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Applying financial concepts in GU(1)

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Applying financial concepts in GU(1)

    Questions Applying financial concepts

    Purpose and analysis of financial ; Explain why company experienced a net statements profit and loss; balance cash inflow compared to an outflow in 2002 sheet; cash flow statements. and discuss the impact that it could have had

    on companys activities.

    ; Using examples, explain how the

    information in financial statements can be used

    to demonstrate the success of the company.

    1 mark for each relevant point + 4 additional

    marks for development, reasoned reference to

    relevant concepts and/or justified illustrative

    examples from the case study.

    Users of financial information purposes ; Which information contained in the case

    for which require information; sources of study is likely to be of value to such an

    relevant information. organisation and why?

    Management ; Identify information from financial

    Employee statements which XXX uses as a measure to

    Shareholders monitor the effectiveness of the company. Competitors Explain how the information you have chosen

    can meet the requirements of XXX

    1 mark for each relevant point + 3 additional

    marks for development and/or examples from

    the case study.

    Marking guidelines

    At HND level, candidates should provide reasons and examples to justify the points

    they make. For example, in a question asking for advantages, candidates must explain

    why the advantage they have identified actually is an advantage. This also means that

    candidates must explain the way in which two factors are connected.

    Answers should also be related to the case study. Candidates who do not make use of

    material from the case study are only likely to gain sufficient marks to pass a question

    in exceptional circumstances.

    Specific points on marking guidelines

    The guidelines give advice on the following:

    ; allocation of marks within each question

    ; the use of development points these are points which extend or justify an initial

    point. They can include examples from the case study and relevant theoretical

    concepts

    ; the relevant concepts which answers could use these are indications and it is

    not expected that all of them necessarily be part of an answer

Explain why company experienced a net cash inflow compared to an outflow in 2002 (8)

    Cash Flow Statement: 2003 and 2002

     2003 2002

     ?000 ?000 ?000 ?000

     19,737 12,989 Net cash flow from operating activities

     Returns on investment and servicing of

    finance

    Interest received 352 268

    Interest paid (12) (11)

    Interest element of hire purchase paid - (4)

     Net cash inflow from returns on

    340 253 investment and servicing of finance

     Tax

    Corporation tax paid (3,349) (4,181)

     Capital expenditure and financial

investment

    Purchase of tangible fixed assets (5,411) (7,750)

    Sale of tangible fixed assets 328 258

     (5,083) (7,492)

     Acquisitions and disposals

    Investment in subsidiary (105)

    Net overdraft acquired with subsidiary (90)

     11,645 1,374

    (4,204) (4,200) Dividends paid

     7,441 (2,826) Cash inflow/(outflow) before financing

     Financing

    Issue of share capital - 50

    Capital element of hire purchase repaid - (304)

    Loans repaid - (30)

     - (284)

     7,441 (3,110) Increase/(Decrease) in cash

2

    The purpose of the cash flow statement is to show movements of cash over the accounting period. From the cash flow statements in the year of 2002, we can see a decrease in cash ?3,110,000. It indicates that a worsening position of cash flow. The main reason is ?7,492,000 paid for fixed assets. Its an unreasonable cost. It can reduce through leasing fixed assets. An outflow ?4181000 of tax is unavoidable based on profit the company make. An outflow ?4,200,000 of dividend is reasonable amount. An outflow ?284,000 of loans repaid is payable in the future and it can avoid through issuing shares instead of debentures.

In the year of 2003, there are ?7,441,000 increase in cash .

5

    The net cash flow from operating activities in 2003 is more than it in the year in 2002(1).

    The interest received in 2003 is more than it in 2002(1). The Barrs spend less money in

    2003 than it in 2002 on fixed assets (1). In 2002, Barr spend money in Subsidiary and in

    2003 Barr did not spend money in this way (1). The corporation tax paid in 2003 is less

    than it is 2002. (1)

满分

    Overall, the cash has increased by ?7441000 in 2003. This is an improvement of the cash flow position. The net cash in flow for operating activities has increased ?19737000 in 2003 compared with only ?12989000cash inflow in 2002 (1)because of the higher turnover and

    operating profit in 2003(1). Besides, the total net cash inflow from returns on investment and serving of finance has increasing from 2002 to 2003 because the interest received in 2003 is more than that in 2002(1). On the contrary, the corporation tax paid in 2003 decreased compared with 2002(1) due to tax paid in 2003 is calculated on the lower profit incurred in 2002(1). In addition, the purchase of tangible fixed assets has decreased largely, but cash inflow from the sale of tangible fixed assets has increased. (1) As result, the cash outflow on

    fixed assets decreased from 2002 to 2003(1). There is no cash outflow on acquisition and

    disposals in 2003(1). Finally, ?284000 was paid on financial activities like repay debenture and hire purchase in 2002 but nothing happened in 2003 (1). In a word, there is cash flow

    before financing with ?7441000 in 2003 that largely more than 2002 because of the increasing profit and interest received, less tax and fixed assets paid. (1)

A G Barr plc A case study

Background information

    A G Barr plc manufactures, distributes and markets drinks, primarily carbonated soft drinks. Based in Glasgow, it has been manufacturing soft drinks in Scotland since 1875. Its most famous product, Irn-Bru, was first produced in 1901. Barr’s became

    a public limited company in 1965. The business has always been associated with the Barr family and members of it own the majority of shares in the company. However, Robin Barr, the chairman, is the only member of the Barr family still directly employed in the business. Barr’s has a deliberate policy of focusing on the drinks market. It does not produce any other type of product and has no interests in any other fields of business activity. It describes itself as an ‘independent, consumer led and profitable

    public company, engaged in the manufacture, distribution and marketing of branded soft drinks’.

