Abstract

            For quite a good time, organizations, businesses and companies have been yearning for the elevation of their financial status. Most firms have therefore resorted to keeping their financial status very sacred and in top secret to avoid the leakage of such information to the general public that may seepage the same information to the immediate competitors in the market. Financial statements have therefore become major milestones at gauging the performance of a firm in relation to the law and its fellow industries in the same sector. This paper, seeks to devote its attention to the financial statement analysis of Safe horizon Company Limited. This is a well renowned company in the wide whole world due to its nature in the business arena. It is believed to be among the best companies in the global arena especially in the management of the financial sector. Safe Horizon has achieved this mainly through its consistent source of funds and the liquidity ratio measurement method which it applies in the management of this wonderful enterprise (Adizes, 2008).

1.0  Introduction

Almost in all companies, the functioning and advancement depends on how efficient the firm manages its finances. The company is currently experiencing diverse development in trying to expand to other areas in the world. This is due to the nature of the services offered by the organization in relation to the humanistic approach mechanisms. This has influenced the company’s business structure, organizational structure, company culture and significantly the financial status of the company. However, this has not stopped the company from maintaining the competitive nature. To evaluate how the company has managed to excel despite the stiff competition in the marketing arena, the paper will analyze the financial strategy that keeps the company alive. This implies that the paper will purely deal with the analysis of the financial statements of Safe horizon in a much anticipated detail so far (Varun et al, 2000).

1.1  Statement of the problem

This study seeks to answer or even solve the following research problems in the financial sector of a specific company in a specific area or location country. In this case it handles the financial statements of Safe Horizon in that deals with the humanitarian issues (Clark, 2006). The research questions are as follows:

        i.            Considering the recent cut made on the budget of most nonprofit organization, will the Safe Horizon be available in the market in the near future?

        ii.            Is the Safe Horizon expected to succumb to debts or not?

        iii.            Is this organization considered financially stable in one way or the other?

        iv.            What are the budget practices practiced by the organization?

        v.            Are these budget practices important or even relevant to the organization’s performance rating among the other organizations in the immediate market?

1.2  Purpose of the Study

The purpose of the paper can be classified into about two groups that are the broad objectives and the specific objectives. The broad objective of the study is to provide an in depth analysis of financial statements of the organization in question. This is achieved through the use of the relevant budgetary and financial tools, concepts and methods available in the financial sector. The specific objectives are as follows:

        i.            To ensure that Safe Horizon survives the economic tide in the near future while considering the recent cut made on the budget of the very organization

        ii.            To investigate whether Safe Horizon is expected to be in debt or not especially in the ultimate end or in the near future.

        iii.            To investigate whether the organization is considered financially stable in one way or the other

        iv.            To investigate the proper and viable budget practices practiced by the organization

      v.            To investigate whether the budget practices are important or even relevant to the organization’s performance rating among the other organizations in the immediate market

1.4 Background information

Safe Horizon is an international organization that is based in the United States of America. It employs an approximate of 65,000 employees, operating in it’s over 10,380 stores across the world. It has branches in over 20 countries across the globe. The firm came up in the the centuries and has thrived in the business arena for several decades (Tadelis, 2007).

The expansion of the company saw its entering into the book of records as the largest store in the whole Europe (Skinner, 2008). The company then progressed to open superstore and managed to benefit from perfect positioning of the products in the market when most customers preferred supermarkets to small shops. The company has since improved and expanded its business to opening a petrol station, internet-shopping services, offering car and house insurance, and mobile phone network (Artill, 2007).

This was a charitable organization that was started in the city of New York in the early wee hours of civilization where a lot of human rights groups were being formed. This was as a result of the ugly scenes that were experienced in these regions. Alabama State was the first to experience the effect of the formation of this organization in about 871 when a husband severly beats up his wife. This was the first incident that was reported and dealt with accordingly with this noble group.

1.5 Organization of the paper

The paper is arranged into two distinct chapters. Thus are the introduction and the literature review. The two chapters basically discuss matters pertaining to the theoretical arrangement in the paper. Chapter one covers the introduction while chapter two covers the literature review. Chapter one which is the introduction deals with the purpose of the study, statement of the problem, objectives of the study, background information, relevance to the study and organization to the paper. The literature review covers the introduction to the chapter, sources of fund to the company, dividend policy and the relevant tool s and methods used in the organization for their financial Statistics.

2.0 Literature Review

2.1 Chapter Introduction

Safe Horizon has been experiencing lots of hardship in trying to execute its services to the human population especially in the United States of America. This is because it offers services to the humanity which are very essential yet it does not aim at making profits at all. This therefore calls for the proper review and analysis of the financial statements to this noble organization. Financial Statement Analysis is also referred to as the financial analysis.  It is defined as the process of understanding the profitability and risk of a Company, business or project.

