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Emma RizemanStudent ID: 12107229Blog Link: STEP 3RM plc are a UK based firm. They have a 46 year heritage of providing technology to the education sector. Then known as Research Machines, RM Education was founded in 1973. Today, the group is made up of three distinct companies:RM ResourcesRM Resources supplies schools and nurseries in the UK with curriculum and education resources. They have two key brands – TTS and Consortium. TTS have a lot of the “fun” learning resources like what you often see in classrooms here in Australia, such as building blocks and magnetic letters. They also have other unique products, such as large foam numbers, which are designed for learning math in the outdoors. Consortium, “the education supply people” are a recent acquisition for RM plc. They seem to have more stationery and essential supplies, such as glue and pencils, rather than classroom resources. Both brands appeared to include a wide variety of high quality products. RM ResultsRM Results are technology experts in end-to-end global high stakes e-assessment. Specifically, they have developed the market leading e-marking platform RM Assessor, which is used to mark around 160 million exam pages each year.The following short video entitled “What is e-marking?” explains clearly how their software works. EducationRM Education provide a wide variety of technology-based solutions to thousands of schools throughout the U.K. These include products and services such as charging trolleys and mounting options, RM Accounts – accounting software specifically designed for the education system, audio visual, cloud backup, desk top and laptop computers, device management, tuition software, web filtering, print services, flexible IT support, teaching and learning apps and essential infrastructure hardware. They are also the UK’s only dedicated educational ISP for schools.To further highlight their position as a market leader in the area of technology, have a quick read about one of their recent staff development events, where they explored the potential development of products such as robots and AI assistants for classrooms, and using facial recognition software to mark attendance! through RM plc’s website, it seems that the Department of Education in England is one of their biggest customers, as they provide services to over 7000 schools nationally. However, I was surprised to also notice that ACCA (Association of Chartered Certified Accountants) is also listed as a client. If anyone is interested in reading the case study, it can be found here: 2018 Annual ReportThe annual report begins well, by highlighting the achievements of the 2018 financial year. I was interested to see that in the U.K, the financial year ends on 30 November. The highlights included Revenue growth of 19%International revenue growth of 30% Good progress in all three divisionsAdjusted operating profits increased 29%Free cash flow of ?13.8mFull year proposed dividend increased by 15% to 7.60pMy initial thoughts were that the company appears to have experienced a lot of success over the last 12 months and are certainly in a period of growth! Comparing the figures in the income statements with previous years also seems to confirm this. In the 2016 financial year, the total comprehensive income was actually a negative number, whereas it is now over ?30m.Something which really impressed me about this firm, was that they seem very transparent as an organisation about who they are and what they are trying to achieve. They are proud of their successes, however they are also very upfront about the risks and challenges which the firm faces, or potentially could face. Alongside this, they also discuss the risk management systems they have in place, to help mitigate these risks. A detailed risk register is maintained, in which risks are categorised under the following categories: political, strategic, operational and financial. For those interested, this can be read in detail on pages 19-21 of the 2018 annual report which can be found here: of the key challenges which stood out to me was the possibility of Brexit. I am the first to admit that I don’t know anything about politics (I literally just asked my husband last night which party is currently in power in Australia), and very intentionally avoid watching the news because it depresses me, however one cannot even read an informative article about Married At First Sight without seeing headlines somewhere on the page about Brexit!My understanding from the little bit I’ve read is that the UK is (possibly?) leaving the European Union. I still can’t figure out whether this means the entire UK (England, Ireland, Scotland, Wales) or just England. I’m also not sure why this is important to business. As from my understanding, England already has a separate currency to the rest of Europe. However, I’ve been hearing about it a lot, and the annual report comments on it as a main challenge they are facing, so I’m going to trust the people who seem to know what they are talking about in this instance! The report states that the Group has undertaken a review of the potential changes resulting from the UK’s exit from the EU, including in the event of a ‘no deal’ scenario.This review focused on the principal risk areas of customers and markets, supply chain, people, treasury, legal, data and regulation and customs and tax. Following this review, although they believe the likely impact to be unfavourable, they continue to believe that it