ASSIGNMENT 3 DRAFT

ACCT11059 USING ACCOUNTING FOR DECISION MAKING

ASSIGNMENT 3

NAME: Ian Eisenhuth            STUDENT ID: s0274317

STEP 1:                   Ratio Analysis and Economic Profit

- See attached excel spreadsheet in Assignment 3 submission section on CQU Moodle site.

Commentary: The net profit margin is how much of every dollar the company keeps in earnings and return on assets is how efficient the company is at using their assets to generate income. Salmat’s net profit margin and return on assets profitability ratios remained fairly constant for 2011 and 2012 with their net profit margin 4.2% and 3.7% respectively and their return on assets was 5.2% and 4.4% respectively. They then experienced 2 years of massive swings where their net profit margin was 8.6% in 2013 and only 0.2% in 2014 and their return on assets was 9.2% in 2013 and 0.2% in 2014. This dramatic drop would have been due to a number of factors. The primary factor a result of a change in their business model and them restructuring the business in June 2013. The income statement shows that Salmat's revenue almost halves from 2012 to 2013 from some $823 million to $467 million and their profit before tax went from $40-50 million in 2011 and 2012 to $11 million in 2013. The profit from discontinued operations artificially boosted the profit for the year and hence the higher profit margin in 2013. 2014 appears to be a terrible year and this is due to the fact that the business experienced issues with implementing the new strategy and as a consequence the net profit margin is only 0.2% for 2014 the business put in place experienced issues when it came to implementing it. The sales for 2014 like 2013 are approximately half of the sales experienced in 2011 and 2012 and the all the costs except for finance costs for each year are similar. Considering a net profit margin of 10% is seen as good it is quite evident that Salmat has not performed very well in this aspect over the 4-year period. The same can be said for the return on assets as generally a value greater than 5% is viewed as good and Salmat performed below this.

The efficiency ratio is the amount of sales generated per dollar of assets and generally speaking the higher the number the better. Overall Salmat’s total asset turnover ratio remained fairly constant over the 4 years but it did deteriorate marginally in 2013 and 2014. This would have been due to the fact that the total assets were reduced as sales decreased. The sales decreased roughly inline with the total assets and this would have been a result of the company selling their BPO division in 2013.

Prior to the restructure of the business (ie in 2011 and 2012) the debt equity ratio and equity ratio were both constant at approximately 100% and 40% respectively. This is fairly high leverage for a business and represents refinancing risks as debt matures. Following the sale of the BPO division into 2013 the debt to equity is reduced to 38.5% in 2013 and 30.9% in 2014 and the equity ratio improved to 58.8% in 2013 and 52.5% in 2014. This represents an improved balance sheet position with less risks should debt markets deteriorate. Even though 2014 in particular was a terrible year from an earnings point of view at least there is less risk from a debt refinancing point of view because what sends a company broke is not being able to repay debt becoming due over the coming 12 month period, so the less debt expiring in the next 12 months the better.

The earnings per share (EPS) were not published or available for 2011. The EPS was 19.2 cents for 2012, 20.4 cents for 2013 and 2 cents for 2014. Clearly 2 cents per share for 2014 is a disastrous number, which reflects the considerably reduced income as the business transformation struck difficulties.

Salmat experienced negative economic profit for the years 2011, 2012 and 2014. This would have been due to the fact that the business cost of capital I used being 10% (as per recommended by Martin) is more than RNOA for each one of these years. 2013 they had a positive economic profit but again this was a result of the RNOA being artificially inflated and because the NOA has been decreased from the sale of the BPO division but there was still profit from BPO division being booked as profit from discontinued operations. It can be seen that the business has never really met its cost of capital total thresholds, although admittedly it got close in 2011 and 2012. 2014 was clearly a disaster on this metric as well as on all other metrics given the slow implementation of the new business strategy.

Overall these ratios tell me that Salmat as a company really has not performed that well at all, particularly in 2014 and even though the ratios make it look like 2013 was a good year it was just due the fact that everything was artificially inflated due to the sale of their BPO division that year for $375 million.

STEP 2:  Capital Investments decisions: Payback period, NPV and IRR

- See attached excel spreadsheet in Assignment 3 submission section on CQU Moodle site.

Commentary:  The 2 capital investment decisions I decided to work with are:

Option A: Voice recognition taxi booking service for Sydney (similar to the one already set up in New Zealand). It has initial investment/cost of $50 million with a forecast profit of $5 million per annum not growing to be sold in 10 years on the basis of a price earnings ratio of 10 times.

