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I often use to hear by my teachers that "numbers speak", while preparing for my ACCA exams i almost always had the chance to know how this statements reflects truth but on scenarios set by examiners, so when it was the time to test it on a real organisation in order to meet my desire of 'number-playing' with no surprise I chose topic 8 "The business and financial performance of an organisation over a three year period" for my RAP. As I indulged into ACCA direct after my higher secondary school so I wasn't a degree holder thus after completing my ACCA exams I decided to grab the excellent opportunity provided by Oxford Brookes university to become a graduate , a plus to my career. By taking this particular topic to analyse an organisation I have a chance to test my skills on a real world organisation outside exam questions, what I always longed for and what really would answer my desire of testing my ability by practically applying the knowledge I gained.
Choosing organisation was not much a difficult thing to do so, I am writing this research paper when Oil is the most talked and discussed about issue (especially after the BP Gulf oil spill), I use to think and was curious to know how these oil-based companies earn profit and what derives it under such fluctuating environment so being a daily petrol user, I opted for "Shell" as I am a daily customer and a its product quality fan. It is one of the biggest Energy and Petro-Chemical Company in the world with equally large, established and renowned competitors. The immense amount of data available made strong my point to choose it as it would contribute to make a good quality research work.
In February 1907 the 'Royal Dutch Shell Group' was created, now commonly known as 'Shell', when Royal Dutch Petroleum company (founded 1890 by B.A.P Kessler, The Netherlands) merged with 'Shell' Transport and Trading company (founded 1897 by Marcus and Samuel, Great Britain).Spreading quickly, by 1921 Shell acquired Mexican Eagle Petroleum company and started operating as Shell-Mex. Later on it merged with British Petroleum in 1935 and operated as Shell-Mex and BP until 1975 when they separated. Recently in 2004 after a news-crisis Shell moved to a single parent capital structure and was named as Royal Dutch Shell plc. Shell is listed on London Stock Exchange and also has secondary listing on Amsterdam Stock Exchange. It is head-quartered and holds tax residency in The Hague, Netherlands while in London, United Kingdom is its registered office. Since its formation it has covered many layers of progress setting a model of 'vertical-integration' and diversifying itself into many broad related areas with hydrogen, solar, nuclear, wind power and biofuels to name a few. Shell operates in 90 countries across all continents.(excerpts from Shell website)
Objectives of RAP :
For my RAP according to the nature of its topic the two project objectives are:
Interpretation and Analysis of Shell plc. using ratio-analysis and SWOT techniques from January 2008 to December 2010, a three year period, and for the same period of time compare it to its well-known rival BP in order to put density in my work: The Financial Analysis.
Understand the reasons behind the financial and business performance of company by analysing the environment in which it operates and the highlighting the factors and business processes that affect it: The Business Analysis.
Objective related questions:
Many related questions arise that need to be answered by statement of above mentioned objectives:
What is the reason behind change in Revenue figure and Profit Margins of Shell and whether these reflect more efficient business operations?
What has been the cash/liquidity position for the three year period, whether the change is alarming?
Working Capital increase/decrease and whether it has been utilized effectively?
What has been the capital structure of company and how it has affected business of Shell?
How do all numbers compare to its rival BP over the same period?
How well the companies satisfy their shareholder needs, comparatively?
How well the companies satisfy their stakeholders' expectations, comparatively?
What methodology can be used to better understand performance of the organisation and then evaluate the report?
What are success factors that can be attributable to successful areas of operation of Shell?
Any weak points in Shell's operations that have made BP win the race in those areas?
Any future opportunities and areas of concern that can or will affect the future performance of the organisation?
Approach adopted on research work:
I adopted the traditional 3 part framework approach to research work, steps of which are sub-headed below:
Information Gathering: The initial part of my work was the information and data collection on which to base my analysis, only secondary data has been used for this purpose , all details regarding information gathering follows in Part-2 laters.
Data Processing: The main part of my work was to analyse the collected data, evaluate and interpret it. Ratio-analysis is the basic technique that I have used to compare the figures of both Shell and its competitor. For the ease purpose to effectively differentiate each section of ratio analysis and to have a detailed understanding I have further broken it into its typical components as follows:
â€¢ Profitability Ratios
â€¢ Liquidity Ratios
â€¢ Leverage Ratios
â€¢ Efficiency Ratios
â€¢ Returns to company owners
All data has been presented in the analysis part using graphs, bars and charts that effectively shows the graphical picture of figures in the financial statements to ease its understanding, which is followed by illustration of these diagrams and an effective evaluation and conclusion that can efficiently communicate what the project is all about.
Ratio-analysis addresses my first objective stated as for the RAP and the most widely used methodology to compare figures of rivals. SWOT analysis has been used to address the second objective and related questions of my report i.e. to understand the environment and business processes of the organisation which will be discussed in detail later.
Results & Conclusion: I have tried to sum up in the final part in words what all of my research and analysis has shown regarding the "business and financial" performance of Shell and any positive and negative points that company needs to focus on for its future.
