Assessment 2 Draft - Steps 1-6

Step 1

Link to my blog: https://coleargus.blogspot.com/

Link to Bega’s Annual Report’s: https://begagroup.com.au/investors/reports/

 

KCQ 1: “The value to customers of the products or services is much less precise and depends on a customer’s subjective assessments. Brands, fashion, and emotional reactions can all play a part in customers’ perceptions of value.”

Upon deeper thought, this statement resonated with me. Thinking about my friends, family, or even social media allows me to see clear truth in this statement and this type of consumer behavior seems to be everywhere today. Thinking about my own purchasing decisions, I realised that I don't always buy products based solely on their functional utility or objective price. For example, when I buy a new shirt, I often find myself drawn to a specific brand not necessarily because it's objectively higher in quality, but because of the graphics, design or fit. The brand's marketing, its association with certain lifestyles, and the way it fits, all play a role in my perceived value for the shirt.

This made me consider the power of branding and marketing in creating value. Companies tend to invest heavily in building brand identities and crafting narratives that resonate with consumers on an emotional level. I've seen how a well-placed advertisement or a celebrity endorsement can drastically alter a product's perceived value, even if its actual features remain unchanged. Similarly, fashion trends can create a sense of urgency and exclusivity, driving up demand and perceived value for items that might otherwise be considered ordinary.

This concept also made me reflect on the subjective nature of "value" itself. What I might consider “valuable”, another person might think is trash. An expensive handbag, for instance, might be seen as an essential status symbol to certain women, however, to the women in my family, this is just a superficial thought process. This variation in perception shows the importance of understanding target audiences and tailoring marketing strategies to appeal to their specific values.

Something I would like to know is, how do businesses measure these subjective factors, like brand perception, and emotional response, to provide accurate pricing for their products or services?

KCQ 2: “You tend to want to know where you are now so you can plan where you want to be in the future. This is because to get where you want to go in the future you must get there by going from where you are at present.”

I found this statement to be interesting and wanted to explore it a little further. The concept seemed simple yet powerful, and I can see how this not only applies to business strategies, but also to your own personal goals. Recently, I've been planning to save for a down payment on a house. Considering I’m juggling work and full-time study; I had to take a hard look at my current financial situation. Much like this chapter tells me how a business analyses its cost objects, I started by tracking my income and expenses. I had to understand where my money was currently going, before I could create a realistic budget and savings plan.

Just like managers need to understand the "where" and "why" of business costs, I needed to understand the "where" and "why" of my personal spending. This involved categorising expenses, identifying areas where I could cut back, and understanding the factors that were impacting my spending habits. After analysing my expenses, I realised I was spending too much on convenience such as dining out with friends and stopping at petrol stations on the way home from work to pick up essentials. I’ve had to cut back on having dinner with friends once every few weeks to save time and money, as well as being more organised about what food I currently have on hand, so I can purchase everything needed in my weekly shop at a lower price.

This experience showed that understanding prior spending patterns is helping to forecast my future expenses and by changing a few of my prior habits, I can save a substantial amount more towards my house deposit each month.

KCQ 3: “The final step is for these costs attached to the operating departments to be absorbed into the products as they pass through each stage of the production process. The products are much like a sponge wiping over a kitchen bench and absorbing water lying on the bench. This water on the kitchen bench is the costs we have attached to operating departments.”

I found the entire factory process of the Cadbury factory in Claremont interesting, however the analogy of a sponge absorbing water to describe cost absorption particularly stood out. This metaphor helped me visualise the entire process of how the costs of mixing, refining, and other operating departments are transferred onto the chocolate products in each stage of production.

To me this process allows you to accurately price your products at the final stage. If you don’t know exactly where your costs will be absorbed and where all your direct and indirect costs are, how can you predict if you are running at a profit or loss until it’s too late? Common sense tells me that this is fundamental to running any business, especially those with many departments that all have their own costs attached to them.

At first, the process of different stages of production absorbing costs was a little confusing based on what I was reading in the chapter. However, breaking it down and thinking about it logically in a real-life scenario like the Cadbury chocolate factory allowed me to make sense of this concept.

KCQ 4: “A firm with genuine prospects to grow sales strongly will have greater potential for growth in profits if it has a high contribution margin ratio than if it has a low contribution margin ratio. However, if the firm’s fixed costs were also high, then this greater potential for growth in profits would also come with significant downside risk.”

