The X Gruppe
Utilising the company strengths in order to improve the financial structure
PUBLIC VERSION
By Maarten Boven
The X Gruppe
Utilising the company strengths in order to improve the financial structure
PUBLIC VERSION
Company: X Gruppe
Supervisor X Gruppe: S. X
University: Rijksuniversiteit Groningen
Faculty: Bedrijfskunde
Directions of specialisation: Financieel Waardemanagement & International Business First supervisor university: Dr. W. Westerman
Second supervisor university: Mr. Drs. H.A. Ritsema
Student: M.R. Boven
Student number: 0993859
Place: Groningen
Date:
The author is responsible for the content of this thesis; the author holds the copyright of the thesis.
Preface
This is the public version of the thesis. This public version does only include the methodology chapter of the thesis. Additionally the Group name, the names of companies of the Group, names of certain persons and names of towns and regions are changed in order to protect the abuse of information in this public version.
The thesis was written at the Subsidiary A facility of the X Gruppe in the German town of Town-x. The research started on 9th of April 2003 and took about six months. The research and the writing of the thesis have predominantly been done simultaneous. Besides the research I was involved in the composure of a credit application report.
I would like to thank S. X for giving me this opportunity and for the amount of time and energy he has spent supporting me during the research. Additionally I would like to thank S.
Y for her contribution. Also I would like to thank the supervisors from the Rijksuniversiteit Groningen; W. Westerman and H. Ritsema. I would especially like to express my gratitude to W. Westerman for his support and collaborative thinking during the research.
Summary
The X Gruppe had a weak financial structure. The weakness of the financial structure was characterised by an overall capital shortage, a high interest rate exposure and a strong dependency on the Group’s banks.
This weak financial structure was in conflict with several organisational goals. Conflict was observed in the goals to be financially flexible, to maximise profit and to secure continuity.
It was this conflict with the organisational goals, which made the management decide to be prepared to take affirmative action. In this context the management employed me with the task to come up with a solution to their problem.
The research goal was to design an implementation plan in order to strengthen the financial structure and the goal was diverted from the problem as held by the management.
I also formulated the research question: “In what way can the X Gruppe’s management strengthen the financial structure of the Group?"
Beside that a conceptual and phase framework was developed. A phase framework formed the basis for the structure of the thesis.
In the initial phase of the research the organisational, financial and strategic context of the Group were described. In this phase it became clear that the X Gruppe had experienced many organisational changes since it was founded in 1983 and that the organisational restructuring has been especially intense during the last years. Additionally from the financial analysis it became clear that in the last years the X Gruppe’s profitability was generally low or even negative mainly as a result of the loss making X companies. Although it seemed that the management had tackled most of the profitability problems just in time, mainly by reorganising the X companies, it had led to a situation in which the equity of the Group is only 10% of the total asset value. From the analysis of the strategic context it became clear that the X Gruppe has lately been reorganising many of the X companies. In the strategic planning it became clear that this process should continue in such a way that all of the X activities should be abandoned in the near future. Besides that from the financial plan it became clear that the Group needed an amount of capital in the 2003-2006 period.
Additionally it became clear that in the future the Group intents to invest all net after-tax cash flows. It is estimated that no cash flows to or from owners will occur in the forecasted period.
Various financial instruments of equity, liability and off-balance finance were analysed for the X Gruppe. A valuation matrix was constructed in which all financial instruments were valued using measures of feasibility, effectiveness and efficiency. The selected most valuable
financial instruments are:
- To obtain a long-term credit accommodation for the “A tree” at the Fortis bank or KBC bank of EURO 500.000,-
- To obtain project finance in the form of a bank guarantee for the customers of the “A tree”
at the Fortis bank or KBC bank so that capital becomes available to the “A tree” for EURO 2 million
- To issue a collar for the “B tree” at the Fortis bank or KBC bank
A implementation plan was constructed using the set of most valuable financial instruments.
The implementation of this plan will result in a stronger financial structure at the X Gruppe and includes five steps. The first step is to establish contact with the KBC Bank and Fortis Bank. Secondly a application report should be handed to the bank employees. Thirdly the feasibility of the accommodation of the credit and bank guarantee should be negotiated. After that the terms should be negotiated on and finally after the successful application of for the credit and bank guarantee a collar should be issued at the same bank.
