receivable balances in bedroom department are depicting abnormality and should be considered. The current facility from vendor's side should also be revised. The bed room division's list of balances regarding trade receivables and payable must be reconciled with list of their balances. The eventually increasing figures of expenses are also of great concerns and should be among top considerations. The managing director of bedroom division is also near his retirement age. He also considers that he is unable to implement control objectives. The presence of such a person in the senior position of the company is a question mark which needs to be answered immediately. The situation, circumstances and the financial figures are truly substantial and strong measures should be taken to avoid any possibility of future failure. Jools needs to address the management issues in the company to allow its future survival and sustainability.

Task2

Role of an Accountant

Now-a-days accountants are not only the persons to make good calculations. The era has converted many professionals towards much professionalism. With the passage of time the role and the responsibilities of the accountants also changed very much. Accountants are now further divided into different branches. A professional accountant is one engaged in different activities related to different areas of a business. The major concerns of an accountant are regarding the inflows and out flows of the company. An account attracts a trust from the business holders. They are responsible for any fraud or similar anomalies within a business. (Brooks, Dunn 2009) Management accounting is also one of vast field and important part of accounting. The accountants contribute well towards the accomplishment of the business plans and targets. Different types of tasks are performed by accountants like reporting and budgeting and making different forecasts. If a company owes a vigilant accountant who understands all his responsibilities and duties, that company's overall risk dwindles. The rapid changes in business need the accountant to be more efficient. Accountants are key players behind business development. Accountants serve a business in many different ways like, auditing, cost controlling, management and many other specialized areas. This shows the need and the responsibility level of an accountant towards the organization. (Lehman 1995)

The Role of Finance Director

The department of the finance is the major part of a company which contributes towards the short term as well as long term success of the business. There are many key functions which should be performed by finance department. Some of the foremost function and key responsibilities are discussed below to highlight the role of the finance director towards business. Finance department is not only concerned to finance related matters, but the team is also involved in many other administrative and business activities like fulfillment of tax returns, making financials and reporting time to time to asses the overall performance and efficiency of the business. All these activities can be performed efficient only because of an observant finance director. Control and Governance is the major risk towards the survival of any organizations. Directors are appointed to keep the control and to run the organization according to the company's polices. Finance director is a key player in maintaining the control and finding any fraudulent activity in the business. Control or governance is not only tracing frauds but it also demands directors to implement the strong control procedures, which should be followed by the others. Cost Controlling is one of the major activities that must be managed well by finance director. A loss making organization can survive in a society, whereas the organization that runs short of money can't. Finance director is responsible to take reasonable measures to overcome wealth problems towards the organization. Internal Control must be well governed by the finance department. The finance director and his team are responsible for each and every flaw in control environment. Finance director is one who is the financial policy maker and makes the control environment strong. Reporting to external stakeholders is one of the major responsibilities of finance department. The finance manger of the organization should be well aware of all the changes and up gradations in the accounting terminology. The accounts should be maintained following GAAP. All the reports must ne following the applicable or international accounting systems. The above mentioned are the most important areas to be controlled by a finance director. The above mentioned responsibilities show that the finance division is the most complex but task oriented department in the organization. If the manger or the director directs his team well, the department will definitely contribute positively towards achieving business objectives. On the other hand if the finance department loses the control over things, then the survival of the business may become a question mark.

The Fiduciary Duty of Directorship

It is a fiduciary duty of director to represent the whole organization. He must take all the decisions in best interest of the organization. The director is not supposed to have any personal interests in any of the company's decision making. Good directors know their limits and powers very well. If a director thinks himself to be not suitable for company he must immediately backup instead of going further. Director is responsible to direct a company and if the director is unable to do so, the company ends up to failure. The Corporate Code of Governance require the presence of non-executive directors in the board of directors but, Jools is currently not having NED in its board. The company should be aware of the consequences of this matter.

