ASSIGNMENT COVER PAGE

MODULE: FINANCIAL MANAGEMENT

DUE DATE: 1 JUNE 2015

NUMBER OF PAGES: 10 (Excluding cover, contents and appendices)

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Contents
Introduction ...................................................................................................... 3
Question 1 ....................................................................................................... 3
Question 2 ....................................................................................................... 5
Question 3 ....................................................................................................... 9
Conclusion ..................................................................................................... 11
References and sources ................................................................................ 12
Appendix A: Benchmarking exercise between the FSG group and the AVBOB
group (AVBOB Annual Integrated Report, 2014) ........................................... 13
Appendix B: Snapshot of FSG Group Financial Results 2014 ....................... 14
....................................................................................................................... 14
Appendix C: Snapshot of AVBOB Statement of Comprehensive Income 2014
....................................................................................................................... 15
Appendix D: Snapshot of AVBOB Statement of Financial Position 2014 ....... 16

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Introduction
Business Partners Ltd require to expand our investments and this can
potentially be achieved through the acquisition of 100% shareholding in the
FSG group.
FSG (Funeral Services Group) operates primarily in Botswana and through its
subsidiaries in other countries such as Zambia and South Africa. It is a public
limited company and the foremost funeral services provider possessing an
impressive 65% market share. (FSG, 2015) FSG’s business activity involves
the manufacture and sale of caskets and coffins, funeral insurance, funeral
related services as well as the establishment and managing of private
cemeteries. (FSG, 2015) The FSG group has been listed on the Botswana
stock exchange since 2008 and therefore have access to a variety of local
and foreign shareholders. (FSG, 2015)
In order to determine if this acquisition would be a financially sound decision,
financial analysis and interpretation of the FSG Group had to be performed.
This was accomplished through tools comprising of interpretation of financial
ratios, the financial performance of the FSG Group as well as financial risk
determined through external sources. This document therefore aims to
determine if it would be financially viable for acquisition to take place for the
expansion of Business Partners Ltd investments.

Question 1
The following ratios are relevant for the analysis of the health, cash flow and
debt management of the company in terms of profitability, liquidity and
leverage of FSG. Historical data from three consecutive years have been
used for identification of consistency and trends. Financial years 2012 and
2013 shall be analysed in more detail due to possessing complete financial
statements with notes.

The gross profit margin has been stable over the three years with a consistent
increase in gross profit and revenue. From year 2012 to year 2013 revenue
has increased due to increases in the sales of goods and services as well as
income from package (funeral policies) and non-package scheme customers.

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 FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12
P’ P’ P’
Gross Profit 101317000 93604652.00 80539373.00
Revenue 122994000 111241786.00 97904372.00
Gross Profit Margin 82.38% 84.15% 82.26%

There was a decrease of the net profit margin year on year as the company’s
finance costs has increased year on year over the period. Earning from the
revenue have decrease and therefore requires to be managed in order to
increase in future.
FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12
Net Profit (After Interest &
Tax) 30033000 29732979.00 26624507.00
Revenue 122994000 111241786.00 97904372.00
Net Profit Margin 24.42% 26.73% 27.19%
Analysing the return on investment year on year, the business was
maintaining a healthy return which is above the norm of 12% over the two
years and was very much consistent over all three years.
FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12
Net Profit 30033000 29732979.00 26624507.00
Total Capital Investment 200728000 185697274.00 167221608.00
Return on Investment 15% 16% 16%

The ability for the FSG Group to meet its short-term debts and therefore its
cash flow management was analysed through the current and quick ratio. The
current ratio year on year was above the norm of 2:1, indicating that the FSG
group was consistent over each year to meet short-term commitments. The
current ratio has decreased from year 2012 to 2013 due to increases in
liabilities.
FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12
Current Assets 85270000 68771435.00 61837045.00
Current Liabilities 26643000 23276246.00 20307491.00
Current Ratio 3.20 2.95 3.05

Determining the quick ratio year on year, it clearly was above norm of 1.5:1,
indicating the current assets less inventory exceed the current liabilities and
therefore the group can meet any short term obligations. It had improved
further in year 2014.

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 FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12
Inventory 10456000 11261384.00 7415067.00
Current assets – inventory 74814000.00 57510051.00 54421978.00
Quick Ratio 2.81 2.47 2.68

The leverage of the FSG Group is determined through the debt ratio. Over the
three year period the debt ratio has been below 40% indicating the business
environment is not risky. Year 2012 to 2013 showed a decrease in the debt
ratio due to a significant increase in inventory specifically finished goods as
well as trade and other receivables, increasing by 45%. In the financial year of
2014 the debt ratio did increase due to increase in liabilities.

FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12

Liabilities 41317000 30680143.00 29920086.00
Assets 242045000 216377417.00 197141694.00
Debt Ratio 17.07% 14.18% 15.18%

The asset management of the FSG Group was determined through the
collection ratio and due to the nature of the funeral services industry mainly
receives cash soon after rendering services. The FSG credit policy does allow
a 60 day credit period to government departments and limited private
customers. Taking this into account the number of days in which the group
collects its account receivables is below 17 days. The group therefore collects
monies in a reasonable time from the clients and therefore this reduces risk.

FSG Limited Group 31-Dec-14 31-Dec-13 31-Dec-12

Accounts receivable 4955000 5012200.00 3452342.00
Revenue 122994000 111241786.00 97904372.00
Collection Ratio 14.70 days 16.45 days 12.87 days

Question 2
Through analysing historical financial data, the FSG Group performance over
the past five years yielded positive results due to increases revenue, profits
and earnings per share year on year as shown in Figure 1. (FSG Annual
Report, 2013)

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 FSG Financial performance
120 111.2
97.9
100 86.3

80 72.6

63.9 Revenue (Pula in millions)

Pula in millions 60
Profit before tax (Pula in
millions)
40 31.7 34
26.6 Profit after tax (Pula in
21 millions)
20 17.5
29.7
26.6
21.8
0 13.8 16.6
2008 2009 2010 2011 2012 2013 2014
Year

FSG were successful in increasing revenue by 13.6% from year 2012 to year
2013 while cost of sales increased by only 1.56%, therefore resulting in
growth in the gross profit by 16.2% over the financial period.
The net profit after tax had also increased by 11.6% from year 2012 to year
2013. However net profit only increased year on year by 4% for 2012 to 2013
due to a 22.6% increase in marketing and administration costs. The significant
increase in the marketing and administration costs could be seen as a
concern; however it was due to building of infrastructure aimed to increase
growth in Botswana and in planned overseas operations. (FSG Annual
Report, 2013)
Analysing the FSG group through its revenue generated, it was observed that
income from the package scheme (assurance business) grew by 21.7% and
revenue generated by sales of goods and rendering of services grew by 9.9%.
The assets of the FSG group had exceeded P 200 million over the period of
2012 to 2013. This therefore shows positive growth and health of the FSG
group.
In order to understand the industry as well as the performance of FSG, a
comparison was performed to another company operating in the same
industry. FSG was therefore benchmarked against a company in a
neighbouring country called AVBOB, which is one the leading and biggest
companies in the funeral industry within South Africa.
FSG possesses the largest market share in Botswana of 65% and therefore
using a competitor is Botswana would not provide the necessary insights into
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the industry. Therefore the financial statements of the AVBOB and FSG
groups were obtained and the financial year of 2013 was used for
comparison.
Comparison of Profitability (Year 2013)
The gross profit margin of FSG was determined to be 84.14% and 36% for
AVBOB. FSG therefore earns a higher percentage of revenue compare to
AVBOB.
However when taking to account all expenses paid after selling the products
and rendering services, FSG’s net profit margin was determined to be 26.73%
and 29.8% for AVBOB. This would therefore indicate that FSG has a higher
percentage of expenses in terms of cost of sale compared to the AVBOB.
The profit generate in proportion to the investment in the both groups indicate
a return on investment of 16% and 15% for FSG and AVBOB respectively.
This therefore indicates the FSG is performing well as the FSG’s ROI is in line
with the industry.

Comparison of Liquidity (Year 2013)

The liquidity of each group was compared and therefore the current ratio
yielded 2.95 and 2.72 for FSG and AVBOB respectively. This indicates both
companies in the funeral industry are above the norm of 2:1 are able to meet
their short term obligations. FSG was also found be in accordance to the
industry norm through comparison.
The quick ratio of FSG was determined to be 2.47 and 2.67 for AVBOB. The
results of the two groups are very close to each other suggesting the FSG
group carry a higher percentage of inventories.
Comparison of Leverage (Year 2013)
The debt ratio of for FSG accounts to 14% and 51.92% for AVBOB. This
therefore indicates that FSG has a lower risk as its assets are much greater
than its liabilities as compared to AVBOB where there is a smaller difference
between its assets and liabilities due to its debt ratio been above 40%.

