Importance of the Group Treasurer in Green Hardwood Corporation - Essay Example

? Case Study Analysis Table of Contents Table of Contents 2 Introduction 3 Current financial practises of GHC and risk involvement in the operations 3 The two recent issues 5 Assessing the risk associated with inward investment 5 Importance of the Group Treasurer in Green Hardwood Corporation 6 Conclusion 7 References 8 Introduction The case study deals with the analysis of the financial practises and the risk assessment of Green Hardwood Corporation. It also reflects the issues related to the currency exchange between the Green Hardwood Corporation and its suppliers. The report will provide a structure which will help the company to manage the operational risk in future. Green Hardwood Corporation (GHC) is a multinational company manufacturing decorative hardwoods including two main divisions i.e. the furniture and the construction. The company started its operations in the home market as a family business and expanded gradually. The huge diversity in the business has helped it to expand. Presently it is a public limited company. The shares of the company are publicly quoted on ‘Alternative Investment Market’ in London. The company imports raw and unfurnished hardwoods. The hardwood finished products mainly include the hardwood flooring, hardwood decorative strips, panelling etc. The company was established 200 years ago and now it is one of the leading hardwood manufacturing companies in the United Kingdom. The company’s effective resource utilisation and efficiency can be determined by the longevity of its operations in the market. Green Hardwood Corporation provides high quality products to its customers which have contributed to the success story of the company. It imports a wide range of hardwood from Asia and South America. The company owns Real Furniture Company as its subsidiary. It mainly converts raw imported hardwoods into finished readymade furniture and the operations of the company take place from the overseas countries from where it is sourced. Current financial practises of GHC and risk involvement in the operations This portion of the project will highlight the current financial practises of the company. Before discussing the financial practises of the company it is very important to discuss in brief about the current scenario of the financial performance of the company. The financial statement of the company (provided in the case study) reflects the cost structure and cash inflows of the company for 5 successive years starting from 2003 to 2007. The sales revenue has shown an increasing trend over the five years which is impressive. This shows that the financial performance of the company have been improving gradually. The cash inflows of the company over the five years (from 2003 to 2007) have been shown below: This shows that the cash inflows of the company have also increased consistently from 2003 to 2007. The issues related to the current financial practises by the company include payment to the suppliers in their home currency. The home currency of the company is British pounds. The sales earned by the company is first converted into the home currency and then deposited into the bank. The payment of other costs including the marketing, manufacturing and shipping costs as well as the taxes is made in the British Pounds from the company’s UK bank account. The fluctuations related to the home currency of the company against the currency values of its supplier countries can have an adverse effect on its business operations. The currency of a particular country can appreciate or depreciate with respect to the currency of one or more foreign countries. Research scholars such as Hirschman (1949), Diaz-Alejandro (1963), Cooper (1971), Guittian (1976), Dornbusch (1988), Krugman and Taylor (1987), Barbone and Francisco (1987) have made research to estimate the effect of the fluctuations in the exchange rate on the price level, real output etc. According to Van Wijnbergen (1989) and Bruno (1979), the supply channel side acts as a catalyst and complicates the effect of the currency depreciation on the financial performance of a company. Currency depreciation of a particular country means the loss of the value of that particular country’s currency with respect to the currencies of other countries. On the other hand the currency appreciation of a particular country means the increase or rise in the value of that particular country’s currency with respect to the other country’s currency. If the currency value of the home country of GHC appreciates against the currency of its supplier countries then it will result in the gain for the company. The company will have to pay lesser pounds of the home currency for 1 unit of their country’s currency while buying the raw materials. Similarly if the currency value of GHC depreciates against the currency value of its supplier countries then it will result in a loss for the company as it will have to pay higher pounds for 1 unit of their country’s currency. The currency appreciation and depreciation does not affect the economy directly. The trade deficit occurs when the economy of a particular nation grows faster as compared to the economy of its trading partners, suppliers etc. The capital flows also affect the trade balances. When the economy of a nation offers investment opportunities which are better than that of other nations, then the capital flow