Finance Director of Jools Furniture Industries Ltd

David Green, the finance director of Jools is qualified chartered accountant. He is a full member of the board of directors of the company. The information states that there is no divisional finance director and therefore David Green is assumed to have all the responsibilities regarding the financial matters of the company. David is practicing an autonomous role in the financial management of Jill, and therefore there is a communication gap between him and the lower level of staff as there is no intermediary in between. It can be noted that the company has a large amount as current assets. This means that the inventory level is high as well as other liquid items such as cash and cash equivalents are not utilized properly. The company has been facing issues to generate revenue in the bedroom department. Since a finance director is in a role to control all such matters, the performance of David is not appearing satisfactory here. A constant increase is seen in the expenses of the company over the years and the trend is almost same in almost all the departments of the company. The increasing expense figure is indicating a poor management by the finance director. As one of the major responsibilities of a finance director is to ensure the profitability of the company, this role is not being fulfilled by David as the expenses do not seem to be under his control. It should be noted that David has to deal with all the divisions of the company alone as he is the only finance director of the company with no directors at the divisional level, therefore a huge burden of work can be a major reason for not performing well in managing the financial matters of the company. Although the revenue is in a constant increase when a comparison of the three years is made, yet the expenses are increasing with a larger pace and overcoming the increasing revenue. Therefore looking at the overall scenario, it can be said that the financial matters are not being managed properly and there is a huge risk that such a scenario can lead to future problems for the company. Jools should consider the likely impact of the outcomes if the situation is not addressed properly. The board including the Finance director should assess that how the financial performance of the company can be proved. Before continuing further, the first step that the board of director should do is to follow the requirements of Code of Ethics and Conduct and appoint the required level of Non Executive Directors at the board to ensure that the laws are complied. Although this may become a further burden over the company's expenditure, yet the role played by NEDs can contribute very positively in the best interest of Jools. The presence of Non Executive Directors will ensure a just and reasonable strategy towards the management of problems in existence in the company and also reduce the possibilities of fraud and miss management. The audit management report has also highlighted some problems with the financial matters of the company. It has been noted that the inventory has been reported stolen, which indicates that the controls are not strong in the inventory management department and a part of its responsibility falls on the shoulders of the finance director who is responsible to ensure the proper working of all the finance related departments. The audit report also shows that the payroll department is also not functioning properly. The incidents of fraud are also reported in that department too. This is a very serious issue which has to be answered by the finance director who has the direct responsibility over that department's functioning. The sales ledger also have shown a five moths outdated balance which is another indication of fraud going on in the company and the finance director is unaware of the issues. As the information states that David is not accustomed to the business environment of Jessi and thereof it should be noted that his non satisfactory performance can be due to the same reason. Although David is a qualified person but as per the information provided, he is not suitable for the furniture industry environment and therefore his presence in the board as well as in the company should be evaluated. However, it should also be noted that besides the problems, the finance directors has shown some satisfactory performances as well. He has maintained the liquidity position at a good rate and ensured that the liquidity performance of the company is not compromised. The return on capital for the company has increased from a level of 14% to 15 % from year 2008 to 2009. Although the total increase is very small yet there is an increase. The company has been able to generate a 9% extra earning before interst during the year 2009 as compared to the last year. Furthermore, David has allowed Jools to expand its operations by effectively managing the company's financial needs. Therefore if there are several problems with the performance of the finance director, there is positive performance as well. Thus the professional expertise of the finance director cannot be questioned and the only problem is the one that the scenario itself identifies that David does not have flair to the Jools business. However, this reason is not enough to justify the malfunctions and frauds being detected in the departments under his direct control. It should be noted that a Finance director is not only responsible for the management profitability and revenue, but also responsible for the decision making related to the sources of finances and their suitability to the company. Moreover, a finance director is also responsible for the management of the control processes in the financial department of the company to ensure that the financial management related processes are operating effectively and according to the required standards.

Recommendations

There are several fraud detections and other serious issues present in the accounting and finance department's performance. These issues can only be solved by introducing finance directors at the divisional levels of the company and allowing them a full autonomy to oversee the departments take actions to control the issue present. The other solution is to review the presence of David as the finance director as the company can definitely find better candidates for the position who are not only equally qualified and experienced but also have flair to Jools business environment. The other most important step that Jools has to take to ensure the prevention of fraud and other anomalies in the company is to appoint Non Executive Directors in the company and abide the applied laws over it. The presence of NEDs will not only add professional expertise in the company but will also add an independent body to ensure that the shareholders' interests are secured and given the prime importance in the company. Finance Director cannot be assumed to owe all the responsibility towards the presence of fraud in the company but the other directors including the managing director have an equal responsibility for it as well.

