sample-38-cuegis-essay.pdf

Sime Darby (SD) is a Malaysian multinational public listed company. Its business operations are well diversified, such as plantation, industrial equipment, motors, property and energy. SD is the world&rsquo;s largest producer of palm oil, with its plantation division accounted for its largest revenue stream. However, climate change and adverse weather patterns (such as the El Nino in 2015) as well as unpredictable fluctuations in the demand for commodities (such as palm-oil) have resulted in the plantation division&rsquo;s profit declining by almost 40% in the last financial year. SD&rsquo;s financial statement also shows its gearing ratio rose from 42% to 49% in the past 5 years.

&nbsp;

Cash flow refers to the money coming in (from sales revenue) and the money leaving the business (when costs are paid). A cash flow management is used to ensure SD remains liquid by preventing sufficient cash balances to fund its daily operations. Sime Darby&rsquo;s final accounts for the past 5 years revealed deteriorating net profit margins (NPM) and return on capital employed (ROCE). The major cause was the company&rsquo;s rising overheads costs due to its expansion funded by longterm loan capital. This caused an injection of cash from the bank loans, but subsequently caused the monthly cash balances to fall steadily due to the cost of finance and a long working capital cycle

&nbsp;

Strategy is the way in which a business intends to achieve its long term organizational goals. Cash flow management has a huge impact on SD&rsquo;s strategy, because without sufficient working capital (the cash available for the day to day operations of the business), it would not be able to survive and pursue its long term goals. This would result in some or many employees losing their jobs. SD&rsquo;s strategies include focussing on its core markets, pursuing growth and efficiency.

&nbsp;

In 2015, SD&rsquo;s cash flow was in deficient of over $1 billion. To improve its cash flow management, SD was considering selling $500 million worth of real-estate assets in Australia to reduce its debts. There were risks associated with the strategy of rapid growth as SD could be entering new markets with their existing products without sufficient working capital. Thus, managing SD&rsquo;s cash flow requires a prudent approach in terms of its capital expenditure and debt financing. However, some shareholders might feel that asset disposal in Australia was a premature strategy to pay for current debts as there could be long-term gains from investing in new markets. Whatever the final outcome, there would be a direct impact on each individual shareholder&rsquo;s return of his or her investment. Likewise, this might affect the bonus paid to the CEO and the Directors.

&nbsp;

In the pursuit of growth, efficiency and meeting changes in market demands such as expectations of corporate social responsibility and sustainability, SD acquired New Britain Palm Oil Ltd. (NBPOL) in 2015 for $1.35 billion. This would enhance SD&rsquo;s oil palm supply chain and ensure sustainability of its palm oil plantations and increase its palm oil refining capacity. However, seeking growth during a time of change (namely an economic slowdown) in economic activities in Europe and China, plus uncertainty about interest rates hikes in the USA, could be risky. Economic changes such as these could harm palm oil production. This would hurt shareholders and directors alike who would not see a positive return on the cash used to acquire NBPOL.

&nbsp;

A related point is that cash flow management is a limited tool on its own as cash flow forecasts can suddenly become inaccurate due to such economic changes.

&nbsp;

Environmental change has also attracted the interest of a wide range of stakeholders, such as pressure groups, and they have changed the mind-sets of customers, employees and local communities. Compliance with changes to stricter environmental sustainability and green practices has also increased the cost of SD&rsquo;s operations. Thus, in terms of liquidity, it means SD needs to manage its cash flow even better.

&nbsp;

In conclusion, a business cannot operate without sufficient cash flow management, so this is vital for SD&rsquo;s strategy and impacts on its ability to initiate and adapt to change. The Directors need to ensure its working capital requirement is managed well so it can operate sustainably and meet the needs of its customers, employees and investors. Effective management of cash flows can therefore support SD&rsquo;s strategy and change.

To achieve full marks for Criterion A, examiners are expecting both concepts and key business management content to be defined and appropriately explained. In this case, change was not explicitly defined, so it become more difficult to gauge the level of understanding. This question could not be effectively answered if the candidate was not well versed in actual real examples from Sime Darby regarding its cash flow management. Overall, there was good application (for Criterion B) and there were good connections made between concepts and content. For Criterion C, there were attempts at presenting a balanced argument, but this was not successful as reasoning was limited in places. Overall, the essay was awarded full marks in Criterion D for its structure and the organization of ideas. To score well in Criterion E, examiners expect both positive and negative implications on stakeholders to be discussed, from an individual and group&rsquo;s perspectives.