Essentials Of Working Capital Management

Description of the core business of the company

Discuss about the Essentials of Working Capital Management.

The present report aims to provide advice to a client for investing in Woolworths Limited accountant at WCP Accountants& Investment Advisers. For this purpose, the report provides a description regarding its core business, strategic priorities and issues emerging from its annual and corporate social responsibility report.  In addition to this, the report analysed the financial position of the company by calculating its key financial ratios and an overall evaluation of the value creation by implementing six capital integrated report. At last, recommendation is provided for the purpose of investing in the company.

Woolworths Limited is an Australian company established in the year 1924, headquartered in Sydney. It is recognised as the largest supermarket chain of the country with operating about 961 stores across the country. The company employees about 111,000 people in its retail stores, distribution centres and support offices and provide the customers high-quality services in terms of value, range and convenience. The company emphasises on the production of best quality products for the customers by working in association with Australian growers and farmers. It procures 96% of fresh fruit and vegetables and 100% of fresh meat from the country’s farmers and growers. Woolworths is being categorised as Fresh Food People as it aims to provide its customers all naturally sourced fresh products (Woolworths Supermarkets, 2012).

Woolworths is second largest company in Australia in terms of revenue and also in New Zealand. In addition to this, it is also believed to be largest liquor retailer in Australia. The main strategic objectives of the company are to provide high quality and lower price products to its customers. The core business of the company includes providing food, liquor, petrol, general merchandise, home improvements and hotels to the customers. The company emphasises on achieving the following four strategic objectives in present:

• Expand its leadership in food and liquor
• Maximise shareholder value
• Continue its past record of establishing new growth businesses
• Develop and maintain a new era of growth

Woolworths aims to meet the changing needs and expectations of the customers by establishing a new phase of growth and opportunity. The company has firmly recognised that retailing sector is rapidly evolving and as such the company needs to create high value for the customers through identifying innovative ways of growth (Mc Arthur, 2013).

The company has established its strategic objectives mentioned above three years ago and since then are continually making progress in attaining its identified strategic objectives. The company has initiated its ‘More Savings Everyday’ program that has enabled it to reduce its prices by about 2.9% in order to meet its first strategic objective. Moreover, it has also launched ‘direct from farmers’ initiative and fresh bakeries in order to deliver fresh and high quality products to the customers. These initiatives of the company have enhanced its market sales and revenue generation (Mc Arthur, 2013).

Discussion on the company’s progress against its strategic priorities

Woolworths has also created its spate Shopping Centres Australasia Property Group in Australia Stock Exchange (ASX: SCP) that facilities it to acquires about $500 million capital that improved its business performance for meeting its second strategic objective. The company in order to meet its third strategic objective is strongly investing for establishing the various stores for Home Improvement and has also invested in enhancing its online sales through establishing its Ezibuy acquisition. The company has also invested in ‘world class supply chain’ by establishing its distribution centre at Hoxton Park that aims to improve its services the Home Improvement and Big W divisions. It has also acquired 50% in a data company that allows it to acquire information about its customer’s habits (Mc Arthur, 2013).

The chairman’s report on Woolworths has reflected that the company has made significant changes in its senior management team for effectively meeting the customer’s needs. The Chairman report reflected that after the retirement of its CEO in 2015, the company conducted a global CEO search for appointing its new chairman. Brad Banducci was appointed as Managing Director in 2015 through the help of global CEO search. Brad was then replaced as the managing director of Woolworths liquor group by Martin Smith. The company is also conducting its search process for appointing new executive directors to develop a competent senior management team. The chairman report reflected that financial year 2015 is recognised as a year of significant changes for the company. The company has undertaken new retail challenges and implemented new strategies such as expanding its lean retail model for meeting them appropriately. The main issue as discovered from the chairman report of the company is resigning of its many executive and non-executive directors by the end of the year 2015. The company has to develop a special recruitment plan for hiring and selecting the vacant positions in its senior management team for meeting its strategic objectives in the future direction (Chairman’s Report, 2015).  