This statement stood out to me because I could relate this to many different things in life. There are endless situations where the concept of risk versus reward can be seen in day-to-day life and there’s a reason why so many people enjoy a trip to the casino from time to time. This to me just seems like a more complex version of risk versus reward. The idea that a high contribution margin can supercharge profit growth is intriguing. Does this mean that additional sales contribute a larger percentage to profit because the variable costs are relatively low?

Alternatively, I guess the opposite effect can occur too if the firm has high fixed costs whereas if sales are slow, those same fixed costs could become a huge burden and lead to losses. Further thought into this concept made me reflect on the importance of risk assessment and planning. It’s not just about maximising profits in the best-case scenario; it’s also about considering the worst-case scenario and how you will handle losses. Throughout my life I’ve heard the sayings, “don’t think about the worst-case scenario” or “be positive about everything”, and when tying those sayings into this concept it really has a negative effect overall.

At the end of the day, I believe it’s important to see the big picture and to explore every avenue before coming to a final decision, be that positive or negative.

 

Step 2

Issues/Concerns in classifying Bega’s Financial Statements

 

The Balance Sheet

Current Assets:

The first issue I came across was figuring out what “cash and cash equivalents” classify as. In my head I feel like this would either be just operating or classify as both because it is used in both operational and financial activities. I’m going to classify this as “OF” for both right now as I’m confused on this and I will ask for help in the weekly tutorial. After discussion in class and further analysis of my company’s annual report, I found that that this would be classified as both in my case (OF).

“Derivative financial instruments” under current assets was another confusing category to me. It has financial in its name but when I looked at the annual reports it had no extra notes to break down exactly what this included. I decided to google exactly what this term means on the balance sheet, and it told me that because this is a current asset this could be a payment that’s expected to be received from another company within the next 12 months. Hence, why the category is showing a positive number. As my company doesn’t define the details of the derivative in its notes I can’t 100 percent classify this as financial or operational, so I’ve put a “OF” for both on the spreadsheet.

For “other current assets” I decided to check the notes in the annual report in case it included anything that would classify as financial. Upon further research these assets included prepayments, trade receivables and another small portion further classified as other assets again. I believe that this is classified as operational so that’s what I’ve put in the spreadsheet.

Non-current Assets:

I had no idea what “right-of-use” assets were, so I delved deeper into the financial statement notes and found out that for my company this was just properties, equipment and motor vehicles. After seeing this, I knew these were classified as operational activities.

“Deferred tax assets” was also quite a foreign term to me. My company’s financial statement notes showed that this figure was mostly made up of items such as employee provisions, leased assets and other provisions. Further research concluded that deferred tax assets don’t really come under financial or operational activities. I’ve classified this category as N/A for now and I’ll have to ask about this in our weekly workshop. Update: I asked about this in the workshop and Maria Tyler clarified that these are classified as operational, so I’ve adjusted the spreadsheet.

Current Liabilities:

For other liabilities, I checked the notes in the annual report and found that deferred income and trade receivables made up the bulk of the total. However, a small amount of “other financial liabilities” attributed to the total but didn’t specify exactly what they were. Financial liabilities as far as I’m aware are classified as financial, however the large portion that came from trade receivables and deferred income is classified as operational, so I decided to classify this category as “O”.

Again, I couldn’t find any information in the notes of the financial statements specifying what “derivative financial instruments” the company had, so I’ve put this as “OF” for both.

I wasn’t sure what “current tax liabilities” would classify as so I did further research. It turns out that these liabilities arise from the company’s taxable income, which is generated from its operational activities. Therefore, this category classifies as operational.

Non-current Liabilities:

For other liabilities, the financial statement notes show that this is made up of financial liabilities, therefore this is classified as financial.

Again, just like deferred tax assets, “deferred tax liabilities” had sub-categories such as inventories, employee provisions, tax losses and leased assets. I’m having trouble with this category because from what I’m reading this doesn’t classify as either financial or operational. Update: I have clarified with Maria Tyler in our weekly workshop, and she said that these are classified as operational.

 

The Income Statement

I wasn’t 100 percent sure on the classification of “other revenue” in my company. After looking through the notes, I saw that this comprises of royalties, which are payments received directly from the results of company research, development or production activities. Therefore, this is an operational activity.

