Strategic Financial Management Report On British American Tobacco Plc Assignment Sample

Introduction of Strategic Financial Management Report On British American Tobacco Plc Assignment

British American Tobacco Plc is a multinational company of Britain who maintain their business activities by selling and manufacturing cigarettes or nicotine products. This company was estd on 1902. It has its headquarters in London. It is one of the largest tobacco selling companies in the world. It operates its business activities in 180 countries in the world. This company has some premium cigarette brands which includes Dunhill, lucky strike, Kent, Pall Mall and Rothmans. They have other brands like Vuse and Vype or Glo. The company has a great number of stockholders in the London stock exchange. Over the years they have maintained their quality of the cigarettes in a way that people can hugely love their brands. These brands provide excellent quality tobacco which makes it smooth and perfect to consume. They also maintain a good quality of filter which harms very much less to the people. Several brands of this company are quite popular around the world and people look for those brands. This strategy to maintain the business is resulting in positive figures of their financial outcome. The actual outcome mainly depends on the company revenue from that position the company maintains a strong hold by giving excellent quality of product.

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Financial Strategy analysis

Ratio Analysis

Any company’s financial strategies can be analyzed by analyzing their financial figures with various managerial tools and techniques. These tools and techniques can be presented that can give a clear view on the strategy and also on the financial performance of the company (Lim et al. 2021). The ratio analysis is also an important tool for analyzing performance and strategies of a company. The ratio can explain the solvency, profitability or liquidity position of the company. These positions can explain what are the strategies which they are applying to manage their business activities.

In this case BAT plc has presented their liquidity position with current ratio and liquid ratio. The current ratio is mainly around 0.7 to 0.9. This can clearly state that they do not have a good current asset position. The company does not meet the ideal position that is right but having a current asset is also not good (Akter, S. 2018). The same thing about the liquid ratio. It is maintained around 0.3 to 0.5. This explains that their liquidity position is not that great. The working capital of the business is also at a risk. The company is having a strategy to maintain the business with too much credit, same with their debtors and creditors. This credit is not maintaining their cash balance for that the company is not having a good working capital. The low working capital will create obstacles in the way of their business.

The solvency position of a company understands how solvent the company is or how much debt risk the company has. Debt equity ratio gives a clear understanding of the solvency position. The company is not having a lot of debt in terms of their equity. It is around 0.50 or 50% every year (Mathebula, P.W. 2022). This means the company is having a strategy to pay back its debt every year. The equity position of the company is increasing every year that is why the debt is not affecting them. But long term debt can also create risk on the company's capital which can affect the company in a way that the company can have low opportunity to take new loans and make new strategies.

The turnover ratios also presented a good sign especially the fixed asset turnover ratio which presented a good increase in their fixed asset. This maintained a great position in their fixed asset to turnover ratio. But their positions in maintaining the credits are in threat because they are keeping creditors and also debtors at a huge position. This will not help them at a risk position (Akter, S. 2021). They have a strategy to maintain credit to their suppliers, but at some position they can reduce their liability by paying their suppliers. This will help them to reduce risks of their company. The inventory turnover ratio is also showing good position. This will ensure how much order they are giving in the whole year to their suppliers.

At last they are improving. They have a standard position in that they can keep maintaining their profit ratios which is showing they have a great return on equity. 0.09 or 0.10 is a good position of return which they are generating by taking revenue from all over the world and also this revenue helped them to maintain a steady position in their ratios. [Referred to appendix 1]

Ratio analysis of Five years
2021	2020	2019	2018	2017
Current Ratio	0.85	0.88	0.71	0.78	0.89
Liquid Ratio	0.50	0.49	0.38	0.41	0.52
Gross Profit Ratio	39.85	38.65	34.84	38.02	32.77
Net Profit ratio	27.15	25.47	22.60	25.36	192.48
Debt Equity Ratio	0.53	0.63	0.59	0.66	0.72
Debtor turnover ratio	6.50	6.93	6.32	6.83	4.83
Creditors turnover ratio	1.61	1.63	1.73	1.43	1.48
Inventory turnover ratio	2.93	2.64	2.77	2.52	2.24
Fixed asset turnover ratio	0.21	0.21	0.20	0.18	0.15
Return on Equity	0.10	0.10	0.09	0.09	0.62

Table 1: Financial Ratios

(Source: Self-Created)

Financial Risk exposure

The financial risks are important for any company because it can provide the business with many obstacles which will not be wanted for the company. Currently the company is maintaining a steady strategy which they expect will give that much sustainability power for the company (Aldous et al. 2021). This financial structure also has some risk exposure which does give them the complete guarantee to sustain in the market competition. They are having threats which are increasing because their competition is increasing day by day. The competitors are making their brands with low tobacco quality which affects their production cost and also decreasing their selling value.