Table of contents
1 Methodology 1
1.1 Introducing the X Gruppe 1
1.2 What is the problem? 2
1.3 Classification of the problem 3
1.4 The problem thesis 4
1.5 Sources of information 6
1.6 Definition of concepts 7
1.7 Research plan 8
1.8 Research relevance 13
1.9 Research feasibility 14
1.10 Conceptual framework 15
Appendix 1
1 Methodology
This chapter will start with a short introduction of the X Gruppe in paragraph 1.1.
Following this introduction, in paragraph 1.2, the problem according to the management of the X Gruppe, is described.
In order to formulate a problem thesis the problem as described by the management is, before this formulation, classified in paragraph 1.3. This classification of the problem supports a correct formulation of the research goal and research question in the problem thesis in paragraph 1.4.
Using the problem thesis as the point of origin, the sources of information are discussed and the mayor concepts of the research are defined in respectively paragraph 1.5 and 1.6.
The next step in the process of methodological design is describing the research plan in paragraph 1.7. In the research plan a phase framework and a time scale for the research are described.
After the presentation of the research plan, the research relevance and feasibility are discussed in paragraph 1.8 subsequently 1.9.
The final step is the presentation of a conceptual framework 1.10.
1.1 Introducing the X Gruppe
In 1983 Mr. V. X found the Subsidiary A in the XXX town of Town-x in North Germany.
Through the years new companies were acquired and founded and this Group of companies evolved into what became known as the X Gruppe. Currently the Group exists of ten companies:
- Subsidiary B
- Mother firm
- Subsidiary A
- Subsidiary C
- Subsidiary D
- Subsidiary E
- Subsidiary F
- Subsidiary G
- Subsidiary H
- Subsidiary I
Subsidiary B and Motherfirm form a juridical entity. Subsidiary B’s role is solely juridical and no activities are located at this company. The X Motherfirm is the mother company for Subsidiary A, Subsidiary C, Subsidiary D, Subsidiary E, Subsidiary F and Subsidiary G. The mother company also owns the real estate used by all Group companies.
Subsidiary A and C are involved in processing stainless steel rolls into various products.
Subsidiary A and C form a service centre, producing intermediate products for the stainless steel processing industry. The products are sold throughout Europe.
Subsidiary E and Subsidiary D are related to the Subsidiary A and C and provide services supporting their activities.
Subsidiary F mainly trades steel, stainless steel and plastic products. Subsidiary G is producing steel and trading aluminium products. Both companies are active on the local market and sell their products to consumers as well as to businesses.
Subsidiary H forms together with Subsidiary I also a juridical entity. Subsidiary H is purely a juridical GmbH without any activities. Subsidiary I produces high-tech robotics and machines mostly for the European steel processing industry.
1.2 What is the problem?
The problem according to S. X, as the representative for the whole management of the X Gruppe, consists of three parts.
The first part has to do with the fact that due to scarcity of financial means the current
financial structure does not satisfy certain supplier conditions. Satisfying these conditions will lead to the offering of certain options by suppliers. These options are price reductions and attractive special offers of products. Both these options are conditionally and only given when the supplier knows that the customer is in a good financial position and is willing and capable to pay in a relatively short period. Because the X Gruppe does not satisfy these conditions, it is impossible for her to take advantage of these options. Estimates of the management of the Group are that the supplier options that the Group is missing each year represent a total value of about EURO 1-1,2 million. Additionally this scarcity is causing the Group’s management to delay or cancel the investments in attractive projects. The main reason for the scarcity of financial means is twofold. Firstly the decreases in the Group’s equity caused by several years of losses shrank the internal financial means. Secondly the banks were increasingly cautious with issuing new credits. The value of the total accommodated bank credit only slightly increased in the last years. According to the management of the X Gruppe the three main reasons why the banks currently involved in the external financing are redundant to invest in the Group are:
- The profit history of the X Gruppe;
The X Gruppe as a whole has been unprofitable for the last years. This makes it hard to convince the banks to invest in the Group. The losses were however mainly caused by a subsidiary that has been terminated lately.
- The hard times in the German financial sector;
Most large German banks are in trouble. The world-wide economic downturn has hit Germany and especially the German financial sector very hard, causing these banks to hesitate in approving credit accommodations.
- The restrictive budgeting systems of the banks;
The current banks perceive the economic development of the XXX region as lagging behind on the average German development. The restrictions imposed on the XXX branches of the German banks are therefore strict. This is causing the banks to be very cautious in approving the accommodation of credit in this region.
