Background

“Fairtrade is a strategy for poverty alleviation and sustainable development. Its purpose is to create opportunities for
producers and workers who have been economically disadvantaged or marginalized by the conventional trading
system. If fair access to markets under better trade conditions would help them to overcome barriers to development,
they can join Fairtrade.”

Fairtrade is a tool for development that ensures disadvantaged farmers and workers in developing countries get a
better deal through the use of the international FAIRTRADE Mark.

Fairtrade Labelling was created in the Netherlands in the late 1980s. The Max Havelaar Foundation launched the first
Fairtrade consumer guarantee label in 1988 on coffee sourced from Mexico. Here in the UK, the Fairtrade Foundation
was established in 1992, with the first products to carry the FAIRTRADE Mark launched in 1994. Read the history of
Fairtrade labelling internationally . 

Fair trade Minimum Price:

The Fairtrade minimum price is the minimum price that a buyer of Fairtrade products has to pay to a Producer
Organisation for their product. It is not a fixed price, but should be seen as the lowest possible starting point for price
negotiations between producer and purchaser. It is set at a level which ensures that Producer Organisations receive
a price which covers the cost of sustainable production for their product. This means it also acts as a safety net for
farmers at times when world markets fall below a sustainable level. However, when the market price is higher than
the Fairtrade minimum, the buyer must pay the market price. Producers and traders can also negotiate a higher price,
for example on the basis of quality, and for some products, FLO also sets different prices for organic crops, or for
particular grades of produce.

The standards also allow producers to request partial pre-payment of the contract. This is important for small-scale
farmers’ organisations as it ensures they have the cash flow to pay farmers at the time they deliver their crop. Buyers
are also required to enter into long-term trading relationships so that producers can predict their income and plan for
the future.

Fairtrade Premium

The Fairtrade premium is a sum of money paid on top of the agreed Fairtrade price for investment in social,
environmental or economic development projects, decided upon democratically by producers within the farmers’
organisation or by workers on a plantation.The premium is fixed by the FLO Standards Unit in the same way as the
minimum price and remains the same, even if the producer is paid more than the minimum price for the product. The
premium fund is typically invested in education and healthcare, farm improvements to increase yield and quality, or
processing facilities to increase income.

Producer certification

FLO-CERT is an international certification company that is owned by FLO International but which is autonomous and
operates independently. It is responsible for the inspection and certification of producer organisations and traders
against Fairtrade standards. 

Trade auditing
 As well as producer organisations certified, for a product to carry the FAIRTRADE Mark, all the traders in the supply
chain must be registered and their products certified. All processors and exporters in the producer country must have
their products certified by FLO-CERT. The products of importers and companies outside the producer country are
certified either by FLO-CERT or by the local Labelling Initiative. The Fairtrade Foundation is responsible for certifying
Fairtrade products in the UK. See Product certification for more information.

Composite products

Many Fairtrade products, such as coffee, tea, flowers, sugar, rice are 100% Fairtrade. However there are other
products, such as cakes, biscuits, ice cream or chocolate, where the ingredients are a mixture of Fairtrade
ingredients from developing countries (such as sugar, cocoa, honey, vanilla) and ingredients sourced more locally
from UK or European farmers (such as milk, flour or eggs). These are known as ‘composite products’.

To take account of this, the Fairtrade Foundation has developed requirements for where and how the FAIRTRADE
Mark may be used based on FLO policy. 

The main principles of these requirements are:

 100% of any ingredient that can be Fairtrade certified, must be Fairtrade certified.
 Any product may carry the FAIRTRADE Mark if more than 50% of its total ingredients (calculated by dry
weight) are sourced from Fairtrade certified producer organisations.
 If the total Fairtrade certified ingredient content is less than 50%, the product may still be eligible if it has
one significant Fairtrade ingredient that represents more than 20% of the product’s dry weight. An example of a
significant ingredient might be an orange juice drink made of 20% Fairtrade certified orange juice and the rest
water.

 Macro/external political government policies,,economical inflation/currency fluctuation,,socialogical

change in customer needs,,, technological transport/packaging,,legal laws,,,environment ,,,
 Micro/internal employee motivation,satsifaction,production process, suastainabile practices in plants
 Drivers of globalization market(developing market) , cost(china,coffe in ghana),government (tax ,+_)
and competetor (saturation,bvjds) drivers

 Growth strategy BCG Matrix

Currant ratio = current assests/current liabialities

Acid test ratio = currentassests – stock /currant liabialities

Debtor days =receivab;les/revenue * 365 debtors/turnover *365

Creditor days = accountrs payble/cost of goods sold * 365 creditors/purchases *365

Stock turnover = closong(avg) stock /cost of stock *365 closing stock/raw materials*365

Fixed assests turnover total assets- current assets

Profitabilability

Ratio Analysis

Ratio analysis should not be taken in isolation of other aspects of a business. What type of business is
it? A company's debtor day indicator (how long on average it takes debtors to settle bills) may be 29
days. This seems fine but not for fast-food business. Ratios must be seen against

 norms/benchmarks for the industry

 performance over time (previous years)
 prospects for the future and
 expectations of significant stakeholders.

As a principle, accounting policies should be applied consistently. Changes must be highlighted and
the impact of changes from an original policy disclosed. This applies when calculating and interpreting
ratios. Trends in a company's performance cannot be determined if published accounting data is
dressed up so as to produce more favourable outcomes. Yet benchmark comparisons against other
companies in a sector may be difficult given the flexible scope offered by Statements of Standard
Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs).