This is attained through the analysis of report on the financial status of the company in question where in cases of this paper is the Safe Horizon Company. These reports could be the annual or the quarterly reports especially in the case of the organizations. For cases of a country, it could possibly be the analysis of a period much longer like perhaps a decade or more. It consists of three major steps. These are the reformulation of the reported statements of finance, analysis and adjustments of measurement errors and finally the analysis if the financial ratios. However, with all the upheavals in the organization, it has received international recognition by the Guide Star called the guide star exchange seal for its permanent commitment to transparency in its operations (Skinner, 2008).

2.2 Steps to the Analysis in Safe Horizon

Dou to the nature of the services offered at the organization, Safe horizon has to handle its financial statements with a lot of care and attention. It has to bear in mind that this is a non profit organization in the making. Safe Horizon has a very complicated system of governance and it is currently involved in the expansion to other sectors of the world especially in Africa where a lot of Humanitarian support programs are required due the unhealthy political situation in the continent.

2.2.1 Reformulation of Safe Horizon’s books of Accounts

The reformulation is done in respect to the income statement of Safe Horizon. Items are divided into either recurring or non recurring items. The recurring items are the normal items while the nonrecurring items are the special items. Therefore, earnings could be separated into core or transitory earnings. The notion brought about by this dealing is that the normal earnings are indeed more permanent as opposed to the transitory earnings and are thus much more relevant for prediction and the total valuation of the financial status of the company. The normal earnings are then regrouped into Net Operational Profits after Taxes (NOPAT) and Net Financial Costs (NFC). The balance sheet to the Company is then regrouped in an explemplary note into the Net Operating Assets (NOA) and Net Financial Debt and Equity (NFDA) (Clark, 2006).

2.2.2 Forecasting at the firm’s books of Accounts

This will question the eminence of the reported numbers in accounting books. These reporting could be bad or even noisy representations of the invested capital. The Return on Net Operating Assets (RNOA) with respect to NOA will be a very noisy measure to the profits underneath the Internal Rate of Return (IRR). R and D brings the expectations of such expenditures yielding future economic benefits which could mean that the R and D creates assets that could have been dealt with in the balance sheet. An adjustment method would involve the removal of the R and d expenditures from the statement of the income and place them directly into the balance sheet. This involves the annotation of the R and D capital promptly into the balance sheet. The reported numbers could as well be adjusted in cases where the analyst suspects mismanagement of earnings.

2.2.3 Financial ratio analysis of Safe Horizon

This should be performed on the regrouped and adjusted statements. It involves two types of ratios. These are the analysis of risk and the analysis of profitability. This aims at the detection of the underlying credit risk within the firm. It consists of liquidity and solvency analysis. Liquidity analysis takes the form of current ratio and interest coverage. Solvency is analyzed through the capital structures ratios. His brings forth the synthetic rating approach to this phenomenon. These ratios have no bench marks whatsoever.

2.2.4 Calculation of NPV of Safe Horizon during the period between 2007and 2011

Safe Horizon had an initial cash outflow of $213,000 in 2007. The cash inflows during the years of 2008, 2010, and 2011 were expected to be $65,200, $98,000, and $55,400 respectively. Find the IRR during this period of time. The NPV should be close to zero for the firm to undertake a viable investment. Therefore, IRR will be calculated using the following formulae

PV of future cash flows − Initial Investment = 0; or

CF1

 + 

CF2

 + 

CF3

 + 

 − Initial Investment = 0

( 1 + r )1

( 1 + r )2

( 1 + r )3

Where,
   r is the internal rate of return;
   CF1 is the period one net cash inflow;
   CF2 is the period two net cash inflow,
   CF3 is the period three net cash inflow.

Solution
Assume that r is 10%.
NPV at 10% discount rate = $18,372
Since NPV is greater than zero we have to increase discount rate, thus
NPV at 13% discount rate = $4,521
But it is still greater than zero we have to further increase the discount rate, thus
NPV at 14% discount rate = $204
NPV at 15% discount rate = ($3,975)
Since NPV is fairly close to zero at 14% value of r, therefore
IRR ≈ 14%

(Safe Horizon Annual report and financial statement, 2010)

2.2.5 Ratio Analysis

a. Current Ratio (or Working Capital)

    Current Ratio = current assets / current liabilities

                        = 4618/ 2560

                        = 1.78798

b. The Quick Ratio (or Acid Test)

     Quick Ratio = (cash + investments + receivables) / current liabilities

                        = (4412) /2560

                        = 1. 45625

c. Cash Ratio

     Cash Ratio = cash + marketable securities / current liabilities

                        = 4789/ 2560

                        = 1.8654

2.3 The Funding program of Safe Horizon

Successful management of the funds and the escalated profit margins are through sound financial management. The finance department in this organization ensures that there is enough money for the expenses such as payment of debts, employees’ salaries and investment of cash for the continuity of the business advancement. The main source of funding is the share capital. The growth in the financial status of the company evaluation is through studying the trend in earnings and the share price.