I decided to look further into “acquisition related expenses” and found that Bega had acquired Lion Dairy and Drinks in FY2021, and the expenses were based on transition service arrangements. I believe this would classify as operational.

 

Comments and Responses to Classifying my Firm’s Financial Statements

Link to my blog post: https://coleargus.blogspot.com/2025/04/assessment-2-step-2.html

I found that classifying my firm’s financial statements in step two of the assessment to be slightly challenging, yet interesting at the same time. Exploring further into my company’s financial statements and notes to each section allowed me to form a broader knowledge base on what each category of financials meant. I did come across a few challenges throughout classifying the categories of my firm which held both financial, and operating items (these were classified as “OF” on the spreadsheet). Most of the items in my company’s spreadsheet required further analysis of the notes to financial statements in order to determine what classification they had. This was both time consuming and confusing at times, but I feel like I’ve classified each term correctly based on my company’s specific operations. The only activities I truly got stuck on were deferred tax assets and deferred tax liabilities as I couldn’t define them as a singular activity. To address this, I asked Maria Tyler in our weekly workshop, and she clarified that these were both classified as operating activities. This was very helpful, thank you!

Overall, completing this task felt very hands-on, which is how I personally learn most effectively. Putting the extra time into researching each specific item on the financial statements and classifying which activity heading they resided under has helped me better understand how they all combine and work together within my firm.

 

Step 3

 

Identifying 3 Products or Services of Bega Cheese:

Bega manufactures many different milk-based products; however, for calculation simplicity, these are the three fresh white milk products I’ve chosen.

1.    Dairy Farmers Full Cream Milk (1L)

2.    Pura Original Full Cream Milk (1L)

3.    Masters Full Cream Milk (1L)

Firstly, Bega Group’s milk supply agreement from 2022-2023 shows that they pay roughly 69 cents per litre of milk from dairy farmers. Bega then transports the milk to their processing plant where the milk undergoes pasteurisation, homogenisation, and other quality checks. It is then bottled and packaged and sent to retailers. I will be using Woolworths and Coles as my example retailers in this situation as they buy and sell the products from Bega that I’ve listed. Woolworths’ profit margin on food products is roughly 5-6%, so let’s assume a 5.5% average.

 

Retailer’s full-cream milk sales prices:

Dairy Farmers (1L) – $2.80

Pura Original (1L) – $2.80

Masters (1L) - $3.15

Calculating the selling price of Bega to retailers:

Dairy Farmers:

0.055 * 2.8 = 0.154

2.8 – 0.154 = 2.646

Price Sold = $2.65

Pura Original:

0.055 * 2.8 = 0.154

2.8 – 0.154 = 2.646

Price Sold = $2.65

Masters:

0.055 * 3.15 = 0.17325

3.15 – 0.17325 = 2.97675

Price Sold = $2.98

Bega’s Milk Products Selling Price
Dairy Farmers Full Cream Milk (1L)	Pura Original Full Cream Milk (1L)	Masters Full Cream Milk (1L)
$2.65	$2.65	$2.98

Variable costs related to the milk processing industry include things like raw milk prices, labour, electricity, fuel, and packaging supplies. Bega doesn’t release information on most of this, and the products are all very similar. In Maria Tyler’s video she explains that high volume items generally have very small margins, therefore, I will estimate the variable costs of these milk products at 90%. The variable cost and contribution margin for the three products outlined above are calculated below.

Variable Cost Prices

Dairy Farmers Full Cream Milk (1L):             $2.65 * 0.90 = $2.39 (rounded)

Pura Original Full Cream Milk (1L):                 $2.65 * 0.90 = $2.39 (rounded)

Masters Full Cream Milk (1L):                          $2.98 * 0.90 = $2.68 (rounded)

 

Contribution Margin = Selling Price – Variable Cost

Contribution Margins

Dairy Farmers Full Cream Milk (1L):               $2.65 – $2.39 = $0.26        

Pura Original Full Cream Milk (1L):                 $2.65 – $2.39 = $0.26        

Masters Full Cream Milk (1L):                          $2.98 – $2.68 = $0.30

These contribution margins are contributing to the fixed costs of Bega such as rent/lease payments, insurance, staff salaries and depreciation on machinery to help generate profit.