The second part of the problem is caused by the excessive use of short-term capital. This is mainly the result of a small and limited amount of long-term bank credit. At a certain point in time all long-term bank credit was in use and only short-term bank credit was available to the Group. The ongoing demand for bank credits forced the Group to take on a larger than ideal proportion of short-term bank credit.
At the X Gruppe the total short-term credit is 79% of the total asset value on 31.12.2002. The other 21% of the assets are financed with long-term bank credit and equity. More ideal would be a situation in which the fixed assets are financed with long-term bank credit and equity.
This would mean a increase in the long-term bank credit to 37%. Achieving this with the current banks is perceived to be impossible. In the current situation (on 31.12.2002) 11% of the total asset value is financed with long-term bank credit. The excessive use of short-term capital makes the Group’s profit extremely vulnerable to a rising interest rate. A strong rise in the interest rate could endanger the Group’s continuity.
The third part of the problem is due to the fact that the Group is despite her international character solely dependent on German banks for her financing. This would not necessarily be a problem, but all her current banks are restricted concerning the approval of credit
accommodations. The dependency on these restrictions is experienced as undesirable by the management.
Combining all parts of the problem, the management concludes that the current financial structure is unsatisfying since the financial means are insufficient, the interest rate exposure is too high and the dependency on the budgeting system of their current banks is undesirable.
As a solution the X Gruppe management would like to have another bank involved in the supply of capital. This bank preferably has to take an 10 to 20 percent stake in the total external financing of the Group. This would roughly be a credit accommodation of EURO 2,5-5 million. The bank has to be a none German bank because the management assumes that all German banks imply the same sort of restrictions. The Group’s management thinks by doing so the Group would be able to decrease the dependency of its external financing on XXX budgets of her current banks.
Additionally, for obtaining a credit accommodation at a European none German bank the management uses the argument that a large proportion of the Group’s turnover is achieved outside Germany but within Europe. The reasoning behind it is that a company with large proportions of foreign turnover should not be externally financed solely by domestic banks.
Perceived, most promising and best fitting is a bank from the Benelux. This is because of the small geographical distance and the large proportion of turnover realised in this region.
Until now the X Gruppe has not been taking the process of getting a credit accommodation further than the initial contact with banks. The management of the Group is however recently in contact with the Belgium/Dutch Fortis Bank for the approval of factoring the Group’s receivables. If the factoring will be approved there are good chances for also obtaining a credit approval at the Fortis Bank.
1.3 Classification of the problem
In order to conduct a qualitatively good research, the researcher has to analyse if the problem, as described by the person who has the problem, is a real problem. It is difficult to decide whether a problem is real or not and to argue why it is so. To a certain extent this will always be a normative process in which the interpretation of the researcher will be decisive.
Kramer (1978) describes the problem of a certain person as a function of the reality, the perception of that person, and the goals of that person. A real problem would be one that is mainly caused by a certain phenomenon in reality. If on the other hand the perception or goals of the problem holder were largely causing him or her to have the problem one would not speak of a real problem but respectively of a perception or goal problem.
In case of a perception problem the problem holder misperceives the reality and by doing so he or she is causing a problem. Goal problems are created by the desire of reaching unrealistic goals (De Leeuw, 1990).
Could it be that the problem described by S. X is a perception or goal problem?
Lets take a closer look at the problem described. Different people have different views on reality. Therefore if more than one person thinks something is a problem the chances of a perception or goal problem are decreasing. The entire management of the Group, consisting of three people (thus not only S. X) has this problem, making it more difficult to belief
misperception or unrealistic goals are causing it.
Also the problem is causing a negative influence on and is in conflict with some general organisational goals and strategies like profit maximisation, financial flexibility and
continuity. Arguing that these goals should not be perceived as the organisational goals in this case is unrealistic, since arguments in favour are well established in literature. Profit
maximisation is defended by Brealey and Myers (2003). Seitz and Ellison (1999) and Wander (2003) argue why companies should obtain financial flexibility and according to Bouma (1991) continuity of a company is often the point of departure in an economic observation.
Besides this the goal of the management to solve the problem is not unrealistic at all. There are many possible ways to solve this problem, but it will require time and effort to do that.
Therefore the conclusion is that misperception or unrealistic goals are not or only in a minor way causing this problem. The current financial structure is really not satisfying and there are possibilities to improve it. The problem is a real problem and it is worthwhile to conduct a research. This research will therefore focus on changing reality and not the perception or goals of the problem holder.
