Discuss about the Flight Centre Travel Group.
Flight Centre Travel Group (FCTG) is the largest retail travel solutions provider in Australia. It is a vast global companies with offices present across Australia, New Zealand, Asia, Europe and the United States. It employs over 18,500 people globally besides entering into strategic tie-ups with other brands across the world. It has recently begun an aggressive expansion into the online space, moving forward from only physical store presence. It has started an in-house brand known as Aunt Betty along with the acquisition of US-based StudentUniverse.com and Australia-based BYOjet.com.(FCTG, 2016)
The Chief Financial Officer, Adam Campbell, is accountable for all the financial risks of a company, while also taking on additional duties of budget planning and book-keeping. He is also responsible for timely release of the company’s financial reports. He works closely with the Chief Operating Office and the Chief Executive Officer, Graham Turner, involved in both strategic and tactical decisions.
Controller and Auditor: The CFO is responsible for assessing the company performance and translating it into financial metrics. He is held accountable by all the stakeholders – shareholders, employees, management – for timely release of financial reports and other financial information. FCTG reported revenues of A$ 2.36 billion and profits of A$ 257 million in FY 2015. Since many strategic decisions are based on these reports, they are supposed to be accurate and precise. Tools like ratio analysis and balanced scorecard help a CFO convert the company’s operational metrics to financial ones.(BIERY, 2015)
Treasurer: The CFO is responsible for managing the company’s financial risk. He has the final word on decisions regarding investment of company’s funds like pension funds. He has to take a call on investment considering the return, risk and liquidity of the investment options available.
The efficient market hypothesis postulates that it is impossible to get higher than market returns without increasing the risk of the investment portfolio. This hypothesis is based on the fact that stock prices always represent the true sentiment of the market and are always trading at their fair value. Therefore, it would be impossible for anyone to buy stocks which are undervalued or short the overvalued ones. This theory is often debated as there are practical examples of investors (Warren Buffet for eg.), who have accumulated above average returns by investing in appropriate portfolios. Also, sustained bull or bear runs also contradict the efficient market hypothesis. However, academic research suggests that it is not possible to beat the market for sustained periods of time. Although one might be able to earn higher returns through selective stock selection, it is very rare to do it over long periods of time. So, it would always be advisable to invest in low-cost market index portfolios which promise average market returns (also known as passive management).
Now, a CFO is responsible for management of pension funds. Role of a pension fund manager is to ensure that the fund operates effectively for a long duration. Since the fund contains significant savings of a large number of employees of the company and is expected to provide benefits after retirement, the risk window available for the pension fund manager to play with is very narrow. Pension fund management is becoming increasing popular as the government is shifting the responsibility from itself to the corporations itself. A CFO may directly manage the pension fund by employing a team in-house. He may also seek the services of a pension fund manager or a consultancy who may manage the fund on behalf of the corporation. Also, he may choose to partner with the government pension scheme or an insurance scheme for providing retirement benefits to the company employees.
Besides investments, the CFO is also in charge of the capital structure of the corporation. He has to arrange for both debt and equity fund raising as and when required and also maintain an appropriate debt/equity ratio. He should also be ready with reasons for his decisions about debt and equity when subjected to scrutiny by the stakeholders.(Anderson, 2016)
Planning and forecasting: A CFO is an integral part of the strategy team of a company. He should be able to critically and analyze and share his insights about the financial performance department-wise. He should be able to identify the high-performing assets for further capitalization and low-performing assets for further improvement. His job description also includes financial modelling and forecasting to ensure long-term sustainable profits for the company. Through scenario analysis, he should consider all the various possibilities that the company can face and suggest contingencies for the same. The decision to actively pursue aggressive online expansion by FCTG must have been arrived at considering the changing market environment, pressure from competitors and drop in margins from physical stores.
The CFO has a major impact in setting objectives for the company and driving the corporation towards achieving those objectives. He, along with the other C-level executives, establishes measurable performance objectives along with a timeframe. These objectives depend on where the company is in its life-cycle. For example a while the objective of an ecommerce start-up might be to achieve 100% growth in Gross Merchandise Volume, the objective of an established automotive company might be to improve its gross margins by 20% over the next quarter. The CFO taps into the past and current financial performance reports and other available resources, analyzing them thoroughly so as to set realistic and achievable targets.
After the objectives have been accurately defined, the role of the CFO switches to monitoring the company’s progress to keep it on track for achieving the desired goals. He has to come up with some Key Performance Indices (KPIs) to quantify the performance objectives. He then has to keep a track of these KPIs and provide feedback to the company management continuously. He should be able to now translate the financial insights into operating procedures to be followed by the workforce in the corporation. He has to collaborate and work closely with the various operating groups in the company for this process.
If a CFO is unable to fulfill his aforementioned responsibilities, it can impact the company’s progress in a significant way. He should readily be able to fulfill any of the funding needs of the company required to achieve its objective. Any non- availability or delay in funding can set the company back by a significant amount of time in achieving its objectives. FCTG’s plan of establishing itself as a market leader in online travel booking space is contingent on the constant inflow of funds from the finance department. Its recent acquisitions of two online portals is a testament of the strong financial standing of the company.