After the covid 19 the market is also becoming short. The covid 19 affected the lungs of people. Many people are leaving tobacco because of that (Mbori, H.O. 2020). These things are reducing the business growth that means what they were expecting of having growth in their current market competition they are not having the same. Their expansion has been stopped due to down trading of consumers.

They have another problem which is to make their capital structure have a maximum of owned capital which can be derived from issuing more shares and paying back the loans. The company should have reduced their debt capital this will make sure that the company cannot have any risk from paying back their debt. The owned capital will help the company to pay back their debt. They also have liquidity risk which means they don't hold much liquid asset at a time. That means they should think about how they can manage their debt capital. This debt risk can impact on many things like, they are unable to provide funds to their proper opportunity of raising their capital structure (Campá García, M. 2019). This will also affect launching new products or introducing some new strategies which will give their company benefits. Another thing is they cannot have a proper structure in their capitals which will obstruct them to assess new funds which they derive from loans. The more debt risk will increase the creditworthiness will be decreased. This will also affect the company that cannot issue new capital sources. The stakeholders will be affected by viewing the position of the company and also the debt risk which can be a huge negative point for the portfolio. The company will also affect his reputation by failure to manage the business capital structure and also affect the share price. The company’s plan to come up with new products will have problems. The brands which they maintain can also be affected by this and they can also lose some revenues. The revenue will hugely affect the profit.

The company is also having a problem with their cost of capital. That means the cost of capital is also affected by the capital structuring. The company cannot derive a great rate of return to their capital. The actual decrease in cost of capital will also affect the stakeholders to maintain their investment in the company (EQUITIES et al. 2022). The investment strategies of the company should be better in terms of they can fund their new products for the growth of the company. This will also help the company to analyze the actual solvency position. The solvency position will decide how much risk they can take at the current time.

Restructuring Activity

In this company they are acquiring a new project. They are introducing a product which is an electronic cigarette. They are hoping that this project will generate more revenues to the company. The actual cash outflow for this job is 50000 million. This project gives a clear idea about its inflow of cash in the next five years. The project also has an assumptions that it can give a return of 10%. By calculating its values using investment appraisal method.

This will give them a clear idea that there is a market for this product (Hasnath, S. 2018). Can this product be able to expand their business? This answer will be made by the research and development team who will ensure that the investing for this product can be beneficial for the company. Then the managerial thinks of how much value or more specifically cash they can generate from the investment. This will make sure that they can easily cover up the investment value by their return. The internal rate of return of a project is really very much important to discuss about the values which will derive from the project. Another method is the NPV which is a method of investment decision and largely accepted. NPV will identify the value of the project and also how much value of the project will remain at the end of the project period. This helps to make decisions and also helps to maintain decisions regarding the profitability of the company (Indika, S.G.T. 2021). Another method of investment appraisal is discounted payback period which will make sure in how many months or years the company may be covering the investment value. This method ensures the earliest time to make sure the profitability levels and also how fast the company will guarantee its profits. The discounted payback period goes through the return percentage and also the period of time the investment is made for. These two things help to generate return values in that year's cost of index. That’s why this method clears more theory on the investment decisions and capital structuring (Mišura et al. 2018). The restructuring of investment and also in the product models gives high growth on the preferred regions of those products which helps to build up growth in the market. British American Tobacco Plc is one of the most important and largest tobacco brands. That's why if they come up with a good product the consumer will take the product in a positive way if the product has certain demand in the market. [Referred to appendix 2]

Current Financial strategy analysis

The current financial strategy which the company is performing is presented in a manner that they can make a great amount of profit. By this method they only analyze the position of the company and also what the weaknesses of their financial strategy will be identified by the management. The company has a great knowledge on how to make more revenues. The strong brand name helps them to improve their strategy regarding merger or acquisition. This merger or acquisition helps them to gain more popularity in different areas of the world. This also helps capture new consumers all over the world (Jackson et al. 2021). Financial strategy also gets strong by their use of resources into the full extinction. This use of resources helps the company to maintain a strong cash flow. The cash flow of the company is properly maintained and iot will show how perfectly they use the resources. They also work under suppliers who are very much reliable. That's why they supply the tobacco which is finely cleaned and also maintained in an order which makes the quality of the cigarettes better. The actual development of British American Tobacco Plc is on their selling networks which they have all around the world. The selling chain or networks helps to distribute the manufactured tobacco in a perfect way and with balancing the economic demand and supply.