1.4 The problem thesis
The problem as described by the Group’s management will be the basis for the research, although a modification concerning the scope of possible solutions is necessary. In this research the solutions suggested by the Group’s management (see paragraph 1.2) will be examined, but a wider scope will be used. This means the solutions as suggested by the management will be analysed and also a wider variety of possible ways to solve the problem will be examined. By doing so the advantages and disadvantages of various possible solutions will be discussed and analysed. This process will lead to a more independent argumentation in favour of a certain best or most promising alternative to solve the problem.
Before the exploration of possible solutions to the problem can begin, the researcher has to acquire information about the X Gruppe. The exploration of the possible solutions therefore demands analyses of the organisational, financial and strategic context of the X Gruppe. At the same time the Group’s strategy will be important in determining the financial planning.
This strategy however should be thoroughly analysed and critically approached.
When the financial context, the organisational context and the best strategy are determined, the exploration of the internal context is complete. After the construction of a financial
planning the exploration of possible ways to solve the problem can begin. During this analysis the external determinants are also included. A well considered selection process will then lead to the choice of one solution out of the possible solutions. This solution will be the input into the implementation plan design process. The implementation of this plan will result in a change of the financial structure in such a way that the profitability and financial flexibility of the Group increase, and the continuity is safeguarded.
Most important of the three sub goals is the safeguarding of the continuity. There is however a strong mutual dependency among these goals. It is likely that improvements of the financial flexibility will also result in higher profits. On the other hand more profits will lead to more financial slack and a more secured continuity. Because increases in the financial flexibility and profitability positively influence the continuity, all of these sub-goals are considered to be equally important in this research.
The research goal as well as the research question highlight the strengthening of the financial structure, the concept of a strong financial structure is defined in paragraph 1.6.
The research goal will be:
“To design an implementation plan, in order to strengthen the financial structure, thereby improving the profitability and creating more financial flexibility in such a way that it also safe guards the continuity of the X Gruppe.”
The research question will be:
“In what way can the X Gruppe’s management strengthen the financial structure of the Group?"
The sub-questions:
- How did the X Gruppe’s organisational context evolve over the years and what is the X Gruppe’s current organisational context? (see chapter 2)
- How did the X Gruppe’s financial context evolve over the years 1999-2002? (see chapter 3)
- How did the X Gruppe’s strategic context evolve over the years? (see chapter 4).
- What should be the strategic and financial planning considering the wishes and
expectations of the X Gruppe’s management and the strengths, weaknesses, opportunities and treats of the strategic entities of the X Gruppe? (See chapter 5)
- Which financial instrument or combination of financial instruments can strengthen the X Gruppe’s financial structure in such a way that the profitability and financial flexibility increase and the continuity is safeguarded, considering the X Gruppe’s internal and external context? (See chapter 6)
- Which financial instrument or combination of financial instruments would most effectively and efficiently strengthen the financial structure and would therefore be the most valuable solution for the X Gruppe? (See chapter 7)
- How could the X Gruppe’s management implement the most valuable financial instrument or combination of financial instruments in order to strengthen the financial structure? (See chapter 8)
Research prerequisites and specifications:
- The X Gruppe’s management is the client of the research and the research will be written in such a way that the X Gruppe’s management will be able to optimise its utilisation.
- With regard to the outcome of the design process, the implementation willingness and implementation capabilities of the X Gruppe’s management are taken into account.
- One person will conduct the field research in a 6 and a half-month period.
- The researcher will join Norinox Benelux for about 5 days.
- S. X will attend the research for the X Gruppe.
- The research will be attended by Dr. W. Westerman as first attendant and Mr. Drs.
Ritsema as second attendant for the Rijksuniversiteit Groningen.
- The researcher is not participating in the implementation of the designed plan as part of the research. The participation in this process has to be seen as a separate part of the internship.
- Monetary means are limited.
1.5 Sources of information
In order to solve the problem as defined in the problem definition, information is needed. The information needed for the research can be divided into two different categories.
The first would be information about the X Gruppe itself. The answers to the first four sub- questions (chapter 2, 3, 4 and 5) mainly required this type of information.