    In the last 40 years, the number of soft drinks manufacturers in Scotland has fallen from around 200 to about six. Barr’s is by far the biggest of those which survive.

    Over the years, Barr’s has acquired a number of other companies. These include other soft drinks firms, particularly ones in England, such as Tizer Limited in 1972 and Mandora St Clements of Mansfield in 1988. In 2001, Findlays Limited of Edinburgh, which produces Findlays Spring Mineral Water, became a wholly owned subsidiary of A G Barr plc.

Appendix 1 gives details of the organisation of Barr’s.

The soft drinks market and Barr’s product portfolio

    Barr’s competes against internationally known brands owned by large multinational companies, like Coca-Cola and Pepsi-Cola. It does so by a combination of brands which it owns itself and brands belonging to other companies which it manages in the UK.

    Branding is highly significant in the soft drinks market. It means that companies must have funds available to spend on marketing their products. At the same time, they have to be able to produce in sufficient quantities to gain economies of scale in production.

Traditionally, Barr’s strength is in Scotland where Irn-Bru is the leading grocery brand

    name. The company has a long-standing aim to increase sales south of the border. Sales there have been rising but they remain small compared to sales in Scotland. Nonetheless, Irn-Bru is now one of the top 100 grocery brands in the UK. It is the third biggest soft drink in the UK and the top non-cola brand. In most developed

    countries Coca-Cola is comfortably the market leader but, in Scotland, this is not the case. In 2003, sales of Irn-Bru in Scotland exceeded those of Coke.

    Although brand names such as Coke, Pepsi and Sprite are known all over the world, the actual drinks are often produced and distributed by locally based companies. In some cases, these companies are subsidiaries of the big multinationals. In other cases, separate companies, like Barr’s, produce and market the drinks under licence from the brand owner. These partnership arrangements, known as franchise agreements, normally last for a specified period of time such as five years. Barr’s has the UK

    franchise for Orangina and for Lipton Ice Tea.

    These operations do not always run smoothly. Barr’s originally agreed a deal for Orangina with the French company, Pernod Ricard, for the period 19952001. In late

    1999, the French government vetoed a proposed take-over by Coca-Cola of Pernod Ricard. A year later, rumours that the brand was to be sold to Cadbury Schweppes, another soft drinks manufacturer, did not materialise. These events caused considerable uncertainty for Barr’s. However, in the event, Pernod Ricard retained ownership of the brand and Barr’s was able to extend its franchise deal.

Appendix 2 summarises the main brands that Barr’s owns and manages.

Building brand awareness

    Barr’s has a policy of developing its own brand identities. It has chosen this in preference to producing supermarket own label products which are low profit lines.

    Barr’s uses a range of promotional activities but makes considerable use of advertising. It sees this as a vital part in maintaining an up-to-date image for its products, particularly as carbonated soft drinks are mostly bought by young people. Barr’s is proud of its reputation for using innovative tactics alongside tried and tested methods.

    Irn-Bru is an example of how Barr’s has tried to build brand share and brand loyalty. A new design for it was launched in 1993 which increased the amount of blue on cans and bottles to contrast with the orange. Orange has been a key colour in recent advertising for Irn-Bru, which has followed an edgy humorous theme. The TV advert featuring ‘Jef’ won the ‘Best Commercial’ award at the 2002 Scottish Advertising Awards following the success of the ‘Electric Lady’ advert which gained the Chairman’s award in 2001. The advertising has not always met with everyone’s approval and Appendix 3 gives two examples of complaints received by the Advertising Standards Agency.

    Barr’s tailors its advertising and promotional activities very closely to the situation of the brand involved. For example, it uses different advertising and promotional methods for Irn-Bru in Scotland and England. In Scotland the aim is to maintain

    brand awareness while in England the brand is still growing and awareness has to be increased.

    Tizer also illustrates the building of a brand. It, too, was re-launched in 1993 with new packaging featuring a red plastic bottle and accompanied by advertising and other promotion. In late 1996, another redesign was introduced. This time the image was ‘A Red Head’ and it was based around the advertising strap line of ‘Refresh your head’. A further re-launch in 2003, repositioned Tizer as ‘redder’ but continued to use the Tizer head, although with a more laid back facial expression. Its target market is now 1315 year old boys.

    In the 2002 Annual Report, Robin Barr said, ‘We remain convinced, however, that the continuing investment in our brands will produce for A G Barr the optimum long term growth.’

Appendix 4 gives some further examples of Barr’s promotional activities.