 

Contribution Margin Similarities & Differences

The variable cost margin is the same for all three products, however the Masters full cream milk variable cost price is slightly higher due to the product being sold at a higher price. Additionally, varying fixed costs would be a characteristic of each product, and factors such as market competition and demand would further contribute to those costs.

The reason all three of these products have similar contribution margins is that they are all extremely similar products, just branded and packaged differently. However, if I had chosen a different product from Bega such as Vegemite, the contribution margin would be much different to standard full-cream milk. More variables within production, and the fact that Vegemite isn’t classified as an essential item would clearly show differences to that of the three milk products chosen.

 

Why might a firm produce a range of products or services with varying contribution margins?

Bega Cheese is a company with a diverse product range which mostly consists of milk-based products. In addition to this, in recent years Bega has also acquired products such as Vegemite and Zooper Doopers, as it looks to expand further beyond its origins. With this in mind, I believe that Bega’s management team has realised the importance of providing a range of different products with differing contribution margins to suit the needs of a wide range of customers. Relying solely on a small group of products with higher contribution margins can be seen as risky for a firm. Using the recent Ex-cyclone Alfred in South-East Queensland and Northern New South Wales as an example, the supply chain of milk production was severely impacted due to weather conditions on dairy farms. This event temporarily caused a shortage of milk production within South-East Queensland and Northern New South Wales, directly affecting the production of any milk-based products for Bega. If Bega solely relied on these milk-based products instead of diversifying into spreads and water ice, their profits would have plummeted until the industry recovered, especially in the case of a more severe weather event. This to me is the most important reason for management to diversify a firm’s products or services with varying contribution margins. Moreover, providing products with lower and higher quality options may also be a useful tool to capture a larger share of the consumer market, who may not be able to afford top end products.

 

Constraints for Bega Cheese

Firstly, as mentioned above, Ex-cyclone Alfred recently caused a major supply issue for Bega to the point in which their shares on the stock market crashed. Additionally, other weather events such as droughts, floods and bush fires can all cause supply issues in milk-based products for Bega and must be considered as a constraint for management. Another recent constraint for Bega that I’ve identified is their net loss of 230 million dollars for the 2023 financial year. The reason I consider this as a constraint is because excess debt can affect the financial flexibility of the company and put pressure on the ability to pursue new opportunities until the debt has been repaid. The annual report also discusses the fluctuation in the price of raw milk being a major constraint for Bega and is possibly the reason that the company has started branching out beyond just milk-based products. This fluctuation paired with overall inflation has made profitability in the industry a lot more complex and competitive than it once was, hence, why I’ve listed this as a constraint for Bega.

These are just a few constraints for my firm but I’m positive that deeper research would show a very long list of different constraints throughout multiple areas of Bega.

 

In what ways are these constraints relevant to the three products I have chosen?

The three products I’ve chosen have direct implications from the constraints of weather events such as the recent cyclone. For example, with limitations on raw milk available these three brands of milk might require price adjustments based upon supply and demand, as well as careful inventory management. In addition to this, the substantial financial loss in 2023 and resulting debt would restrict the ability to invest in a production increase and marketing options for these products. Finally, with the price of raw milk being relatively volatile, paired with inflation considerations, pricing strategies become more complex and reinforce the pressures needed for cost control by management.

These constraints make it difficult for Bega’s management to make definitive choices regarding resource allocation, pricing, marketing, and diversification for the three milk products I’ve chosen.

 

Step 4

Reflection of Ratios

 

Profitability Ratios

Gross Profit Margin: The gross profit margin is calculated by taking direct costs from the revenue. This shows how efficiently a firm is generating revenue from its direct cost of producing the goods or services it provides. That being said, having a higher gross profit margin is what every firm strives for as it indicates high profitability and success. Bega’s (GPM) hasn’t had much fluctuation over the past 4 years (FY2021-FY2024) and ranges from 19.4%-22.9% and seems to be on a slightly downward trajectory. However, based upon a few other companies that I’ve researched, the (GPM) sitting at around 20% on average is quite high in comparison to those firms, which is a positive sign.

Net Profit Margin: This margin is classified as the percentage of revenue remaining after all expenses have been deducted. For most people, this is considered the overall profitability of a firm and how much profit it generates for every dollar of revenue earned. The (NPM) for Bega for FY2024 is currently sat at 0.9% which is extremely low, however, considering that FY2023 was -6.8% it seems to be having a rebound from significant losses in the prior year.

