Financial Systems Interventions
To benefit from a healthy economy, an efficient and effective financial system is needed. Economic activity affects small and large businesses, interest and mortgage rates, the stock market, and the global marketplace . In a sense, it affects the nation's entire purchasing power. The financial system's primary role is to move savings from one business or individual into investments for another business or individual. It is extremely important to have general familiarization with basic financial concepts to communicate with the finance division, or the accountant , or the marketing specialist, or with anyone in the organization concerned about money and its true cost. There may be a time in the future of a company when a PT practitioner will intervene in financial forecasting or suggest protocol and criteria for capital investment and spending. There may even be involvement in cash flow analysis. Knowledge in these areas will serve well. As non-instructional interventions, financial systems deal with economics and decisions tied to the financial aspects of business (see Table 5-16). The financial systems interventions considered here are financial forecasting, capital investment and spending, and cash-flow analysis. Mergers, acquisitions, and joint ventures , three multiorganizational arrangements, are included as financial systems interventions because of their bottom-line results.
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Financial Forecasting
Financial forecasting is anticipating the future cash needs for a particular business. Financial managers use forecasts to determine whether or not their plans are consistent with the goals and objectives of their businesses. Financial forecasts play a major role in the planning of business strategies, monitoring the firm's financial affairs, and controlling and investing cash. Forecasts help management anticipate problems so that appropriate actions can be taken to minimize financial problems. These activities help to increase profits and reduce risk and are, therefore, vital components in the continuing effort to make businesses successful.
Financial forecasting methods are scientific in nature, meaning that two people applying the same methods and using the same data should be able to arrive at the same conclusion. Although this may be true, theoretically, statistical manipulations do not guarantee accurate financial forecasts. Successful financial forecasting also relies on solid judgment combined with an objective analysis of the data available. All variables , domestic and foreign, must be reviewed to come up with a financial forecast that is accurate and reliable. Information for financial forecasts may come from various locations, such as the balance sheet, the income statement (or cash-flow forecasts), or trend forecasts.
Financial forecasting affects all employees. Companies invest excess cash in stocks, bonds , and securities of other companies to generate extra revenue. All of this affects the bottom line of current and future business. Employees need to learn about their company's financial goals and objectives so that they can become better consumers. A review of company financial statements may help people understand the connection between their efforts and the bottom line of the company. [95]
Capital Investment and Spending
Capital investments yield returns during future periods and may include property, buildings , equipment, and securities of other companies. Property may include the land on which the firm's facilities are located. Equipment may include furniture, tools, computers, and machinery that the company uses to produce the goods that it sells to customers. Capital investments are made in the anticipation of returns in the future and usually involve large sums of money. Resources and cash often are committed for long periods, so it may be difficult to reverse the effects of a bad decision. Uncertainty about return on investments is a risk factor.
To decide whether an investment or strategy should be pursued, the analyst must decide whether it has the potential of value for the firm's stakeholders. To create value, the investment or strategy's returns must exceed its costs. Determining which costs and benefits are relevant to the particular investment or strategy must also be determined. Capital invested in new products has a cost. To use capital, the company has to pay for its use. Money invested in new products, equipment, or facilities could be diverted to other uses, such as paying off debt, making a pay-out to stockholders , or investing in stocks or bonds. These all result in economic benefits to the company.
Once management has decided to make an investment in property, plant, equipment, or working capital, a decision must then be made to fund the project. Funds that are invested in these types of endeavors may come from stockholders and/or bondholders. The capital budgeting problem is essentially balancing the benefits from these new capital expenditures with the costs needed to finance them. The cost of this capital, adjusted to a minimum acceptable rate of return, plays an essential role in ranking the relative effectiveness of different types of capital projects and in establishing acceptable guidelines for project acceptance. A sound capital expenditure program will recognize the need to search for investment opportunities, to conduct long- term planning, to estimate future benefits from projects, to appraise the state of the economy, to establish guidelines for return on investment, and to review all completed projects.
Many companies experience uneven cash flows during the year. An example is department stores, which generate a large portion of their revenues during the months of November and December, resulting in a large cash inflow during the holiday season . In many instances, these large amounts of cash are not immediately needed to fund the operations of the company. Many of these companies may elect to put some of their excess cash into short-term investments until the cash is needed for operations. These investments usually produce higher earnings than those available from bank accounts, enabling companies to increase their earnings.