will be towards that nation. Now if the suppliers of GHC are paid by the depreciated currency value of the home country, then it will result in the continuous loss for the company. The company needs to adopt a strategy so that it finds a solution to bring a control to the losses due to the currency depreciation. The company needs to maintain long term relationship with the suppliers in order to reduce the business losses arising due to the currency depreciation. The country can also implement the strategy of listing the company’s stock in the foreign country having high currency value. This will help the country to recover from the huge losses at the time when the home currency value has depreciated to a great extent. The two recent issues The company has been approached by the government of the supplier countries to source the maximum hardwood from their country. The government has offered attractive incentives to provide an added value to this approach. The company has also been offered by the Government of the supplier countries to establish the manufacturing and processing activities in those countries. There are benefits on both sides if the offer is accepted. The management team needs to consider the issues and reach a conclusion whether to accept or reject the offer. If the offer is accepted by GHC then there are some expectations from the government of the supplier countries as well as the company. The governments have an expectation of earning benefits from the export tax due to the operation of GHC in their country. They are expecting the development of technology related to the hardwood manufacturing industry in the country. This is because GHC is one of the leading hardwood processing companies in UK. The Small and Medium Enterprises will also be benefitted by the entry of GHC in these countries. These enterprises will be able to supply raw materials to GHC and earn a good amount of revenue. Moreover it will help in the advancement of technology. If this deal is made, then the company also has some expectations. The company expects to win customer loyalty in the new markets by the quality product offerings to them. The company expects to win a leading position in the new market and expand rapidly by accepting this offer. The supplier countries are mainly the Asian and the South American countries. The labour cost in the Asian countries is expected to be low as compared to that of UK. Thus the company will be benefitted by hiring labour at a cheaper rate as compared to that of the European countries. This cheap labour cost will help the company to control its cost structure and reduce it. The direct establishment of manufacturing and processing facilities in the new markets will reduce the carrying cost of the company. The company will no longer have to pay high carrying costs for transporting its finished products from UK to the new markets. The company is also expecting high incentive from the government because of its operations in their country. Thus the offer is appreciable and beneficial for the government of the supplier countries as well as Green Hardwood Corporation. Assessing the risk associated with inward investment The company can start its operations in the new markets either by implementing green field projects or by franchising. Green Field Project or Investment is used as an alternative to various other forms of investments such as joint ventures, mergers and acquisitions etc. This model is often mentioned in the context of foreign direct investment where a company starts its new venture in the foreign country by building new operational facilities from the starting. This is the best suitable investment model for the multinational companies entering new markets in the developing countries. Green Hardwood Corporation can establish the manufacturing and processing facilities in the new markets i.e. the supplier countries by following the Green Project Investment process. A definite risk return model should be followed while determining the project valuation. It is important to determine the cost of capital of the company undertaking the project to check whether the project has similar risk profile as the company’s existing operations. If the investors investing in this project are diversified and only demand for the extra return of the company’s specific risks they have assumed, then the beta of the Green Field companies should always be higher than those companies which are only replacing or upgrading their existing assets. The company would not be able to sustain in the new markets if the project cannot return good amount of profit ultimately. The main focus of the investors investing in this project will always be to earn a good return from the project as they will be taking a huge risk in investing in the project. The cash flow generated should be able to recover the fixed cost figure, meet the amount of operating costs, cost of interest and finally give a good amount as return to the investors. There are various methods for risk identification and risk analysis (Hayes et al., 1986; Williams, 1995; Bajaj, 1997; Godfrey, 1996, Songer 1997). Research scholars such as Roumboutsos and Anagnostopoulos (2008), Abednego and Ogunlana (2006), Ye and Tiong (2003), Merna and Khu (2003), Ng and Xie (2008), Wibowo and Kochendo?rfer (2005) have made various research related to the quantitative risk analysis. Important parameters for determining the financial viability