will not have a materially adverse effect on the Group as a whole, whilst assuming that the UK government does not fundamentallychange its approach to education funding. It seems that in this area of education funding the Group would be at the total mercy of the Government, so to speak. If the UK government were to change their policies on how schools were funded, this could certainly affect the ability of their key customers to purchase their products. However, the same could be said of many industries who are affected by government regulations. That is notsomething that is necessarily unique to this business. My initial thoughts were that this would be something that the Group would have very little control over, however after reading their risk mitigation strategies in more detail, I noticed that they do actively monitor the education policy environment, and also ensure to build strong relationships with education policy makers. Hopefully this would ensure that they are able to have a certain degree of influence over this! I also understand that Brexit could affect the Group in terms of currency fluctuations, which would in turn affect their profit levels. The Group has European sales of ?12.4m.This risk is managed through currency hedging against exchange rate movements, typically 9-12 Months into the future. I had to google to find out what hedging means! I’ve understood this correctly, they are agreeing on the exchange rate with their customers ahead of time, and the transaction will be made based on this exchange rate, regardless of the market exchange rate at the time. Readers can feel free to correct me if I am wrong on this! When discussing the group as a whole, the CEO stated that they continue to expect that tight budgets and funding uncertainty will keep the UK market subdued. However, improved margins, good cash generation and a strong balance sheet mean they are well placed to enable the Group to deliver long-term shareholder value. As I read through the statements from the CEO, CFO and the chairman, something that really stood out to me is that while the three different companies within the group have similar target markets, and are all affected by the broader economic challenges as discussed in the annual report, they still are operated rather autonomously and have unique strategies for growth, underpinned by the overall group strategic themes of intellectual property and technology development, international growth, innovation and efficiency and simplicity. RM ResourcesAccording to the chairman’s statement, RM Resources and each of the two brands, TTS and Consortium, delivered revenue growth in the year. The international business in RM Resources was strong and grew by 41%. The board has approved an investment to consolidate the five distribution centres into a single automated facility by the end of 2021, which will deliver operational and financial benefits.I feel like a company who already possesses such capability in the areas of software and technology should be able to do this very efficiently. I was just reading in my economics textbook about how Bunnings has done this very successfully and reduced expenses due to less overheads. RM Resources’ strategy is to grow its market share in the provision of resources to schools, early years and special educational needs markets via online sales, a direct sales force and direct catalogue, both in the UK and internationally.It seems like they are already a major market player in the UK, and the main avenue for them to achieve further growth would be to expand internationally. The report stated that growth in international sales to overseas resellers and international schools is expected to continue. I read that they actually design their own products, and map these very closely to the curriculum. As my husband is a primary teacher, and I now also have a son in prep I know how important this is! In recent years an “Australian Curriculum” has been implemented by the Departments of Education in the various states, which means that all school students nationwide should be learning the same material. I imagine that they would have a similar system in the UK, especially as, as far as I know they do not have state governments there. RM ResultsRM Results’ strategy is to grow the e-assessment business through expanding the scope of solutions to existing customers and to win new customers in both the UK and overseas markets. RM Results have four specific target markets – language testing, professional bodies, general exams and higher education. RM Results won seven new contracts in the year, six of them with international customers. They also renewed several contracts with long-term customers.During the year the e-marking software, RM Assessor3, won in the digital category at the London Design Awards and is being rolled out successfully across their customer base. Overall revenues improved slightly, driven by international sales which offset legacy data contract exits.RM EducationRM Education’s strategy is to build on its strong presence and brand pedigree in UK schools and colleges, where it delivers ICT software and services to a high standard, by investing in and growing annuity based solutions that enable education leadership teams to improve outcomes. Recurring annuity revenues are in excess of 70% reflecting the continued improvements over recent years.Though revenue decreased in RM Education, they have won over a hundred new managed services customers. They also agreed a new five year contractual