This information have mainly been obtained using the following sources:
- Knowledge possessed by employees and management of the X Gruppe
- The X Gruppe’s internet site
- The X Gruppe’s annual reports
Besides the information concerning the Group itself, information on the possible solutions through external involvement have been explored. The last tree sub-questions (chapter 6,7 and 8) require mainly information about the external context. The following sources have been used:
- Internet sites of financial institutions
- Knowledge possessed by employees of various financial institutions
- Knowledge possessed by the supervisors of the Rijksuniversiteit Groningen
- The university libraries of the Rijksuniversiteit Groningen
- Chambers of Commerce of various countries
Limitations on the use of these sources are various. The employees and management of the X Gruppe have been available for comments and questions without appointment unless it is not interfering with their working processes.
Additionally there has been a weekly appointment with S. X. The various internet sites and the Group’s annual reports were always accessible. The contact with employees of banks and
the chambers of commerce have been on appointment. The supervisors have been available for questions and comments with and without appointment. Additionally periodical
appointments with the first attendant have been scheduled. The university library has been available on normal office hours.
1.6 Definition of concepts
- Referred to as the X Gruppe or Group is the current group of companies existing of:
- Mother firm - Subsidiary B - Subsidiary A - Subsidiary C - Subsidiary H - Subsidiary I - Subsidiary E - Subsidiary D - Subsidiary F - Subsidiary G
- Referred to as the B tree is the part of the X Gruppe currently existing of:
- Mother firm - Subsidiary B - Subsidiary A - Subsidiary C - Subsidiary E - Subsidiary D - Subsidiary F - Subsidiary G
- Referred to as the A tree is the part of the X Gruppe currently existing of:
- Subsidiary H - Subsidiary I
- A strong financial structure is a financial structure that is not in conflict with the overall Group strategy wherein there is sufficient amount of financial means, an acceptable exposure to the interest rate and an acceptable rate of dependency on the credit accommodating parties.
- Short-term capital is referred to as capital with duration of up to one year.
- Long-term capital is referred to as capital with duration of one year or longer.
- Financial institutions are all organisations involved in the supply of financial services to companies.
1.7 Research plan
In the research an analysis of the organisational, financial and strategic context of the X Gruppe together with a strategic and a financial planning is the input into an exploration of possible ways to improve the current financial structure. This exploration forms the basis for the analysis of most valuable financial instruments. These most valuable instruments are used to develop an implementation plan.
The reason for conducting this research is to solve a real problem that makes it a problem solving research as defined by De Leeuw (1996). The information or data analysis method is predominantly qualitative, although quantitative data from the annual reports is the dominant type used in the second sub-question.
The inductive perspective (Saunders, Lewis & Thornhill, 2000) is used. By using this perspective, the information gathered during the research shapes the approach towards an implementation plan in this case. A phase framework forms the basis for this research in such a way that it provides the structure for the information gathering process.
A multi-method approach is used to collect information. The multi-method approach is a research method in which the use of both primary and secondary information can be combined (Saunders, Lewis & Thornhill, 2000). The reason for choosing this method has been the combination of the need to be very precise (secondary quantitative information) and at the same time having to deal with the complex and unique nature of the problem (primary qualitative information).
The phase framework as illustrated in figure 1.1 will form the basis for the research trajectory.
This phase approach is used because of the practical context of the problem. This practical context demands an open approach in which there is the possibility to change the direction in which the solution can be found. The individual steps in the phase framework will eventually lead to an implementation plan. The implementation of this plan will result in the
strengthening of the financial structure at the X Gruppe. The various steps in the phase framework should therefore be interpreted as a guide on the path from a weak financial structure towards a strong financial structure. All the sub-questions, as formulated in the problem thesis in paragraph 1.4 are, somewhat adjusted, included as chapters in this phase framework. The adjustments were made in order to shorten and simplify the chapter titles and by doing so making them easy and quick to understand.
Figure 1.1 Phase framework
The framework can be divided into two parts namely the first part that is predominantly focused on the internal context of the X Gruppe and the second part that is focused on the internal as well as the external context.
Chapter 2 What is the X Gruppe’s organisational context?
Chapter 3
What is the X Gruppe’s
financial context?
Chapter 6
Which financial instruments could strengthen the X Gruppe’s financial structure?
Chapter 7
What are the most valuable financial instruments?
Chapter 8
How could the most valuable financial instruments be implemented?
The effects of the current weak financial structure
Implementation of the plan will result in a stronger financial structure Chapter 5
What should be the X Gruppe’s strategic and financial planning?
Chapter 4
What is the X Gruppe’s strategic context?