The CFO also has to keep the company appropriately leveraged, so as to provide enough liquidity for all the operational needs, while also managing the financial risks so as to build strong fundamentals. While providing funds for expansion, CFO has to ensure that there are significant liquid funds available for smooth functioning of the offline business while also keeping adequate cash reserves for exigencies.
Over the years, the role of a CFO has evolved from a book-keeping accountant to a strategy consultant to the CEO. He is today one of the most trusted members of the CEO’s strategy team. It has changed from a transactional nature to more of a business partnering nature. He has grown from an attention – to – detail micromanager to a thought leader, from a hands- on doer to a delegator, from a reserved line- follower to an outspoken and collaborative decision- maker. He is now supposed to be excellent at stockholder communication and is an important advisor to the board of director. In today’s highly volatile macro-economic environments, CFOs ensure that the financial backbone of the company remains intact. The significant impact of the CFO status is best realized by the fact that many CFOs now hold the additional title of “CEO-in-waiting”.(Investopedia Staff, 2015)
FCTG has seen unprecedented growth in order to become a multi- billion dollar corporation employing thousands of people. Its objective of “opening up the world for those who want to see” has resonated well both with customers and its tour partners. FCTG has won many corporate and leisure travel awards like the best National Travel Management Company, Best Agency Corporate and Best Wholesaler. Such recognitions and exemplary financial performance evidence that the company has been able to achieve its objectives successfully till date. It is however now venturing into the online space which is a completely different ballgame. Now only does it lower the barriers to entry for new players making the play fairer, it demands a more agile kind of an organization to handle an internet business. It has started on a strong note by making the right kind of moves by acquiring the correct players. FCTG will need all the strategic and financial support that it can get from its CFO, now more than ever. However, considering the excellent performance record of FCTG, the future does look quite well for all its stakeholders.
The efficient market hypothesis was used by Fama in the year 1970. He defined efficient financial market as a market where the prices of the securities reflect the information available in the market by all the investors. Thus efficient market hypothesis states that in financial market in the real world the stock prices reflect all the information about the firm. If the prices are high then the firm is doing well and if the prices are low then the firm is not doing well. Thus it is a true reflection of the performance of the company and the investors or trading system cannot earn excessive profits or return than the equilibrium profits or return as the current information available is present with all the investors. It also says that in the long run an investor whether a person or a mutual fund cannot continuously beat the market and the huge amount of resources which are invested by these investors in selecting the stocks, analyzing and trading them to beat the market will be wasted. The efficient market hypothesis states that the investors should not be actively involved in managing the money but be a passive investor as the market will bring prices to equilibrium. (Investopedia, 2013)
The theoretical foundation of the efficient market hypothesis relies on three important points. Firstly, it assumes that the investors are rational and they will value the stocks rationally. i.e. they will take sensible decision while deciding the price of a stock and thus the market will be able to balance equilibrium with the information available.
Secondly the efficient market hypothesis assumes that there will be some irrational investors in the market who will trade irrationally buying stocks at random. But since there will be an also set of people doing exactly opposite so in total there will be no net effect on the prices of the stocks.
Thirdly, the efficient market hypothesis assumes that the irrational investors meet rational arbitrageurs who cancel their effect on prices.
Efficient market hypothesis believes that the rational investor will calculate the value of a company by discounting all the future cash flow taking its risk into consideration. However in reality, the investors are not fully rational and thus the efficient market hypothesis does not stand true. Also the argument stating lack of correlation between the trading of irrational traders is limited. Thus passive investment in the market can lead to huge losses.
The pension fund manager is responsible for the money of the clients and it is his duty to provide a diversified portfolio to minimize risk and maximize return will which be acceptable to the investors.
The statement that the pension fund manager should invest in any kind of portfolio is incorrect as the pension fund manager has to diversify his portfolio and random selection of stock may not help in achieving this goal. Also even if the portfolio is diversified the pension fund manager should provide the maximum return to investors which is possible by analyzing and picking the right stocks and minimizing risk.(Shleifer, 2016)
References
Anderson, C. (2016). What Are the Top Ten CFO Responsibilities. Retrieved from https://www.bizmanualz.com/be-a- better-boss/what- are-the- top-ten- cfo-responsibilities.html
Biery, M. E. (2015).4 Key Functions of a Chief Financial Officer. Retrieved September 7, 2016 from https://www.entrepreneur.com/article/242001
FCTG.(2016). Flight Centre, The Airfare Experts and World’s largest travel agency. Retrieved September 7, 2016 from https://www.flightcentre.com/
Investopedia Staff. (2015). What does a Chief Financial Officer (CFO) do. Investopedia.Retrieved September 7, 2016 from https://www.investopedia.com/ask/answers/04/042204.asp
Sheliefer, A. (2016). Are Financial Markets Efficient? Retrieved September 7, 2016 from https://www.oxfordscholarship.com/view/10.1093/0198292279.001.0001/acprof-9780198292272-chapter-1
Malkiel, B.G., 2003. The efficient market hypothesis and its critics. The Journal of Economic Perspectives, 17(1), pp.59-82.
Laffont, J.J. and Maskin, E.S., 1990. The efficient market hypothesis and insider trading on the stock market. Journal of Political Economy, pp.70-93.
Malkiel, B.G., 2005. Reflections on the efficient market hypothesis: 30 years later. Financial Review, 40(1), pp.1-9.
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