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Business Finance {Compass Group}

Compass Group Plc INTRODUCTION Compass group Plc is a market leader in providing food and a range of selected support services to customers in the workplace, schools and colleges, in hospitals at leisure or in remote environments. The company has a unique approach to achieve strong sustainable leadership positions in markets that offer potential for profitable growth. It announces that “We bring together the combined strength of a group which operates in 50 countries, with more than 428,000 employees, to deliver the same superior standards of service globally, daily, personally”.

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The history of Compass Group in the UK dates back to 1941, when Jack Bateman founded factory canteens to feed British workers supporting the war effort. In 1967, the company was acquired by Grand Metropolitan and the catering business became Compass Services in 1984. Following a management buyout of Grand Metropolitan’s contract services division in 1987, Compass Group was formed. Compass Group floated on the Stock Exchange a year later. In 1998, the Group became a FTSE 100 company.

In July 2000, Compass Group’s UK business merged with the catering arm of Granada PLC to become the UK & Ireland division of Compass Group – the UK market leader in foodservice and hospitality. Compass is a world-leading foodservice and support services company: -Revenue: ? 1. 8bn -Operating margin: 6. 4% – Operating Profit: ? 114m Compass Group, UK annual revenues (in the year to 30 September 2010) employing over 50,000 people. Part of Compass Group PLC, a world leading foodservice and support services organisation, with annual revenues of around ? 14. billion (in the year to 30 September 2010) and operations in 55 countries world wide. www. compass-group. co. uk This report would be analyse the financial position and performance of the Compass Group Plc for the year ended 30 September 2010 and also looking at the company’s financial strategy . Compass Group Plc Part A Profitability Ratio 1. Return on capital employed {ROCE}: Return on capital employed establishes the relationship between the profit and the capital employed. It indicates the percentage of return on capital employed in business and it can be used to show the overall profitability and efficiency of the business.

Significance: Return on capital employed ratio is considered to be the best measure of profitability in order to assess the overall performance of the business which is 30% in 2009 and also 30% in 2010 this indicates how well the management of compass has used the investment made by owners and creditors into the business. And also this can be used as a basis for various managerial decisions. See appendix figure 1 2. Gross profit margin: is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales.

Significance: Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. The gross profit of compass remained at 7% in both years. There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends. See appendix figure 1 . Net profit margin: is the ratio of net profit (after taxes) to net sales. It is expressed as percentage. Significance: NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. The net profit of compass has increased by 1% from 2009; this shows the firm’s capacity to face adverse economic conditions such as price competition, low demand, etc. he higher the ratio the better is the profitability. See appendix figure 1 Compass Group Plc Efficiency Ratio 1. Fixed assets turnover: Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. The turn over of compass has stayed the same way from 2009 to 2010 they had a turn over only 3 times. See appendix figure 2 2.

Stock turnover: Stock turn over ratio and inventory turn over ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. Stock turn over of compass was 7 times in 2009 and decreased to 6 times in 2010 this indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which compass is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not.

See appendix figure 2 3. Debtor’s collection period: Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Significance: Accounts receivable turnover ratio or debtor’s turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtor’s turnover the more efficient is the management of debtors or more liquid the debtors are.

Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. The debtor’s days remained the same as 46 days over the period of two years. See appendix figure 2 4. Creditor’s payment period: This ratio is similar to the debtor’s turnover ratio. It compares creditors with the total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Significance: The average payment period ratio represents the number of days by the firm to pay its creditors. The ratio compass increased by 4 days over the period of two years.

A high creditor’s turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly. This situation enhances the credit worthiness of compass. However a very favourable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors. See appendix figure 2 Compass Group Plc Short Term Liquidity 1. Current ratio: It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm.

Significance: This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm’s financial stability and compass figures increased from 82. 1 to 85. 1. It is also an index of technical solvency and an index of the strength of working capital. Limitations: Even if the ratio is favourable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities.

See appendix figure 3 2. Acid test: Liquid ratio is also termed as “Liquidity Ratio”,”Acid Test Ratio” or “Quick Ratio”. It is the ratio of liquid assets to current liabilities. The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due. Significance: The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm and compass figures were from 75. 1 to 78. 1 this measures the firm’s capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio.