The time value of money is a key concept in investment analysis. The time value of money refers to the fact that a dollar received today is more valuable than a dollar received one year from now. The dollar received today can be invested at some interest rate so that it will be worth more than the dollar received one year from now, which cannot be invested until that time. [96]
Most workers do not understand the strategies involved in deciding whether money should be invested in capital equipment, land, facility expansion, or securities. To many, machinery is bought to build products, products are sold to make money, and money pays the bills and gives the person a paycheck. But these investments must create value, which means that they must be able to produce a product that, when sold, will produce revenues that exceed the cost of the production of that product. These decisions are important, especially when one bad decision can bankrupt a company or stress it enough financially that it can never fully recover.
Cash-flow Analysis
Cash-flow analysis provides information about the inflows and outflows of cash during a specific period. The ability of a business to generate cash is important because it affects the ability of the business to pay its debt obligations. Cash also enables the business to replace old equipment, to expand product lines, and to provide dividends to shareholders. Cash flow is the difference between revenues ”the amount of money taken in from the sale of a product or service ”and the cost of the product or service that was sold. These costs could include materials, labor, equipment, and overhead, among others.
It must be remembered that not all healthy businesses have a large, positive cash flow. Businesses that are experiencing extensive growth often use their excess cash to expand their production facilities, acquiring new equipment and labor and thus reducing the amount of cash on hand.
Financial statements provide financial managers and others with historical data about cash. Sufficient cash must be available on an ongoing basis so that the firm can meet its commitments. The information contained in the financial statement will enable the financial manager to make proactive decisions about the company's financial situation, not reactive decisions. The management of cash begins with projecting the amounts and timing of future cash flows. If positive cash flows are forecasted, management must identify some profitable uses of the excess cash. If negative cash flows are forecasted, then alternative sources of cash must be found so that obligations can be met. Possible sources include short- and long-term debt, an infusion of cash by the owners of the company, or the liquidation of assets. Other possible strategies include trying to hasten up collections from customers and delay payments to suppliers. [97]
The extent of many employees' knowledge of cash-flow analysis is that they want the company to have enough money in its bank account so that their weekly paycheck is covered on payday. But cash flow plays a very important role in the everyday running of a company. Being able to pay its obligations in a timely manner is just one part of doing business. It also needs to produce profitable products, to replace old or defective equipment, expand productive and profitable product lines, and provide dividends to shareholders to keep them happy. These are the other steps that need to be taken to make a company successful. Employees need to know how cash flow in their business operates. They may be in a business that has cycles, as in department stores, which get most of their revenues during the holiday season. If workers know how cash flow operates, they may be able to suggest areas where money could be saved when excess cash is at a minimum.
Mergers, Acquisitions, and Joint Ventures
A merger is when two separate companies combine operations and become one company. An example of this is if Company A and Company B merge, resulting in a new or surviving company called Company A (or it could be called Company B, or it could be called something new). Mergers are usually negotiated by the management of the two merging companies. The surviving company acquires either the stock or the assets and liabilities of the nonsurviving company, and the nonsurviving company no longer exists as a separate company.
The advantage of a merger is that it can lower the costs of product development, management, financing, research, and marketing. The most common economies are from the reduction of duplicate fixed costs for production and management, since fewer production facilities may be needed post-merger, and fewer managers will be needed to run the facilities. A reduction in the accounting and personnel departments, as well as in upper management, may be accomplished because of duplicated job functions. Research economies may also be achieved by eliminating duplicate research efforts and personnel. Marketing economies may be produced through savings in advertising and from the advantages of offering a more complete product line.
An acquisition is when one firm acquires more than 50 percent of the voting stock of another firm, thereby controlling that firm. The buyer firm is referred to as the parent company, while the acquired firm continues to exist and operate as a subsidiary of the parent company. This type of arrangement offers several advantages when compared with mergers. The parent company may obtain effective control without having to acquire 100 percent of the acquired company, substantially reducing the amount of capital needed for the transaction. Because the subsidiary continues to exist as a legally separate company, the parent company has only a limited liability for the debts of the subsidiary. If the parent company should ever decide to increase or decrease its investment in the subsidiary, it is very easy to either sell or purchase shares. Other advantages of an acquisition include complete control over operations, new technology, immediate access to new markets, and instant credibility and gains realized by owning an already established company.
