Financial Review assignment on Univeler PLC in a post Pandemic World

Question

Task: In this Financial Review assignmentreport number of financial ratios of Unilever have been discussed. In doing so, it has been found that the company has witnessed a fall in its liquidity position; however, the interest-paying ability of the company has increased.

Answer

1.0 Introduction
On this Financial Review assignmentwe observe that Unilever PLC is a multinational holdings company and the owner of hundreds of well-known fast-moving-consumer-goods (FMCG) that are popular globally. Unilever operates in over four hundred countries and categorizes its products into four segments: Homecare,Personal Care, Refreshment, andFood (Unilever annual report, 2021).This Financial Review assignmentwill review the financial performance of Unilever utilizing the company’s publicly available annual reports for the past five years (2017-2021). Additionally, we will review and discuss budgeting and performance management tools and make recommendations on what practices Unilever should maintain and propose new systems that they should adopt. Finally, we will investigate a new business opportunity and conduct an investment appraisal to determine if Unilever should proceed with the investment using Net Present Value and Internal rate of Return.When reviewing the last five years of Unilever’s performance it is obvious that the Covid-19 virus and the resulting worldwide lockdowns had a massive impact on the business. We will at times need to repeat the “Covid-19” cause and effect phenomena but we shall endeavour to look beyond Covid-19 as the cause of all things negative.

2.0 Financial Review assignment- Performance review
2.1 Return on capital employed
The percentage of PBIT (Profit before interest and tax) to the capital employed (total liabilities and equity – current liabilities)is known as the ROCE, or the return on capital employed, is (Maeenuddina et al., 2020). The ROCE of Unilever has been constant at 17% for 2020 and 2021. Although the PBIT has increased from 7996 million pounds to 8556 million pounds in 2021, the capital employed has increased as well. The subsequent increase in total liabilities and equity and the current debt increase the capital employed as well. Since the ROCE is constant, therefore, the historical data is being analyzed, and it has been found that in 2018 the ROCE was 30% which started to decline in 2019 (Unilever, n.d). Therefore, over a period of time, the company has been generating lesser returns on the capital employed. However, the Financial Review assignment shows the period of 2020 and 2021, which is the pandemic and the post-pandemic era then, it is certainly observable that the company has been able to generate consistent returns, which is commendable under the pretext that the probability of generating lower returns was high due to lack of demand and problems in the supply chain across the globe.

2.2Financial Review assignment - Asset turnover
As per the Financial Review assignmentinvestogations,Asset turnover is the ratio between the sales and net assets of the company. It assists in analyzing the revenue generating efficiency of the assets (Irman and Purwati, 2020). In 2020, the asset turnover was 2.33, which decreased to 1.80 in 2021. The decline in asset turnover implies that the assets of Unilever have become more and more inefficient. Although the sales have increased from 50724 million pounds to 52444 million pounds in 2021, the net asset of the company has increased as well due to the increase in total assets of the company (Unilever, n.d). The company has invested more in assets which conversely means that the company should have been able to generate more sales in comparison with the increase in assets. However, that is not the situation; hence, it can be stated that the firm’s assetshave become inefficient. In order to increase the efficiency of the assets, the company will have to increase sales and decline the urge to invest in assets unnecessarily. On the off chance that the company raises loans, then the net asset would decline, thereby increasing the asset turnover of the company. This could be a very good idea considering that the company has a high-interest cover.

2.3 Financial Review assignment -Current ratio
The current ratio is the ratio between the current asset and short-term debt (Siagian, Wijoyo and Cahyono, 2021). In the case of Unilever, the current was 0.78 in 2020, which declined to 0.70 in 2021. Therefore, during post pandemic, the liquidity of Unilever has declined. The current assets of the company analysed on this Financial Review assignmenthave increased from 16157 million pounds to 17401 million pounds. There has been an increment in the current debt of the firm as well. Since the current liabilities of Unilever has increased more than that of the short-term assets, therefore, the current ratio has declined. The decline in the current ratio implies that the liquidity has declined; therefore, the firm's ability to pay off the current debt has declined. In order to increase liquidity, the current assets should be increased, or else the current debt is required to be paid off. Unilever can easily increase its inventory level in order to increase its current asset.

