Finance and Accounting: Nike Inc - Essay Example

 Finance and Accounting: Nike Inc. Executive Summary Accounting and budgeting information are essential tools for the enhancement of strategy formulation and implementation. This paper examines such importance with close reference to Nike Inc. Corporation, which is a public listed company. It further looks at the benefits of issuing bonds and financial leverage over other sources of finance. The financial statements of the company are also examined and thereafter conclusions and recommendations arrived at. Table of Contents Page Introduction……………………………………………………………………………………….4 Nike Inc……………………………………………………………………………………………4 Importance of budgeting and accounting information…………………………………………….5 Financial leverage and bonds issue………………………………………………………………..9 Financial statements……………………………………………………………………………...10 Conclusion……………………………………………………………………………………….12 Recommendation………………………………………………………………………………...13 Reference List……………………………………………………………………………………14 Appendix Items…………………………………………………………………………………..15 Finance and Accounting: Nike Inc. Introduction Financial information is an important component for any organization in the contemporary business environment. Accounting and budgeting information are important aspects of finance and accounting that rely on accuracy, reliability and ease of access for the strategic advantage of any firm. This paper reviews the financial status of Nike Inc. with special emphasis on its financial information, financing and the financial indicators in the recent past. Nike Inc. Overview Initially setting up shop in the name of Blue Ribbon Sports in 1962, the Oregon based company has become to be known as Nike Inc. as from 1972. The company has grown significantly and has several subsidiaries including NIKE Golf, Cole Haan and Harley international among other business enterprises (Nike Inc., 2012). This has seen the company grow to a global leader in the sporting goods industry. Besides, it is recognized as the global leader in design, marketing and distribution of athletic boots, clothing and accessories for varied sports and fitness needs. The company’s main objective is to design, develop and market the sports related merchandise around the globe. The company serves as wide market segment with its products made for different social groups like women, men and children. To further illustrate this diversity, it is indicated that the company has well over 300 shoe models designed in 900 different styles to suit a further 25 different sporting activities (Nike Inc., 2012). To help in its expansion and market penetration, the company has collaborated with many firms internationally. This has helped the company to explore markets that do not fall in its core operational competencies. The company’s main competitors are Adidas and old navy among other industry giants. The company has to remain innovative in its product development and promotion so that it survives in the highly competitive industry that also involves clients who are in some form of competition. In the area of finance and accounting, the company has remained a giant in the industry if the group’s ever-impressive results are anything to go by. However, the company’s operation in a highly competitive industry means that the organization’s management has to constantly review its strategic management decisions so that it remains a leader in the industry. Accounting and budgeting information will therefore remain an important contributor as well as determinant of the company’s strategic decision-making. Accounting and budgeting information and Nike Inc’s strategic decision making Like any other corporate operating in a highly competitive and globalised business environment, Nike Inc. has to effectively utilize its budgeting and accounting information to offset the problems that come with such challenges. Such information is therefore important in various ways as shall be discussed in this section. Forecasting Revenue and Costs The sporting goods industry operates differently in comparison to other industries. For instance, Nike Inc. has to secure contracts for events like the Olympic even several months before they take place. In this case, the company has to depend on its budget and accounting forecasts for the projected event attendance, for instance, to be able to determine the resultant revenue and costs that will be incurred. Strategically, this will be important for planning purposes as the projected revenue and costs for a certain event will help in determination of the amount of financing on projects such as marketing and the volumes of merchandise to be produced. Planning Activities Accounting and budgeting information are essential for planning of activities that may be important for income generation as well as organizational growth and development. Nike Inc. requires such information for planning on the various strategic formulation and implementation components. For instance, for the purposes of market segmentation, the company’s management could analyze the budgetary allocation for a market segment, say the emerging Asian market, and propose that there be future adjustments in accordance to the prospects of increasing investment or otherwise in the identified segment. Planning is needed by a corporate like Nike and therefore, budgeting and accounting information will be essential in aiding this activity. Managing Cash Flow Accounting information from cash flow statements, for instance, is of great benefit for management. Positive cash flow is a positive indicator that a company is on the right path of financial liquidity. For instance, an increase in Nike’s cash flow in a certain period may indicate that the company’s transactions have been active in terms of sales or activities that are being carried out by the organization. In a strategic point of view, such information may be important in the analysis of the most appropriate actions to take in cases of investment appraisal of closely tied projects. In addition, accounting information will indicate the best way of spending during times of economic constraints so that the company is able to remain competitively positioned in the various markets it operates in. Identification of Alternative