Research plan part 1
In the first part the research will predominantly be internally focussed. This means the X Gruppe itself will be the subject of examination. The first four steps in the conceptual framework, that is chapter two, three, four and five are included in this first part. The red arrows in the framework illustrate the effects that the current weak financial structure has on the organisational, financial and strategic context. The outcome of the first three chapters in the first part will be the input for the fourth chapter. Chapter four will be the input for the first chapter of the second part (chapter six).
In the first part the organisational, financial and strategic context of the X Gruppe is analysed and the strategic and financial planning is constructed. Information will mainly come from sources inside the X Gruppe. In this first part both primary information through interviews and observations as well as secondary information like balance sheets and income statements will be used. During this stage existing literature will be used mainly in order to construct the strategic planning.
Chapter 2 What is the X Gruppe’s organisational context?
The sub-question answered in this chapter is:
“How did the X Gruppe’s organisational context evolve over the years and what is the X Gruppe’s current organisational context?”
In this chapter the organisational development of the X Gruppe over the years 1983 until 2003 will be analysed. Besides this the organisational context as it is on 01.01.2003 will be
analysed and described in this chapter. The information from the analysis will provide a proper context for the further analyses of the financial and strategic context of the X Gruppe.
This organisational analysis will be used as input for the strategic and financial planning in chapter five.
The information used for the analysis in this chapter is going to be predominantly gathered through semi-structured interviews with the management of the X Gruppe. Another source of information will be the annual reports of the various subsidiaries.
Chapter 3 What is the X Gruppe’s financial context?
The sub-question answered in this chapter is:
“How did the X Gruppe’s financial context evolve over the years 1999-2002?”
In this chapter the financial context in the period 01.01.1999 up till 31.12.2002 for the companies of the X Gruppe will be analysed. Besides this the financial context from 01.01.1999 till 31.12.2002 for the X Gruppe as a whole will be analysed. In this chapter various aspects of the financial context are included like; assets, equity and liabilities, bank relations, turnover, net income, liquidity and solvency.
The information from this chapter is crucial in order to construct the strategic and financial planning in chapter five.
The analysis in this chapter will therefore be input for chapter five.
The information used in this chapter will consist of annual reports. Both the annual reports from the various Group companies as well as the consolidated Group annual reports for the years 1999-2002 will be used. The financial modelling will be done using Microsoft Excel’97.
The data from the German annual reports is going to be compressed and translated into English and imported into Microsoft Excel’97 (see appendices 1-12). The next step will be the creation of graphs in Microsoft Excel’97. Finally these graphs are going to be imported into Microsoft Word’97.
The original annual reports of 1999 are nominated in DM. In order to make a proper
comparison, between figures in the annual reports of 1999 and the years after 1999, the 1999 figures as displayed in the appendices are going to be nominated in EURO. The official conversion rate of DM 1,95583 is equal to EURO 1 (The Universal Currency Converter, 2003) will be used to accomplish the conversion.
Chapter 4 What is the X Gruppe’s strategic context?
The sub-question of this chapter is:
“How did the X Gruppe’s strategic context evolve over the years?”
In this chapter an analysis of the strategic developments of the X Gruppe from 1983 until 2002 is conducted.
The information used here will be predominantly gathered through semi-structured interviews with the management of the X Gruppe. Besides that some information will come from the annual reports.
Chapter 5 What should be the X Gruppe’s strategic and financial planning?
The sub-question of this chapter is:
“What should be the future strategic and financial planning considering the wishes and expectations of the X Gruppe’s management and the strengths, weaknesses, opportunities and treats of the strategic entities of the X Gruppe?”
A SWOT analysis will be conducted in order to formulate a strategy for the future. The wishes and expectations of the management of the X Gruppe are also taken into account during this formulation. The formulated strategy will be the basis for a financial plan, in which future expenditures and income will be estimated. The strategic and financial plan will provide a context for the exploration of possible solutions in chapter five.
Research plan part 2
In part two the external focus will be added. The second part includes chapter six, seven and eight. In this part it will be important to create a fit between the internal and the external contexts. This means that the internal context, as described in part one, has to be matched with the external needs, possibilities and considerations. The outcome of this process will then lead to a well-considered choice for a certain financial instrument or a certain combination of financial instruments in order to strengthen the financial structure. This alternative will be the basis for the design of an implementation plan. This implementation plan will be the key to a stronger financial structure at the X Gruppe.
Both internal and external sources of information will be used. The information used here is going to be mainly primary, for example interviews and questionnaires. Literature will also be used here mainly in order to categorise the different possible ways to improve the financial structure.