The managing directors’ report in company’s performance reflects that Woolworths is striving to enhance is growth continually but its revenue generation has not been increased from the past year. This is a significant issue for the company that it needs to place focus for creating value for all its stakeholders. As reflected from the managing director’s report. The company is emphasising on renewing its customer focus strategy for achieving customer satisfaction. For this purpose, the company is striving to provide best products to the customers at reduced prices. However, for attaining customer satisfaction the main challenge that exists before the company is to regain momentum in Australian supermarkets. The increase of competition in the retail sector has impacted the company’s performance in last few years. The company need to re-invent its lean retail model for staying competitive in its external business environment. The company’s sales have declined significant in the past few years mainly driven by the reduction in fuel prices and its disappointing trading result in Australian Food and Liquor and General Merchandise (Annual Report, 2015). The company had divested its core business into owning petrol stations, pubs and hardware that has not gone well with its performance. The main reason for the decline in company’s sales as predicted by analysts is its long-term strategy for investing in opening large number of retail stores around the country. The company has loosed its focus on its core business area such as fresh food by investing in large number of businesses. As a result, it has loosened its faith in customers responsible for its continually declining sales. Thus, the managing directors’ report has reported a decline in the company’s profitability over the past few years that need to be improved by renewing its customer strategy. The company need to shift its focus again to its main core business that is providing fresh food products to the customers for enhancing its sales and regain its market leadership in Australia’s retail sector (Grath, 2015).

Discussion on significant issues emerging from the Chairman’s Report

Woolworths has launched its Sustainability Strategy eight years gap for ensuring the implementation and adoption of sustainable practices in its business operations. The strategy of the company focuses on improving its operational efficiency through minimising waste generation by responsible sourcing. However, as reflected from its corporate sustainability report that the company has still not achieved the ambition of generating zero food waste. The company largely focuses on achieving sustainability through minimising its carbon generation by 42% and implementing effective policies for ethical sourcing, timber, paper and animal welfare. The main challenge that is present before the company as analysed from its CSR report is to attaining zero waste generation by optimum utilisation of its resources. It still needs to improvise on its sustainability issues by developing further strategies for reducing waste generation. The company still needs to reduce its carbon footprint and waste generation to landfill for attaining sustainability (Corporate responsibility report, 2015).

Financial ratios are the key indicators for the financial performance of the company. Ratios are considered important because they help to compare the financial performance of one year with another year within same company as well as with other company. In this segment key ratios related to Woolworth Limited will be evaluated and recommendations will be provided on whether to invest in the company or not.

Liquidity ratios (All figures indicates below are in million dollars)

Liquidity ratios are known as short term financial ratios and it tell about the company ability to pay debt obligations. It is calculated using ratios like current ratio, quick ratio etc.

Current ratio tells the short term liability position of the company and it is the ratio of current assets to current liabilities (Sagner, 2010).

Current ratio of year 2015: Current assets/current liabilities

= (7661 / 9169) = 0.84 times

On looking at the ratio it can be said that liability position of the Woolworth was not good in year 2015 as value of current asset is low from the liabilities that have to be paid in year 2015. Liquidity position can be good if company works out to manage the current liabilities through paying excessive amounts through reserves and start collecting account receivables more frequently.

Quick ratio is similar to current ratio but there is small difference that while estimating the quick assets inventory and prepaid expenses are excluded because both of these can’t be converted into quick cash within a short period of time. Quick ratio is the ratio of quick assets to current liabilities (Walton, 2000).  

Discussion on significant issues emerging from the Managing Director’s Report

Quick Ratio: Quick Assets/Current Liabilities          

= 2488/9169 = 0.23 times

Having looked at ratio it can be said that Woolworth ahs very low quick ratio as per the market conditions. Ideal quick ratio range between 0.90 and 1.10, and compared to it Woolworth liquidity position was not sound. Management in Woolworth have to rethink about the policies on liquidity position of the company.

Profitability ratios guide about the income capability of the company and it is used to assess the company’s ability to generate the earnings as compared to expenses. Here two profitability ratios will be examined: Net profit ratio and Return on total assets (Fridson and Alvarez, 2011).

Net profit ratio: Net profit ratio tells the profit earned by the company in the period of time (Drake and Fabozzi, 2012).

Formula: Net profit / Net revenue

= 2,146/60868 = 3.5 %

Net profit ratio of Woolworth Limited in year 2015 was 3.5% and it is very low from the expectations. It can be said that company’s major earnings goes in the cost of goods sold and other operating expenses. In order to increase the net profit margin company has to decrease the expenses through avoiding business where earnings are below and are at break even point.

Return on total assets: This ratio tells profit earned using the assets of the company.

Formula: Net earnings/ total assets

= 2146/ 25337 = 8.5 %

The net profit to total assets ratio of Woolworth is 8.5 % and it was not up to the mark as it expected in year 2015. It can be said that overall profitability position of the Woolworth was not good and management has to rethink on the business activities that were giving losses.

