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Finance Section 4 Profitability and GFM Strategies

Evaluate the financial management strategies a business can use to


achieve its financial goals.

Step 1:
Assess: define

Step 2:
Brainstorm: identify the financial management strategies you could use
in this response. Then identify three to five strategies that you can use
that best fits the case study and answering this question.

cash flow management


cash flow statements
distribution of payments, discounts for early payment,
factoring
working capital management
control of current assets cash, receivables, inventories
control of current liabilities payables, loans, overdrafts
strategies leasing, sale and lease back
profitability management
cost controls fixed and variable, cost centres, expense
minimisation
revenue controls marketing objectives
global financial management
exchange rates

interest rates
methods of international payment payment in advance,
letter of credit, clean
payment, bill of exchange
hedging
derivatives

Step 3:
Financial goals identification:

1.0 Executive Summary


The purpose of this report is to make a judgement based on value of the
profitability management strategies that a business can utilise to achieve its
financial goals. Furthermore this report will make a judgement based on value of
the global financial management strategies a business can use to achieve its
financial goals. This report will make reference to the case study of Apple Inc.
1.1 Corporate Descriptor (Optional)
Apple Inc. is a leading consumer electronics company that operates on an
international scale. Its headquarters is located in California, but it operates in 15
countries, employing more than 90,000 employees.
2.0 Profitability Management Strategies
Profitability strategies are defined as the strategies used to generate a
profit, and refer to cost controls fixed and variable, cost centres,
expense minimization and revenue controls marketing objectives.

2.1 Cost Controls


Cost controls are the expense minimization method of carefully analysing the
expenses of a business and whether those expenses are needed for a businesses
continued operations. (context)
2.1.1 Cost Centres
Cost centres are particular areas, departments or sections of a business to which
costs can be directly attributed. This strategy is recommended as it enables the
incurred direct and indirect cost to be specifically placed on a part of the business .
This process places ownership on costs as these are recorded, measured and
monitored. Inevitably, this strategy places responsibility on employees and ensures
there is no excess expenditure. This would substantially reduce costs and hence
improve profitability. (define)
By identifying areas of costs to budget allocated, a business is able to minimise
expenses of overrun and look for opportunities to minimise fixed and variables costs.
It is this management and monitoring that enables for increased profitability. This
strategy is of high value to a business since it allows for the minimisation of
expenses and increased efficiency. Profit and efficiency are two key financial goals
that the utilisation of cost centres can effectively achieve. (expand)
Apple utilises the cost centres as a strategy to achieve its financial goals of profit and
efficiency. By grouping its costs into division, department and geographic locations
for accounting and management purposes (Retail, Americas, Europe), Apple has
consistently recorded expense figures that exceed industry averages. In 2014, Apple
recorded an expense ratio of 16%, which exceeds the industry average of 20%. By
using costs centres, Apple tracks expenditure and strategies to drive costs down in
their business. For example, Apples tracks the amount of materials being used in the
manufacture of their partners such as Foxconn and Pegatron in order to ensure that
wastage do not reach over 21% of incoming and out coming products. Apple has
been able to balance its expenses across the business effectively, and as a result,
the businesss profitability has benefitted as well. In 2014, Apple recorded $39 billion
dollars (a record) indicating the effectiveness of cost centres in achieving financial
goals. (example)
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2.1.2 Expense Minimisation

This involves a business focusing on the reduction of costs throughout the entirety of
the business; this is regardless of the proportionality with which expenses are
incurred, across different departments. (define). If a business is able to successfully
implement this strategy, it can effectively improve its efficiency, through the overall
lowering of expenses. This strategy can include the use of supplier rationalisation
policies, dual suppliers to create competitive tension, buying in bulk, sourcing direct,
from low cost country sourcing and volume aggregations. By dealing with one or a
smaller number of suppliers it also takes a level of complexity out of the supply chain
allowing the business to focus on its core business functions. In addition by taking up
this strategy individuals will also be able to achieve economies of scale by producing
large qualities through smaller number of supplier allowing for a decrease the cost
per unit. This can result in the maximisation of profitability and growth, since a
business will have access to a larger portion of funds that can be used to invest into
expansion overseas, research and development. (expand)

Apple has consistently aimed to utilise expense minimisation, which has contributed
to their significant successes in achieving profit, efficiency and growth. For example,
Apple buys its entire component parts in bulk (committing to more than 150 days
worth of supply) this ensures the lowest price per unit and prepays for these
component parts to receive a discount for early payment. Apple utilises outsourcing
to countries with a competitive advantage such as countries will a low wages and
abundance in resources which both can be achieved for a low price. Outsourcing
materials such as lead and tin which is essential for the inner components of the
iPhone and labour is outsourced to China due to their low wages which allows Apple
to significantly lower expenses. Ipad manufacturing in the US costs Apple $338
whereas an Ipad made in China cost $38 saving $300 which in 2013 71 million were
sold. Apple enjoys one of the highest GP and NP in the industry 41% GP (7% more
than Samsung) and 23% NP. As a result of their successful efficiency and
profitability, Apple has undertaken several effective expansions overseas, indicating
the effectiveness of expense minimisation in achieving growth. In China, Apple has
50% market share in the smartphone market. (example)
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2.1.3 Fixed and variable costs
NO DEFINITION. Fixed costs do not change with the level of activity of a business.
These costs must be paid regardless example, wages, salaries, insurance and
lease. Fixed costs are better in improving cash flow problems as due to fluctuations
in variable costs they will severely affect how liquid the business will be. Variable
costs are those that change proportionately with the level of operating activity in a
business for example materials and labour used in the production process. Variable
costs are better suited to solving profitability issues as during positive periods of
growth the variable costs will decrease and as a result increase the profits of the

