Abstract
The principles of financial management are very important as they help in ensuring the smooth running of all the financial activities of a firm. Several financial management principles are in existent and they cover different areas of management. There are about ten different principles of financial management. However, in this paper we are going to lay more emphasis on three of the principles among them; cash is king, not all risks are equal and efficient markets. This research is going to consider the Zales Jewelry Company and how the company implements the use of different financial management principles. We are also going to look at the importance of using any of the financial management principles. We are going to get most of our literature from the company’s annual report to give us an insight of the activities in the firm.
Introduction
Financial management involves the planning, controlling and organizing all the monetary resources of an organization or a business entity. Financial management in essence involves the managerial activities in any financial system that ensures a smooth running of all the financial activities in any business establishment. In financial management, there are three important decisions which are involved in the system. They include; financing, investing and dividend distribution. The principles of financial management can be used as the guiding principles on business activities in any given business establishment. If a business does not have any guiding principle on its operations then it is likely to fail. This research is going to lay more emphasis on three financial management principles among them are; cash is king, efficient market and all risk is not equal. We are going to have a detailed analysis of each of the principles in discussion.
The Zales Jewelry Corporation is a leading retailer of jewelry products in North America. It has over 1200 speciality stores and 684 kiosks which are mainly located in shopping malls throughout the United States of America. This company was started in 1924 by Morris Zale, William Zale and Ben Lipshy. Zales maintained its prices during the bend over years in an attempt to expand its opportunities. The company was listed on the American stock exchange in 1957. It has undergone a series of changes in terms of ownership. Most of the transformations which have been experienced in the company have helped improve its stock value. It is now a public company trading on the New York Stock Exchange. The Zales Jewelry Company has implemented the use of several financial management principles which has contributed to its success in the market over the years. (Zales Corporation, 2005)
Literature review
This phrase, Cash is King not profit is a favorite of Alex Spanos. This phrase has also appeared in some articles of Motley Fool. This phrase was used more often in 1988 after the global stock market in 1987 by the CEO of Volvo, Per G. Gyllenhammar. It was also commonly used in 2008 during the global financial crisis. Charlie Munger, the chairman of Wesco Financial (AMEX: WSC ) said that "There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn't awash in cash -- and I don't want to go back." (Montley, 2009)This statement also shows on how cash is important and many top managers have the same view. There are so many activities that can be performed as long as cash is there. This makes cash a very important aspect in financial situations. The Zales Jewelry has also used this concept during its transformation over the past few years. Upholding of this principle has helped the Zales Jewelry to acquire more stores and hence improve its market value in both the stock exchange and the market value. In 1944, the Zales Jewelry acquired Corrigan's of Dallas, which was a finer jewelry purchase that was later joined by the Bailey Banks & Biddle brand. (Zales Corporation, 2005) This was only possible after an adequate satisfaction by Zales that they had enough cash to facilitate the transfer.
All risk is not equal has also been used by several business entities when they are analyzing business risks. It has been realized that there are several risks which can attack any business. The methods of handling these risks are varied. We cannot have the same methods for solving each of the risks since their origin is also varied. Each method of solving the risks depend on the origin and the nature of the risks involved. Zales Jewelry for instance has experienced several risks throughout its operations. Some of the risks have contained using several means whereas other risks have seen the company struggle for survival. Some of the company’s stores have been closed down in order to ensure that the company’s activities remain manageable within the available budget. The Zales Company used to operate leased fine jewelry but the chain stores were sold off to Finlay enterprises as the company could no longer manage the stores due to the tough financial times the company was going through. (Staff of JCK, 1997). The company later tested a repair store concept in 2006. This also became a failure and all the test stores which were being used were closed down. Some of the decisions made by the top management of the company resulted into several stores being closed in 2008 and 2009. In 2008, the company closed 12% of the total locations and in 2009 an additional 191 stores were closed. (Zales 2009 annual report)
An efficient market is also another principle of financial management which is very vital in the management of financial activities in any given entity. The efficient-market hypothesis was first developed by Professor Eugene Fama of the University Of Chicago Booth School Of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school. (Kirman, 2009). Zales Corporation was also seeking to gain an efficient market so as to boost its operations in the Jewelry Industry. Zales has revised its campaign strategy so as to boost is market both in America and beyond the borders. The 2006 was rough on Zale Corporation due to the shrinking market share and disappointing holiday results. This forced several top executives out of the company. The company appointed a new CEO whose main aim was to ensure that Zales problems came to a halt. She accessed the situation and acted quickly to ensure a successful 2006 holiday season. Zale has also worked out ways to gain market dominance in America. This has been possible through the number of several stores that they have established all across America. In 2009, Zale operated 1,247 specialty jewelry stores and 684 kiosks located mainly in shopping malls throughout the US, Canada and Puerto Rico (Zales Corp. 2009 Annual Report) Having a higher number of stores and other outlets has helped boost the sales of the company. An efficient market usually depends on the number of outlets that are available for a given company.