Operations

    Barr’s produces soft drinks in three manufacturing plants at Cumbernauld, Mansfield and Atherton in Manchester, while Findlay’s Spring Water is bottled at Pitcox, East Lothian. It has six distribution depots in Scotland and six in England.

    Barr’s manufactures soft drinks in recyclable cans as well as glass and plastic bottles. The combination of sizes and types of containers depends on the product. Barr’s controls costs of raw materials, like sugar, through rigorous procurement and purchase methods. It also has a programme of continually up-dating production facilities and investing in leading edge technology. As well as improving manufacturing efficiency, measures like these allow a greater volume of output to be produced.

    In addition to its investment in operations, Barr’s has recently updated its IT systems and its supply chain activity.

    The importance of cost control can be illustrated by an example. During 2001 and 2002, the value of the pound was high against the Euro. One consequence of this was that it was cheaper for wholesalers in the UK to import drinks such as Coca Cola from places like Spain than to buy them from the UK producer. This situation forced UK suppliers to cut prices and had a knock-on effect on other soft drinks, even those, like Irn-Bru, that could not be sourced abroad. In 2001, for example, Barr’s was forced to cut prices to wholesalers by 30%.

Employees

    Barr’s employs over 900 people, more than a third of whom have been with the company for 15 years or longer. It conducts an annual Employee Opinion Survey which measures the views of employees on their own jobs and the company as a whole. Communications and training and development are among the topics covered. Results are consistently positive. In 2001, for example, 81.5% of employees said that they were proud to work for the company. Barr’s encourages employee involvement at every level and, as part of this, managers discuss with employees their responses to each question with a view to identifying possible improvements. Managers give a formal briefing on company developments, including trading results, to employees twice a year.

    Barr’s provide specialist training programmes for employees and have recently introduced an ‘E-learning’ facility to enable employees to learn desktop PC skills.

    Normal terms and conditions are supplemented by some additional reward schemes. These include a Long Service Award scheme and several schemes to encourage employees to own shares in the company. More details of these are given in Appendix 5.

Exports: The Russian market

    Russia is Barr’s largest overseas market. In the first half of 2002, Barr’s export earnings were ?380,000, of which ?300,000 came from sales to Russia. Barr’s began exporting Irn-Bru directly to Russia in 1994 when the market opened up to western firms after the fall of the communist regime. Previously, goods like soft drinks were not readily available and awareness of all brands was low.

In 1998, Barr’s entered into a franchise deal with a Russian company, KLP. KLP

    would produce Irn-Bru and Cream Soda under licence in a new soft drinks factory in Moscow using essence exported by Barr’s from Scotland. A significant factor was the help obtained by Barr’s from government agencies, particularly Scottish Trade

    International (STI), which is responsible for encouraging Scottish based companies to export. STI has offices in a number of foreign countries, including one in Moscow. Its contacts in Russia and elsewhere enabled it to bring together Barr’s, KLP and an

    American firm, API, which provided the $7m needed to finance the Moscow factory.

    However, the Russian economy collapsed and, despite a successful advertising campaign in 1999 essence sales to Russia in 2001 fell.

    In February 2002, Barr’s concluded a new franchise agreement with the Pepsi Bottling Group (PBG), the largest franchise bottler for Pepsi-Cola in the world. Irn-Bru is produced at its bottling plants in Russia and is distributed through PBG’s extensive distribution network. This arrangement seems to be working well: at the end of its first year, in 2003, Irn-Bru sales accounted for almost 1% of the Russian market.

Barr’s other important European market is Spain, where Irn-Bru is also produced under

    franchise. Sales are mainly in the tourist areas popular with Scottish holiday makers.

Appendix 6 gives some financial information on the company.

    (The information in the case study is taken from the A G Barr plc Annual Reports, 1999 2003 and from the company’s website at www.agbarr.co.uk. Additional

    material came from news reports from Scottish Enterprise at

    www.scottish-enterprise.com; from the Advertising Standards Agency at

    www.asa.org.uk; and from www.s1news.com; and www.trustnet.com)

    Note: The above, and the accompanying appendices, are current at 1 January 2004 and refer to the situation at that date.

Appendix 1: Company Organisation

    The company’s Head Office is in Glasgow, where members of senior management are based. As well as the Chairman, Robin Barr, and the Managing Director, Roger White, the executive directors are the Finance Director, the Operations Director and the Commercial Director, Jonathan Kemp, who is responsible for sales and marketing. The Group Personnel Department and the Export Team are also based in Glasgow. Robin Barr was previously Chairman and Managing Director. He is 65 years old and joined the company in 1960. Roger White, who is in his late 30s, was appointed in 2002. Jonathan Kemp, also in his 30s, was appointed in 2003. He replaces the previous Sales and Marketing Director who left after 21 years’ service. Both the other two Directors have worked for Barr’s for over 25 years.

    The Finance teams are spread across three locations Glasgow, Atherton and

    Mansfield while the IT teams are based at Head Office and Atherton. Staff in the Operations function are located across the four production sites at Atherton, Cumbernauld, Mansfield and East Lothian as well as the Head Office in Glasgow and the Regional Office in Atherton. Administrative and clerical support for Sales and Marketing is provided by a Sales Services team based at Atherton.

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