Acquisitions may take place under two different circumstances: in the form of a tender offer or via a hostile takeover. In a tender offer, one corporation will ask the shareholders of another corporation to sell to them their shares in the targeted corporation, at a specific price. This is typically done after approval from the targeted corporation's board of directors. In a hostile takeover, a corporation sends the board of directors of another corporation a letter announcing the acquisition proposal, requiring the board of directors to make a quick decision on the proposal. If the board of directors rejects the proposal, the corporation may appeal directly to the targeted corporation's shareholders by way of a tender offer for their shares.
A joint venture is undertaken by competitors for a specific purpose. This may include acquiring new technology, entering new markets, generating new products, or meeting customer demands quickly. It may also include accessing new distribution systems or new capital or personnel resources. Joint ventures can be more involved when a domestic firm enters into a partnership with a foreign firm. There is the possibility of disagreements regarding objectives, such as how much profit is desired and how fast it should be paid out to stakeholders. [98]
Often during mergers and acquisitions employee morale drops because of concerns about an uncertain future, the stress of change, and job losses. However, if people know the ramifications of a merger, acquisition, or joint venture beforehand, they may be able to better position themselves in the new organization by acquiring additional training to reduce their risk of job loss.
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Situation
Roberts Manufacturing, a New Jersey producer of apparel fasteners, announced a merger with Muller Manufacturing, a German producer of various small machinery replacement parts and apparel fasteners. The merger with Muller Manufacturing significantly increased Roberts Manufacturing's ability to compete with their major competitors in China. With the merger, the new company became the largest single manufacturer of apparel fasteners, with four production sites in the U.S. and two in Germany. Muller-Roberts, as the new company was called, expected to reap the benefits of economies of scale. The stated objective of the merger was to integrate Roberts Manufacturing's technological superiority and higher profit margins with Muller Manufacturing's distribution system and expanded markets. Muller Manufacturing sells its products in 20 countries , whereas Roberts Manufacturing sells 97 percent of its products in North America.
Although both companies produce similar products, there are many differences between the two companies. Roberts Manufacturing employed union production employees in all four production facilities in the U.S., where six-day workweeks were the norm. Muller's employees were not union and worked a standard 40- hour workweek. Differences in language, wages , health benefits, work environment, safety programs, employee training programs, currency, and culture were also strongly evident when comparing the two companies.
Once the merger announcement was made, Roberts Manufacturing noticed a decrease in worker morale as well as a 12 percent decrease in production and a 16 percent decrease in the quality of their products. Employees' anxiety levels seemed to increase because of their sense of insecurity and uncertainty as to how the merger would affect them. Although the new, combined management announced that there were no planned layoffs or reductions in the workforce, most believed that layoffs and workforce reductions were imminent. Many Roberts Manufacturing employees felt that the merger was not really a merger of equals, but that Roberts had actually been bought out by Muller. Upper management of the new company seemed to be split between the management personnel of both companies, with Muller's CEO taking his position at the top of the new company. Key positions in the new company were filled by management from Muller.
The challenge was to get production and quality levels back to premerger levels as soon as possible, since these two major problems were costing the company millions of dollars. To accomplish this, the employee morale, culture, and quality differences of the two companies would have to be reviewed. Feelings of insecurity and uncertainty among the people would have to be dealt with to combat the problems.
Intervention
Several interventions were used to deal with the merger issues. Clear goals and objectives were written and conveyed to employees by the upper management of the new company. The hope was for all employees to accept the new direction that the company was going to follow. Training sessions were held to discuss production and quality problems as well as new production procedures that were to be implemented as a result of the merger. These training sessions were followed by team-building sessions so that each production group could work on problems in their specific areas. Upper management made decisions regarding wages, the elimination of overtime work, and health benefits. Many employees felt that these decisions were solely based on what was good for the company, not taking into account what was good for the employees as well. These decisions were conveyed to the employees in town hall-type meetings presented by upper management.