Sources and Costs of Funding Nike’s strategy of market and product expansion highly depends on the way the group’s top decision makers are able to access the information on costs of capital and hence identify cheaper ways of capital acquisition. A corporation like Nike operates in an industry that requires a large capital outlay that may not be sometimes available internally. It is therefore strategic to identify cheaper and readily available sources of capital that in turn make it possible for the company to strengthen its presence in the market. This is very necessary owing to the nature of the business it operates that may require large amounts of money put into product promotion, events sponsoring and large volumes of merchandise being produced. Sometimes, these products will need to be produced in a highly differentiated nature. It is therefore important that there are budgeting and accounting information like the internal rate of return that will assist in identifying the best means of attaining high revenues through identification of cheap sources of capital. Negotiations with Financers or Investors Financers or investors usually need assurance and this information can only be obtained from an organization’s books of account and other financial statements. An organization like Nike Inc. will need to acquire finances and negotiating for such from over cautious investors or financers can be a daunting task. The company may adopt a self-explanatory strategy by laying down its financial indicators like the cash and liquidity ratios to reassure investors or get bargaining power during negotiations. Accounting information as well as budgeting information is therefore essential for the company because when such information is well presented to financers or during negotiations for finances, it may lead to the company gaining advantage in how it is likely to obtain financing. Evaluation of Investments Investment appraisal is an important but challenging function of management at the top level. In the presence of accurate and professionally presented accounting and budgeting information, the top management is easily able to arrive at important decisions in cases of evaluating proposed investments. Nike inc. has various subsidiaries and determining whether they need to be further expanded or new investments alternatively made will depend on accounting information as well as other environmental analysis. For instance, it will benefit the company to check the likely cost of capital, rates of return among others before choosing or identifying the most suitable investment area. Strategic success of any given organization relies on prudent decision making, planning and implementation of investment decisions that will propel the organization to greater heights. Measurement and Control of Performance Performance appraisal is a necessity in the stages of strategy evaluation and re-formulation. Nike’s management is able to evaluate performance of projects as well as that of the corporation given accurate accounting information. For instance, the financial position and the profit and loss account of the company are important for yearly comparison of the company’s relative position, say, in the amount of assets or accrued debts among other issues. Such information is very important when there is need to review investment or expenditure for coming financial periods. As a result of informed control, the management is able to improve the company’s operations and identify areas that need further attention through investments or promotion. Strategy implementation and evaluation depends on such information and therefore the importance of accounting information to the company’s strategic process. Union and Government Negotiations External actors or stakeholders and the government usually rely on assurances and authoritative arguments when it comes to negotiations. Accounting and budgeting provide information on liquidity, cash flow, asset base and other financial indicators that may be important during negotiations by trade unions and governments. Nike Inc. operates in many regions of the world and as such, it has to contend with different regulatory and socio-economic adversities. The information supplied by its accounting and budgeting functions is therefore important for explaining its actions when it comes to such regions. For instance, it may justify its low remuneration policy in certain regions if it indicates that sales in that region have significantly risen or the costs associated with operations have shot up. Costing Compliance with Social, Environmental and Sustainability Requirements As seen in other cases, the globalised market in which the corporation operates in is characterized by varying regulatory, social, economic and environmental requirements. For instance, in some regions, full disclosure is a requirement. The accounting and budgeting information compiled are therefore useful in attaining the compliance requirements. The budgeting information for Nike may, for example, indicate that the corporation intends to acquire environmentally friendly equipment like the ones used for production or jerseys made out or recyclable plastics. This information may be strategically used by management to persuade the users to purchase more of the company’s products in addition to being a good statement of meeting environmental sustainability requirements. In the current highly sensitized markets, meeting the set standards for the benefit of the consumers and the society is a very essential component of any organization’s strategy. Having looked at the role played by accounting and budgeting information for the company, the next section looks at the use of financial leverage against the issuing of bonds. Use of Financial Leverage vs. Issuing Bonds To begin, financial leverage of Nike Inc. shows the rate or level at which the company utilizes borrowed amounts to its advantage. A company may decide to issue financial leverage or bonds instead of borrowing from commercial banks because of the costs involved. One advantage of issuing bond or financial leverage is that the interest accrued is deductable on the company’s income tax. In this way, a company like Nike gets the advantage of reduction