Chapter 6 Which financial instruments could strengthen the X Gruppe’s financial structure?
The analysis in chapter five will result in the answer for the sub-question:
“Which financial instruments or combinations of financial instruments could strengthen the X Gruppe’s financial structure in such a way that the profitability and financial flexibility increase and the continuity is safeguarded, considering the X Gruppe’s internal and external context?”
In this chapter initially a literature study will be conducted in order to explore the various types of possibilities in order to strengthen a financial structure. The outcome of this literature study will then be fit to the internal context as analysed in part one of the research. The next step will be to explore the possibilities of the financial instruments in the external context.
In the analysis in this chapter literature of Diepenhorst (1962), Dorsman (1994), Bouma (1991) and Seitz & Ellison (1999) and Eiteman, Stonehill & Moffet (2001) will be used. In this initial exploration of the possibilities to improve the financial structure the internal as well as external context is considered. Information about the external context will during this initial exploration predominantly come from the literature. Information about the internal context gathered through semi-structured interviews will also be used in this chapter.
Chapter 7 What are the most valuable financial instruments?
The sub-question answered in this chapter is:
“Which financial instrument or combination of financial instruments would most effectively and efficiently strengthen the financial structure and would therefore be the most valuable solution for the X Gruppe?”
In this chapter all possible financial instruments or combinations of financial instruments are thoroughly examined. The effort and benefit of all financial instruments or combinations of financial instruments will be estimated. The result will be the selection of one financial instrument or a combination of financial instruments with the best effort to benefit ratio. This most valuable alternative will be the input into the next and final chapter.
A valuation matrix will be constructed in order to value the various financial instruments.
This valuation process will be done using information from the internal as well as the external context. The information about the internal context will come from semi-structured interviews as well as annual reports. The information about the external context will be gathered using internet recourses. After the valuation an argumentation for one financial instrument or set of financial instruments is given. This financial instrument or set of financial instruments will be the input for chapter 7.
Chapter 8 How could the most valuable financial instruments be implemented?
The sub-question for this chapter is:
How could the X Gruppe’s management implement the most valuable financial instrument or combination of financial instruments in order to strengthen the financial structure?
In this chapter the most valuable alternative will be the input into a design process. This design process will result in an implementation plan. The implementation of this plan by the Group’s management will result in a stronger financial structure.
Information about the internal context will be gathered using semi-structures interviews and the data from the annual reports. The information about the external context will be
predominantly gathered using face to face and telephonic semi-structured interviews.
Research time scale
Out of practical reasons a time scale for the research has been set up. It has to be noticed that the target dates have not been hard deadlines. The time scale has been the guidance for a rather flexible research process.
Figure 1.2 Research time scale
Throughout the research theory is used. In appendix 1 the mayor theoretical concepts, which are used in the research and require nearer explanation, are described.
1.8 Research relevance
The relevance of this research is that the research explores possible ways to escape a financial structure that is conflicting with the organisational goals of the X Gruppe and her
management. Eventually an implementation plan is designed in order to eliminate most of this conflict.
Research time scale
Total available time six and a half month
Target date month number Task to be achieved
09.04.2003 0 Starting the research
29.04.2003 0,6 Finishing chapter one, the research methodology including, problem definition, research plan and the
phase framework.
09.07.2003 3 Completing chapter two, three, four and five, the writing of the first part of the research, the analysis of the internal context.
08.08.2003 4,5 Finishing chapter six and seven, the analysis of the most valuable solution to the problem, considering the internal and external context.
26.09.2003 5,5 Finishing chapter eight, the writing of the
implementation plan.
20.10.2003 6,4 Finishing the work on the research.
The financial structure is in conflict with the organisational goals:
- To be financially flexible
- To optimise profit
- To secure continuity
The first conflict is observed in the goal of the Group’s management to be financially more flexible. The financial flexibility is very small, making it difficult to invest money in
interesting projects that for example are highly profitable. Additionally the budgeting systems of the banks and as a result of that their restrictions on the accommodation of new capital are in permanent conflict with the Group’s desire to be financially flexible.
The second conflict is observes in the financial structure which is characterised by an overall shortage. This situation is in conflict with the desire to optimise profit because profitable investments are not undertaken due to the shortage. Changing the financial structure creates opportunities that could lead to a significant contribution to profits. Taking the view that annual profits of the Group are EURO 1-1,5 million without the improvements of the Group’s financial structure, the management’s estimates are that a financial restructuring could lead to a doubling of profits on a yearly basis.