relationship with the largest customer in the Connectivity business. Renewal rates continue to be high, in addition to which, they are investing more heavily in increased sales and marketing capability to help drive improved new customer acquisition. In the year, a restructuring removed significant run rate costs enabling the Division to improve margins.Revenues in the Division declined by 4% to ?67.6 (2017: ?70.6m) driven primarily by the planned contract completion of several long-term contracts. Adjusted operating profit margins improved, increasing to 11.6%(2017: 9.3%), benefitting from a reduction in the cost base and a resulting one-time benefit in the long-term contract lifetime margins which more than offset restructuring costs in the year. Adjusted operating profit increased to ?7.8m (2017: ?6.6m).Financial StatementsRM plc have 5 different consolidated financial statements. A question I initially had was the difference between the consolidated and the company financial statements. I have since learnt that the consolidated financial statements represents the activity of the entire group and it’s companies whereas the company financial statements represent the activity of the parent company only. This also makes me wonder what the parent company actually does? As all the operational activity, if I have understood correctly, would take place within the companies themselves. I thankfully am finding the income statement quite easy to understand, as I have some experience with profit and loss statements. I have previously created profit and loss statements for my own businesses, and also for clients of the tax accountant who I work for. This actually seems to be a much more simplified version, as it just shows the totals of each category, without all the individual transactions. The Earnings per share part of it is slightly more confusing. My guess is that you would divide the total profit by the number of outstanding shares. The statement of comprehensive income is rather more confusing. Mainly because I don’t understand the headings involved. Eg. Defined Benefit Pension Scheme remeasurements, Exchange loss on translation of overseas operations, Fair value gain/loss on hedged instruments, Tax on items that will not/are/maybe reclassified subsequently to profit or loss. None of this actually makes sense to me, and one question I have is that if they are still part of the income or expenses of the business, why are they just not included on the regular income statement? Why do they have to make it so complicated?Another question I had is why are finance costs higher than investment income? Seems like they are making a loss? Is this interest on debts?The balance sheet seems like a lengthy version of the accounting equation, as I can see that it includes the now familiar terms of assets, liabilities and equity. However, I still have many questions that I would like answered to enable me to understand this fully. What is the difference between current and non-current assets and liabilities?What exactly is goodwill? I have heard of this many times but don’t quite understand? How is is calculated?What are intangible assets? I understand the concept of an asset, and I understand the meaning of intangible to be something you can’t see or touch. However, I can’t think of an asset that would meet this definition. This is something I would like to understand further. I am finding the Statement of Changes in Equity to be very confusing! Literally the only concept on there that I understand is the dividends. I have grasped from reading the study guide that it represents that transfer in value between the shareholders and the company itself. Though how this actually occurs is something I am struggling to get my head around! I don’t understand the cash flow statement very well yet, although I read in chapter 3 of the study guide that this is an important part of valuing a business. I see that there is a positive cash flow figure at the end of the 2018 financial year, compared to negative the year before, so I’m hoping that means things are improving! The total dividend for the year was 7.6 pence and at the time of writing this, the company’s share price is 232.48GBX . This is approximately a 3.3% return. I would personally not invest in this company, as I choose my shares based on at least 7% return, however it is still slightly more than an ING savings account. Not sure of current interest rates in the UK or whether they have franking credits? I still don’t quite understand the cash flow method of valuing a business, so perhaps I will change my mind on this one I delve into this further. DISCUSS MY KCQ’S WITH OTHERS…WHAT SIMILARITIES OR DIFFERENCES ARE THERE BETWEEN MY FIRM AND THE FIRMS OF OTHER PEOPLE AND IN THE WAY THEY PRESENT THEIR FINANCIAL STATEMENTS? ARE YOU HAPPY WITH THE FIRM YOU HAVE BEEN GIVEN, OR WOULD YOU HAVE PREFERRED TO BE GIVEN A DIFFERENT COMPANY? WHAT CONCERNS, IF ANY, DO YOU HAVE AT THIS STAGE?COMMENT ON OTHER PEOPLE’S BLOGSTELL US WHICH WAS YOUR FAVOURITE BLOG AND WHY.RATE YOUR TOP 3 BLOGS (GIVING YOUR OPINIONS, REASONS AND EVIDENCE)INCLUDE LINKS TO YOUR TOP THREE BLOGSCOMMENT ON YOUR FAVOURITE BLOGS IN THEIR BLOGS AND ON THE BLOG LINKS FORUM IN THE COMMUNICATION SECTION OF MOODLE.STEP 4Company Financial Statements – please refer to separate excel fileSTEP 5Wow! If you are reading this, it means that I eventually managed to complete Step 5 of my assignment, which is to write down some of my ideas, reflections and reactions to reading Chapter 2 