Option B: Voice recognition taxi booking service for Melbourne. It has an initial investment/cost of $50million with a forecast initial profit of $1 million which is lower than Sydney’s but which grows over time. Again it is sold after 10 years at a price earnings ratio of 10 times.

Judging from the payback period, the NPV and the IRR calculations the better business decision for Salmat and the one I would recommend for them to invest in would be the option B: the voice recognition taxi booking service for Melbourne. Even though the payback period for each option is fairly similar (option B = 9.5 years and option A = 10 years) option B is clearly superior when it comes to the NPV and IRR. The NPV for option B is $64 million (approx.), which is greater than the initial $50 million investment whereas option A NPV is only $48 million (approx.) which is less than the initial $50 million investment. Along with this the IRR for option B is 13.15%, which is greater than the 10% cost of capital (which I have used as the discount rate) whereas option A IRR is only 9.44%, which is lower than the 10% cost of capital. As you can see option B is clearly the better option for Salmat to invest in.

STEP 3:       Student Feedback

 SPREADSHEET

Assignment 2 Draft

ACCT11059 USING ACCOUNTING FOR DECISION MAKING

ASSIGNMENT 2

NAME: Ian Eisenhuth            STUDENT ID: s0274317

Step 1:                                     Chapter 4 KCQ’s

Chapter 4: ‘Analysing financial statements’

‘Capital markets’… Insert chapter reading notes

Step 2:                                     Restated Financial Statements

Commentary:   I began with restating the statement of changes in equity only to realise I was a little unsure as to where to begin with it all. After going back through the chapter reading I decided to start with restating my firm Salmats statement of financial position. I initially misunderstood what was required with this task as I took all of the current assets from this financial statement and put them in the spreadsheet as operating assets, I put all the non-current assets in the spreadsheet as financial assets, all the current liabilities in the spreadsheet as operating liabilities and I put all the non-current liabilities in the spreadsheet as financial liabilities. Upon completion I realised something definitely wasn’t right. I decided to email Martin my spreadsheet and asked him for some guidance. He pointed out one error I had, which was putting ‘borrowings’ under operating obligation rather than a financial one. He also suggested I liase with students on the Facebook page and the forum on Moodle because I had quite a bit of work to do on m spreadsheet. I decide to go back through the chapter reading and it was then everything kind of clicked and I realised I had made many other errors. In fact I had pretty much done the restating wrong from start to finish.

I took a step back and spent quite some time going through each individual item on the Salmat’s statement of financial position and referred to the notes in their annual reports in order to fully understand what each item was. I also googled some of the items/categories to get a better understanding of what these were. After doing this it became clear to me that if I had of been that thorough from the beginning this task of restating their financial position would have been a hell of a lot easier and less frustrating, confusing and stressful for me.

Upon finishing restating Salmat’s financial position I realised that for the year 2013 my Total Net Financial Obligations (NFO) + Equity didn’t equal my Net Operating Assets (NOA) as it should have. After referring back to their financial statement and going over all the numbers I realised my ‘trade and other payable’ for 2013 was entered incorrectly as 58,808 rather than 59,808. After changing this value all my spreadsheet recalculated and my Total NFO + Equity = NOA. J

Because I had trouble with restating the statement of changes in equity on my first attempt I decided to go through the ASS2 student forum on Moodle and the Facebook group page to get some hints and ideas as to how other students had attacked and managed this task. It was on the Facebook group page I came across a very helpful post from Tash Muller. She added a link to one of the lecture videos whereby the lecturer Maria Tyler went through ASS2 step by step offering tips and hints along the way. After watching this video it became much clearer as to what was required of me in restating the statement of changes in equity. A task, which surprising in the end was quite easy and involved me having to make very few changes to it at all.

I found the final task of restating Salmat’s financial performance to be a lot more challenging than that of the statement of changes in equity and the statement of financial position. I spent quite a lot of time going over Martins example in the chapter reading to help me get my head around it all. After understanding his Ryman Healthcare example I made a start on my own but found it rather challenging and confusing. I decided to take a break from it all and by chance later that day I saw an ex personal training client of mine on the street. After some small talk of telling each other how we had been he asked me what I was doing with myself these days. I mentioned the study I was doing and this assignment I was currently working on. After I spoke of my troubles with the assignment and being a fund manager he offered to have a quick look at it for me and offer some guidance where he could. Even though he wasn’t 100% sure of everything he told me his thoughts on how he interpreted the task and which items he saw as ‘operating’ and ‘financing’. I found this to be of great help and the little kicker I needed to get the ball rolling and restate the financial performance of m firm Salmat. From here I proceeded fill out my spreadsheet with all the different categories I needed which seemed fairly straight forward. The only little hiccup I had was finding the interest received in order to calculate their tax benefit as this figure was no where to be seen on Salmat’s statement of comprehensive income. After looking back through their annual report and the note section (note 3) I found they had itemised their revenue and had the value of each year’s interest received only it was labeled as ‘finance income’. Once I had this I found it was just a matter of punching numbers into the spreadsheet and following the formula Martin gave in the chapter notes to calculate the tax benefit. This involved me working out Salmat’s ‘net interest expense’. I did this by adding their ‘financial expenses’ and ‘financial income’ and then multiplying the net interest expense by 0.3. I used 0.3 because being an Australian Company their tax rate is 30%.