British American Tobacco Plc sets their financial strategy in a way they can merge with new brands but in some of the small brands they have not provided any importance they lose their controls in that company and also the company’s cannot maintain proper work culture. They do not have a great research and development team which is a weakness of their financial strategy that they set poor financial strategies to maintain the solvency and liquidity of the firm. Their competitors have a great team to research which gives them the opportunity to identify the consumers choice and also they can maintain introducing new products and also help them to improve their team (Khan, M.U. 2018). The liquidity position is seriously should be checked by the company’s financial team which will help the company to manage their cash or equivalents in a great and perfect way. This will require a proper financial planning to make sure that the company can hold as much as amount in their cash equivalents balance. This makes sure that the pricing of the product also increases hugely that's why the company cannot maintain a possible collection from their debtors. This huge pricing of products cannot attract all ranges of consumers especially in the countries who have low income people.

The company should implement more strategies which can help to pay back the debt of the company. In this company the main problem is the risk assessment of the company which their financial team should do (Kostiuchenko et al. 2019). This will help them to structure their debt capital and also improve their pay back rate. The faster they can pay their debt will release liability. The liability position is also huge for the firm and the firm should have a plan to mitigate the liabilities or more specifically the debts.

Conclusion

The report is to present a clear understanding of the financial performance and strategies of British American Tobacco Plc. The company is maintaining the tobacco business with a smart and interesting approach. Their financial strategies are set to make profits but most of the time it is losing its hold on their capital structure. The capital structure can be improved by the company. The ratio analysis of the company proved they are improving their revenue generation every year but they should control their costs also to make more return on the equity. This will give more sustainability options for the company. The investment appraisal methods are likely to present in a way that they can provide more projects in the future and also maintain the projects in a profitable way. This would be likely to share any of the experiences from the management to affect the project management. The company should come up with new strategies to sustain in the competition with their competitors otherwise they cannot make proper changes in their business operations.

References

Journals

• Akter, S., 2018. An Overview of British American Tobacco Bangladesh (BATB).
• Akter, S., 2021. Companies’ vision, mission, and core values focus on human resource management. International Journal of Financial, Accounting, and Management, 2(4), pp.343-355.
• Aldous, M. and Roy, T., 2021. Reassessing FERA: examining British firms’ strategic responses to ‘Indianisation’. Business History, 63(1), pp.18-37.
• CampáGarcía, M., 2019. Valuation of the Merger of British American Tobacco & Reynolds American.
• Dhandhania, A. and O'Higgins, E., 2021. Can “sin industries” prove their legitimacy through CSR reporting? A study of UK tobacco and gambling companies. Accounting, Auditing & Accountability Journal.
• EQUITIES, T.M., MASTER, M.M., CAPITAL, M., MASTER FUND, L.P., CREDIT, B.M., FUND, A.M., GUADALUPE, B., SUMMIT, B., FUND, B.M.M., SICAV-SIF, S.C.A. and BARRY, W., No. 368A20 TWENTY FIRST DISTRICT.
• Hasnath, S., 2018. Critical analysis of autonomous maintenance deployment at British American Tobacco Bangladesh.
• Indika, S.G.T., 2021. A Review of Tobacco Taxation and Packaging Laws in Sri Lanka: Suggestions for Development.
• Jackson, R.R., Rowell, A. and Gilmore, A.B., 2021. “Unlawful Bribes?”: A documentary analysis showing British American Tobacco’s use of payments to secure policy and competitive advantage in Africa.
• Khan, M.U., 2018. Importance of tobacco & wrapping material wastage management in secondary manufacturing department.
• Kostiuchenko, N.M. and Zakorko, A.A., 2019. Transnational companies' strategic planning in the context of the Global Sustainable Development Goals.