Task 3

Prospects of Investment Proposal

The data submitted for the investment proposal to the board shows a positive prospect about its future outcome. The project is expected to earn an NPV of £500,000 over 6 years duration. This project is to support the growth strategy of the company and to uphold its future sustainability in the market. Although there is a positive NPV of £500,000, yet it should be kept in mind that the project is having a probability of only 25% to get break even.

Loan as a Source of Finance

The decision to implement the above investment proposal is highly dependant upon the availability of finance. Finance is one of the major limiting factors for any organization. The directors of the company have requested the board to raise a £ 1.8 m loan to finance the proposed project. However, the board needs to look upon the implications of securing a loan before accepting the request and also carefully evaluate the use of other sources of finance which the company can use to raise finance. (Hall 2010-A)

Advantages of Loan as a Source of Finance

The major advantage that a loan has is the quick availability of it. Any company can raise a loan through any lending organization as far as it can place a security against the amount. This quick availability of loan makes it the most widely used source of finance. The other advantage that a loan has as a source of finance is the flexibility in the repayment options. The company can negotiate a loan based on its suitability and dependant upon its stream of income. A loan can be generated easily as there are a lot of lending companies offering to give a loan to companies. Another advantage of using loan as a source of funding is the amount which a loan can offer. It has been seen that the lending organizations can lend as much as a company requires, however only if an equally valued security is deposited against it. (Hall 2010-B)

Disdvantages of Loan as a Source of Finance

Besides the above advantages, loan has a lot of disadvantages associated with it as well. The biggest disadvantage is the interest payment that often becomes a headache for the companies to pay. An interest is actually the payment for using the facility of loan and if it's unpaid, it attracts further interest on the amount unpaid, therefore, making loan a costly source of finance. The other great disadvantage associated with a loan is the security which has to be placed against it. Arranging a security often becomes an issue for small to medium sized companies, who usually need loans more to fund their operations as compared to a large entity. Placing a security is also difficult because the lending institution often demand a liquid item to be secured over the loan. The other negative impact of a loan can be seen of the financial analysis of it. A company surviving majorly over loan financing, depicts a high gearing ratio and this high gearing ratio discourages potential shareholders to invest in the company's shares. Moreover, loans can also decrease the profitability of the company, thus leaving a smaller amount for the companies to pay their shareholders. (Hall 2010-C)

Other Alternative Sources of Finance

There are a lot of other alternatives to raise finance other than using a loan. Two of them are listed below;

Fund Raising through Stock Market

One of the major sources of finance for companies is the stock market, where they can trade their shares as a commodity and raise funds for their needs. Companies can issue shares to attract buyers and raise finance by selling those shares to them. The cost of issuing shares is usually the administrative expenses associated with the share issuance and payable to the brokers, however a company needs to be registered on a stack market in order to get involved in stock market trading. Moreover, the issuance of shares depends highly upon the current position of the company with respect to its financial performance and also the present estimates and forecasts of its future performance. Share holders are interested to invest their money in a company which can offer them a steady income as well as a security of their investment. The only security that a shareholder can get is the great future prospects of a company as no physical security is required in this case. (Hall 2010-D) Therefore, Jools Furniture Industries Ltd can use this source of finance for raising the money required by the kitchen department for creating the new operations.

Sale and Leaseback of Assets to generate finance

A very important source of finance for companies is its own assets. Instead of securing an asset with a bank or any other lending company, and getting itself involved with paying high amounts of interests, while bounded to follow the restrictions to use the secured asset applied by the lending company, a company can enter a sale and lease back agreement and generate the funds. A sale and Lease back arrangement is where a company sells an asset to someone with an agreement that the asset will be used by the company, but a rent will be paid for that usage. The company retains the unrestricted use of the asset as well as gets an immediate finance for its needs. The only disadvantage associated with this source of finance is the amount of rent payable to the purchase. Furthermore, the asset gets off the company's balance sheet as it no more remains to be an asset of it. (Hall 2010-E)

Recommendation

Although Jools Furniture Industries Ltd is seeking a loan as a source of finance, but the above analysis shows that there are better alternatives available for it. If the company is registered with a stock exchange, it can issue shares and get the funds needed. However, if a company owns an asset, either spare or not in much use, it can be used to generate fund through a sale and leaseback agreement. The board has to decide over the matter keeping in view the desired outcomes.

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