Discuss about the Management Control Systems to CSR Strategy.
The concerned report deals with the strategic financial and overall analysis of Coffeecups Ltd which is major coffee based Retail Company headquartered and settled in U.K. The company deals with a wide variety of coffee products and apart from being a coffee retailer, the company also focuses on selling coffee to its customers across various public platforms like schools, colleges, office buildings and bookstores. The Company primarily operates under two wings, one concerned with the retail section of distribution of coffee to prospective dealer and sellers and the direct selling to its customers across various public platforms as mentioned above. Apart from their coffee service, they also provide a wide range of cold drinks to its customers. The company has a deep regard for its employees and customers. They ensure that their customers receive the highest quality of coffee every time they approach Coffeecups. Of late the company has been facing a financial crunch, earnings have fallen and it has caused a 25% decrease in the projected profit of the third quarter. As a result of which, the company is facing a financial dilemma because of its stalled investments which have hampered its operations and profits. In this report, the company’s financial officer has come up with three options to guide the company, which have been analysed in detail and the best option has been prescribed.
Coffeecups has over 600 locations across Europe and U.K. They offer wide range of products right from high quality whole beans to a variety of chocolate chip muffins, pastries and coffee beans. They sell directly to their customers approaching their stores as well as they operate as a retailer. They even offer food services to colleges, hotels, businesses and even universities. They have also started catering to the demands of cold coffee requirements of their customers because of the increasing warmer climate of the United Kingdom.
Coffeecups take employee policies, welfare and development very seriously. They know the worth and the importance of their employees. They offer exemplary services to their employees. Their specific policies about their employees have been described below:
The capital structure of the company has been provided below:
The company has always given due importance to both the most widely used financing techniques of a company; financing through equity and financing through debt. As a result of which, the company gives due importance in the usage of both. As of now, the company derives its funds through these two techniques of both debt as well as equity. The percentage of spilt is of 60% and 40%. The cost of equity financing is estimated at 8% and the cost of debt before tax is estimated at 13.5%.
2015 has proved to be a very successful year in the company’s history. In 2015, the company was successful in opening 200 new stores. The year 2015 was exceptional for Coffeecups in many ways. This was the part of the company’s European expansion strategy. In this very year, the company’s all time profit had a record increase and stood at £75million.
The company’s third quarter earnings had a significant amount of fall which had resulted in a 25% decrease in the projected earnings and profits. This was the first financial downfall of profits in the history of the company after the incorporation of the company, back in the year 1984.
The company had performed an initial investigation to derive the cause of this sudden fall in the profits of the company. After the primary investigations, it was concluded that the earnings may have had a slip because of the company’s preoccupation with the activities related to brand development with the synergies with other products. It was even estimated from the meeting of the board members that net cash inflow could increase by a further £17,000 per year per shop if the company developed this area. The company’s MD believes that through their tie up and investments with NASDA supermarket, the company would be benefitted in the form of new store openings.
Effective management control evaluates and monitors the different aspects of the working of Coffeecups. The management ensures that goals of the company are met by efficient use of the resources of the company at the company’s disposal. It is done by the management by engaging in the following:
A successful coffee company employs the best possible management control system in order to ensure better all-round performance and profitability. It employs the following procedures to ensure this:
A diagrammatic explanation of the management control system has been provided below:
Coffeecups has to ensure that an effective management control system is placed in its organisational epicentre to arrest its financial crunch an achieve success (Arjaliès and Mundy, 2013). In this entire structure, the following internal working takes place, which acts as the primary engine for its MCS. The steps include making important decision regarding the company’s requirements in terms of its objectives and targets, followed by the process of control management action, where the performances are measured and consequently decisions are taken for the necessary changes and implementation.
A successful company, be it a coffee company or any other requires cost accounting in association with management control. Cost’s significance cannot be downplayed, although it makes an impact over the company’s results but not as large as that of managerial control. It is a much broader concept than cost accounting. Its scope includes costs measurement and taking actions for cost control, but managerial control includes every aspect of an organisation’s operations, including cost control. Therefore, it could be concluded that for long term sustenance both play a major role and cannot be sacrificed for one and another.
In any business venture the need for continuous innovation is the need of the hour. Innovation in coffee industry involved change in terms of quality, health factor and the overall sustainability of the industry. Entrepreneurship is no more a nascent term in today’s world (Forbes.com, 2018). Coffee has been instrumental in creating many good entrepreneurs since a long period of time. Howard Schultz had set the trend of becoming a coffee entrepreneurs by founding Starbucks and the trend has continued till today.
