Some things which caught our eye recently...with some links to how our programmes can help make sense of the business world.

Bank shares for sale: at what price?

It has recently been reported that the US government is preparing to sell its 27% stake in Citigroup during 2010.  The US Treasury says 7.7 billion shares in the bailed-out bank are to be sold. At Citigroup's opening share price of $4.39 on 29th March 2010, the Treasury's stake is valued just over $33bn, making it $8bn profit, as the shares were acquired for $25bn as part of the $700bn Troubled Asset Relief Program.A sale of these proportions would mark another stage in the re-building of confidence in the financial markets in general and Wall Street's recovery from recession in particular.But who will buy these shares?  At what price? And what is the effect on the bank's balance sheet? Like any market there is a need for buyers and sellers, both taking a view that the price represents good value.Our finance courses explore the balance sheet impact of share sales, the ‘risk vs reward’ question asked by investors and why confidence plays a part in share price performance.

Pumping up the costs

The price of oil has hit an 18-month high leading to speculation that UK petrol prices will pass the record levels seen in the summer of 2008. Rising oil prices are likely to hit the wallets of British drivers already suffering from a weaker pound pushing up wholesale petrol costs.  Although the Chancellor has phased in the introduction of the “green” duty rise, 1p a litre was added on April 1, with a further 1p rise to come in October.So if your supplier puts up the cost of your raw materials how easy is it for you to pass this on by way of a price rise to your customers?  What would be the impact on your sales and profits if you put up your prices – or even reduced them?  How well do you understand margins and their relationship with overall profitability?These are some of the themes we explore on our finance courses and business simulations. Pay us an on-line visit or call for an informal chat about how we can help your workers make better financially informed decisions.

In administration: what does this mean?

Rail maintenance company Jarvis has called in administrators as the cash dried up and lenders refused to offer the company further credit.  With Jarvis’ creditors no longer prepared to offer it the money it needed to continue as a going concern the company said it had no option but to enter administration, and trading in its shares on the London Stock Exchange have been suspended. Following negotiations with the company's secured lenders, it has today become clear that sufficient support will not be extended to the company to enable it to continue trading as a going concern. As a consequence, the directors now have no option but to take steps... to place the company, and certain of its subsidiaries, into administration." But how can the support of lenders and creditors be so important to a business that withdrawal of that support leads to insolvency?  Cash is, as ever, King – our finance training programmes put this into context and explore these implications.

Share buy-backs: good or bad indicators?

Pepsi have just announced it intends to buy back $15 billion of its own shares over the next 3 years. But why, and what does this say about the wider economic situation? Share buy-backs generally happen when a company has too much cash and cannot put it to more productive use, and so it returns money to the shareholders, who can gain the same return on a lower level of investment (boosting return on equity and often the share price). This move (and Pepsi is only one of many) is seen by many as a good indicator - that companies no longer feel the need to hoard cash to protect against the downturn. Others however see this as something more pessimistic, and with long lasting effects. Perhaps companies undertaking buy-backs really cannot see any productive growth opportunities in the short term, and so are returning capital to their shareholders.These are some of the themes we explore in courses like Financial Analysis and Financial Strategy.

Motor manufacturers "strengthen their balance sheets"

At a time of widespread concern in the sector, both BMW and VW have recently announced lower profits, even though there is growth in their domestic market. Many motor manufacturers are reported to be strengthening their balance sheets during the recession. But what exactly does that mean?

There are many things that most companies can do to manage their balance sheets - in essence improving liquidity and reducing the risks associated with external debt finance. Stock management, supply chain management, effective credit controls, balancing fixed and variable costs; all these are ways of improving cash flow, which in turn creates options such as paying down debt, or making wise investments for the future. Virtually every business can make liquidity and profitability improvements, both in recession and growth years, to build a sustainable business for the future and take advantage of opportunities as they arise. These are some of the themes we explore in programmes such as our business simulation "Apples & Oranges" - which comes in variants for manufacturing, service and retail sectors. Click here for more information.

So what exactly is window dressing?

Repo 105 has been making the news recently. Repo 105 is a technique used by the failed Lehman Brothers, under advice from Ernst & Young, to temporarily move some items off its balance sheet which it didn't really want there on key dates - the day in each quarter when its accounts are struck and made available to the world at large.

But repo 105 is just one way of window dressing that has been used to make a company's accounts look better at critical times - often on the one day a year that the accounts are produced. THe very next day, we're back to where we were, but few external parties will ever know this - perhaps at least not until it is too late.

UNderstading what goes into a set of accounts, and the scope for judgement in how certain items - especially assets - are valued, is critical in making sense of financial statements. So in programmes such as Financial Awareness and Financial Analysis, we look beneath the apparent numbers and try to work out just exactly what is going on. Click the lnks for more details.

How the exchange rate helps pick your rugby team

Some 30 English rugby players are playing in the French league, Ligue Nationale de Rugby, this season – double the number in the 2007-8 season.  Johnny Wilkinson and James Haskell to name but two.  Why this exodus?  Money, surely? 

Well, yes, but not necessarily in the way you might think.  Wages caps operate in both countries, but in different formats.  The wage bill of French clubs is limited to 52% of their forecast operating budget.  During 2009, the sterling-euro exchange rate plunged from 1.36 to 1.03, making English players look very good value for the French clubs.  And with new French tax legislation providing good tax incentives for talented sports stars to move to France, the deal works both ways.

That’s fine for everyone here.  But what about the rest of us?  Exchange rate fluctuations can make or break a business, whether an importer or exporter.  But this aspect of the business should not be left to chance; businesses need to focus on what they are good at – the products and services – and make sure that the risks in the foreign exchange markets are both understood and managed.  We have a number of training programmes aimed at helping business who export and import.  Have a look here for exporters or here for importers.

Football club finances: the gap widens

Portsmouth enter administration and face relegation, whilst Manchester United's income grows as they progress in the Champions League and the Premiership. The gaps grow on and off the pitch. Where does all the money come from? In the recent Delloitte's annual Football Money League, Manchester United rank behind Real Madrid and Barcelona in the table of biggest money earners. For clubs like these, only 25-30% of the income comes from matchday ticket sales. 40% or so is from broadcasting rights, and the rest from commercial sales (hospitality, replica shirts, etc).

Football club finances are a real anomaly - players appear as assets - unknown in virtually any other company's balance sheet, the financial year-end reflects the football season and is related to contract dates with TV companies, and as clubs enter and exit the listed markets, more or less financial information becomes publicly available. In our financial courses we look at a range of different business types and help participants to understand the key drivers and influences in a business's finances. Have a look here at a sample programme.

The cost of an iPhone

The cost of components and assembly of a 32GB iPhone 3GS is $170.70 (source: The Economist, January 2010). Based on current retail prices you can probably work out how much profit you think Apple makes on each of these. However, the company still needs to cover its costs of research, product development, marketing, patent fees, retailer costs, etc. An understanding of fixed and variable costs, and how these costs behave, is critical to the running of any business. A number of our finance courses develop an understanding of business costs. Have a look here at a sample programme, or visit our Business & Finance Courses page to see a wider range of programmes.

Kraft and Cadbury: too highly geared?

Several commentators have expressed concern about how highly geared the takeover by Kraft of Cadbury is - lots of finance, including some provided by British banks. But why would a huge company like Kraft need to borrow so much? Well, they don't need to. But this mix of debt and equity - the "capital structure" - reduces the weighted average cost of capital to Kraft, and increases the potential return to the shareholders. But it also raises the risk. Understanding the choice of issues behind a company's capital structure is part of a number of our programmes. Look here at a sample programme.

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