Sources of Data collection:
As the RAP preparation guide on ACCA's website states that either primary or secondary data or both can be used for RAP preparation. In my case of chosen topic and organisation since there was more than enough information available through secondary sources, to meet my objectives of the project and to answer the research questions, so I decided to stick to it. Worth mentioning here that visits to City Business Library in London which was near my work place, gave me wide range of access to print data .The following are various foundations of information which I utilized:
Annual Reports , Shell 2008-2010
Annual Reports , BP 2008-2010
City Business Library , London
Shell official website
Search Engines ( AOL , Google , Msn )
Msn Money website
AOL Money website
ACCA textbooks BPP publishing
Newspapers ( FT , WSJ , Business week ,Times)
Method of data collection:
Annual statements of both Shell and BP were the prime sources of information whose soft copies I utilized, also hard copies I printed out by accessing them on their respective internet sites to read thoroughly and get as much detailed information as I can.
Apart from web data a wide range of books and magazines at Central Business Library, London made it much easier for me to gather Print versions of relevant data where ever I felt the need to.
For the analysis part of my project I had to use business articles and publications and annual reports together with each other in order to gain deep insight of my work. Also it is worth mentioning here that not all of the data I gathered was completely relevant so I had to crop much of it and tried to pile up only which made satisfactory contribution towards making of my project.
Also while performing synthesis and analysis of information gathered there were numerous occasions on which I had to further search for more relevant data or go in more depth if I felt the material I have, needs more additional relevant data to be included in so I had to further filter it from library and search engines.
Limitations on Data collection:
The point I feel limited my task of collection were:
Relativeness: There was no 'totally relevant' data available I had to filter through piles of information and at times double check the information.
Reliability: There is always an element of doubt while using secondary data, especially when it comes to print media that I used from City Business Library, London. Therefore, I had to cross-check it by using print and electronic media in collaboration with each other.
Bias: The writer of articles and books may have biased opinions so their opinion must be thoroughly investigated that whether they depict facts before citing it , so was the case in my collection.
Past-Information: Mostly information available can be traced to being out-of-dated and updated versions are necessary in order to show the present picture.
Size: The amount of end-less data available calls to fact that it should be cropped down, it used a fairly long time period to do so, and I think this was the most arduous task that I carried on for my project.
Ethical issues and resolution:
ACCA stresses a lot on Ethics, being fundamental for its students and members and in all of its paper there is a portion on Ethics, furthermore a whole section in its Paper P1 Professional Accountant exam stresses on Ethics, also to mention here the Professional Ethics module introduced to take students to depth of Ethics, particularly related to everyday accountancy scenarios. All of these I have attempted prior to preparing this research project so keeping in mind all those frameworks and theories I learnt i think the ethical issues arose were:
I have tried to reference my work as thoroughly as I can and relying on secondary data made it much easier to avoid any instance of plagiarism and relying on other people's thought and work.
All of the research work has been done on my own therefore I have avoided joint project making in order not to collide with someone else's thoughts.
All data has been obtained from secondary resources therefore is no data invention and any data and quotes used have been referred to.
Being Shell's daily customer i have avoided favouritism for my organisation by including all relevant source's information and my evaluation further helped me to comment on the black areas.
Analysis techniques and their limitations:
Ratio analysis is the basic quantitative analysis tool used in all most all financial analysis made. It comprises taking financial numbers and using them in the form of numerator and denominator to calculate their relative magnitude. Ratios can be in the form of decimals or can be in percentage terms. The relative magnitude can then either be compared to prior year values for example Net-Profit margin is calculated and compared to previous year ratios OR standard values like Quick ratio of 0.6 is considered satisfactory. It is always the best tool rather than using the stand-alone figures from the financial statements. Nevertheless it does carry some limitations some of which are summed up as:
Subject to manipulation since the figures are obtained from financial statements of companies which can be distorted by the management.
'Window-Dressing' is a common tool used by management which causes difficulty in determining whether it depicts the actual performance.
They do not show why the change in financial numbers has taken place.
Ratios themselves are meaningless unless used in collaboration with other comparatives such as past year figures and industry figures which themselves may not show the actual picture.
Ratios do not tell us about the future performance of an entity thus they are more 'past-focused'.
SWOT analysis depicts strategic position of the company, incorporating external as well as internal factors and hence is an indicator of environment in which organisation operates. It uses the following components for evaluation:
Strength: characteristics that give advantage over others
Weakness: characteristics that affect performance negatively
Opportunities: factors that could be used as tool to gain advantages
Weakness: elements harmful for entity that need to be addressed
The limitations of this technique include:
SWOT analysis tends to over-simplify the categorization process into its four components which may not always be true and certain strategic aspects may be over-looked.
SWOT analysis does tell us the four evaluation components but fails to address how an organisation can find elements for their own categorization.
The factors identified may not persist long and may be only be describing the present position of the company.
SWOT analysis adopts 'same approach for all problems' thus is unable to identify the factors that need more attention. It may not provide a clearer picture and more depth to research may be required.