Step 3: Identify 3 products or services of firm and estimate selling price and variable cost

Even though my firm Salmat’s Annual Reports does have segment information, this segment information does not contain details on individual product lines or services. It merely displays costs allocated for geographical and major areas so for the purpose of this assignment I have made assumptions about the pricing and various costs involved in some of the products and services they offer.

1.     SMS marketing for retailers like Mitre 10 Hardware

Selling price: $1.50 per SMS

Variable cost: IT costs-30%, cost of line rental-30%, and people costs-15%

Contribution margin*: 15% or 22.5 cents per SMS

2.     Traditional direct mail of catalogues and brochures

Selling price: $ 1 per brochure

Variable cost: cost of materials-30%, property rental-10%, printing costs-40%, people costs/wages-15%

Contribution margin*: 5% or 5 cents per brochure sold

3.     Speech recognition based call booking for clients like Auckland Taxi Services

Selling price: $1 per min/call

Variable cost: IT costs/software enhancements-20%, people costs/wages-15%, Office costs-10%, cost of line rental-30%

Contribution margin*: 15% or 15 cents/min per call.

*Contribution Margin = Sales – Variable Costs

- Discuss how contribution margins might differ or be similar

I feel like the contribution margins for the SMS marketing and the speech recognition services would be similar as they are very similar services, which have similar variable costs. The contribution margin for the brochures on the other hand could be lower because this service is more of a commodity so it is harder to set a price and extract a profit.

- Why might your firm produce a range of products/services with different contribution margins? Why not only produce the one with the highest contribution margin?

Some benefits of Salmat offering these different products/services with different contribution margins could not only be for them to potentially gain greater exposure and be open to a broader market but for them to maximize their profits and share the costs of the business over a greater area. For example the head office or CEO costs can be spread across the various departments or product/service areas. The reason behind producing services with different contribution margins and not just the one with the highest contribution margin would be in order for the to maximise profits across the company as a whole.

- Identify one or more resource constraint and any market constraints you feel may impinge firm.

I feel the brochure service they offer may be susceptible to resource constraints. This mainly being due to the fact that with aging technology people are increasingly using brochures as a form of marketing and advertising less and less. People seem to respond better to marketing and advertising through other resources such as television and social media. Social media may also act as a constraint on this area of Salmat’s business as people use it as a way of promoting and marketing their businesses. Not only is this a free service but it is a much more cost effective and efficient way to get a message across and can reach a much broader audience in much quicker time frame when compared to the distribution of brochures. 

The speech recognition based call service for Auckland Taxis Salmat offer may have some constraints in that being based in another country it may require the company to pay to send people from Australia over to monitor and gauge the performance of the business. They would also have to consider and have the constraint of dealing with a different currency and having to manage currency risk.

 

- What ways might these constraints be relevant when deciding whether or not (or how much) these 3 products should produce or sell?

These constraints would be relevant in that they would have to weigh up the cost of say producing the brochures and contribution margins they receive. Technological advances and other more effective ways of advertising and marketing (ie social media) will probably see more and more businesses move away catalogue and brochure distribution so Salmat would then have to determine if keeping this aspect/department of their company open is a profitable one. This would be the same for the speech recognition service they offer. They would have to manage the different currencies and the currency risk involved and determine is running an overseas service is a profitable and worthwhile business decision. Along with this Salmat would continually have to look at the variable costs involved and contribution margins of all the services they provide to determine how they are performing (ie how many are being sold or used) and whether or not they are making sufficient profits in keeping those aspects of the business running.

Step 4:

Feedback for ASS#2 drafts

STUDENT #1:         

STUDENT #2:

STUDENT #3:

ASS#1 DRAFT

ACCT11059 USING ACCOUNTING FOR DECISION MAKING

ASSIGNMENT 1

NAME: Ian Eisenhuth            STUDENT ID: s0274317

- Step 1: Personal profile set up with a photo, description of photo as well as a brief introduction about myself and a link to my personal blog, which is: http://theaccountingdream.blogspot.com.au/

- Step 2:

·      The Company I have been assigned is Salmat

·       I have attached Annual Reports ending June 2014, June 2013 and June 2012 to Assignment 1 submission section on the CQU Moodle site.