The main innovations in the coffee arena include:
Entering into business ventures and partnerships have been done by major coffee companies. The most notable venture of recent time has been the coming together of Tata Global Beverages and Starbucks for opening of coffee outlets in India. It has been carried out to exploit the business opportunities in a developing economy like India. Starbucks, Pepsi and Unilever have ventured into the tea category recently (Tataglobalbeverages.com, 2018). All these ventures have been entered into with the strategic aim of expansion of markets and profitability.
The company must follow an inclusive dividend policy. A proper balance should be followed in terms of cash retention and dividend distribution. . The board of directors have to decide a proper dividend policy which is in sync with the profit retention policy of the company. If funds need to be kept aside for future projects and contingencies or if shareholders want a quick return on their investment. Coffeecups must keep in mind these kind of goals of both the management as well as the owners. A proper sync should be the aim in deciding these policies.
There is a close relation between the prices of inputs and the stock prices of coffee companies. When the coffee prices are low, their shares prices tend to increase and vice versa. The case today is more of the latter one, where the stock prices have fallen. Various economists have said that the companies were purchasing coffee at a slower pace than before despite falling coffee prices as the company adopt a cautious approach in the case of buying highest quality coffee.
In the case of equity and debt source of financing, the concerned company must be wise enough to choose the correct financing procedure to fund its operations and existence. The company must strike a balance between the two. The traditional approach states that no debt issue should be made, instead funds should be collected through equity because the payment of dividends depends on the company. In case of the modern approach, the affinity towards debt is more and is therefore considered because of the tax benefits available. In this case a proper synergy should be maintained and a mixture of both equity and debt should be used.
The company is now in rejuvenation mode and it must tread carefully in the future. It must take into account certain important factors which influence the profitability of the coffee companies worldwide. Some of these factors have been explained below:
Option 1: This alternative is about investment in opening stores with the NASDA Supermarkets. After calculating the cumulative cash flows, it has been seen that the cash flow remains negative till the sixth year of the NASDA undertaking. Only after the sixth month, the company becomes successful in recovering its initial costs which consisted of investment costs, staff salary, research and development and other expenses. After the sixth year, Coffeecups starts earning an excess revenue amounting 8, 75,000. In the worst case scenario, the company might not be able to recover its investment during the ten year period of the investment. In this case, it would not be wise, on the part of the company to continue with this investment collaboration with NASDA Supermarkets. As a result of which, the company would not be able to meet its objective of establishing cafes with the assistance of NASDA Supermarkets. The NPV in the case of the branding is very good, amounting to 6, 58, 94,530, so it can be concluded it is a better deal. This should not be abandoned.
In the second option, the company tends to increase its turnover by investing in opening the Casa or the de-luxe model. The analysis of each of these two models have been provided below:
The average life span of the Casa model is eight years before it requires serious remodelling or innovation and in the case of de-luxe is ten years. As these projects are of unequal life years and are mutually exclusive nature, as a result of which replacement method should be used. In case of the Casa model, the NPV stands at 3, 53, 83,021 and the internal rate of return is 35% which is more than the rate of return expected from the De-luxe model which stands at 31%. Moreover the NPV is comparatively less than the Casa one as it is only 1, 02,588.84. Moreover, the company in case of De-luxe model has to be financed with an 11% loan, which will eventually have a bad impact on the returns expected from the adoption of this model. Thus in this case, the company with the higher IRR must be chosen, which Casa model is in this case. Moreover the most recent coffee in the United Kingdom is Costa and it has grown steadily for a long period of time overtaking Starbucks in the process (Costa.co.uk, 2018).
Option 3: This alternative focuses into discontinuing operations and markets in the UK and refocus on European market. This would generate a cash of about $63 million and it would cost about $14 million. It would be shared over a period of three years. The NPV is 4,14,55,257. The company’s objective is to maximise the profits of itself, if this closure takes place, the prospective future cash flows from the opening of markets in the UK would come to an abrupt end. As a result of which, the company’s profitability objective would be compromised. When the NPV is being compared with branding it stands at 6,58,94,530 which is more than the NPV of the closure. The shareholder’s objective as a result of which would not be maximised as it is in conflict with the company’s objective.
Conclusion:
In this project a detailed financial review of Coffeecups has been done. In particular the various alternatives which were chalked out in the board meeting of the company had been discussed. Opening of outlets with NASDA, creation of Casa or de-luxe style of shops and discontinuing operations in the UK market, all had been investigated. On careful analysis, it can be concluded that the NASDA investment is the best of them all as after the sixth year, the company would recover its investment and would eventually start earning revenues from the 7th year onwards.
References:
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