Understanding Financial Management - Assignment Example

Business Microsoft Words Table of Contents Part 3 Part 2 4 Part 3 11 Conclusion 14 References 15 Bibliography 17 Part PESTLE is a globally used macro environmental framework to analyze the political, economical, social, technological, legal and environmental factors affecting a business scenario. This simple but widely used strategic tool gives an overview of the different macro economic factors the firm has to take into consideration (Jisc Infonet, 2008).The purpose for doing PESTLE analysis is as follows: By making effective use of PESTLE analysis, the firm can predict the market growth/decline, business and industry position and applicable operational procedures. PESTLE can predict the future risk and costs associated with the business and it can successfully forecast the reasons for failure of operations. It is useful to analyze the unconscious assumptions of a new market place, especially in case of foreign market entry of a firm. The Different factors of PESTLE are – Political: Type and stability of the Government Bureaucratic hierarchy Regulation and de regulation trends. Tax, Tariff and trade policy Consumer protection facility Change in political stability (Brook, 2012) Economic: Economic Growth rate – both current and projected Inflation, unemployment and labour policy Per capita income Impact of globalization Socio-Cultural: Population size, age profile and growth rate Public opinions, social attitudes and social mobility Lifestyle choices and changes in population (Riley, 2012) Technological: Impact of emerging technologies and remote working facility Undergoing and future Research and development activities Technology transfer (Mind Tools Ltd. 2006-2011) Legal: Consumer Law, Antitrust law, employment laws Health and safety standards imposed by foreign govt. Environmental: Weather and Climate Change Impact of climate change. Part 2 The manufacturing industry is expected to grow by 13.60% next year and where as the company’s sales are expected to grow by 8.40%, considering the competition from major market players. The 5 year financial projection of the company on the basis of following growth estimates are shown below: Political Factors: Corporate Tax The forecasted time series corporate tax rates are as follows: Year Corporate Tax Rates 2011 26 2012 24 2013 23 2014 21 2015 20 2016 18 2017 17 2018 15 (Source: HMRC, 2014) The time series graph of forecasted corporate tax rates shows a declining pattern which is favourable for manufacturing sector. Economic Factor – Inflation: The forecasted time series inflation rates are as follows: Year Inflation 2011 4.00 2012 3.60 2013 2.70 2014 1.90 2015 1.25 2016 0.53 2017 -0.19 2018 -0.91 (Source: Mail Online, 2014) The inflation is expected to decline gradually and by the second quarter of 2017 it is expected that inflation will turn negative. This will reduce lending and borrowing rates which will enable the manufacturing companies to leverage returns by employing debt capital. Socio-Cultural Factor – Population Size The forecasted time series size of population (in million) are as follows: Year Population 2011 62.74 2012 63.24 2013 63.76 2014 64.27 2015 64.78 2016 65.29 2017 65.81 2018 66.32 (Source: statistica.com, 2013) The population is expected to increase in a predictable linear trend pattern which is good for manufacturing industry. This is because higher population will create higher demand for goods and services. Technological Factors – IT & Communications (Source: European Information Technology Observatory, 2012) The graph depicted above forecasts Information Technology & Communications expenditure. The graph reveals as to why European telecommunication networks and services are the backbone of Europe’s developing technology sector. Increased expenditure in this sector will encourage manufacturing industry to use modern technology in the manufacturing process. Environmental Factors – CO2 Emission: The forecasted time series Co2 emission levels are as follows: Year CO2 Emission 2011 459 2012 479 2013 499 2014 519 2015 539 2016 559 2017 579 2018 599 (Source: The Carbon Brief, 2013) Increase in Co2 levels indicates the requirement of manufacturing companies to adapt to more eco-friendly and green technologies that will help to reduce carbon emission levels in atmosphere. Legal Factors – Minimum Wage Rate Here, we have considered varying minimum wage rate enforced by Government regulation as a legal factor to be taken into account Year Minimum Wage Rate (£) 2010 5.93 2011 6.08 2012 6.19 2013 6.31 2014 6.44 2015 6.55 2016 6.68 2017 6.80 2018 6.92 (Source: www.gov.uk, 2014) Note: These data shows the minimum wage an employee is entitled to receive from an organization Here, we have considered the minimum wage of employees having minimum age 21. The minimum wage rate for employees under the age 21 and apprentices are different from these data. The age groups were different before 2010. This market size is an indication of developing political, legal and economic