Applying Financial Data to Support Achievement of Strategic Objectives: British Airways Plc

Summary

To provide the financial data analysis and meet the requirements of the essay, it has been chosen to discuss the financial performance of British Airways Plc taken during 2016 – 2015 fiscal years. British Airways Plc is one of the largest international enterprises with the biggest number of flight directions, which was launched in 1974. British Airways Plc is a part of the British Airways Group, which consists of a number of subsidiary firms, such as British Airways Holidays Limited and British Airways Travel Shops Limited (British Airways Plc., 2017). Nowadays, the organization operates regular flights to more than 600 destinations around the world.

The company has four main strategic objectives, which are to inspire people, which have a client-oriented approach, they care about globalization, and sustainable profitability. Thus, inspiring people is considered the firm’s dominant goal, which is referred to employees of the organization, who need to be stimulated, and must be able to learn and benefit from the corporate success. The firm’s customers have a wide choice of services that the airline offers. At the same time, the management of the firm realizes that the company must have a presence in other countries, which is one of the reasons why it seeks to conclude an international alliance with the American Airways. The analysis of the company’s annual report, taken for the period of 2016 – 2015 years (British Airways Plc., 2017, 2016), has allowed to provide the analysis of its financial performance in the most recent years and answering the questions provided by each of the tasks required for the essay.

Task 1

Financial resources of an enterprise are a combination of personal funds, proceeds of borrowed and attracted funds that are intended for the fulfillment of financial obligations, financing of current costs and the costs, associated with the capital expansion. There are external and internal sources of organization’s financial data.

The main sources of financing of the company’s activities are personal funds. According to Parkinson (2012), internal sources include an authorized capital, funds accumulated by the enterprise in the process of activity (reserve capital, additional capital, and retained earnings), as well as other contributions of legal entities and individuals; among the contributions of legal entities are a special-purpose funding, charitable contributions, donations, and others. The authorized capital allows to identify the owners’ shares and the value of shares at par, as well as guarantees the rights of the company’s shares. The funds, accumulated by the enterprise in the process of activity, allow evaluating the level of investments in fixed assets, replenishment of working capital, bonuses for employees, payment of salaries to individual workers over the wage fund, provision of material assistance, and other purposes. The means of additional capital, such as financing of current costs, and costs associated with the capital expansion, allows identifying whether the authorized capital should be increased or not, or the payoff of the loss identified by the results of work, as well as the distribution between the founders. Parkinson (2012) also notes that external sources of financial data are the borrowed capital, such as loans, investments, and accounts payable, which allow assessing the risk of loss of liquidity, because it is the most urgent obligation of the enterprise.

Internal sources of financing require further investigation because understanding of these aspects allows companies to distribute profits that remain at their disposal. A rational use of the profits implies the consideration of such factors as the implementation of plans for further development of the enterprise, as well as respect for the interests of owners, investors and employees. The amount of undistributed profit depends on the profitability of business transactions, as well as on the dividend policy that is adopted at the enterprise.

In case of the financial investment, investors pay attention to the level of the firm’s profit, the company itself and its share of ownership in it, because a high share of the foreign investment means that the owners have lesser control there, which is very attractive for future investors.

Task 2

The analysis of the firm’s financial performance relies on the theoretical basis that is adopted for all enterprises. The growth of profit creates a financial base for self-financing, expanded reproduction, and solution of problems of social and material needs of labor collectives. Table 1 represents the accounting ratios that are considered as the most appropriate measures of the financial performance of British Airways Plc over the time period of 2016 – 2015 fiscal years. In particular, the financial performance of British Airways Plc has been conducted, using such ratios as gross and net profit, return on capital employed, gearing, asset turnover, current ratio and the acid-test ratio. The data required for the estimation of the discussed above ratios has been taken from the company’s annual reports, as of 2016 (British Airways Plc., 2017) and 2015 (British Airways Plc., 2016) fiscal years. Table 1 Financial Performance of British Airways Plc over 2016 – 2015 years