About Salmat

Salmat is a publicly company listed on the Australian Stock Exchange (ASX) and trades under the ticker SLM. It currently has a market capitalisation of $174.2 million. The company’s current share price is $1.05 (as at COB 16/03/2015) with their shares trading in the range of $1 to $2 over the past 12 months (ASX website).

Salmat was founded by good mates and entrepreneurs Phil Salter and Peter Mattick in 1979 in Sydney. The company is a player in both the traditional and digital based marketing industries and provides a range of ‘multichannel marketing solutions for leading Australian Companies’ (Wikipedia, 2014). For example;

·      they offer traditional direct mail of catalogues and brochures. Some might refer to these catalogues as junk mail,

·      they offer SMS marketing for retailers like Mitre 10 Hardware,

·      they have speech recognition based call booking for clients like Auckland Taxi Services, and,

·      also have speech recognition based automatic phone answering service for NSW Police and others.

Some of Salmat’s other clients include leading Australian companies such as Woolworths Limited, Target Australia, Telstra and the Australian Government.

There are currently over 6000 people employed at Salmat in Australia, New Zealand and the Philippines. The company ‘manages over six billion customer interactions across multiple channels’ (Salmat website, 2015) every year.

They have 2 main divisions: Consumer Marketing Solutions (CMS) and Customer Engagement Solutions (CES). The CMS division comprises of letterbox media and digital catalogue solutions; digital marketing, SMS services and e-commerce solutions, customer loyalty and feedback services, as well as local area marketing solutions. The CES division designs and delivers multichannel contact centre services and technology solutions, field sales services, and learning and development solutions. Salmat’s contact solutions include outsourced contact centre, on-demand contact centre, cloud contact centre, and speech technology (source Wikipedia).

As a company they aim to help their clients build and maintain relationships with potential customers, help them connect with these clients and keep them as regular and loyal customers. They do this with the primary goal of helping their clients boost their overall profits and revenue and ultimately achieve their organisation’s goals. They engage and get closer to their clients customers through 5 different service lines. These being;

1.     Media: through letterbox media (catalogue distribution), and digital catalogues.  

2.     Contact: through help desks and consulting and outsourcing solutions

3.     Digital: through email and direct SMS, data services and facebook competitions

4.     Field: through face to face direct sales and field, retail and event sales

5.     Local: they use their tools and expertise to help find a local market, how to appeal to this market and how to keep them close.

Some of my KCQs after looking through Salmat’s Annual Reports

I have to admit up until last Friday I had never heard of the company Salmat nor did I have any idea as to what they do. The question of being happy with the company I have been assigned has been raised and in all honestly I don’t think it really matters whether you’ve been assigned a company you have some knowledge or little to no knowledge of. Yes having some knowledge of your company will may make things a little easier to begin with because you will already know the organisation's goals and their primary business purpose but I think once it comes to reading through each company’s annual reports the majority of students will find this to be something new to them and quite challenging. So I guess overall yes I am happy with the company I have been assigned and I am enjoying learning about what they do and the different business strategies they employ to achieve their overall organisational goals.     

Like many other students I initially found the amount of information and content within the annual reports to be quite overwhelming. I did find quite a few things within their financial statements and throughout the report, which I didn’t quite understand. I have noted some of these below along with some of the aspects of the report I found to be of importance to me.

There were some acronyms throughout the report, which I didn’t recognise but after doing some research I am starting to understand.

·      EBITA: Earnings Before Interest, Taxes and Amortization. This basically is a financial indicator which is commonly used to measure the efficiently and profitability of a company.

·      NPAT- Net Profit After Tax. This one being self-explanatory really meaning the net profits of a company after taxation. Often referred to as the ‘bottom line’ and is where the companies dividends are paid out of.

I noticed that Salmat put forth a three-year growth strategy, which they launched in July 13 with the company being refocused into two key divisions, being Customer Engagement Solutions (CES) and Customer Marketing Solutions (CMS). 

In reading the company’s ASX announcements and Annual Report, 2014 seems to have been full of significant events for the company. The first of these were major board and management changes. It is the first year for the new chairman taking over from retiring long serving chairman. He had to act as interim CEO while the company sourced a permanent CEO. They then hired a new Chief Information Officer (responsible for IT), a new Chief Financial Officer and a new Head of People and Culture. This seems highly unusual and indicates that there was a problem with the old executive team that had needed to be addressed by replacing them all.

