Financial Management Strategy

2nd Assignment

ALLAMA IQBAL OPEN UNIVERSITY

(Department of Business Administration)

Assignment # 2
Business Policy and Strategy (5532)

TOPIC: FINANCIAL MANAGEMENT STRATEGY

Submitted to: Sir Imtiaz Ahmad Submitted by: Ishtiaq Ahmed (0333-6824303) AH-526270

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ACKNOWLEDGEMENT
All praises to Almighty Allah, the most Gracious, the most Beneficent and the most Merciful, who enabled me to complete this assignment. I feel great pleasure in expressing my since gratitude to my teacher, for his guidance and support for providing me an opportunity to complete my Project. My special thanks and acknowledgments to Mr. Ishtiaq Ahmed for providing me all relative information, guidance and support to compile the practical study at Lucky Cement. I will keep my hopes alive for the success of given task to submit this report to my honorable teacher Sir Imtiaz Ahmad, whose guidance; support and encouragement enable me to complete this assignment.

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EXECUTIVE SUMMARY
In this professional project analysis of Lucky Cement Company Limited is done in very detail to check out current position, performance and progress of the company. To measure these activities balance sheet (trend analysis), balance sheet (vertical analysis), income statement (trend analysis), income statement (vertical analysis), ratio analysis, and SWOT analysis and are performed that has explored the real picture. At the end conclusion is made on the basis of these analysis. Then future recommendations are made to improve company in every aspect.

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Table of Contents Title page Acknowledgement Abstract Table of contents Introduction to the issue Practical study of organization

Page No 01 02 03 04 05 09

SWOT analysis Conclusion Recommendations References

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Introduction to Topic
Financial management:
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Financial Management can be defined as: The management of the finances of a business/organization in order to achieve financial objectives taking a commercial business as the most common organizational structure, the key objectives of financial management would be to: Create wealth for the business Generate cash, and Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested.

Objectives of Financial Management:

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be, To ensure regular and adequate supply of funds to the concern. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders? To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. To ensure safety on investment, i.e. funds should be invested in safe ventures so that adequate rate of return can be achieved. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management:

1.

Estimation of capital requirements:

A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
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Determination of capital composition:

Once the estimation has been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
3.

Choice of sources of funds:

For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing.
4.

Investment of funds:

The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
5.

Disposal of surplus:

The net profits decisions have to be made by the finance manager. This can be done in two ways: d. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. e. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.
6.

Management of cash:

Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to
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creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.
7.

Financial controls:

The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Role of Financial management strategy:

The FMS comprises a financial management plan and a financial model. The Financial management plan is a qualitative document that describes what capital works need to be undertaken and why; a financial model uses this information to create a quantitative document (i.e. forecast of revenue and expenditure). To be effective the financial management strategy needs to: Give effect to strategies identified in the corporate and operational plans, and TMP business management plan; Demonstrate the long-term viability of the organization. Be integrated with the organizations broader financial management planning. Be an interactive process (i.e. regularly reviewed and revised); Company with legislative (including QCA, DERM & DIP); and provide mechanisms for effective monitoring and review. Financial management is a process of assessing the organizations current and projected financial performance in a manner that provides meaningful information for planning, performance measurement, internal control and corporate management.

Benefits of Financial management:

Effective outcomes: Financial management has the following beneficial

The business remains viable in the short, medium and long term. Customer gets value for money.
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Statutory requirement are met. Managerial have financial information (cost, KPIS, etc) to allow them to manage the business more effectively and efficiently in the short term and long term. These outcomes are achieved by: Identifying the need for future infrastructure investment (capital works) and potential sources of funding for it (e.g. reserves, debt, subsidies) thus allowing the business to plan its future capital requirements. Assessing whether sufficient revenue is being generated to meet long-term financial obligations; Communicating effectively with the board of management. Highlighting changes in the cash position, profitability, and size of the business

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Practical Study of the Organization