However, the company will have to consider its inventory turnover as well. In 2021, the inventory turnover increased from 54.88 to 55.16, implying that the demand of the company has been increasing (Unilever, n.d). Hence, it will be a sound plan to increase the inventory in order to increase current assets.

2.4Financial Review assignment - Interest cover
The interest cover is the ratio between the PBIT and the interest. This ratio assists in assessing the firm’s ability to pay off the interest on loans. In the case of Unilever, the interest cover was 10.98 in 2020, which increased to 17.43 in 2021. The increase in interest cover post-pandemic implies that the ability to pay off the interest on loans has surged. In 2020 the company generated 7996 million pounds in PBIT, which increased to 8556 million pounds in 2021. Therefore, it is a clear indication that in 2021 the company was able to generate more income. The fact that the interest payment of the firm has decreased as well gave an upward impetus to the interest cover. The fact that the interest cover in 2021 is 17.43 implies that Unilever has the ability to pay off the interest expense 17.43 times using the PBIT it generated (Unilever, n.d). Hence, it has the ability to raise higher amounts of loans which will increase the payment of interest. However, the firm would be able to pay off the interest expense on the debt easily due to higher interest cover.

2.5 Limitation of ratio analysis
On Financial Review assignment, theRatio Analysis is a useful tool to interpret the performance of any given firm, but there are limitations of this analysis which should be discussed and understood. The first limitation is the actual quality of the financial statements. In the case of publicly traded businesses and given the strict audit requirements they must comply with; it is easy to assume that the information is correct. However, there are several reasons why financial statements may be misstated from errors in assumptions made and errors in information reported to, in the worst example, fraud. If the primary data being used on this Financial Review assignment to calculate financial ratios is incorrect so will be the analysis of those financial ratios.

Another weakness of ratio analysis as a tool is that it is grounded in historical information. All of the analysis is based on what has happened already in the years past, and therefore it is risky to be certain that historical trends will continue into the feature. It is useful in looking at the performance of a company’s management in the past and making limited assumptions about how that management team may perform in the future, but in terms of firm business projections into the future, the limitations should be made clear and understood.

Changes to accounting standards or policies are another risk of using ratio analysis and comparing historical periods. These types of changes can materially affect the interpretation of the analysis and it is important to up to date with changes to policies in accounting. Changes made are actually found in the section to the notes to the financial statements. Lastly, theFinancial Review assignmentdata found in the financial accounts of a company is limited. They do not consider wider issues such as inflation, disruption to trade, supply chain issues, government policy, and changes in market sentiment. All these factors can materially affect and influence the performance of a company that are not covered in a company’s accounts. It is therefore imperative to use other sources of data to support your assumptions when analysing a company and remember that ration analysis is one of many tools that should be considered.

3.0 Budgeting and performance management
3.1 Advantages and disadvantages of budgeting
Financial Review assignmentAdvantages
a) Management and control: The main aim of the Financial Review assignmentbudget is to provide a strategic plan for an individual or organization to take caution against any expense that may be encountered in the future (Wu, 2022). It helps to check the prospect and make decisions accordingly.

b) Evaluation of policies: The budget is prepared to provide certain policies and goals to be fulfilled. It is a guideline for taking decisions in terms of spending and investment.
c) Promotes competition: Budget can help in promoting competition among individuals and organizations who are well aware of their financial status and can make estimations in operations and activities to earn profit.
d) Systematic and organized: The budget gives a systematic and disciplined framework that ensures deep and successful study. This helps the company to make sound decisions and take proper action as per the requirements.

Financial Review assignmentDisadvantages
a) Inflexible: A budget can be inflexible in nature. A budget is prepared based on the goals and policies of an individual or organization (The World Bank, n.d). However, if there is a change in the financial status due to changes in the market, the prepared budget cannot be altered.
b) Time-consuming: For the preparation of a budget, it requires a lot of time and patience. A well-prepared budget will take in all the possible aspects of the company for reaching its goals. But this method is time-consuming as every aspect of the organization must be considered for taking proper action.

c) Inaccurate and unrealistic: A budget is prepared on the basis of judgment and assumption. A change in the business plan or the occurrence of any uncertainty can have a severe impact on the budget. Therefore, as per the Financial Review assignment, this inaccurate and unrealistic.
d) Conflicts: If the budget plan fails due to any kind of uncertainty, then there may be a rise in conflicts and tension in the organization.