and 3 in the Study Guide. I have spent the better part of this week feeling totally overwhelmed by everything that I need to accomplish, a feeling which has unfortunately resulted in a lot of procrastination. I’ve also been really struggling with the fact that there are not clear-cut “rules” on how to complete this assignment. I am the kind of person that if you tell me how you want something done, I will do it. However, when left to my own devices, I can become so overcome by anxiety and indecisiveness, that I end up doing very little at all. Nevertheless, I am choosing to become inspired by the wise words in one of Martin’s Facebook posts:Employers are increasingly looking for people able to act in future unknown contexts rather than simply reproduce knowledge... constant adaption and adoption through learning and uncertainty is an inherent trait of professional contexts of the future - particularly for accountants, the most digitally disrupted profession.I am optimistic that if I continue to step outside of my comfort zone and challenge myself, the lifelong skills I will gain from doing this will provide me with far greater benefits, both professionally and personally, than what I would gain from “just” learning how to read financial statements. As I start reading chapter 2, I immediately am greeted with the concept that, other than those managing a firm, there can be many other people with a genuine interest in a firm’s economic and business performance. I understand this to mean that there are far more stakeholders in a business than one may initially consider. The fact that there are so many different stakeholders makes a lot of sense to me. My husband and I used to have a mould removal business. Initially, one could be forgiven for thinking that the only ones affected by the performance of this business were my husband and me. Even though this was a relatively small business, there were still many different people who were interested in our performance. Our suppliers – as our success directly affected whether or not we would need to re-order product in the future.Our customers – as we provided a warranty, it was important to them that we would still be around in the future. The tenants of the properties we treated (who were often not our direct customers)Our insurance company was interested in our turnover as this had an impact on our premiumThe ATOOur subcontractorsI can easily imagine that with this many stakeholders in our small business, there would be so many more in the case of large companies. However, unlike large companies, while these stakeholders certainly had a vested interest in our performance, we were under no obligation to provide them with our financial statements. (Even the ATO and our insurance broker were only given total figures). This meant that I did not have to follow the “rules of the game” and creating a simple profit and loss statement in Excel was enough to assist me with meeting our reporting obligations with the ATO. I felt excited about the prospect of learning the rules of accounting, and when I first saw that there are Generally Accepted Accounting Principles (GAAP) as well as other Accounting Standards, I was ready to knuckle down and learn. But of course, it was not much further down the page that I started to read other crazy things such as:“These rules also keep changing”“There is no way any one person can know all these rules. And these written rules are not even all the rules”“There are many unwritten rules in accounting”“You can’t have a rule for everything”What the? I’m starting to see very quickly that accounting is not a subject, nor an industry, where simply learning the facts or the rules will suffice. The accounting “rules” are not necessarily as black and white as I would have initially expected (or hoped) them to be. However, what they do is provide a conceptual framework within which the truly learned can make appropriate judgments and decisions. However, this can only be possible when one learns “for real”. Grasping this concept is further reinforcing the fact that learning “for real” is going to be so important in this degree, and builds upon how I have already been starting to redefine my understanding of learning. We need to learn in a way that allows us to truly construct our own knowledge and understanding, and allow our education to change who we are and the way we think about life. Of course there are going to be workplace and real life situations that I encounter for the first time. If I am just simply reproducing knowledge, I will have no idea on how to handle it. But if I have learnt “for real” understood the knowledge and changed as a person because of it, I will then be able to apply this knowledge to tackle the uncertain and the unknown. I am able to relate this back to many years ago when I worked as an insurance underwriter. We had rules that we had to follow when deciding whether or not to insure someone. One of these rules was to not insure an under 25 driver who had previously lost their licence. However, there were also certain brokers who we were generally not allowed to say no to. So what was I to do when one of our top brokers had a son who had lost his licence multiple times, and he wanted an insurance policy for his son’s car? If I had not a genuine understanding of the industry, or the underlying reasons for our guidelines, this would have prevented me from being able to make a prudent decision, as I would have become too caught up in the rules. I look forward to developing