factors of the country. Increasing Operating cost is the most critical issue in any business and in order to increase profitability, this needs to be controlled. Part 3 One can consider manufacturing in domestic market of UK because of the political factors that are currently aimed at reviving lost market demand after recession. For instance, the UK government has planned to strengthen the existing supply chain network in UK which would create and preserve over 15,000 jobs in manufacturing industry. The rationale is that by boosting manufacturing sector and creating more jobs, the economy will accelerate out of recession. A joint industry and government investment in form of public-private partnership aims to strengthen advanced supply chain in UK by investing over £200 million (Schutte, 2013). When one conducts a cost-benefit analysis for setting up a manufacturing base in UK the company has to perceive the investment decision keeping in mind the long-term growth prospects. This can be achieved by conducting a PESTEL analysis that was defined earlier. These factors are based on theoretical assumptions and the consequences of PESTEL analysis varies from one economy to another. Various political, economic, legal, technological, environmental, etc. factors have to be considered before making any investment decision. A cost-benefit analysis can be conducted using the payback period or break-even analysis. Payback period is usually the time within which the firm recovers its initial cash outlay. Every company has its own standard for setting the payback period. Shorter the payback period the better because in that case the firm would be able to earn profits much earlier. In case of machinery there is an estimated period for which the machinery can operate this is generally known as the economic life of the machinery. A break-even analysis may also be used to analyse the uncertainty or the risk of investment and the approach converts uncertainties into calculated risks. The break-even analysis of a project is used to determine the lowest cost of production at which the project has to operate in order to keep out of financial trouble. The payback period can be used to evaluate the project’s break-even point in years (Jackson, Sawyers, and Jenkins, 2008, p.204). The lower the break-even point, the greater is the prospects of project’s future earning and less is the chance of incurring loss (Baker and Powell, 2005, p.248). One will also have to consider the risk factors considering current economic scenario resulting from PESTEL analysis. The following are some of the identified risk factors for setting up a manufacturing base in UK: Funding – It is one of the most significant factor in a business. Without funding or access to capital one cannot proceed with the functioning of the business. There is a need to be pragmatic about establishment costs. New entrepreneurs often misjudge the time it takes for a business to start earning profits and the amount of money required to be invested in the business before it proves profitable. Developing an honest and thorough financial plan will help in avoiding this mistake. Marketing / Sales effectiveness – This relates to leadership and planning of the founder of the business. The sales and marketing team if not effective will not appeal and reach to the end consumers. The marketing strategies should be in line with the product or service requirements. If one applies marketing strategies relevant for some other product then it cannot appeal to the customers. Regulation – For many businesses, both in service and manufacturing sectors have to be up to date with the regulations that come into force. It’s not only the big ones are affected, even the smallest businesses have to comply with the safety and health legislations, environmental regulations and employment law. Change and innovation – It can be called Information technology overload. In this ever changing world of technology it is becoming really difficult for an organization to survive without adapting to the latest technology. Cost-advantage – Smaller businesses often land up in trouble when they get into a price war with larger firms. The larger firms win the fight with absolute cost advantage because of their huge scale of operations. So, the product to be marketed should not be such that is being produced on a large scale otherwise it becomes really difficult for the business to survive the tough cost competition. On the positive note, the following schemes are launched by government and aimed at supporting the manufacturing sector in UK: AMSCI (Advanced Manufacturing Supply Chain Initiative) – Provides funding for capital investment, skill training, research and development up to £120 million (Gambica, 2013). Apprenticeship Services – These incentivise small businesses worth £1,500 for work-based training programmes (Gambica, 2013). Automating Manufacturing Initiative – It is government funded awareness campaign that shows manufacturers the benefits of automation (Gambica, 2013). Business