Ratio	2016	2015
Gross profit (%)	28.56	26.39
Net profit (%)	12.87	11.15
Return on capital employed	0.12	0.12
Gearing	3196%	9062%
Asset turnover	0.08	0.16
Current ratio	0.74	0.5
Acid Test	0.71	0.48

The company’s net profit shows the extent to which it is beneficial to work in one direction or another, whether it is worthwhile to continue the business or to suspend it. Gross profit shows how much money the firm receives directly from sales before accounting for other costs. The asset turnover ratio shows the amount of monetary units of sold products that each monetary unit has brought to the firm. Gearing ratio points to the number of personal funds, accounted for one monetary unit that has been borrowed. The return on capital employed ratio serves as a benchmark for assessing the appropriateness of attracting an organization’s borrowed funds at a certain percentage. Current ratio shows the company’s ability to repay current obligations at the expense of current assets. The acid-test ratio characterizes the company’s ability to pay off its short-term obligations through the sale of liquid assets (Raj, Walters & Rashid, 2017).

The analysis of the financial performance of British Airways Plc during the period of 2016 – 2015 reporting years, presented in Table 1, allows discussing the following results. The firm’s gross and net profit margin increased by 2.17% and 1.72% in 2016, comparing with 2015, showing the improvement of the business in 2016. The firm’s return on capital employed remained the same at 0.12 during 2016 – 2015, which means that British Airways Plc was operating at the expense of available personal funds within 2016 – 2015 years. The current and acid-test ratio also increased by 0.24 and 0.23 in 2016, compared to 2015. At the same time, the current ratio was estimated at 0.74 in 2016, while it was 0.5 in 2015, meaning that the enterprise was unable to steadily pay off its bills, which is related to a high financial risk. However, the increase of the ratio by 0.24, allows realizing that the risks were lowered in 2016. The results of the company’s acid-test ratio allow realizing that its liquid assets were not covering short-term obligations within 2016 – 2015, which means that there was a risk of loss of solvency, which is a negative signal for investors. At the same time, the increase of the ratio in 2016 allowed realizing that the risks were reduced and the financial performance of British Airways was improved. The management of the organization should pay attention to these two aspects, in the first place, when developing strategic aims of the firm.

The estimation of the gearing ratio has shown negative results of the relationship between the company’s personal and borrowed funds, which is significantly greater. In particular, it has been estimated the gearing ratio at 3196% in 2016, and 9062% in 2015. The decrease of the ratio positively affects the company’s financial health in 2016, but indicates a potential danger of a lack of personal funds, which can cause difficulties in obtaining new loans, in case it is needed. Another concern is related to the company’s asset turnover, which declined by 0.08 in 2016, compared to 2015, which can be associated with the inadequate asset utilization efficiency during 2016.

Although, the discussed ratios have been considered as the most appropriate measures of the enterprise’s financial activity during 2016 – 2015, this is not enough for a comprehensive analysis that could allow understanding all problems of the company. To understand the existing problems, it is recommended to provide the overall analysis of the company’s performance that would also include the analysis of the property, financial stability, business activity and risk analysis.

Task 3

Budgeting can be different at each enterprise, and depends on both the object of financial planning and the system of financial and non-financial goals. Therefore, it is important to remember that budgeting can pursue its own goals and use its own means in every company in terms of management technology. Bamber and Parry (2017) note that a general budget is a work plan of the firm, as a whole, coordinated across all subdivisions and functions, combining blocks of individual budgets and characterizing the information flow for the adoption and monitoring of managerial decisions in the field of financial planning. The analysis of the 2016 annual report of British Airways Plc allows realizing that the firm considers future profits, cash flows and supporting plans in its main budget, and, therefore, it presents the outcome of numerous discussions and decisions about the company’s future, as well as provides operational and financial management (British Airways Plc., 2017). This is very important for the company because calculations carried out in the process of forming the budget make it possible to determine the necessary amount of money in full and in a timely manner, required to implement the made decisions.

In addition, the functions of the budget vary, depending on the phase of formation and implementation it is in. At the beginning of the reporting period, the budget is a plan for sales, costs and other financial transactions in the upcoming period, while it plays the role of a measurer in the end of the reporting year, which makes it possible to compare the results obtained with the planned indicators and to correct further activities. The 2016 annual report of British Airways Plc also contains this feature, that is implied on every field of the financial report, and allows comparing the financial results at the beginning and at the end of the fiscal year (British Airways Plc., 2017).