my accounting knowledge to the degree that I am able to have the same high level of understanding and making sound decisions. I like the idea that even though the rules for accounting are not always clear cut, we do have a clearly defined conceptual framework to work within. The qualities of information which I feel that I personally value the most are faithful representation and understandability. Faithful representation, because if what I am reading is not actually correct or accurate, then it is of no use to me at all. Understandability because I need to understand what I am reading if it is going to be of any use to me. As I progress further in my degree and later in my career, comparability would also be of high importance. Especially, when I am making decisions as an investor. I feel that the comparability of financial reports would be very important. One, so that I can easily see if a company is increasing or decreasing over the years. And also if I need to decide which is the best of two companies. I am somewhat familiar with the concept of accrual accounting, and had in fact been doing this long before I knew what it was called. When my husband and I had our mould removal business, I found it easier to put our income into the profit and loss statement as soon as I created the invoice. This was mostly due to simplicity and so that I knew I wouldn’t forget to do it. It was only when I started working for a tax accountant recently that I learnt this had a name! As I moved onto chapter 3, I was excited to see that we would be now start to focus on the financial statements themselves. Especially when I read that we will be focussing on equity investors as one of the groups of people with a genuine interest in using financial statements. I personally am quite interested in the share market, and it has definitely piqued my interest that this subject will potentially help me become better equipped to research companies and therefore make better investing decisions. The study guide mentions the four general purpose financial statements some businesses are required to provide: the Balance sheet, Income statement, Statement of changes in equity and Statement of cash flows.I enjoyed the way that Martin likened this to meeting someone at a party. We will often meet someone and pretend that we know them because we know their names, we may even know superficial information about them. I am feeling a little like this with the financial statements at the moment. I have already completed step 4 of my assignment so have entered all the data. Understanding them though is an entirely different matter. Kind of like if I met someone at a party who talked to me about science or politics. I would have lots of information about them but none of it would make sense.I could really relate to the statement that the annual report is a marketing statement, as I had already been having these thoughts when researching my company. I noticed a real consistency across the website and the annual report. The same key information was highlighted on their home page, and at the beginning of the report. The same key achievements were commented on by the CEO, CFO and the chairman. They wanted to make sure people knew how well they were doing! I also noticed that the report was well-presented and easy to understand. They used very simple language, as opposed to the financial jargon I was expecting. It seemed that they wanted the information to be understood by a wide range of people. Particularly, I would expect investors and potential customers. Study guide says (particularly if you are an investor, but also, for example, to help their staff feel good about the firm they work for)As they are marketing their services to large organisations, I imagine people in these organisations would be researching the company well before making a decision, however these people may not necessarily have a good level of financial or accounting knowledge. This links back to what we read in chapter 2 about there being various stakeholders within an organisation. Customers or at the least potential customers, are certainly one of these. I feel like I now understand the concept of the balance sheet some what well, as I am able to link it back to the accounting equation. It’s great to see it “come to life” in a real format, instead of just an abstract formula. Though I’m still struggling to get my head around how items such as “goodwill” would be valued, or the difference between current and non-current assets and liabilities. I’m hoping that I will learn this as I progress through the unit. Straight after I typed this, I read Martin’s comments about the footnotes, sure enough there was an entire page dedicated to goodwill, (which took up only 1 line on the balance sheet). I must say , I am feeling relieved by Martin’s further comment about not trying to understand the footnotes just yet, but to just have a quick look at them. Phew, some of the pressure is off for now at least! I was relieved to read the explanation of the difference between consolidated financial statements and company financial statements, as this was one of the questions I had when I first viewed my company’s annual reports. I now understand this to mean that the consolidated financial statements represent the activities of the group as a whole, including all it’s subsidiary companies, whereas the company financial statements represent the activities of the parent company separate to it’s subsidiaries. I did not see any non-controlling interests