In terms of asset management, the collection ratio of both groups is similar

with FSG and AVBOB having a collection ratio of 17 days. Therefore FSG
performs well as its collection ratio is on par with the industry.
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Financial risk management
As the FSG group performs transactions involving financial instruments
(tradable assets), the group exposes itself to certain financial risks. The
financial risks comprise of credit, liquidity, market, currency, and interest and
capital risk. We require insight into what risks exist within the FSG groups as
well as how these are managed and mitigated.
Capital risk is a risk which the group is aware of and managed through
optimization of equity and debt balances to ensure it will be able to continue
with its concerns. (FSG Annual Report, 2013)
Interest rate is considered as a risk for the FSG group as fluctuations in the
interest rate directly impact the value of short-term cash investments. The risk
is not viewed as significant as the group’s fixed interest investments are short-
term and the group therefore only ensures optimum money market rates.
(FSG Annual Report, 2013)
Loans and overdraft facilities are obtained through trustworthy institutions
which are in accordance to normal market interest rate risk. The bank
overdraft balance of the group reduced from P 781 904 in year 2012 to P
372 357 in year 2013 reducing the groups interest rate risk. The group also
performs forecasts to determine the impact of the interest rate through
increases and decreases in basis points. (FSG Annual Report, 2013)

The group is exposed to credit risk due to not receiving payments due on time
from related companies, trade and other receivables and investments in cash
and cash equivalents. The credit risk is managed by placing limits on single or
group parties and is also monitored by a credit control process. Analysis of
the aging of trade and other receivables indicates a total gross amount of P
1 251 818 was past due and an impairment amount of P 496 928 was
recorded for year 2013. (FSG Annual Report, 2013)

The liquidity risk of the FSG group is the risk of not meeting obligations when
due and is managed by the group through setting limits on minimum
proportion of maturing funds to be available to meet such requirements.
Foreign currency risk exposure to the group is due to transactions which take
place in currency other than the Pula. The currencies which are used in
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foreign transactions comprise of the South African Rand, the US Dollar and
the Zambia Kwacha. The group manages this risk as through not taking cover
on foreign currency due to the stability of the Pula and therefore the net
exposure to foreign currency accounts to P 1 411 568 which could be seen as
limited risk. (FSG Annual Report, 2013)
Other non-financial factor of risk would be considering the economic growth of
Botswana and the degree of political stability.
Botswana possesses political stability as the Botswana Democratic Party
(BDP) been in power since 1965 and recently won 45 of the 57 seats in the
2009 elections held in October. (The World Bank, 16 October 2014)
The Botswana economy relies mainly on the export of diamonds as the
country is the biggest producer of diamonds and therefore the economy is not
diversified. The GDP grew by 5.9% in the year 2013 and has slowed slightly
to 4.9% in 2015. (Reuters with staff writer, 2 February 2015)
In the year 2013 Botswana per capita GDP was higher than other countries
such as Turkey and Mexico. (Reuters with staff writer, 2 February 2015)
Botswana has the highest credit rating in Africa; achieving an A2 credit rating
according to Moody’s and therefore the outlook for the country for investments
is stable and positive. (Reuters with staff writer, 2 February 2015)
A social factor which is important to take in consideration is that Botswana
suffers the second highest HIV/AIDS adult prevalence in the world. Poverty is
another social issue with an employment rate of 20% and a life expectancy of
47 years old for the population. (Reuters with staff writer, 2 February 2015)

Question 3
The critical information required for budgeting would be the organisation’s 3 to
5 year long term goals and how the yearly financial resources are align to the
organisational goals. Within my organisation the yearly budget is determined
by senior executive management through strategic planning and strategic
objectives including cost saving. The key component of our organisation’s
budget is determined by the sales budget targets. This is used in budgeting
for expenses and reducing costs within the various departments of the
organisation.

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For example the manufacturing budgets are aligned to the sales budgets in
terms materials, machine hours and overtime required to produce the electric
power cables.

Another important aspect is how the company plans to grow and expand
which will affect the capital expenditure in the budget. Within my organisation,
capital expenditure is motivated during the year for large projects such as
machinery which could improve manufacturing efficiencies and productivity.
Through the motivation and return on investment a decision on the approval
of the capital expenditure would be taken.
Other important information would be how well did the organisation perform
according to the financial budget. By understanding any causes for deviations
from the planned budget and the actual financials income and expenditure,
trends could be identified in the market. Such trends could be labour unrest
due to seasonal strikes as we experience in South Africa as well as loss in
production due to insufficient power supply during winter.
Economic conditions such as inflation and commodity or metal price
fluctuations are critical pieces of information which are needed to be built in
the budget, as inflation will cause increases in expenditure for the company.
Fluctuation in copper price can have a severely negative impact if it changes
dramatically, as copper is a main component is and electric cable.
Changes in legislation such as BBBEE (Broad-Based Black Economic
Empowerment) score card ratings affect the company’s spending and
therefore have to be included in the budget in order to improve the BBBEE
rating. Within my company BBBEE spend is important as we require a high
BBBEE rating in order to tender on large parastatal requirements.