According to Candreva (2017), budgeting performs analytical function, financial planning, financial accounting, financial control, motivational function, and function of communication. One of the possible approaches to the production of a budget can include the following five stages. The first stage is the formation of a financial structure, which is the development of a model of the structure that allows establishing responsibility for the execution of budgets and controlling the sources of income and expenditure. The second stage is the creation of the budget structure, while the third stage is the formation of accounting and financial policies of the organization. The fourth stage is the development of a planning framework that defines procedures for planning, monitoring and analyzing the reasons for the failure to fulfill budgets. The final stage is the work on the preparation of operational and financial budgets for the planned period, the conduction of the scenario analysis, as well as the adjustment of the budgeting system, based on the analysis of its compliance with the needs.

There are three main approaches to the budgeting process, which are from top to down, from down to top, and bottom-top/top-down. The drawback of the first method is the weak motivation of managers of the lower and middle levels to achieve the balance, while the limitation of the second approach is that the planned indicators for expenditures are overstated, and, by income, are underestimated, so that they receive undeserved compensation, when performed. The bottom-top/top-down approach is the most balanced method and it avoids the negative consequences of two other methods. With this approach, the top management gives general guidelines on the company’s objectives, and the managers of the lower and middle levels prepare a budget that is aimed at achieving the company’s goals.

Task 4

The financial and economic activities of the company can be expressed through the cash flows, which includes the information about the firm’s revenues and expenses. The choice of the decision concerning investment of money resources is the major stage of work of each firm. To successfully use raised funds and make the highest profit on the invested capital, it is required to carefully analyze the future cash flows, related to the implementation of transactions, agreed forecasts and projects.

Byrnes (2015) notes that the most complete assessment of the effectiveness of the company gives a profit and a loss account. However, this statement does not answer the needs of the head of the firm because the report is made on the principles of accrual, in which expenses are only fixed after writing-off in accounting, but not when they need to be implemented. Therefore, even an ideally prepared report will reflect not payments that the company has committed or intends to make, but conditional economic results. Thus, it is required to consider another type of reporting to be able to understand the financial activities of the organization. This type of report should be able to demonstrate the extent to which the company is provided with cash at any time, an independence from any influence of legislative and accounting requirements, and cover as many aspects of company’s activities as possible. The budget of cash flows meets all these requirements, which is a table, showing the receipts and expenditures of the enterprise’s cash.

According to Hansen and Mowen (2015), there are two common methods for preparing this document, which are direct and indirect approaches. When using a direct method, operating cash flows are distributed by income and expense items, such as sales receipts, wages and taxes. The indirect method assumes that operational flows are determined on the basis of net profit, adjusted for depreciation and changes in working capital. The overview of the budget has allowed realizing that the organization has used the direct method for its conduction, which is supported by the fact that the report consists of proceedings, associated with receipts and payments. In particular, the report uncovers the financial data of the firm’s sales receipts and proceeds from a loan as the company’s receipts, as well as material purchases, wages, fixed costs, lease of new building, advertising fees, corporation tax, capital expenditure, and loan repayment as the company’s payments. Finally, the report summarizes the company’s net cash flows, opening and closing bank balance, as of each reporting period.

The limitation of the discussed budget is that it consists of the results of operational activities only while one of the optimization ways of the report is to add the results of the investment and financial activities. This is due to the fact that the investment activities allow studying the firm’s fixed investments in fixed assets and other long-term investments, as well as income from the sale of assets, while the financial activities take into account receipts and payments, related to financing, except for the interest on loans. Other two alternative courses of action the enterprise could take to help improve the report is to add the comparison of the actual values for the current period with the planned ones, or the comparison of actual indicators for the current period, and the same period of the last year. The improvements of the report will allow understanding the quality of the company’s budget execution, as well as tracking down negative trends. The comparison of the results, achieved in the previous year, can create an objective picture of the company’s current financial health.

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