of costs since it operates internationally. Secondly, issuing such instruments will ensure that the ownership of the corporation is not devalued through increased number of owners. A company like Nike that operates in a highly competitive market needs a lean ownership structure for smooth decision-making process. Since the individuals that acquire issued bonds and financial leverage are not owners of the company, this method therefore sounds more prudent for Nike and other corporations. However, there are disadvantages that might come as a result of engaging in issuing of bonds and financial leverage. One such demerits of issuing these financial instruments is that a company like Nike will place itself in a more risky situation. Brigham and Houston (2009) illustrate this by stating that they are considered fixed costs to a firm and therefore have an impact on the organization’s financial position in cases of fluctuations. Cash Flow Statements and Financial Statement Analysis Liquidity Overview Liquidity ratios may entail the current ratio, quick ratio and operating cash flow ratio among others. These are used to ascertain a company's financial standing on the way it will offset its debt. In general terms, the higher the figure of the ratio value, the larger the margin of safety it is endowed with to cover its debt in the short run hence a boosted creditors’ confidence on the company. 2008-12 2009-12 2010-12 2011-12 Current Ratio 1.84 1.96 1.89 1.64 Quick ratio 1.44 1.51 1.45 1.29 OCF 1736 3164 1812 1899 Source: The Morning Star, 2012. The liquidity for Nike shows a great leadership in the market because it has remained above that of its competitors in the period under examination as indicated in the table above. Solvency Overview from the year 2003 to 2012 Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Debt/Equity 0.140 0.140 0.12 0.07 0.06 0.06 0.05 0.03 0.02 Source: The Morning Star, 2012. A higher debt/equity ratio indicates generally that a company has largely been involved in financing its growth with debt. This in turn may result in unpredictable earnings caused by the additional expenses incurred by the company during payment of the resultant interests. The table indicates a decreasing ratio of debt and equity within the stated period. This in effect means that the company has been reducing its debt expenditure and utilizing more equity as the years progress. Profitability Overview Profitability Ratios are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios. Nike 2008-12 Nike 2009-12 Nike 2010-12 Nike 2011-12 ROE 0.13 0.23 0.25 0.25 ROA 0.08 0.14 0.15 0.15 Source: The Morning Star, 2012. Conclusion Overall, Nike has shown a market leadership quality in the industry. The company still shows through its financial performance that it will continue to dominate the sporting goods industry. The valuation of the company as well as its financial health has been on a steady path. However, it is important that the company look into ways of addressing the growing challenges in the industry such as the increase in number of entrants in the industry. A good example is to engage in more strategic partnerships and explore ways in which it can be involved in market growth apart from increasing its market share. The company’s future prospects are positive and hence it remains the best company in the industry to invest in. Recommendation The company should however utilize the financial accounting information for strategy purposes in cases of market expansion so that the competition in the industry it operates in is checked. The top management of the firm should check into issues of cash flow and others that may be indicative of sales volumes for the corporation. References Brigham, E. and Houston, J. (2009). Fundamentals of Financial Management. Connecticut: Cengage learning. Nike Inc. (2012). About The Company/Financial Statements. Retrieved from and The Morning Star.(2012). Nike Inc. Financial Ratios. Retrieved from Appendix items Nike Inc., Common-Size Consolidated Income Statement                05/2012 05/2011 05/2010 05/2009 Revenues 100.00% 100.00% 100.00% 100.00% Cost of sales -56.60% -54.42% -53.72% -55.13% Gross margin 43.40% 45.58% 46.28% 44.87% Demand creation expense -11.24% -11.73% -12.39% -12.27% Operating overhead expense -19.56% -20.35% -20.88% -19.81% Selling and administrative expense -30.80% -32.08% -33.27% -32.07% Restructuring charges – – – -1.02% Goodwill impairment – – – -1.04% Intangible and other asset impairment – – – -1.05% Operating income 12.60% 13.49% 13.01% 9.69% Interest income 0.12% 0.14% 0.16% 0.26% Interest expense -0.14% -0.16% -0.19% -0.21% Interest income (expense), net -0.01% -0.02% -0.03% 0.05% Other income (expense), net -0.22% 0.16% 0.26% 0.46% Income before income taxes 12.36% 13.63% 13.24% 10.21% Income taxes -3.15% -3.41% -3.21% -2.45% Net income 9.21% 10.22% 10.03% 7.75% Source: Nike Inc., 2012. Financial reports Nike Inc., Consolidated Statement of Financial Position, Liabilities and Stockholders' Equity             May 2012 May 2011 May 2010 Current portion of long-term debt 0.32% 1.33% 0.05% Notes payable 0.70% 1.25% 0.96% Accounts payable 10.27% 9.79% 8.70% Compensation and benefits, excluding taxes 4.60% 4.19% 4.15% Endorser compensation 1.90% 1.89% 1.85% Taxes other than income taxes 1.16% 1.43% 1.10% Dividends payable 1.07% 0.97% 0.91% Import and logistics costs 0.86% 0.65% 0.55% Advertising and marketing 0.85% 0.93% 0.87% Fair value of derivatives 0.36% 1.24% 1.14% Other 2.48% 1.94% 2.64% Accrued liabilities 13.28% 13.24% 13.20% Income taxes payable 0.43% 0.78% 0.41% Current liabilities 24.99% 26.39% 23.33% Long-term debt, excluding current portion 1.47% 1.84% 3.09% Deferred income taxes and other liabilities 6.41% 6.14% 5.93% Non-current liabilities 7.88% 7.98% 9.02% Total liabilities 32.87% 34.37% 32.35% Redeemable Preferred Stock – – – Common stock at stated value 0.02% 0.02% 0.02% Capital in excess of stated value 30.01% 26.30% 23.86% Accumulated other comprehensive income 0.96% 0.63% 1.49% Retained earnings 36.13% 38.68% 42.27% Total shareholders' equity 67.13% 65.63% 67.65% Total liabilities and shareholders' equity 100.00% 100.00% 100.00% Source: Nike Inc., 2012. 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