Analysis of the chosen principles
All risk is not equal
Risks refer to the chances of an event to take place due to a given action taken by an individual or an organization. The action taken normally has a possibility of yielding into a negative or positive result. Thus, an individual or organization needs to have adequate knowledge on the possible outcome before involving in an activity since this will affect an organization’s movement. (Barkley, 2004) There are several types of risks that can affect an organization. Zales Jewelry for instance has experienced several types of risks which have threatened it existence in the American Stock Market. However, most of them have been contained and the company is currently struggling to regain its market dominance in the jewelry industry of the United States of America. Examples of risks which have been experienced in this company include:
Credit risk and market risk
Credit risk – these are risks which come out as a result of missing or being late on a payment. The company experienced this during the 2008 global crisis but has struggled in order to rectify this situation. (Zales Corp. 2009 Annual Report)
Market risk – these are risks which come as a result of change in market value. Zales industry had its market change drastically. They did not have any market security to control this risk which later resulted into several stores being closed. The company is currently struggling to deal with this kind of risk and regain its market dominance. (Zales Corp. 2009 Annual Report)
Systematic risk and residual risk
Systematic risks – These are risks which cannot be diversified away in any way.
Residual risks – these are risks which can be diversified away in a portfolio.
These risks are however not equal and should be managed in different ways. The process of risk management is usually common irrespective of the type of company being dealt with. (Barkley, 2004) Risks are best managed using a systematic approach like the one shown below:
i. Risk identification:
This includes the likely cause of the problem or the problem itself. Sources of the problem may be the employees and the stakeholders of the organization.
ii. Risk Assessment:
This is a special study covering the possibility of risk occurrence on the execution of a given project. The assessment of risk will help the management in making a decision of whether to carry on with the project along with the risks attached to it or not. It will also help the management team to find out the highest risk factors, which should be given a special attention.
iii. Mapping:
This step involves mapping out factors like; the social dimension of risk management, the stakeholders and their purpose, and the grounds on which the risk will be solved and the possible limitations.
iv. Define structure of activities involved:
After mapping out these factors, the risk management team should then define a structure for the activities involved and the agenda. These will help in the identification of the risk.
v. Risks analysis
The fifth step is to analyze the possible risks in the entire process. The risk should then be mitigated using the organization’s resources like; employees and technological resources.
One way of risk alleviation is to transfer certain risks to others through signing of an agreement with other organizations at an agreed cost. An organization may decide to transmit the risk’s cost to another organization or an individual under fixed- cost contract. Alternatively, the owner organization may retain the value of the risk based on the cost- plus- fee agreement. These will however depend on the organization’s capability of managing risks. Lastly, an organization may also decide to terminate a project. This may result from the management team’s realization of the projects ineffectiveness in the end. For example, the management may terminate a project whose execution may lead to the organization making huge losses or a project whose implementation may not be realized within the time bound. (Atkins & Simpson, 2008)
Effective risk management involve numerous activities, these may include the following; planning of how well the risks attached to a project will be managed effectively. A proper timely plan should be made to ensure successful risk management. In coming up with a successful plan, the management should take into consideration factors like the financial budget, the risk management tasks and the division of responsibilities of the risk management. Another key factor it to appoint a risk officer. This should be a member of the risk management team separate from the project manager known as the risk officer. This individual should be responsible in forecasting possible problems that may result from the project in question. . (Atkins & Simpson, 2008)
After identifying a risk and assessing it, the management may decide to avoid the risk. This entails evading an activity that may lead to the anticipated risk. For example, the organization may decide not to take up the project to avoid negative results that may effect from its execution. This however would also result in avoiding its possible benefits. The team may also resort to risk reduction; this involves the reduction of the harshness of the loss should it occur in the organization. For example, the organization may decide to hire external experts to work on the whole project as a means of evading the risks that may result from the execution of the project. (Barkley, 2004)
The risk management team may also decide to share the risk with another party. This may include resorting to other auxiliary services like insurance, which will come in to mitigate the anticipated losses should they occur. Finally, the management may decide to retain the risk. This entails being prepared to adhere to the possible losses or benefits should they occur. This however may only be suitable for minor risks where the cost of the loss mitigation may be higher than the actual loss if it occurs. For instance taking up the security defense by the company may be more expensive than the consequences of not hiring the services. (Barkley, 2004)
Cash is king not profit
This principle implies that cash on hand is important more than some form of anticipated profits. This statement has been used to analyze business or investment portfolios. It also refers to the importance of cash flow in the overall financial shape of a business. Cash is very important especially during falling financial markets. It is also very useful in places where there is availability of investment opportunities. The phrase describes the importance of sufficient cash as an asset in the business for short term operation, purchases and acquisitions. Most of the payments in a company are done using cash. Therefore cash availability is very vital in any business establishment. (Kirman, 2009)
The wealth of any business entity depends on cash flows and not profits. It should be noted that profits and cash flows are different. In most cases profits are usually anticipated and do not have any importance when it comes to acquisition of business materials or for use in the business. The cash flows are the actual revenue or expenditure rates at a particular time. The profits depend on the allocated revenues and costs.