Company History:
Lucky Cement Limited has been sponsored by one of the largest business groups in Pakistan, the Yunus Brothers Group (YB Group), based in Karachi with history of 50 years. The YB Group is engaged in diversified manufacturing activities including textiles, spinning, weaving, processing, finishing, stitching and power generation. The Group consists of a number of industrial establishments like: Lucky Cement Limited Gadoon Textile Mills Limited Fazal Textile Mills Limited Yunus Textile Mills Lucky Energy (Private) Limited M/s. Yunus Brothers Lucky Textile Mills Security Electric Power Company Limited

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Lucky Cement Limited was founded in 1996 by Mr. A. Razzak Tabba. The co`` mpany initially started with factories in the Pezu district of the N.W.F.P, now called Khyber Pakhtunkhwa. Also it owns a factory in Karachi. When it came into existence in 1996 its daily production capacity was 4200 tons but now it is producing 21000 tons per day from dry cement plant and rated amongst the few best plant in Asia. In addition, lucky cement is aggressively pursuing to develop export markets for cement to export in bulk from Pakistan to gulf countries, African markets and Far East region including Nepal and Sirianka. Considering sizeable exports potential luck cement is decided to increase its capacity to 2.5 Million tons per annum. The expansion program was completed in 2008. It is the desire of luck cement to put Pakistan on world map as a leading producer and exporter of loose cement in international market. Lucky cement has also installed jumbo packers at its Karachi plant to dispatch cement in one ton packing requirement. All this made lucky cement the largest cement producer with emphasis on supply of superior quality cement to its customers.
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Vision Statement:
We envision being the leader of the cement industry by identifying and capitalizing on new market opportunities, meeting expectations of the stakeholders, contributing towards industrial progress and sustainable future, while being responsible corporate citizens (Lucky Cement, 2010)

Mission Statement:
Our mission is to expand our business network by forming strategic alliances in the global market. We endeavor to equip our business with the latest technology to produce quality cement while conserving energy and reducing CO2 emission to reinforce eco-friendly business practices; thus meeting international standards. (Lucky Cement, 2010)

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Practical Study of the Organization with respect to the Issue

Financial Management Strategies Of Lucky Cement Ltd:
Estimation of capital requirements Determination of capital composition Choice of sources of funds Investment of funds Disposal of surplus Management of cash Financial controls

Financial Analysis:
1.

Balance Sheet:
The balance sheet of Lucky Cement is: Lucky Cement Particulars ASSETS NON-CURRENT ASSETS Property, plant and equipment Intangible assets Long term advance Long term deposits CURRENT ASSETS Stores and spares Stock-in-trade Trade debts - considered good Loans and advances Trade deposits and short term

2010

31,378,255 2,977 55,373 2,175 31,438,780 4,008,288 608,813 779,305 105,915 48,807
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prepayments Other receivables Tax refunds due from government Taxation net Sales tax refundable Cash and bank balances

184,805 the 538,812 145,151 117,939 333,629 6,871,464 38,310,244 3,233,750 21,862,179 25,095,929 1,658,600 31,957 319,217 1,562,850 3,572,624 3,043,320 155,500 6,267,112 term 175,759 9,641,691

TOTAL ASSETS EQUITY AND LIABILITIES SHARE CAPITAL AND RESERVES Share capital Reserves NON- CURRENT LIABILITIES Long term finance Long term deposits Deferred liabilities Deferred taxation CURRENT LIABILITIES Trade and other payables Accrued mark-up Short term borrowings Current portion of long finance

CONTINGENCIES AND COMMITMENTS TOTAL EQUITY AND LIABILITIES 38,310,244

2.