It is used as a complementary ratio to the current ratio. See appendix figure 3 Compass Group Plc. P art B Issues to consider when preparing projected financial statement For statement of financial position 1. Non current assets: These are fixed costs in general, fixed cost remain as the same but fixed cost will occur due to decisions of taking investments should be included to increase the value of non current assets. 2. Current assets: An increase in the level of sales will lead to an increase in current assets. Inventories: the main variable costs are raw material, irect labour, and direct expense. These are production should increase the value of inventories among current assets. Accounts receivables: increase in level of sales may increase trade receivables 3. Current liabilities: An increase in the level of sales will also increase the level of current liabilities. Account payable: more purchases will make as an increase in the level of sales For the income statement Increases in the level of sales will definitely increase the cost of sales and operating expenses. Items can be identified: 1.

Cost of sales: This can be calculated together with increase in inventories. 2. Operating cost: these are selling, distribution costs, and administrative expenses. Source: Module booklet Compass Group Plc. Calculating the growth rate revenue The Compounded Annual Growth Rate (CAGR) is commonly used to measure a markets annual growth over a period of time. This measure is a constant percentage rate at which a market would grow or contract year on year to reach its current value. This formula is used to express the rate of growth in sales, earnings units or some other measure over a number of years.

It is a more representative measure of annual growth over a number of years. {Module booklet. use a textbook} The formula for calculating CAGR is: These figures in appendix Fig 6 were taken from compass annual report to calculate the company’s compounded annual growth rate in sales for the company. g= 8. 95% aprox 9% Compass Group Plc. Projected Financial Statement Projected financial statements are statements of the predicted financial outcomes pursuing a particular course of action being considered by a business, normally compromise: •A projected income statement A projected statement of financial position •A projected cash flow statement These projected statements can be prepared to reveal the impact of options of the future financial position and performance so that comparison can be made. Source: Module booklet Projected income statement Profit and Loss Account is sometimes called The Income Statement, Cox and Fardon (2007). Cox and Fardon (2007) also state that, “Profit and loss account is a financial statement which summaries the revenue and expenses of a business for an accounting period (one year) and shows the overall profit or loss”.

The information shown is; the turnover of the business, the cost of sales made by the business, and the overheads of running the business, such as administration, wages, rent paid, telephone, interest paid and travel expenses, Cox and Fardon (2007). In another words, this means, the Income Statement shows how compass performs over a period of time; a week, month or year. It takes all the company’s expenses into account, from prepaid expenses to expenses paid in the future. Generally, the Income Statement tells the operator if the business is making a profit or loss.

From there, the operator can begin making changes in policy and implementing strategies that will help compass achieve its goals. The basic formula for an Income Statement is; Sales – Cost of Goods Sold – Expenses = Profit or Loss, Bobie and Merton (1998). If sales are higher than Cost of Goods Sold and Expenses that means profit, and loss is experienced when Sales are less than sum of Expenses and Cost of Goods Sold. For example; Compass group plc”. See Appendix, Fig. 4 Compass group made profit by year ended 30 September 2010. Compass Group Plc. Projected balance sheet

According to Bodie and Merton (1998), a firm’s balance sheet shows its assets (what it owns) and its liabilities (what it owes) at a point in time. The difference between assets and liabilities is the firm’s net worth, Bodie and Merton (1998). It allows operators to forecast short and long-term cash flow, Bodie and Merton (1998). This means the health of a restaurant can be analysed from the Balance Sheet at any point in time; that is today, last month or tomorrow. The Balance Sheet lists all the assets, liabilities and equity of the restaurant. The basic formula for Balance Sheet is:

Assets – Liabilities = Capital, Gowthorpe (2005, p. 96). If the Assets of compass are higher than liabilities that means the business is worthy, but if the liabilities becomes higher than assets it means the business can not pay up its debts and may shut down. Example of a Balance Sheet: Compass Group. See Appendix, Fig. 5 Compass group is worth and can afford to pay its creditors. Compass Group Plc. Conclusion & Recommendation My main focus when considering the loan is repayment the repayment of the loan I would be requesting that the manager orders me a copy of the business- credit report from a credit reporting agency.

In that report I would be looking if the company has a sound record of credit worthiness as indicated in the credit report, I would be requesting letters of recommendations, work history. I would be investigating if the manager has invested savings or personal equity in their own business totalling at least 25 to 50 percent of the loan he is requesting. I would also like to know if the company has sufficient cash flow to make the monthly repayments on the amount of the loan request. Lastly I would like to know if the manager has sufficient experience and training to operate a successful business because we cannot afford them going bankrupt.