A rolling forecast can definitely make a difference in the critical information

require above as adjustments to the budget can be made soon which can
make the company more agile to changes in bad debts, labour unrest and
commodity or metal prices. The debtor’s department in my company use a
rolling forecast in updating the debtor’s books for the money coming into the
company. Each month a forecast is done according to each customer
payment terms and the company bank statement is checked daily in order to
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update the budget and compare the forecast to the actual monies received
from the debtors. Through the rolling forecast and age analysis, debtors who
pass their payment period can be contacted in order to retrieve payments.
Performing a rolling forecast makes a difference if the copper price drops
drastically it affects the selling price of the electric power cables as the
finished products would not be sold profitable due to the copper market price.
Therefore the budget can be updated through rolling forecast and action plans
would have to be put in place in the budget.

Conclusion
Synergy exists within the FSG group as each subsidiary fulfils needs for the
funeral industry from the manufacturing of caskets to managing of cemeteries
and rendering of funeral services.
The financial ratios compared over the years are consistent showing the
group is financially health in terms of liquidity, leverage and profitability with
the revenue of the group increasing over the past five years.
The FSG group compared to other leading funeral services in the international
industry such as AVBOB, it was determined that the FSG group performs in
line and exceptional for certain financial ratios.
The financial risk of the group was found to be managed well by the group
and through analysis other factors such as political stability, it was found that
Botswana was stable. The credit rating of the country is the highest in Africa
according to Moody, which is positive and stable. The FSG group is listed on
the Botswana stock exchange which provides the benefit of a variety of
shareholders.
The group already possesses a 65% market share in Botswana and is
expanding overseas showing the positive growth of the company.
Through analysis and interpretation of the FSG group financial performance
and ratios as well as considering the financial risk it is recommended that
Business partners Ltd should expand investments through the acquisition of
the FSG group.

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References and sources
1. AVBOB Annual Integrated Report. 2014. [Online]. Available:
http://www.avbob.co.za. Accessed 12 May 2015.
2. Boucher, K. 2015, Financial Management. Johannesburg: University of
Stellenbosch.
3. FSG Annual Report, 2013. [Online]. Available:
http://www.fsgbotswana.com. Accessed 12 May 2015.
4. FSG. 2015. FSG Botswana History. [Online]. Available: http://
www.fsgbotswana.com. Accessed 12 May 2015.
5. Reuters with staff writer, 2 February 2015. Botswana sees slower
economic growth at 4.9 in 2015 says finance minister. Business day live
[Online]. Available: http://www.bdlive.co.za/africa/2015/02/02/botswana-sees-
slower-economic-growth-at-4.9-in-2015-says-finance-minister. Accessed 25
May 2015.
6. World bank, 16 October 2014. Botswana overview [Online]. Available:
http://api.worldbank.org. Accessed 25 May 2015.

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Appendix A: Benchmarking exercise between the FSG group and the
AVBOB group (AVBOB Annual Integrated Report, 2014)

FSG AVBOB
31-Dec-13 01-Jun-13
P' R 000
Gross Profit 93604652.00 636691.00
Revenue 111241786.00 1768193.00
Gross Profit Margin 84.15% 36.01%
Net Profit (After Interest &
Tax) 29732979.00 526884.00

Revenue 111241786.00 1768193.00

Net Profit Margin 26.73% 29.80%

Finance costs 223248.00 0.00

Profit before tax 34027644.00 636691.00
Net Profit (Before Interest
& Tax) 34250892.00 636691.00
Revenue 111241786.00 1768193.00
Return on Sales ratio 0.31 0.36

Revenue 111241786.00 1768193.00

Fixed Assets 147605982.00 6981935.00
Investment Turnover 0.75 0.25

Net Profit 29732979.00 636691.00

Total Capital Investment 185697274.00 4258586.00
Return on Investment 16.01% 14.95%

Current Assets 68771435.00 1875151.00

Current Liabilities 23276246.00 689472.00
Current Ratio 2.95 2.72

Inventory 11261384.00 35081.00

Current assets - inventory 57510051.00 1840070.00
Current Liabilities 23276246.00 689472.00
Quick Ratio 2.47 2.67
Liabilities 30680143.00 4598500.00
Assets 216377417.00 8857086.00
Debt Ratio 14.18% 51.92%
Accounts receivable 5012200.00 81107.00
Revenue 111241786.00 1768193.00
Collection Ratio 16.45 days 16.74 days

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Appendix B: Snapshot of FSG Group Financial Results 2014

14
Appendix C: Snapshot of AVBOB Statement of Comprehensive Income
2014

15
Appendix D: Snapshot of AVBOB Statement of Financial Position 2014

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