Capital ratios tell the position of the company and how these capitals are used to generate the profits.

Debt Equity Ratio: This ratio shows the amount of debt capital as against the equity capital. Equity capital reflects the amount of capital that is taken through issues shares in the market whereas debt capital refers to capital that is taken from the financial institutions.

Formula: Debt/Equity

= 5331/10834

= 0.49

Debt equity ratio of the company was good in year 2015 but it was noted that company was increasing debt capital in last 4 years to finance the activities. It shows that company was dependent on debt capital more as compared to equity capital (Bull, 2007).

Discussion on significant issues emerging from the Corporate Responsibility Report

Equity to total assets ratio: This ratio shows amount of total assets financed from the equity liabilities or owners funds.

Formula: Total Shareholders equity/ Totals Assets

= 10,834/25,337 = 0.43

On looking at ratio it can be said that Woolworth Limited has financed 43 % of total assets from the shareholders equity and it reflects good capital structure of the company. Woolworth has to issue more equity shares in order increase the owner’s capital and decrease the debt capital.

The best way to analyse the value creation of Woolworths is to examine its six capital such as financial, manufactured, intellectual, human, social and relationship, and natural. The financial capital of the company is not presently in a sound condition as it is not enhancing its equity capital but rather emphasising on the incorporation of debt in its capital structure. This is bound to increase the liabilities of the firm and also poses a potential threat for its long-term development with decline in its sales. The company has invested largely into manufacturing of various products such as home improvement, owning petrol stations and investing largely in its liquor operations besides its main manufacturing of food products. However, the company need to focus largely on its main business area for improving its sales.  The company largely relies on its intellectual capital through implementing a private label brands on all its products. Human capital refers to the employment proposition of the firm that is composed of skills and competent employees facilitating it to develop unique products. Social relationship capital of the company is developed on the basis of its good relations with customers, suppliers and business partners. At last is the natural capital that is developed by the company through sourcing naturally fresh fruits and vegetables for manufacturing its products (WOOLWORTHS HOLDINGS LIMITED 2015 INTEGRATED REPORT, 2015). 

Conclusion

On the basis of investigation made in Woolworth Limited it is highly recommended to the clients that they must hold or buy the shares at this moment because market value of share is very low as compared to last few years and it is highly expected that it will rise in coming years. So, it is profitable for the clients to buy the shares at this moment and sell them at the right moment when there is increase in value of market share.

Financial performance of the Woolworth was not string in year 2015 and management has to reframe the policies to figure out the non profitable activities so that more profits can be generated through investing in profitable business.

References

Annual Report. 2015. [Online]. Available at: https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed on: 12 September 2016].

Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. Elsevier.

Chairman’s Report. 2015. [Online]. Available at: https://www.woolworthslimited.com.au/annualreport/2015/chairmans-report.html [Accessed on: 12 September 2016].

Corporate responsibility report. 2015. [Online]. Available at: https://woolworthslimited2015.csr-report.com.au/files/Woolworths_CSR_2015.pdf [Accessed on: 12 September 2016].

Drake, P. P. and Fabozzi, F. J. 2012. Analysis of Financial Statements. John Wiley & Sons.

Fridson, M. S. and Alvarez, F. 2011. Financial Statement Analysis: A Practitioner's Guide. John Wiley & Sons.

Grath, P. 2015. Woolworths axes 800 jobs as sales decline. [Online]. Available at: https://www.abc.net.au/worldtoday/content/2015/s4230529.htm [Accessed on: 12 September 2016].

Mc Arthur, T. 2013. Woolworths makes progress on its strategic priorities. [Online]. Available at: https://www.fool.com.au/2013/08/29/woolworths-makes-progress-on-its-strategic-priorities/ [Accessed on: 12 September 2016].

Sagner, J. 2010. Essentials of Working Capital Management. USA:  John Wiley & Sons.

Walton, P. 2000. Financial Statement Analysis: An International Perspective. Cengage Learning EMEA.

Woolworths Holdings Limited 2015 Integrated Report. 2015. [Online]. Available at: https://www.woolworthsholdings.co.za/investor/annual_reports/ar2015/whl_2015_integrated_report.pdf [Accessed on: 12 September 2016].

Woolworths Supermarkets. 2012. [Online]. Available at: https://www.woolworthslimited.com.au/page/Who_We_Are/Our_Brands/Supermarkets/Woolworths/ [Accessed on: 12 September 2016].