Bank – It helps small and medium sized organisations to raise funds (Gambica, 2013). Enhanced Capital Allowances – It allows companies to claim 100 percent capital allowance in first year for some particular, defined, and qualifying plant and machinery (Gambica, 2013). From the above discussion it is now possible to summarise and classify the various factors of PESTEL as favourable and unfavourable factors as follows: Favourable 1. Political 2. Technological 3. Environment 4. Socio-cultural Unfavourable 1. Economic conditions (external and internal factors after the financial crisis and recession) 2. Legal (inter-country trade policies, restrictions on imports-exports, etc.) The typical concern for the manufacturing industry in UK is to maintain product quality, logistics, and reliability of supply-chain. These factors are widely appreciated in the industry as appropriate consideration of these elements give organisation the actual cost advantage and economies of scale. Conclusion The global market has been in a state of instability since the global financial crisis and the recession that followed after the crisis. The manufacturing sector of UK is struggling to operate at full capacity by expanding resources due to slump in demand for goods and services. In the past eighteen months many companies have adopted strategies like temporary lay-offs and geographic diversification for minimising cost of production and also maximise efficient utilisation of scarce resources. While there is a school of thought that suggests outsourcing manufacturing activities are cost efficient there is a counter argument that availability of quality or skilled labour force is very rare in foreign markets where labour force is available at lower cost. References Baker, H. K. and Powell, G., 2009. Understanding Financial Management: A Practical Guide. United Kingdom: John Wiley & Sons, Inc. BDO, 2013. Manufacturing Returns to the UK?. [Online]. Available at: http://www.bdo.co.uk/talk-shop/manufacturing-returns-to-the-uk-tom-lawton. [Accessed on February 20, 2014]. Brooks, C., 2013. “PEST Analysis: Definition, Examples & Templates”. BusinessNewsDaily. Riley, J., 2012. “PEST Analysis”. [Pdf]. Available at: http://www.tutor2u.net/business/strategy/PEST_analysis.htm. [Accessed on February 20, 2014]. European Information Technology Observatory, 2012. Telecommunication Statistics. [Pdf]. Available at: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Telecommunication_statistics. [Accessed on February 21, 2014]. Gambica, 2013. Manufacturing Support Scheme Awareness Survey. [Online]. Available at: http://www.gambica.org.uk/ManufacturingSupport. [Accessed on February 20, 2014]. gov.uk, 2014. National Minimum Wage Rates. [Online]. Available at: https://www.gov.uk/national-minimum-wage-rates. [Accessed on February 22, 2014]. HMRC, 2014. Corporation Tax Rates. [Pdf]. Available at: http://www.hmrc.gov.uk/rates/corp.htm. [Accessed on February 21, 2014]. Jisc Infonet. 2014. PESTLE and SWOT analyses. [Pdf]. Available at: http://www.jiscinfonet.ac.uk/tools/pestle-swot/. [Accessed on February 20, 2014]. Mail Online, 2014. Economy Tables: GDP, Interest Rates, Inflation History, Unemployment. [Pdf]. Available at: http://www.thisismoney.co.uk/money/news/article-1586103/Inflation-Interest-rates-Economic-growth-Unemployment-Latest-statistics.html. [Accessed on February 21, 2014]. Mind Tools Ltd. 2006-2011. PEST Analysis. [Pdf]. Available at: https://depts.washington.edu/oei/resources/toolsTemplates/PEST_analysis.pdf. [Accessed on February 20, 2014]. Satistica.com, 2013. United Kingdom: Total Population from 2003 to 2013 (in millions). [Pdf]. Available at: http://www.statista.com/statistics/263754/total-population-of-the-united-kingdom/. [Accessed on February 21, 2014]. Schutte, S., 2013. “Industrial Strategy aims to boost UK Manufacturing Sector”. Real Business. The Carbon Brief, 2013. UK Greenhouse Gas Emissions Rose in 2012 – DECC. [Online]. Available at: http://www.carbonbrief.org/blog/2013/03/uk-greenhouse-gas-emissions-rose-in-2012-decc/. [Accessed on February 21, 2014]. Bibliography BMGI, 2013. Top ten problems faced by business. [Pdf]. Available at: https://www.bmgi.com/resources/articles/top-ten-problems-faced-business. [Accessed on February 20, 2014]. Lennox, D., 2007. Top 12 Issues Facing Small Businesses. [Pdf]. Available at: http://www.dslcs.com/top_12_reasons_for_failing.pdf. [Accessed on February 20, 2014]. McAllister, T., 2013. The Top 5 Challenges New Small Businesses Face. [Pdf]. Available at: http://www.smallbusinessbc.ca/starting-a-business/top-5-challenges-new-small-businesses-face. [Accessed on February 20, 2014]. Monette, H., 2010. Problems of Small Business. [Pdf]. Available at: http://www.insidebusiness360.com/index.php/problems-of-small-business-12336/. [Accessed on February 20, 2014]. Rosenberg, J., 2012. 5 issues facing small businesses in 2013. [Pdf]. Available at: http://www.nbcnews.com/business/5-issues-facing-small-businesses-2013-1C7660251. [Accessed on February 20, 2014]. Read More