Thirdly the impossibility to obtain new credit is in conflict with and endangering the Group’s continuity. New credit could improve the financial structure of the Group in such a way that continuity would be more secure. At the end an increase in the total amount invested means that losses can be financed longer. A possible bankruptcy could perhaps be delayed and evaded, as a result of this increase in financial means. Besides that a reduction of the interest rate exposure would decrease the chances of going bankrupt because an increase in the interest rate would have a smaller impact on the cost of capital.
A plan that changes the financial structure and results in an increase in the Group’s profit, improvement of the financial flexibility and a more safe guarded continuity would be of mayor relevance to the X Gruppe.
1.9 Research feasibility
Baarda and De Goede (1995) define three factors that determine the research feasibility:
- Time available for the research
- Money available for the research
- Willingness and availability of people to co-operate
The time available to the researcher was enough to complete the research (for a more detailed time plan see the time scale in paragraph 1.7).
Money was a constrain because the budget of the research was limited. Both the researcher and the client company were not willing to invest large amounts of money into the research.
The conduct of the research therefore avoided the use of expensive means or sources.
Considering the financial constrains the conduct of the research was certainly possible, but the researcher had to keep this constrain in mind during the research. Before incidental costs were incurred, the researcher had to ask the attendant for permission.
The information gathering and information analysis concerning the company was not the most problematic part. Full co-operation of employees and management was given. The employees and managers were open and willing to provide all the information. The analysis of that information caused some problems. In case the researcher was unable to overcome such a problem, the supervisors of the Rijksuniversiteit Groningen were available for guidance and advice.
The gathering and analysis of information concerning possible solutions of the problem and eventually the design of an implementation plan was the most difficult part of the research.
Especially the exploration of possible solutions with regard to external context was a difficult task. Not only superficial knowledge and information about the financial market was
sufficient here. Concrete information of the possibilities of the financial institutions in this market was needed.
The greater part of this kind of information was gathered through the contact with and questioning of employees of the different financial institutions. Since the people working in the financial sector were in general under a high working pressure this was problematic. An important advantage was the banking background of the researcher, giving him some additional knowledge on how to deal with this problem. This banking background consisted among others of close relatives working at Dutch banks. With the analysis of this information and the ultimate design of the implementation plan the researcher used, in case of an
insuperable problem, again the expertise of the attendant lecturers.
Considering all possible difficulties, the realisation of the research was difficult but not unattainable. Most difficult was the gathering of specific information about external financial institutions.
1.10 Conceptual framework
In the conceptual framework in figure 1.3 various concepts and their interdependencies are shown. This conceptual framework shows the assumed interdependencies of the concepts used in this research.
The internal context exists of an organisational, financial and strategic context. This internal context determines the formulation of a strategic and a financial planning. The strategic and financial planning will together with information on the external context be used to effectively and efficiently restructure the financial structure.
This financial restructuring has to result in a reduction of interest rate exposure, a reduction of the dependency on the current banks and an elimination of the capital shortage.
The exposure to interest rate changes could be reduced and by doing so the continuity could be more secure. The use of all financial instruments to manage the interest rate risk will be categorised in this research.
The reduction of the dependency on the current banks will lead to more financial flexibility for the X Gruppe. A reduced dependency on the current banks will for example lead to more possibilities to issue new bank credit.
Figure 1.3 Conceptual framework
The elimination of the capital shortage will result in more capital available and therefore an increase of the financial flexibility. Besides that the elimination of the capital shortage will allow investments in highly profitable projects and will therefore lead to an increase in profitability.
The last three concepts financial flexibility, profitability and continuity are also interrelated.
Assumptions are that an increase in the financial flexibility will positively influence the profitability and continuity. Besides that a increase in profitability would lead to increases in the financial flexibility and secure the continuity.
The research will focus on reducing the interest rate exposure, eliminating the capital shortage and reducing the dependency on the current banks. By doing so the research goal, to design an implementation plan, in order to strengthen the financial structure, can be achieved.
Although the idea of this conceptual framework will be used during the research, the research is structured according to the phase framework that is presented in paragraph 1.7.
1
Reduction dependency current banks
Elimination capital shortage Reduction of interest rate exposure Continuity
Profitability
Financial flexibility
Internal context
Organisational context
External context
Financial restructuring
Strategic context Financial
context
Strategic and financial planning