Compass should bring Financial Statements with valid dates; year ending 30 September 2010. The owner will be liable for paying back the loan therefore he should bring proof of his fixed assets, competition frame, ownership of the company, employees and customers numbers. However, at this point in time, the business can not lend money to the restaurant owner. Compass Group Plc. Bibliography Berman, K. and Kremer, C. (2007) ‘Pocket Mentor: Understanding Finance: Expert Solutions to Everyday Challenges’, Harvard Business School Press, Boston, US. Bodie, Z. and Merton, R. C. 1998) ‘Finance’ Preliminary Edit, Prentice-Hall Inc, USA. Boczko, T. and Davies, T. (2005) ‘Business Accounting and Finance’ 2nd Edit, McGraw-Hill Education, UK. Collier, P. M. (2006) ‘Accounting For Managers: Interpreting Accounting Information for Decision-making’ 2nd Edit, John Wiley 7 Sons Ltd, England. Cox, D. and Fardon, M. (reprinted 2007) ‘Management of Finance: a guide to business finance for the non-specialist’ 1st Edit, Osborne Books Ltd, Worcester. Gowthorpe, C. (2005) ‘Financial Accounting for non-specialists’ 2rd Edit, Thomson Learning, London. Millichamp, A. H. 1997) ‘Finance for Non-Financial Managers’ 3rd Edit, Continuum, London. McLaney, E. (2006) ‘Business Finance: Theory and Practice’ 7th Edit, Pearson Education Ltd, England. Peavler, R. (2010) “Statement of Retained Earnings”, About. com Guide: Business Finance, http://bizfinance. about. com/od/yourfinancialposition/tp/Statement_Retained_Earnings. htm, [accessed 24/3/2011] College-Cram (2010), “Statement of Retained Earnings: Bogus Manufacturing, Inc. example”, http://www. college-cram. com/study/accounting/financial-statements/retained-earnings-statement [accessed 24/3/2011] http://www. accountingformanagement. om/capital_gearing_ratio. htm [accessed 24/3/2011] Financial Times 05. 4. 2011 Compass Group Plc. Appendix PROFITABILITY RATIO20102009 Return on capital employed {ROCE}Operating tax/equity x 100903/3073 x100= 30%773/2545 x100= 30% Gross profit margingross profit/sales x 100989/14469 x100= 7%877/13444×100= 7% Net profit marginnet profit {bit}/sales x 100680/14469 x100= 5%592/13444×100= 4% Appendix fig 1 EFFICIENCY RATIO20102009 Fixed asset turnovertotal sales/fixed assets at NBV14468/5502= 3 times13444/5091= 3 times Stock turnoveraverage stock/cost of sales x365238/14468 x365= 6 days230/12574 x365= days Debtors collection periodtrade debtors/credit sales x3651830/14468 x365= 46 days1680/13444 x365= 46 days Creditors payment periodtrade creditors/credit purchases x3652638/13485 x365= 73 days 2378/12574 x365= 69 days Appendix fig 2 SHORT TERM LIQUIDITY20102009 Current ratiocurrent assets/current liabilities2752/3239= 85. 12550/3099= 82. 1 Acid test {current assets-stock}/current liabilities{2752-238}/3239= 78. 1{2550-230}/3099= 75. 1 Appendix fig 3 Compass Group Plc. 20102011 ?m? m Revenue14,46815,770 Operating costs(13,485)(14,699) Operating profit9831,071 hare of profit associates65 total operating profit9891,078 finance income55 finance cost8694 hedge accounting ineffectiveness44 change in the fair value of investment and minority interest put options11 profit before tax913995 income tax expense 246268 profit for the year from continuing operations 667727 discounted operations profit of the year from discounted operations1314 continuing and discounted operations profit for the year 680741 Appendix fig 4{income statement} Compass Group Plc. 20102011 ?m? m Non-current assets goodwill3,8334,178 other tangible assets570621 roperty, plant and equipment581633 interest in associates3232 other investments3740 trade and other receivables 7278 deferred tax assets296296 derivative financial instruments8188 Non-current assets5,5025,968 Current assets inventories238259 trade and other receivables 1,8301,995 tax recoverable3134 cash and cash equivalent643701 derivative financial instruments1010 current assets2,7522,999 Total assets8,2548,966 Current liabilities short-term borrowings148161 derivative financial instruments55 provisions130142 current tax liabilities273298 trade and other payables2,6832,924

Current liabilities3,2393,530 Non-current liabilities long-term borrowings1,2001,308 derivative financial instruments22 post-employment benefit obligations389424 provisions302329 deferred tax liabilities1516 trade and other payables3437 Non-current liabilities1,9422,117 Total liabilities5,1815,647 Net assets3,0733,320 Equity share capital 189206 share premium account317346 capital redemption reserve4444 less: own shares11 other reserves45214,928 retained earnings20022,182 Total equity share holders funds30683,344 Minority interests55 Total equity30733,349 Appendix fig 5{Balance sheet}

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