are Internal Rate of Return, Debt to Equity Ratio, Pay Back Period, Break-Even Analysis etc. The Internal Rate of Return method for calculation of the financial viability of the project so that the Net Present Value does not give negative figures, is the best approach to estimate or assess the risk of the investors related to the investment in the project. The determination of the financial viability of the project that has been undertaken is very important to be ascertained as it helps to understand that the project is going to give a good return after its completion or not. This helps to assess the risk of the investors investing in that project. The company will have to follow the government policies and have knowledge about the concessions provided in sales tax, excise, income tax etc. The company should make an agreement with the host Government that the tax rules should not be complex. The operations of the company in the new market implementing Green Field Project involve high risk for the company as well as the investors. The company should demand for huge incentives as a return for accepting the proposal and starting direct operations in the foreign market. Importance of the Group Treasurer in Green Hardwood Corporation The Group treasurer and the chief accountant both have separate responsibilities in the company. Both of them play significant role in the company and are equally important. The responsibilities of the treasurer should be well distinguished. He should maintain a cash book showing the breakdown of all disbursements, receipts and the cash balances. The treasurer should match the recent dynamics of the company. The treasurer will present the budgets and financial statements to the management committee. He will have to keep the records of all the cash transactions. The treasurer will be responsible for ensuring that the financial system is in place and under proper control. He will be responsible for ensuring that the performance of the company is in compliance with the legislation. He will propose and advice on the fundraising strategy of the company. It is his duty to ensure that the use of funds is in compliance with the conditions that have been set by the funding bodies. He will be monitoring all the financial transactions and reporting it to the management committee. In the field of financial planning and budgeting, his responsibility will include presenting the budgets of the recent ongoing projects at that point of time. He will have to advise on the financial implications related to the strategic as well as operational plans. He should prepare revised financial forecasts, which should be based on actual expenses, and present it to the management committee so that they can have an idea that whether their present expenditure pattern is going to have an adverse effect on the financial stability of the company in future. The financial reporting duties include preparation of financial reports presenting the financial position of the company, preparing accounts for audit purpose, preparing accounts in the Annual General Meeting etc. The banking and book keeping responsibilities of the treasurer include managing and setting up of appropriate systems for the purpose of book keeping, payments, receipts, and other petty cash expenditure. He will ensure that the transactions and handling of money has maintained proper records and documentation. The duty of the chief accountant will be to analyse that the financial reports, financial statements are based on the present accounting principles and concepts. The chief accountant would be preparing the business plans and would show the cash flow projection for a particular period of next five or ten years. The chief accountant should supervise the activities of the treasurer and assist him wherever needed. The responsibilities of the chief accountant and the treasurer must be stated clearly from the beginning so as to avoid any confusion in terms of their individual role in the company. The whole task of financial accounting will be much more simplified if the chief accountant and the treasurer coordinate with each other and perform their functions. Conclusion Green Hardwood Corporation is one of the leading hardwood manufacturing companies in UK. The company is practising the method of paying its suppliers in their home currency which is resulting in the exposure to the foreign exchange risk for the company. The company should not be practising this method. It should plan for a flexible approach which will reduce its risk exposure in the foreign exchange market. The treasurer should perform financial analysis of the capital market and suggest the best possible mode of payment to the suppliers which reduces its risk exposure in the foreign exchange market. In the new market, the company should follow the Green Field Investment model to achieve leadership there. A proper analysis using the important parameters like IRR, Pay Back period method etc should be done to understand the financial viability of the project undertaken in the new market. The company should have the ability to adapt to the changes related to the market trends and patterns. References Abednego, M.P. and Ogunlana, S.O., 2006. Good project governance for proper risk allocation in public-private partnerships in Indonesia. International Journal of Project Management, 24(7), pp. 622-34. Bajaj, J., 1997. 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