This concept of cash is king can be applied in the case of Zale which became bankrupt due to lack of cash. Anticipated profits do not matter but the cash in hand matters a lot. (1992)In the early 1990s, the Zales Corporation grew in terms of the market share and had over 2,000 stores with a total revenue of $1.3 billion. This market lead did not last due to the advent of the Persian Gulf War that resulted into new taxation system on luxury commodities. This made the Zales to incur a loss of $64 million in 1990. In 1991, the company’s losses amounted to $106 million. Zale tried restructuring the company and had to close over 400 stores. The company’s creditors threatened to force the company into bankruptcy. The company later petitioned for voluntary bankruptcy. This situation continued until 1993 when its debt was settled with 700 fewer stores. The company appeared back to good health in 1995 and had a 12.2% increase over the previous year. (Glen, 1997)
Zales was able to manage the series of acquisitions due to the presence of cash. Lack in cash may make a business to thrive through debts which is not healthy for any business establishment. The company’s value in terms of cash strength helped it to be listed in the New York Stock Exchange in 1989. (Zales Annual report, 2009)
Efficient markets
Marketing refers to a set of procedures for making, communicating and conveying desirable quality to customers. It also involves sustaining a good customer relationship for the benefit of the organization. Marketing research similarly helps stakeholders to understand the state of the market and the products or services required by customers. Marketers normally create a new product concept to help them in identifying the consumers’ reaction to their new products. This involves creating an image or an oral report of a given product or service that an organization is presenting for sale. The three pieces of market research help in stating, recognizing and determining the prevailing market. The three pieces include; stating the limitations; these are constraints placed on major answers to a given problem, identification of the required data for marketing exploitation.(Zales Corporation, 2005) This kind of data is necessary for informing managers thus assist them in making an appropriate decision on the best action to take. The Zales Company has also used several marketing strategies so as to ensure that they have efficient markets for their products. They have attractive discounts on their items which have contributed a lot to their sales. The diagram below a sample webpage of the Zales showing the discounts they are offering in an attempt to get an efficient market for their products. (Zales Annual report, 2009)
Source: http://www.zales.com/
Efficient market is one of the principles of financial management that ensures that proper marketing strategies are put in place to ensure a success of a given business enterprise. The market prices usually reflect all public information about some form of security in a firm. It is the wish of every business entity to have efficient and reliable markets for their commodities. This will ensure that all products produced find their way to the consumers. Capital markets react very quickly to any form of information supplied to them. (Zales Annual report, 2009) This enables them to determine the performance of a given commodity in the market and know when to produce what quantity of the product. The value of a firm in the market is the best measure of true value of that firm. A firm with a small market value is usually not preferred by investors. Investors cannot profit from publicly available information but there is need to dig deeper and get the actual information on the ground. In order to maximize the share price, a company needs to maximize the shareholder wealth. There are three forms of efficient markets hypothesis. They include:
i. Strong form – in this case, market prices are an unbiased estimate of future cash flows and they reflect all information available both in public and private.
ii. Semi-strong form – in this case, the market prices reflects fully all publicly available information about a given product or firm in the market.
iii. Weak form – in this case, the market prices reflect only the past history of stock prices.
The test of capital market efficiency
The efficiency of capital markets cannot be directly tested as the actual price of a stock cannot be compared to the correct price of a given commodity in the market. (Zales Annual report, 2009)
The following are the conclusions which can be drawn when conducting the tests
i. Every test which is conducted here is a joint test of the theory of the correct price and efficiency of any given system
ii. Evidence supporting it seems to be stronger than evidence not supporting it
iii. There are many empirical studies accompanying the tests
Conclusion
Financial management principles are very vital in any business set up. They help in ensuring that there is a smooth running of all the activities in a business entity. Risk management is a very essential factor to consider when executing a project in an organization. This will help in avoiding possible losses thus achieving the organizational goals. Some of the factors to consider in project risk management include; the costs incurred the available alternatives and their costs, informed employees among others. An improper assessment and prioritization of risks within an organization may result in time wastage. For example, the management team in dealing with risks whose occurrence is uncertain may spend much time. When the risk’s certainty is very low then the organization may alternatively hold it and focus on the consequences of the risk. Several financial management principles have to be taken into consideration in order to have an efficient financial management system. Efficient markets are very vital as the main goal of a business is to make profits. This can however not be achieved if a manufactured product does not get its way to the consumers. This is only possible through markets. It is therefore very necessary to have an efficient market which will help in forming the avenue for the manufactured goods to the consumers. Cash is a must in any business establishment as it is used for paying wages, bill settlements and raw materials acquisition. Therefore it should not be underrated in any way as without it a company can be declared bankrupt and hence seize to exist.
References
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