Return on Assets: The return on assets is used to measure a firm’s ability to generate profit from its assets. Similarly, with the net profit margin it’s at a very low level of 1.4% coming from the back of FY2023’s -10.7%. It seems to be recovering at the same rate as the net profit margin and almost directly scales to those figures. Again, this is not an ideal (ROA) by any means, but it’s a good sign seeing the ability to recover from a terrible performance in FY2023.

 

Efficiency Ratios

Days of Inventory: This ratio is used to measure how long on average a firm is holding its inventory before the product is sold. This ratio could provide valuable insight for a company like Bega because if management can present methods of moving inventory through the sales process quicker, it allows for a larger volume of products to be sold per year, leading to greater profitability. Within Bega, this area seems to be improving as each year passes, FY2021 had a 78.3 day average, compared to 46.3 days in FY2024. There is still improvement to be made but from what Maria Tyler said in her ratio video, this ratio is all about balance, you don’t want the turnaround to be too fast or too slow.

Total Asset Turnover Ratio: The total asset turnover ratio indicates how many dollars of revenue a company generates for each dollar of assets it owns. A higher turnover ratio is ideal as it shows the effectiveness of the firm’s ability to generate revenue from its assets. Within my firm, I can see a progressive and linear increase from year to year in this ratio. FY2021 was calculated at 0.83, whereas FY2024 is up to 1.65. This indicates a drastic increase over the last four years and my knowledge of the company brings me to the conclusion that this could be due to the diversification of their product base. This also seems to be moving in line with the days of inventory ratio when the average days of inventory decreases, the total asset turnover ratio is increasing.

 

Liquidity Ratios

Current Ratio: The current ratio is useful in measuring a firm’s ability to pay off its short-term liabilities with the use of its short-term assets. This seems important to me, because how can the company meet any long-term obligations if it doesn’t have control over its short-term obligations? The current ratio for Bega has been very stable over the last four financial years, ranging between 1.16 and 1.23. Although the ratio has been stable and 1.16 is considered within a healthy level of liquidity, seeing an increase in this area and making a push towards 2.0 long-term would be a great goal for Bega.

Quick Ratio’s 1 & 2: Quick ratio’s one and two offer a refined perspective on the firm’s immediate short-term liquidity. By excluding less liquid current assets such as inventory, prepayments and receivables, the adjusted ratios provide a focus on the firm’s most readily available assets in relation to its current liabilities. This provides a more realistic assessment of the firm’s capacity to meet its more urgent obligations. Bega’s financials show a low, decreasing figure for both ratios and are trending downward. This is a worrying sign for the health of its short-term obligations and might be cause for concern for Bega’s management team.  

Note: I had to add two extra lines (prepayments and trade receivables) within my financial statements spreadsheet to get accurate formulas for these liquidity ratios.

 

Financial Structure Ratios

Debt/Equity Ratio: Bega’s debt/equity ratio is quite high for the industry, sitting at 110.8% for the FY2024. This figure is down 3.7% from the previous financial year, however it looks to be trending up as FY2022 was 86.9% and FY2021 was 98%. Generally speaking, a lower debt/equity ratio is preferred, as it suggests to investors a lower proportion of debt and lower financial risk for the company. That being said, the rising rate of debt to equity within Bega is a bit of a concern here and should be targeted by management.

Equity Ratio: The equity ratio is used to establish the proportion of a firm’s assets that are financed by equity instead of debt. As such, a higher ratio is ideal in proving financial stability, low financial risk and more cushion for potential losses. Bega’s financial statements show that this number has decreased from 50.5% in FY2021 to 47.4% in FY2024. The massive losses during FY2023 have proved to have a detrimental impact on the overall financial position of the company as they work to recover in FY2024.

Time Interest Earned: To evaluate a firm's security in meeting its debt obligations, the times interest earned ratio compares operating income to interest expense. A higher (TIE) ratio demonstrates a greater margin of safety in covering interest payments, indicating less financial vulnerability and a lower probability of default. Looking at Bega’s figures for this was shocking, I had to question whether I’d entered the correct formula or not. The figures are all over the place for each year and I believe it’s due to Bega earning such a small amount in interest each financial year. During FY2023 where Bega made a giant loss, the times interest earned ratio was recorded at -256.80, however, during FY2021 the (TIE) was 992.0. Based upon my knowledge a higher TIE is obviously a good sign, but I’m not sure if I can come to any serious conclusions about these figures as they are all over place.