business as the derived demand for labour and materials drives down prices for
those costs and thus profits increases as a whole. (expand)
Apple is well regarded as having the best cost controls in the industry. Apple can
pressure prices of their component parts (variable costs) by knowing suppliers
margins, and order in large quantities. Apple uses air freight which is generally
expensive however Apple buys in bulk which decreases prices down as a whole.
Subsequently the cost of sourcing, which is variable is minimised. Therefore, Apple
enjoys significant cost saving efficiencies by reducing variable costs. Apple records
the highest GP in comparison to Samsung and other technology companies 7%
more GP. (example)
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2.2 Revenue Controls


NO CONTEXT PARAGRAPH
2.2.1 Marketing Objectives
NO DEFINITION. (eg. marketing objectives are defined as the objectives and goals
set by the business to control its revenue by changing the direction of marketing.)
The achievement of marketing objectives, such as market share, growth and
customer service, is heavily linked with a businesss ability to achieve its financial
goals. Through the display of high quality customer service, for example, it is likely
that a business will be able to incur increasing amounts of revenue this is due to
the customer loyalty that can be obtained as a result of having knowledgeable staff
members that provide positive attitudes towards consumers. This can contribute to
increased profitability and growth, via the impact of increasing revenue. Similarly, the
achievement of market share is vital to a businesss growth. (expand)

Apple has been significantly successful in achieving the various marketing objectives
as a result, the business has also been successful in achieving the financial goals
of profit and growth. Apple is ranked in the top 50 companies in the world, in its
quality of customer service. This, combined with Apples increasing market share
worldwide, allowed the business to record revenue of $180 billion in 2014. This
contributed to Apples high profitability, recording $39 billion net profit in 2014. Also,
Apples growth as a result of this financial performance is indicated in the businesss
50% market share of the Australian tablet market. These factors indicate the
effectiveness of revenue controls in the achievement of financial goals. (example)
3.0 Global Financial Management Strategies

NO CONTEXT PARAGRAPH
3.1 Interest Rates
NO DEFINITION. The utilization of overseas interest rates is a strategy a business
can use in order to achieve its financial goals, specifically liquidity and solvency. By
only taking out loans in countries with lower relative interest rates, businesses will
have significantly less interest to pay on these loans, hence freeing up surplus funds
for the business, and improving its liquidity and solvency. Since the business is not
obliged to put a certain portion of funds into interest payments, they contribute this
money to the liquid funding of the business. Similarly, a business can also aim to
only deposit funds into banks within economies with higher relative interest rates, in
order to receive higher interest payments from these banks. (expand)

Apple has the advantage of being able to borrow in the economy of its headquarters,
the US, due to the relatively low 2% interest rates its banks provide. This has
allowed Apple to borrow funds at a low rate, which has resulted in the businesss
interest payments being less heavy than if it was to borrow from another economy.
As a result of this, Apples liquidity and solvency has been boosted significantly as
well, through the effective use of interest rates in borrowing practices. Apples current
ratio in 2013 was 1.68:1, indicating strong liquidity. Also, Apples gearing ratio in 2013
was 1.64:1, indicating the businesss high solvency. The achievement of these
financial goals has come as a result of Apples effective use of interest rates as a
global financial management strategy.
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3.2 Hedging
Hedging is a risk minimisation strategy that businesses are able to utilise in order to
protect against fluctuations in foreign currencies during international exchanges.
(define) It involves both parties involved in the exchange agreeing to make an
immediate transaction, or a spot exchange, so that neither party is weakened during
the transaction due to changes in currency value. If hedging is used, a business will
likely maintain a stronger position, in terms of solvency and liquidity, than if it were to
not use hedging, and expose it to currency changes. This is because a business
may lose some liquid funds during the process of transaction, due to its own
currency being weakened. By using hedging, the business ensures these liquid
funds are safe. (expand)

Apple often employs hedging as a strategy to ensure its funds are protected during
international transactions. Since Apples international sales represent 60% of their

revenue, this means that Apple is a net receiver of foreign currencies and as such is
at risk of fluctuations in exchange rates. If foreign exchange rates are stronger than
the US $, then this have a positive impact on Apples revenue line. By using
hedging, this has protected the business against any possible negative fluctuations
in the US dollar, which would weaken Apples purchasing power in the global market.
Hence, Apple has been able to undergo spot exchanges, at times of the businesss
choosing, to make transactions with overseas parties. As a result, the business has
protected significant amounts of its surplus funds, contributing to its strong liquidity
and solvency positions. (this paragraph can also be used for exchange rates case
study) (example)
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4.0 Conclusion
This report, overall, has made judgments, based on value, of the profitability
strategies, and the global financial management strategies that businesses can use
to achieve their financial goals.