or minority interests in my firm’s balance sheets, which tells me that the subsidiaries are wholly owned. A question I still have is what does the parent company actually do? As it seems that all the operational activities and customer interactions take place within the subsidiaries. Are functions such as human resources and payroll retained within the parent company? Or does each subsidiary company operate these divisions autonomously.I am familiar already with income statements, as I understand this within terms of profit and loss. I have completed profit and loss statements previously, both for my own businesses, and for clients of the tax accountant I work for. Though I must say, it’s annoying that the financial statements are not always called the same thing! Two weeks ago, if you’d asked me what an income statement was, I would have said that I had no idea! Yet, if you’d asked me about a P&L, I could have described this easily! However, even though the income statement seemed comfortingly familiar, I struggled with those items included as part of the Comprehensive Income Statement, as well as the Statement of Changes in Equity. I’m not even sure what my specific questions are at this stage, just that I don’t really understand it. I’m excited to see that the chapter discusses share ownership in terms of the dividends to be received. I personally am very interested in the stock market, though I definitely still have a lot to learn. In the past, I have attempted to approach this more as a “trader” with the hope of quick capital gain. I recently achieved this, selling Mortgage Choice (MOC) shares with a 25% gain in the space of a month, though this is actually quite rare. My usual approach now is to select shares in the hope of giving me a long term return on dividend, so I’m excited by the thought that this unit may help me to do that better. My current strategy is to select shares who payout a total dividend of at least 7% of the current share price, and which are also fully franked. I guess that in a sense, this is my own personal version of the Discounted Dividend model. Though this method has the disadvantage of hoping that companies continue to payout dividends of the same amount as what they have in the past, which does not always happen. So I’m definitely keen to learn any methods which may enable me to better understand the companies I am researching and to make better investing decisions. I am really trying to understand the Cash Flow model of valuing businesses, as I feel that this is very important. I understand from reading the study guide that it is essentially the net amount of money generated by a business after allowing for expenses, including both operating expense and capital expense. So whereas capital expense may be depreciated over a number of years on an income statement, it still is effectively paid by the business upfront in that income year. So I can see that this is more of the “real” profit of the business for that year, before adjustments are made due to the Australian Taxation laws. And I can see why the dividend paid should be based on this amount. As this effectively divides the “real profit” between all the owners of a business. However, in reality a share price does not reflect the actual value of a firm. In fact, (and correct me if I’m wrong), this is more affected by the economic principles of supply and demand than it is by a firm’s real value. An investor who is looking for capital gain may look more to whether a firm is over or undervalued, however an investor who is looking for dividend returns may not even care, as long as the dividend payout is (what they believe to be) a higher percentage of the share price than what they would potentially earn if they put the same amount of money in the bank. It also makes sense now why the cash flow statement would also be important to look at, regardless of what kind of investor you are - if we want to assume that dividends will continue into the future, as they can’t continue to pay dividends forever if they are making a loss! Whereas just looking at the recent dividends paid could be quite misleading. I also found it an interesting comment that the statement of cash flows eliminates the judgment aspect of accrual accounting. With the cash flow statement there can be only one correct answer – I like this one! A bank balance is a bank balance!!I actually feel now that doing this step of the assignment has been very beneficial to me. Sometimes when I need to process how I feel about something in order to make a decision, I will discuss it with my husband, my Mum or a close friend. This is not necessarily because I want their advice, but often just that talking things aloud helps me work out what I want to do. A similar process has occurred for me in regards to the cash flow statement method of valuing a company. I literally started typing this without really “getting it”, however as I preserved with the task, I felt that something “clicked” for me. I also found that thinking of the profit and loss statements that clients bring in helped me as well. They will often bring what would more realistically be termed a cash flow statement, as they have forgotten the rules about depreciation. We will then make adjustments to the figures to turn it into a profit and loss. I am really looking forward now to learning to understand the financial statements even further, and am looking forward to the future units! STEP 6 ................
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