Ratio Analysis:

The ratio analysis of the Lucky Cement for the year 2010 is given below: S. No A) 1 2 Ratios Profitability Ratios Gross profit to sales Years 2010 32.56%

Net profit after tax to 12.80% sales

2009 37.26 % 17.46 %

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3 B) 1 2 C) 1 2 3 4 5 6

Return on Equity after tax 12.50% Solvency/Debt Ratios 0.53 Debt : Equity ratio :1 Interest Coverage ratio 7.45 Operating/Activity Ratios Inventory turnover 18.31 No. of days in Inventory 19.93 Creditor turnover 5.78 No. of days in Payables 63.16 Operating Cycle Total assets turnover -43.23 63.97% 77.96%

19.77 % 0.65 : 1 5.83 17.33 21.06 5.31 68.79 47.73 68.58 % 86.23 %

7 D) 1 2 E) 1 2 3 4 5 6 Dividend Payout ratio 41.23% Market Value Per Share as 62.14 Fixed assets turnover Liquidity Ratios Current ratio

Quick/Acid test ratio Investment Valuation Ratios Earnings per share (after tax) 9.7 Price / Earning ratio (after tax) 6.4 Cash Dividend per share 4 Dividend Yield

0.71 0.86 : :1 1 0.65 0.73 : :1 1 14.21 4.12 4.00 6.83 % 28.15 % 58.53

6.94%

Explanation of the Ratios:

1.Profitability Ratios
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The profitability ratios show that there is a decrease in the profitability ratios. The main reason for this was: The cost of production had increased in the country due to high inflation and energy crises. The sales prices are continuously decreasing. Due to these reasons the Gross Profit Margin and as well as Net profit Margin has also decreased. That decrease also effect the ROE of the company.
2.

Solvency/ Debt Ratios:

During 2010 the companys capital structure has also changed and the total debts are decreased during 2010 that 2009. Due to that the companys interest coverage ratio is also increased. It shows that the company is now in a good position to pay off its debts efficiently.
3.

Operating / Activity Ratios:

The activity ratios of the Lucky Cement show a positive performance of the company during 2010. The companys operations are had been efficient during 2010. Due to that its inventory turnover, average age of inventory had improved during 2010 that 2009 and due to that the companys operating cycle is also decreased. However due to decrease in the sales prices the sales in amount had been decreased that effect the total assets turnover and as well as affixed Assets turnover.
4.

Liquidity Ratios:

Due to decrease in sales prices the there is a little decrease in the liquidity of the company. The companys current and liquid assets in 2010 are now less that to meet its current liabilities.
5.

Investment Valuation Ratios:

There is a positive sign for the investors to invest in the shares of Lucky Cement. The reason for this is that during 2010 the company sales (in Rs.) had decreased but the company by using stable dividend policy pay same dividend this year. That thing increases the dividend yield, price/earnings ratio and dividend payout ratio of the company. That ultimately had affected the market value of the firm.

Composition of Balance Sheet Assets

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Composition of Balance Sheet Assets

Vertical Analysis:
1.

Balance Sheet:
Vertical Analysis -% Share Capital & Reserves Non Current Liabilities Current Liabilities Total Equity Liabilities 200 9 60.5 6 15.7 4 23.7 201 0 65.5 1 9.32 25.1 7 100
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Non Current Assets Current Assets Total Assets

79.5 3 20.4 7 100

82.0 6 17.9 4 100

During 2010 the company mainly focusing on the share capital and the short term financing as for as its capital structure is concerned. The company also made more investment in the fixed assets that that of the current assets.
2.

Income Statement:
Vertical Analysis - % Turnover Cost of Sales Gross Profit Distribution Cost Administrative Cost 200 9 100 62.7 4 37. 26 201 0 100 67.4 4 32. 56 14.0 9.22 1

0.63 1.24 27. 17. Operating Profit 41 31 Finance Cost 4.7 2.32 Other Income/Charges 3.05 1.04 Profit before 19. 13. taxation 66 94 Taxation 2.2 1.14 Profit after 17. 12. taxation 46 8 There is an increase in the cost of production during 2010. Due to that the companys Gross profit and as well as the net profit is also affected.

Horizontal Analysis:
1.