3.1.1 Ratio analysis (Budget considerations)
The gross profit ratio of the company indicates that there has been a very small rise in gross profit, although the sales have increased a lot. As a result, the gross profit margin declined. Therefore, it means that the COGS sold has increased. Hence, Unilever should be concerned about the cost incurred in production. In order to optimize the cost incurred by the company, it can recheck the budget of the company, thereby allowing the company to analyze the areas where the cost has increased and subsequently find out means to reduce the cost incurred by the company. The inventory turnover period clearly indicates that the company has been able to sell off more inventory in the given period (Amanda, 2019). However, the cost is high, which might impact the income of the company. Therefore, the company should go through the inventory budget and find out ways to reduce the purchasing amount. Also, the company will have to check whether or not the cost of holding the inventory has increased or decreased. By implementing proper inventory management techniques using Financial Review assignment research methodologies, the company can order and repurchase raw materials such that the purchase price is optimized and the inventory holding cost is minimum. The receivable collection period has increased from 35.54 to 37.74, implying that there has been a delay in receiving payment by the creditors of the company. Therefore, there can be an increase in the bad debts of the company. Therefore, the company can use this data to review the budget and check whether or not it has adjusted the amount of bad debt from the total cash flow that could be generated (ADEBOWALE, n.d). If the company has not increased the bad debt, then it should try to do so since the delay in payment will increase bad debt; therefore, the loss in cash will increase.

3.2 Zero-based budgeting and activity-based budgeting
Zero-based Budgeting: It is a method of budgeting in which justification of all the expenses is done for each period. It is the preparation of a new budget from scratch or “zero bases”. The Financial Review assignmentresearch shows, it is required by the organization to compare all the components of the annual budget and check whether they are cost-effective and relevant (Schneider and O'Bryan, 2018).

Pros
Efficiency:This method of budgeting is useful for the organization in allocating resources efficiently. This method provides accurate results, which reduce the waste of resources and makes the activities more efficient.

Reduction in redundant activities:Zero-based budgeting helps in identifying more cost-effective and optimum ways of making the operation work smoothly. It also eliminates all the unproductive activities in the process.

Cons
Time-consuming: This Financial Review assignmentbudgeting approach requires a lot of time to prepare as the company has to make the budget from scratch and compare it with the annual budget to get the actual results.
Activity-based Budgeting: This is a planned system in which the organization identify, research, and analyze all the cost involved in the business process and prepares the budget based on the result. This Financial Review assignmentmethod of budgeting is more comprehensive than the traditional approach of preparing the budget. This budget aims to improve the efficiency and cost reduction of the organization (Wegmann, 2019).

Pros
Evaluation: This method evaluates all the cost drives involved in the business. It takes into account the steps involved in the activity and eliminates any irrelevant items.
Elimination of Bottlenecks: ThisFinancial Review assignment budgeting system is done with deep research and analysis. It eliminates all unnecessary items involved in the activities (Wanto and Nengzih, 2022). This helps the organization to reduce any bottleneck and allows the smooth function of activity.

Cons
Complex:The nature of activity based budgeting could be very complex as it requires extensive analysis of number of factors that is involved in the operation. It includes the estimation of demand by which it allocates the resources as per the various activity requirements.