Market Ratios

Earnings per Share (EPS): Earnings per share (EPS) quantifies a company's profitability on a per-share basis, representing the portion of net income attributable to each outstanding share of common stock. This ratio is important for shareholders in evaluating the firm's stock value and its earnings performance. A higher (EPS) suggests that the company is generating more profit for each share held. Again, Bega’s figures don’t look great here, although a clear rebound can be seen from FY2023’s loss at -0.76 to now 0.10 in FY2024. Prior years of FY2022 and FY2021 sat at 0.09 and 0.25 respectively so (EPS) didn’t look promising regardless of profit margins for the firm.

Dividends per Share (DPS): Dividends per share (DPS) represents the per-share distribution of a company's earnings to its shareholders. A higher (DPS) is seen as favourable and indicates a more substantial cash return to investors for each share they own. Interestingly for Bega, their (DPS) ranged from 0.07 to 0.10 and although they operated at a major loss in FY2023 they still distributed 0.10 (DPS) to their shareholders (this was exactly the same as the prior year FY2022). I wonder if this was to maintain a healthy relationship with its shareholders so that they didn’t look elsewhere for investment opportunities.

Dividend Yield Ratio: The dividend yield ratio calculates the annual dividend per share as a percentage of the current stock price. This provides investors with a direct measure of the income potential of a stock. For Bega, these figures ranged from 1.5% to 3.5% over the years of (2021-2024) and this makes complete sense. The dividend yield ratio fluctuated exactly alongside the price of the market shares each year, as the price of shares dropped, the dividend yields increased and vise versa.

Price Earnings Ratio: The price to earnings ratio shows the price investors are currently paying for one dollar of a company's earnings per share. It can indicate whether a stock is relatively expensive or inexpensive. The price earnings ratio for Bega has fluctuated heavily throughout the four financial years, which makes sense considering how the company’s performance has been quite volatile.

Net Asset Backing per Share Ratio: Investors use the net asset backing per share (NABPS) ratio to estimate the underlying asset value supporting each of a company's shares. It represents the potential cash payout per share if the company's assets were sold and all debts were paid. Considering that the market price of shares in 2024 was $4.22, slightly above the (NABPS) at $3.33 shows that investors were more interested in this financial year. This is most likely due to the improved performance by the company compared to FY2023 where the (NABPS) was well below the market price of shares.

Market/Book Ratio: The market to book (M/B) ratio serves as a gauge of how the market perceives a company's value relative to its recorded accounting worth. It essentially tells us the premium or discount investors are willing to apply to the firm's net assets. Bega’s (M/B) ratio has improved from 86.39% to 126.74% in the last year. When a company’s (M/B) ratio is under 100% it indicates that the market values the company’s equity at less than its book value. Therefore, Bega’s improvement in this area is a positive sign and shows that the market now values the company’s equity above its book value. Additionally, this points to confidence within its investors regarding future prospects of the company.

 

Current Operations & Looking Ahead

Bega Cheese's current operational landscape proves that the company is in a state of recovery following a challenging year in FY2023. While Bega demonstrates strengths in managing its direct production costs, evidenced by a gross profit margin of 19.8% in FY2024, this efficiency isn't fully translating to the bottom line, resulting in a low net profit margin and return on assets. Positively, Bega is showing improved asset utilisation and a more efficient inventory turnover compared to prior years, suggesting enhanced operational processes. The rebound in important profitability metrics (net profit margin and return on assets) from the prior year's losses is offering investors some optimism for future performance.

However, several areas will require close attention. The quick ratios decline is indicating to me that Bega’s short-term liquidity is weakening, raising concerns about its ability to meet pressing financial obligations. Furthermore, the increasing debt-to-equity ratio shows a growing reliance on debt financing, which elevates financial risk for the company. The irregular nature of the time interest earned ratio also makes it difficult to determine the consistent security of Bega's debt servicing capacity. Although Bega maintained consistency with dividend payouts over the four years, the low earnings per share reflect the limited profitability on a per-share basis.