Balance Sheet:
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Horizontal Analysis (Year on Year %) Share Capital & Reserves Non Current Liabilities Current Liabilities Total Equity & Liabilities Non Current Assets Current Assets Total Assets

20082009 24.64 -23.49 18.37 12.13 17.97 -5.96 12.13

20092010 7.93 -40.87 5.97 -0.21 2.96 -12.55 -0.21

As compared to year 2008-2009, in 2009-2010 there is an increase in the Share Capital and the Current liabilities of the company. But here we can see that these are increasing on decreasing rate. The same is the case with the fixed assets they are also increased during 2010. On the other side the current assets and the long term liabilities of the company are increased in the year 2010.
2.

Income Statement:
Horizontal Analysis (Year vs Year %) Turnover Cost of Sales Gross Profit Distribution Cost Administrative Cost Operating Profit Finance Cost Other Income/Charges Profit before taxation Taxation Profit after taxation 20082009 55.27 31.1 125.18 110.19 31.96 134.61 875.97 24.95 124.45 -256.4 71.66 20092010 -6.92 0.07 -18.68 41.4 82.75 -41.22 -53.99 -68.16 -33.99 -51.75 -31.74

The sales of the company had decreased in 2010 due to decrease in the sales price and also the gross profit is also affects due to that and due to cost of sales. All that ultimately affects the net profit of the company.
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SWOT analysis
Strength:
Capturing giants share in export market Lucky Cement Group becoming a key success factor Sea route trading becoming a vital and cost efficient strategy Consistency in clinker exports in Mid East and India

Weakness:
Fuel costs to dampen the core earnings Expansive export market inflating the distribution costs

Opportunities:
African Market proving to be a buffer after Indian demands Subsides

Threats:
Excessive regional capacity posing threat Cut in PSDP depressing local demand
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Conclusion
After conducting all the analysis we conclude that Lucky Cement is now facing problems due to recession in the country. Its sales are going down in amount terms but efficient in unit term. Due to large scale of production it is operating at minimum cost of production level as compare to its competitors. The thing that Lucky Cement has to do is to go for the European market. That will help it to maintain its market position for a long time period. Further Lucky Cements future is very healthy and diverse. It has huge market share and has ability to raise funds. Currently it is showing less profit as compare to previous years but in the long run its scope is very vast and bright.

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Recommendations
On the base of above analysis we have suggested the following recommendations: Focus less on debt financing as a solution to increasing cash needs as the industry is already burned and highly leveraged with the total industry debt standing at Rs. 120 Bn. Government of Pakistan should actually go about helping the industry through setting up a minimum price level that helps the firms survive in the face of low demand locally and this price should be set looking at the cost of production of the major producers and then on the basis of this set a price that is reasonable. Also the government needs to actually increase the amount of inland freight subsidy to go about facilitating export for companies producing cement who are located in the north and cannot realize the full export potential due to the high transport cost involved despite the subsidy.
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The industry production capacity stood at 44.07 Mn tonnes which is going to increase to 48Mn tonnes by the end of June 2011. Local demand n the country stands at around 20 Mn tonnes which leaves a surplus of 24 Mn tonnes which could be exported if the government provides adequate facilities on the ports for handling and packaging of cement. Government should aim at removing transportation bottlenecks in the way of exports 0f consignments to India and to port of Karachi which will increase exports to African and Middle East Markets, Sri Lanka, Myanmar and other Asian countries. The export oriented refinancing facilities like export refinance being provided to the sector has increased its applicable markup rate from 7.5 % to (% as a result of the IMF policy of removal of subsidies which is endangering the profitability of this sector. Govt. Should improve law & order to support export Ban likely to be place on cement import No changes in cement import and export policy.

Reference
www.slideshare.com http://www.Lucky-Cement.com.pk/ http://www.Lucky-Cement.com.pk/careers/whyLucky-Cement.php
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http://en.wikipedia.org/wiki/Lucky-Cement_Pakistan http://www.scribd.com/doc/24651033/HR-REPORT-cultural-compatiblepractices-inLUCKY-CEMENT

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