3.3 Discussion on corporate structures, budget performance, budget variance, and total quality management
The company's management body will be looking after the master budget of the firm. The responsibility centres in a company are allocated by the management of the company as well. The Financial Review assignmentfixed budget variance is the difference between the results formulated by the fixed budget and the actual one. In case the actual revenue is being inserted in the fixed budget, this would imply that the variance that will be generated will be in between the budgeted and actual expense and not the sales (Kato et al., 2022). The flexible budget variance is the difference between the formulation of finances that are generated by the flexible budget and the results in actuality. Using this budgeting method, the companies will be able to find the areas where it is required to increase or decrease the budget, which will make the budget more and more optimized (Maheshwari, Maheshwari and Maheshwari, 2021). Total quality management is the process of finding out the errors in manufacturing the goods and eliminating those. Total quality management will assist the company in streamlining the supply chain. Since Unilever is an FMCG company, therefore, the optimization of its supply chain is one of the priorities that it should look for. Unilever will be using total quality management in order to eliminate errors in manufacturing the goods, which will help the company to sell good quality products, thereby increasing the goodwill of the company in the market (Eniola et al., 2019). The company will thus be able to increase the speed of production, which will help the company to sell more and more products. The Financial Review assignment shows the brands is well established which increased the speed of production, it will cater to a larger crowd of customers, thereby generating more and more revenue.

4.0 Investment appraisal
4.1 Project idea
We are evaluating the launch of an online store to sell our FMCGs to customers directly. We are doing a pilot project in one country only (Brazil) and after analysis we will decide if this should be offered globally. The funding approved for this Financial Review assignmentproject is 50 million pounds and should have a lifespan of 10 years (starting in 2023). (Student is required to makeup own cashflows, assume no inflation, 10% interest)

4.2 Pros and cons of N.P.V. and IRR

4.3 Calculations

The Financial Review assignmentresearch shows the amount to be invested is 50 million pounds. The cost of capital is 10%. It has been assumed that in the first year, the company will be able to generate 5 million pounds in cash flow. It is sufficiently less considering Unilever is an age-old brand, and it has been in the market for a very long period. The rate at which the cash flow will increase is 10% for the first four years; then it will increase by 15% for the next four years. Finally, when the company has established its eCommerce website for more than eight years, it is fair to assume that it will be able to increase the cash flow by 18% for the last two years.

As per the calculation, theFinancial Review assignment project’snet present value amounts to 599215.64 pounds, and the IRR is 10%. Considering that these are the values, it can be stated that the company will be profitable from this project.

4.4. Financing
The company can finance using the debt financing method. The interest cover of the company is high, which has been discussed earlier as well. Therefore, the company will be able to raise loans more often since it has an interest-paying capacity. If the company tries to raise financing via equity, then the cost of capital will increase, which will essentially decrease the N.P.V. of the company. However, if the company can increase its sale vigorously, then the N.P.V. will increase as well.

4.5 Financing method
Out of the two Financial Review assignmentfinancing methods that are debt and equity financing, the debt financing method is recommended to the company. The company has been able to increase its PBIT despite the pandemic implying that the company has the ability to generate higher profits (Luo et al., 2019). Since the profits will increase, the ability to pay off the debt will increase as well. Also, if equity financing is being used, then the company's discounting rate will surge, that will decline the firm’s net present value.

4.6 Risk and uncertainty
The risk and uncertainty of availing debt financing are that the company will have to pay interest. As a result, the net income of the company will be impacted. Also, the solvency position of the organization will be affected. If the firm’s solvency position plumets, then it could impact the going concerns of the company (Sharma, 2020). Hence, the Financial Review assignmentrisk and uncertainty of affecting the solvency of the company are the things that must concern the company since it might affect the ability of the company to incur debt in the future as well.

4.8 Recommendation
The investment is being recommended since the N.P.V. is positive. The assumptions of cash flow are very pessimistic since the company is way more popular than any other FMCG company. Since, under the pessimistic assumptions, the company will be able to generate positive cash flow via the Financial Review assignmentproject. Therefore, the investment will benefit the company.

5.0 Project Conclusion
Based on the above analysis, it can be stated that Unilever is that the firm has been able to increase its income based on the demand that it sustained post-pandemic. However, in situations such as liquidity, the company has taken a hit such that the firm’s liquidity position will deteriorate. Moving the company has the ability to pay off more and more debt. Therefore, it can raise debt finance in the future, which is also recommended to the company in case of its investment proposal as well. The company can easily invest in the proposal, thereby generating a higher amount of cash. However, expanding its investment will help the company to generate higher cash from theFinancial Review assignment projects. The company has been performing well. However, the company will have to check its cost and try to optimize it to the extent that reduces the cost of manufacturing, allowing the company to generate higher income in the future.

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