Looking ahead, I believe that Bega's management should prioritise strategies to enhance net profit margins, potentially by examining operating expenses and other factors impacting profitability outside of direct production costs. Addressing the declining short-term liquidity and the rising debt levels will be critical for ensuring long-term financial stability and reducing financial risk. Finally, the recent improvement in the market-to-book ratio seems to be improving investor confidence, and Bega can capitalise on this by demonstrating consistent and improved financial performance in the future.

 

Step 5

Capital Investment Options

Option 1: Bega Cheese is looking to expand their product range into different locations and different customer bases such as cafes, restaurants, petrol and convenience, and more. To do this, they plan on investing in a new business to business (B2B) customer portal that will enable them to access more marketing data and information as well as sell a broader range of products to customers they wouldn’t otherwise have.

Option 2: Bega Cheese has also expressed interest in the investment in automation in their main national logistics centre in Laverton. This option would be a long-term investment to gain annualised benefits in areas such as efficiency, cost reduction and supply chain optimisation, ultimately producing significant profit maximisation for the company.

Table. 1a below represents the two potential capital investment decisions for the firm. The table incorporates the original cost, estimated useful life, discount rate and estimated future cash flow. As Bega is an Australian company all figures will be expressed in Australian Dollars ($AUD).

 

Table. 1a	Option 1: (B2B) Customer Portal	Option 2: Automation in Laverton’s Logistics Centre
Original Cost	$75 m	$50 m
Estimated Life	10 years	10 years
Discount Rate	8%	8%
	Estimated Future Cash Flow
Year 0	($75 m)	($50 m)
Year 1	($50 m)	($40 m)
Year 2	($10 m)	($25 m)
Year 3	$40 m	($5 m)
Year 4	$80 m	$20 m
Year 5	$130 m	$50 m
Year 6	$180 m	$100 m
Year 7	$210 m	$180 m
Year 8	$225 m	$280 m
Year 9	$225 m	$380 m
Year 10	$220 m	$ 430 m

Note: Please refer to my excel spreadsheet for the calculations of Bega’s NVP, IRR & Payback Period.

 

Capital Investment Options

Table. 1b	Option 1: (B2B) Customer Portal	Option 2: Automation in Laverton’s Logistics Centre
Net Present Value (NPV)	$621.14 m	$644.88 m
Internal Rate of Return (IRR)	44.3%	40.8%
Payback Period (PBP)	4 years, 1.4 months	5 years, 6 months

 

Capital Investment Analysis and Recommendation

Upon calculation of the NPV, IRR & PBP of these options, it is quite clear that both are good capital investment options. The largest difference between the two options can be seen in the payback period with option one’s (B2B Customer Portal) having a one year and 4.6-month shorter turnaround on investment, opposed to option two. Firms deem that a shorter payback period and faster investment recovery are superior when it comes to capital investments, as they are less risky.

The net present value (NPV) is considered highly important when deciding on capital investment options. It’s used to account for the time value of money and recognises that future cash flows are worth less in the current. Comparing the NVP’s of each option, option two (automation in Laverton’s logistics centre) is substantially higher at 644.8 million dollars, opposed to option one’s 621.14 million dollars. The difference in these NPV’s indicates that option two is the more profitable investment of the two.

The internal rate of return (IRR) is the rate of return a project is expected to generate. The reason it’s important within capital investment decision making is because it represents the break-even discount rate at which the present value of the expected future cash inflows exactly equals the present value of the expected future cash outflows. When looking at the IRR figures above in Table. 1b, option one is slightly higher at 44.3%, compared to option two’s 40.8%. These are both considered very high and suggest strong potential returns within both investments. All things considered; I don’t believe that the IRR difference here presents enough grounds to cancel out the NPV benefits of option two.

 

Strengths & Weaknesses

Table. 1c	Option 1: (B2B) Customer Portal	Option 2: Automation in Laverton’s Logistics Centre
Strengths	·         Slightly higher IRR ·         Shorter payback period ·         Broadening customer base and access to new markets	·         Lower initial investment ·         Technological advancements ·         Cost reductions ·         Revenue growth ·         Higher cumulative cashflow ·         Future-proofing and optimising supply chain
Weaknesses	·         Higher initial investment ·         Higher risk investing in different sectors ·         Irreversible investment if marketing fails	·         Longer payback period

 

As mentioned previously, I believe that both are extremely profitable capital investments, and it was quite difficult to pinpoint any weaknesses in either option. If I had to choose one, based upon the calculations, I see option two (automation in Laverton’s logistics centre) to be a more beneficial and profitable investment long-term. Although the payback period is slightly longer within option two, the NPV and cumulative cashflow over the 10-year period provides me with more confidence in this investment’s longevity compared to option one. In addition to this, investing in the company’s future through its supply chain and technology seems to be virtually risk-free, opposed to branching out into new sectors of the industry, to capture new customers.