From the statements of accounts of the same organization in 2006, the earning per share was 20.07. This increased to 23.84 in 2007, 26.95 in 2008, 28.92 in 2009, 31.66 in 2010 and 33.10 in 2011. The profit recording for the company has been on the rise since 2002. The profits recordings for the last four annual reports are as follows: £ 2,130 in 2008, £ 2,166 in 2009, £ 2,336 in 2010 and £ 2,671 in 2011, which has consistently increased. However, in 2011, the company recorded the worst sales in United Kingdom in a historical period of 20 years. This resulted from consumer’s reducing their purchases of the non-foodstuffs in the company’s outlets.

The company enjoys a higher share in the market compared to its competitors. For instance, in 2009, the company’s market share was 30.5% compared to its closest rival, Aldi, which was 16.9%. According to 2011 financial analysis, the customer loyalty was higher in Tesco Company than in that of its competitors. The customer loyalty scaled at 29.7 % for Tesco and 18.5% for Aldi - the closest competitor (Richard et al 1995).

The possible risks that can threaten a business include unclear strategy, unavailability to meet business needs, fluctuations in interests and exchange rates. The company also seeks external advice for the best steps to be in the management of the problems realized in the company strategy. There is also consistent reviewing of policies in the treasury functioning. 

Liquidity is a state when a company cannot sufficiently finance its activities or the ability to secure such interest comes with an extra cost. This risk hinders the development of the company leading to funding risk. There is a dedicated treasury functioning established by the company with the aim of managing the liquidity and funding risk.

Moreover, the organization has established a strong liquidity position with a wide range of stocks. This ensures that the sales of the different commodities help to cover instances of hidden zones for possibilities of liquidity risk. In addition to this, it has ensured that the retail trades other than the wider company manage lending of cash. This gives the retail trade a responsibility to monitor the lending and follow up to avoid bad debtors.

The company also conducts a daily monitoring, management of key funding and liquidity ratios for early intervention before things slip to complicated levels. Another measure used by the company is conducting regular stress testing for determining the stability of the company in the market. These measures together ensure that the company manages its financial risk effectively, thus, retaining the position in the market. This form of risk arises in cases where liabilities and assets of an organization present different re-pricing dates. It counters this through minimizing the sensitivity of gross revenue to fluctuations in interest rates. The company uses Value at Risk to control interest risk, especially the short-term exposures.

Success in the management of interest risk is due to the well-established policies in the company. The company operates under a policy of fixing interest rates minimum level of 40% of the realized and procrastinated debt interest expenditures. In 2010 financial year, the value of the debt at an established rate of interest was £6.2 billion. It was at 91% of the company’s total debt, leaving the other amount in floating rate form.

Credit risk is the risk associated with losses realized from default by financial associate groups. These groups fall in the list of reliable credit counterparties. To avoid such risk in the Company, the retails hold an update of credit rating for such counterparties. The retail branches use a framework policy to evaluate the possibility of lending money to the customer. This policy has well delineated limits and standards depending on the level of the customer’s lifecycle. The ability of the customer to repay the debt is before lending. The policy also has monitoring scheme that validates the affordability of the client to a loan, thus, avoiding bad debtors. Among the most used frameworks for the assessment of the credit process there are such as Fitch, Standard and Poor’s ratings.

A venture’s choice of the fund is through the availability and accessibility of sources of fund. The corporate lifecycle theory determines the level or the position that a company/organization holds. It will be very crucial in the selection of the fund to ensure that the organization’s future is secure. A stable company will mostly show cash rich report, but will be dealt with later on during the life cycle, when it reaches the aristocratic stage. This is actually the time when the company will reveal signs of aging. Organizations should avoid the reflection of aging since at this time the company may decline drastically (Prahalad & Hamel, 1990).

Modigliani and Miller theorem argues that an organizational value remains unaffected irrespective of the means of financing the company. However, the theory acknowledges that some factors must maintain. These factors include absence of taxes, bankruptcy costs, agency expenditures and asymmetric information, in addition to a state where, the company operates in an efficient market. This theory is also the capital irrelevance principle. The theorem has enhanced the use of advantage in the companies.

Safe Horizon mainly uses the fund from the income generated from its varied ventures. This ensures the company ability to reduce the debts, loan interest and fines. In this vein, the company enjoys a stable financial strategy, which is at the equilibrium within the internal environment of the firm (Perakath et al. 1994).  The company is at the prime level where it can sustain most of its financial activities without involving the external sources of funds. The management uses profit gained as the main choice of fund. The company is also beneficially a shareholder of the firm. This offers the company revenue through dividends. This follows the authorization of the company to purchase its own share to a limit of 10%.