Results
Many longtime employees felt betrayed by the whole merger process and believed that nothing management ever could do would change their feelings. Some of the employees decided to retire instead of adjust to the new company environment. Others, after attending training sessions, team-building sessions, and the town hall meetings, had a better attitude toward what had taken place and what was planned for the future. Upper management decisions seemed to make more sense to the employees when they understood the rationale behind the decisions. The insecurity and uncertainty levels exhibited by employees right after the merger announcement decreased, while morale increased. Production and quality levels soon returned to pre-merger levels before surpassing those levels as new production processes were implemented.
Lessons Learned
When dealing with mergers, employees' feelings of insecurity and uncertainty are probably unavoidable no matter how prepared a company is ahead of time to combat those feelings. It is common for employees to feel that way when change occurs. But it is still management's job to calm those fears.
The content for this section and the Muller-Roberts case study were contributed by Leonard M. Constantine, Jr, M.S., M.B.A., Daimler-Chrysler. Used with permission.
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Directions: Identify the problems and benefits associated with the three multiorganizational arrangements. Discuss your findings with your group. How would you explain their differences to an HPT or an HRD colleague?
ISPI 2000 Permission granted for unlimited duplication for noncommercial use.
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Directions: One way to distinguish between basic financial statements is to consider the following points. Check ( ¼ ) the appropriate category (categories).
| What We Need to Know | Balance Sheet | Income Sheet | Statement of Cash Flows |
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ISPI 2000 Permission granted for unlimited duplication for noncommercial use .
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Directions: Review the elements included in each of the financial statements. Discuss the rationale for including them.
| (TEMPLATE 1) | MULLER-ROBERTS COMPANY, BALANCE SHEET (as of December 31; 000s of dollars) | |
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| Assets | ||
| Cash | ||
| Marketable Securities | ||
| Accounts Receivable, Net | ||
| Inventory | _____________________ | |
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| Gross Fixed Assets | ||
| Less: Accum. Depreciation | _____________________ | |
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| Liabilities and Owners' Equity | ||
| Accounts Payable | ||
| Notes Payable, Short-term | ||
| Accurals | ||
| Taxes Payable | ||
| Current Maturities of Long-term | ||
| _____________________ | |
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| Common Stock | ||
| Paid-in-Excess of Par | ||
| Retained Earnings | _____________________ | |
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| _____________________ | |
| (TEMPLATE 2) | MULLER-ROBERTS COMPANY, INCOME STATEMENT (Year ended December 31;000s of dollars, except per share) | |
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| Net Sales Revenue | ||
| Cost of Goods Sold | __________________________ | |
| Gross Profit | ||
| Operating Expenses: | ||
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| __________________________ | |
| Earnings before Interest and Taxes | ||
| Interest | __________________________ | |
| Earnings before Taxes | ||
| Provision Taxes | __________________________ | |
| Net Income | __________________________ | |
| Less: Dividends Paid | __________________________ | |
| Addition to Retained Earnings | __________________________ | |
| (TEMPLATE 3) | MULLER-ROBERTS COMPANY, STATEMENT OF CASH FLOWS (Year ended December 31, Year ______) | |
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| Opening Activities: | ||
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| Adjustments to Reconcile Net | ||
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| Depreciation | ||
| Decrease (increase) in accounts receivable | ||
| Decrease (increase) in inventories | ||
| Increase (decrease) in accounts payable, accrued liabilities | ||
| Increase (decrease) in short-term notes payable | ||
| Increase (decrease) in taxes payable, deferred taxes | __________________________ | |
| Net cash provided by operating activities | ||
| Investing Activities: | ||
| __________________________ | |
| Net cash from (used) investing activities | ||
| Financing Activities: | ||
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| __________________________ | |
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| Increase (decrease) in cash and short-term investments | ||
| Cash and short-term investments, beginning of year | ||
| Cash and short-term investments, end of year | ||
ISPI 2000 Permission granted for unlimited duplication for noncommercial use .
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[95] Render and Stair, 1997
[96] Cox, Stout, and Vetter, 1995
[97] Cleverley, 1997
[98] Rakich, Longest, and Darr, 1992
EAN: 2147483647
Pages: 98