Assignment 1 – Step 2

Chapter 2 – How a Firm Adds Value

A firm’s strategy is important. A firm with a good strategy and a sense of direction is more well off than a firm with a bad strategy and no sense of direction… duh. When reading about taking a step back and looking at other factors such as its competitive environment and how well it is positioned within this environment, the key risks that may be faced and key economic factors driving its profitability made me think of the business’ that are close to home. Airlie Beach, where I live, is a gateway to adventure and tourists from all over the world come here to check out the local beaches, islands and relaxed lifestyle that is on offer here. The most predominant kind of businesses here are hospitality and tourism all fighting for tourists to choose what they have on offer and they are all competing against each other. The tourism industry here is huge which can have a potentially positive or negative influence on how well they perform, which can all come back to their strategy.

 I see strategy as a way of acting on dreams or goals that you may have instead of just sitting back and helping them. It is not necessarily doing the actions to achieve those goals, instead it is firstly working out the plan of attack. By organizing this ‘plan of attack’ this can reduce the obstacles and difficulties you may face along the way. You wouldn’t do a lot of things in life without making a plan first, so why should it be any different in business? ‘There is one thing we can do today and that is dream about doing it and what it might take to turn those dreams into reality’. I really liked this quote and I often find myself thinking and dreaming a lot as a trainee accountant and where I want this career to take me, I’ve got a few steps in mind but this section has made me consider collating an in-depth strategy. I have a long, long, long way to go.

When reading about the five P’s of strategy I questioned whether I would be able to remember what they five P’s were, let alone what they all meant in terms of strategy.

Reading further into Chapter 2, two aspects that were mentioned, which I feel may be key concepts to this unit eventually, that are left out of financial statements are whether the business has the ability to generate positive net present value investments, and opportunity cost. I thought that I may have heard of these concepts in an old unit that I have previously done with Martin, however I wasn’t sure. There are quite a few things that I feel like I should have paid more attention to previously and now they seem to be catching up with me.

The next few paragraphs were really daunting when the author started to discuss Ryman Healthcare and terms such as Return on equity, for example. I was excited to know whether these were the types of calculations we were going to be doing for our own companies to help us better understand them. Learning these sorts of things really interest me as it is quite different to the tasks I do daily at a small public practice firm. I researched this so I could understand what it meant and this is what I found: when you divide the net profits of a business by the shareholders equity, this will give you the return on equity to allow you to determine just how much profit was earned for every dollar invested by its shareholder… I hope this is somewhat correct.

In terms of accrual or cash accounting, I have only ever understood how this can affect a business from a GST perspective. I have never taken the time to understand what affect the method of accounting would have overall when reporting at year end and how this may look to other people on the financial statements.

My understanding of this chapter is not quite all there yet however the key concept that I took from this chapter is that before we start analysing a firm’s financial statement’s we must understand the background of them and their strategy. After all, we can look at the numbers on their financials but if we don’t take a step back and really understand them, those numbers could mean anything. We need to know whether those numbers are negative or positive, if they are improving or if they are getting worse in comparison to others.

Chapter 3 – Many Ways to Assess Value

One of the first things I found interesting from history is that from around the 1890’s, it was only around then that the separation of current and non-current assets and liabilities on the balance sheet became a ‘thing’; I had just assumed that this was always the case.

Reading further, I was finally becoming aware of just how much ratios play an important part in the analysis of firms. One thought that did come to mind through the discussion of ratios and the history, is how many ratios are there exactly? And with all of these, how do we know which ones will tell us what we want to know? Is this what we will learn along the way in this course?

I was feeling overwhelmed when the paragraph about forecasting dividends, cash flows or earnings came along. These are just very few of quite a lot of methods and approaches that we can utilise to help us understand the business realities of a firm which is quite obviously a very key concept that I have taken from this chapter. The author states that we will need to take time to understand these methods that we will be using, and I am already aware that this will take me longer than I anticipated.

After re-reading and applying it to real life businesses I do work for, I was able to understand the concept of free cash flow (FCF) and I knew this is something I needed to understand before the end of the chapter as it was mentioned in Chapter 1 as one of the frameworks we will be looking at. I’m sure the equations following the paragraph regarding free cash flows are a very important concept to learn but it is something I am really struggling with.

From this chapter I have figured there are many ways to assess the value of a firm and this has somewhat changed as the years have progressed. I have become even more aware just how complex this unit will become so I will hopefully understand some of these elements soon.