2.4 Share holders’ dividend in Safe Horizon

Lintner model of dividends suggests that in cases of smooth dividends, there must be another factor(s), which dilutes the fluctuations in the functioning profitability. In an illustration, dividend absorbs only a part of the income deviations; thus, the company has to establish ways of stabilizing the other part of fluctuations (Greve, 1998).

Other theories that describe dividend policy include the dividend relevance theory and the dividend irrelevance theory. The relevance theory holds that there exists the best dividend policy that the company must implement to achieve the best value for the firm (Theories of dividend policy, 2011). The market price is to determine the value of the dividend. The dividend irrelevance theory illustrates that a company will pay only dividends from residual earnings. This implies after the crucial financial activities. Modigliani-Miller theory holds that the firm is the core determinant of dividend value. Therefore, more care and interest should be to the firm. 

The dividend irrelevant theory holds that dividend policy is irrelevant in cases where the firm is not facing taxes and bankruptcy cost. According to this theory, a company needs not to mind about the dividends since they influence insignificantly to the company capital structure.

In respect to safe Horizon, the company values its dividends. The firm renewed its dividend policy in 2006. The dividend policy, namely “increasing the firm’s dividend pay-outs broadly in relation with its income escalation rate”, this illustrates that the dividends are considered relevant for prospect of the company. The company’s dividends have been on the rise showing proper management of the companies share market.  Thus, the best theory that explains this is the Bird-in-the-Hand Theory. The company is determined to repay the dividend in the line of the profit margins realized (Sturgeon, 2002).

The historic development and achievement of the organization towards humanitarian sector clearly illustrates a successful firm. From the time of the company’s inception, it has continuously maintained commendable increment in profit and expansion. Despite the strong competition in the market, challenges in the economic field and inflation cases, the company has been able to survive. The financial assessment of the company reveals profound policies formulated and lay down with an aim of close monitoring and corrections of hiccups once realized. The proactive nature of management has enhanced low operational cost in managing risk (Wood, 2005).

Table 2.4: Safe Horizon Balance Sheet as at February 2009

Year Ended 25 February

2009

2008

2007

2006

2005

£ millions

Intangible Assets

4618.0

4338.0

4177.0

4076.0

2336.0

Tangible Assets

25710.0

24398.0

24203.0

23152.0

19787.0

Fixed Investments

1949.0

1254.0

1015.0

321.0

309.0

Total Fixed Assets

37918.0

35167.0

34258.0

32085.0

23864.0

Stocks

3598.0

3162.0

2729.0

2669.0

2430.0

Debtors

n/a

n/a

n/a

n/a

n/a

Cash at Bank and in Hand

2305.0

2428.0

2819.0

3509.0

1788.0

Total Assets

50781.0

47206.0

46023.0

45564.0

30164.0

Creditors Amount Within 1 year

28576.0

26829.0

23928.0

22789.0

8179.0

Creditors Amount After 1 year

2560.0

1956.0

2616.0

1796.0

1202.0

Total Liabilities

32980.0

30583.0

31342.0

32658.0

18262.0

Net Assets

17801.0

16623.0

14681.0

12906.0

11902.0

Net Current Assets

n/a

n/a

n/a

n/a

n/a

Called Up Share Capital

402.0

402.0

399.0

395.0

393.0

Share Premium Account

4964.0

4896.0

4801.0

4638.0

4511.0

Other Reserves

40.0

40.0

40.0

40.0

40.0

(Safe Horizon Annual report and financial statement, 2009)

2.5 Chapter Conclusion

In order for the business to continue thriving in the market, the following recommendations may be crucial. The firm has to consider placing its products at an affordable price among the customers yet not losing its customers. This will ensure that the more customers will be able to purchase ample products rather than going for the optional cheaper products in the market. The company should consider developing strong risk assessment especially the liquidity-funding risk, credit risk, and interest rate risk. The company should also act swiftly in cases where there are financial losses. For instance, in 2009, the company recalled some of its products that were to incur loss. This is avoidable through detailed research of the market regarding the brands. The company domination in one region USA (75%) could be detrimental in cases of calamity. The company should diversify in other regions of the world in a great proportion (Chesbrough and Apple, 2007).

Credit risk is the risk associated with losses realized from default by financial associate groups. These groups fall in the list of reliable credit counterparties. To avoid such risk in Safe Horizon Company, the retails hold an update of credit rating for such counterparties. The retail branches use a framework policy to evaluate the possibility of lending money to the customer.    This policy has well delineated limits and standards depending on the level of the customer’s lifecycle. The ability of the customer to repay the debt is before lending. The policy also has monitoring scheme that validates the affordability of the client to a loan, thus, avoiding bad debtors. Among the most used frameworks for the assessment of the credit process there are such as Fitch, Standard and Poor’s ratings (Wang, 2011).

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