As an example of such flexibility, under SSAP 13, Research and Development, companies may within
certain limits decide to capitalise development expenditure, as an alternative to charging this expense
to the P&L account. One firm may do this and by-pass the P&L account in certain years whereas
another may not. This will affect performance ratios and make it difficult to conclude on how the
company compares against its competitors.

Key ratios
These offer measurements for the evaluation of

 business performance
 liquidity (short term and long term)
 efficiency.

 Performance
Return on total capital employed.

Used to measure overall business efficiency in employing its resources

How to calculate

Profit before interest and tax

------------------------------ x 100
Share capital + reserves + debentures

Using/interpreting this ratio

 This targets the return on capital. The figure will be set by investor expectations.
Consistent failure to hit the target would indicate that it would be better selling the
company and redeploying its resources elsewhere.
 Comparisons with real interest rates in the market should account for inflation if
resources could be redeployed in different economies.
 If assets have been re-evaluated this may increase capital employed and so reduce
the return ratio.
 This ratio needs to be considered in relation to the goodwill and development
expenditure of accounting policies.

Gross profit percentage

.... indicates the margin the company earns on its sales

How to calculate

Gross profit
----------- x 100
Sales

Using/interpreting this ratio

Note the effect of changes in

 sales prices without associated changes in costs

 sales mix. If last year a company sold £3m of cream deserts at a 12% margin, and
£170,000 of catering consultancy services at a 28% margin, pulling out of cream
desert sales will reduce turnover, but improve gross profit %.
 the calculation of closing stock. Gross profit % may show up stock valuation
irregularities. Gross profit = sales - cost of sales (opening stock + purchases - closing
stock).

Net profit percentage

- identifies the affect of fixed and variable overheads on sales.

How to calculate
 Net profit before interest and tax
----------------------------------- x 100
£ sales

Using/interpreting this ratio

It requires attention to

 changes in the value of sales.

 changes in the structure of overhead costs. A company that has incurred a move to
newer, more costly premises will feel an adverse affect on net profit %
 Liquidity

Short-term Liquidity

The following are generally expressed in N to 1 terms.

Current ratio

This measures a company's capacity to cover its current liabilities as they fall due.

How to calculate

Current assets
-------------
Current liabilities

A manufacturer normally needs a current ratio of around 2:1. More than this suggests poor
resource usage and potential liquidity problems.

Quick ratio or "acid test"

This test/ratio excludes slower-moving item (stock) from current assets and pinpoints real
short-term liquidity.

How to calculate

Debtors + cash
------------------
Current liabilities

Using/interpreting this ratio

For both current ratio and quick ratio we must be aware that

 Low ratios may indicate liquidity problems yet some businesses/industries

(supermarkets once again) operate on tight liquidity ratios.
  high ratios look good but may pinpoint poor management of funds. Cash mountains
may not offer the returns that shareholders are looking for.
 If we examine the make-up of the ratio we may find high stock levels. This may give a
healthy current ratio but stock obsolescence may be evident affecting real stock
valuations.

Long-term Liquidity

Gearing ratio

There are several variations but the general gearing ratio measures the relationship between a
firm's borrowings and its shareholders' funds.

How to calculate

Fixed return capital (debentures, preference shares, loan stock

--------------------------------------------------
Equity capital + reserves

Using/interpreting this ratio

Note:

 company cash flow stability. Strongly branded business can rely on stable cash flows.
Such a company can borrow heavily against its brands/labels in order to fund
acquisitions/expansion etc.
 policies to revaluate fixed assets may improve shareholders' funds and reduce gearing
are popular as they avoid breaches of covenants when raising additional debt.
 Efficiency Ratios

Stock turnover

This measures a company's effectiveness in converting stock into sales. So long as a sale
involves a profit then the faster the company turns its stock over, the more it makes.

How to calculate

cost of sales closing stock

----------- or ------------ x 365
closing stock cost of sales

Closing stock is better than average stock for comparisons unless we have data from several
years.

Using/interpreting this ratio

 low turnover may point to obsolete stock though some businesses/industries may
need high stocks or carry high-value, slow-moving items. Higher gross profit %s in
these cases may compensate for lower stock turn.
 high stock turn may indicate efficient management but stock-outs may occur affecting
the quality of customer service.
 Debtor days

This indicates the period of credit taken by the company's customers.

How to calculate

Closing debtors
-------------- x 365
Credit sales

Using/interpreting this ratio

 an increase over the previous year may be due to bad debt problems but it may also
indicate a change in a company's change settlement terms policy.
 the customer base may have changed, important new customers demanding longer
settlement terms
 we should evaluate whether or not year_end debtors are representative of the year as
a whole? If we stock up ahead of a sales drive just before year_end, a distorted
pattern may result.

Creditor days

This measures the credit period a company takes from its suppliers

How to calculate

Trade creditors
--------------- x 365
Credit purchases

Using/interpreting this ratio

 high figures suggest liquidity problems (financing the business on the backs of its
suppliers. Examine the company's overdraft position. Has it has run out of bank
facilities?
 Is a potential receivership on the cards? Are creditors losing patience?
 Does the ratio reflect the year as a whole?

Using the Ratios

You need to be able to

 calculate the ratios

 interpret your findings
 make suggestions.

In many cases the constituent parts of a ratio must be examined to cast light on

 movement, trends
 priorities and significant influences
  implications. Is an adverse ratio a blip or a long term, worrying trend?
 the ratio result set against the industry norms and relationships with other ratios

price earnings method = p/e ratio*earnings per share*number of shares

net asset valuation method