I also noticed that the three-year growth strategy, which had been launched back in July 2013 had run into some trouble by May 2014. The Earnings Guidance Announcement in May 14 issued by the new CEO shows the earning guidance cut from $14 to $16 million back to $8 million for 2014 financial year (ie a nearly 50% reduction which again seems highly unusual), the reason given being under-performance in both the CES and CMS divisions.  In the June 2014 Annual Report, the EBITA was confirmed at $8.6 million, a 66.7% reduction on the 2013 result.  The reasons given in the Annual Report matched those in the May 2014 Earnings Guidance Announcement.

While there was strong demand for the CES division’s contact centre solutions and even though these new contracts had been secured they had not yet been implemented by the company. Instead, they had to spend their time getting existing customers on to the new IT platform. This resulted in lower revenue and higher costs.

The CMS division also reported lower revenue and profit. This was said to be a result of delayed spending by mid tier retailers on the Salmat direct marketing products and lower profit margins seemingly caused by customers not paying the prices that Salmat had budgeted for. 

By the time of the FY15 first half update in February 2015, the new CEO seemed to be having an impact.  In the update, the CEO announced that revenue was growing as customers adopt its products and services but that financial results were poor so the company would do three things:

·      Implement a cost reduction plan

·      Simplify business operations

·      Cut out non strategic work areas ie services which don't make a profit

It will be important to see how these actions drive the company’s performance in the coming months.

My Top 3 Blogs

1.     http://mcolesy.blogspot.com.au/

I found Mitchells blog to be the most visually inviting and easy to follow. He gave good insight into himself in his introduction and by doing so I felt I was able to connect with him a lot better than I did with other students blogs, which had very little information or detail about themselves as people. I found learning about Mitchell and his love for skydiving to be very unique and interesting. Mitchell was assigned Emeco Holdings as his company and even though he only gave a short description and brief introduction into this company it was straight to the point and achieved its purpose. By reading it I was able to get a good idea as to what Emeco Holdings business is about and where they operate.  

2.     http://theadventuresoftanyahoward.blogspot.com.au/

Tanya also gave good background information about herself which I like because it helps me not only get to know a little about her but also connect with her better. I found her blog layout to be very on the eye as well as easy to read and navigate.

Tanya gave a very thorough description and history of her company Cardno. She has provided enough background information about Cardno, the industry they’re involved in, services they provide and where the business is operated in order for any reader to be able to leave her blog knowing Cardno.

3.     http://rhianahp.blogspot.com.au

I enjoyed reading Rhiana’s blog. She gave a good introduction and description of herself, which made it easy to relate to her and take a liking to her blog. I am sure many other students are in the same boat but I feel I can relate to her in that she is juggling full-time work and study.

It was interesting to learn about Rhiana’s company Mastermyne Group Limited. A company which I had previously never heard of or knew anything about. She provided good insight into the services they provide, the coal mining industry they are involved in and some interesting facts about the company she has discovered.

- Step 3:

See attached excel spreadsheet in Assignment 1 submission section on CQU Moodle site.

- Step 4:

- Step 5:

MY TOP 3 BLOGS

Hi all, 

My top 3 blogs and some reasoning behind why...

  

1.     http://mcolesy.blogspot.com.au/

I found Mitchell's blog to be the most visually inviting and easy to follow. He gave good insight into himself in his introduction and by doing so I felt I was able to connect with him a lot better than I did with other students blogs, which had very little information or detail about themselves as people. I found learning about Mitchell and his love for skydiving to be very unique and interesting. Mitchell was assigned Emeco Holdings as his company and even though he only gave a short description and brief introduction into this company it was straight to the point and achieved its purpose. By reading it I was able to get a good idea as to what Emeco Holdings business is about and where they operate.  

2.     http://theadventuresoftanyahoward.blogspot.com.au/

Tanya also gave good background information about herself which I like because it helps me not only get to know a little about her but also connect with her better. I found her blog layout to be very on the eye as well as easy to read and navigate.

Tanya gave a very thorough description and history of her company Cardno. She has provided enough background information about Cardno, the industry they’re involved in, services they provide and where the business is operated in order for any reader to be able to leave her blog knowing Cardno.

3.     http://rianajp.blogspot.com.au

I enjoyed reading Riana’s blog. She gave a good introduction and description of herself, which made it easy to relate to her and take a liking to her blog. I am sure many other students are in the same boat but I feel I can relate to her in that she is juggling full-time work and study.

It was interesting to learn about Riana’s company Mastermyne Group Limited. A company which I had previously never heard of or knew anything about. She provided good insight into the services they provide, the coal mining industry they are involved in and some interesting facts about the company she has discovered.