I understand that risks can be a necessary part of business progression and profitability. However, in this situation where the profitability of both options looks extremely similar and considering Bega is still in recovery mode from major losses within FY2023, choosing the option with less risk is the logical decision. Therefore, with the analysis of the strengths and weaknesses listed in Table. 1c, as well as the comparison of capital budgeting figures in Table. 1b, option two (automation in Laverton’s logistic centre) is my recommendation for Bega.

 

My Learning Experience in this Unit

I’m currently enrolled in four units full-time at CQU and out of those this unit has been my favourite. The learning experience has been extremely unique compared to my other units and differed from my certificate IV in TAFE last year. The short-length lecture style, the audio recordings for different chapters of the textbook and particularly Maria Tyler’s videos that guide you through certain challenging steps to do with excel spreadsheets really did wonders. The other units I’m enrolled in had quite a confusing layout on Moodle and seemed disorganised, which ultimately cost me a lot of time over the course of the semester and could have been utilised more effectively within my studies. This was not apparent at all in this unit and all the assessments and weekly tiles had a clear layout to follow. Another useful tool was the exemplar’s provided; it gave me a solid foundation to work upon and a good idea of what was required if I wanted to achieve higher grades.

Something else unique to this unit was the forced style of interaction with other students in an online setting, through blogs and forum posts. I can definitely see how some students might not enjoy this part of the unit. However, considering that this unit was strictly online, you quickly understand the importance of group-work and how peer-to-peer feedback and cooperation can benefit one another. At first, I thought of this as an unnecessary chore and didn’t feel like it was my place as a fellow student who is new to the subject of accounting, to be giving criticism or praise to others in their work. However, after providing and receiving feedback in assessment one, I found it to be an enjoyable yet challenging task, and to do this well requires deep thought about other students’ work. Doing this extra step forced me to understand certain concepts within the unit from a different point of view, and perhaps this is exactly why giving and receiving feedback has been implemented into the unit. The overall experience made me realise that providing direct criticism as well as thoughtful feedback is a useful skill to have, and like anything else requires time and practice to master.

To future students, just make sure you attend Maria Tyler’s workshops each week and you will pass. All jokes aside, I did find attending workshops as frequently as possible to be a very useful tool, as Maria went through each of the students’ annual reports and spreadsheets if they were having trouble and set them on the correct path. Something that worked well for me was dedicating multiple days in a row to this subject without putting time into other units. This tends to be an unpopular opinion amongst teachers in the past and they tell you to do a little bit of each unit, each week. Personally, I find that I can learn the content properly and retain knowledge more effectively when I’m able to focus on one thing for an extended period of time. Additionally, it can save time messing around trying to remember where you were up to in another unit and simplifies what’s floating around in your mind, similar to how having a messy workspace may affect your productivity.

Overall, this was genuinely an enjoyable experience. It had its challenges at times, but I feel like I’ve learnt a lot, not just about accounting, but deeper thought processes and the skill of learning itself. I’m sure I will carry this knowledge into my next units at university and through my career in the future. Thank you, Dr Martin Turner and Dr Maria Tyler, you’ve put together quite a unique learning experience for students and I’m sure you will continue to improve it over time.

 

Step 6

 

KCQ1: “We will consider a few techniques managers can use, some involving a consideration of the ‘time value of money’ (that is, money is worth more to us now than in the future) and some that do not.”

The time value of money is something that has been on my mind for a very long time, well before starting this unit. It’s a concept that I use almost every day and have incorporated into many areas of my life. For example, I’ve personally used this concept within areas such as stock investments, collectable purchases, assets, etc. The idea of an asset or investment earning you money with little to no time investment was something I considered before making these decisions and ideally should be the goal of everyone, yet I rarely see it utilised amongst my friends and family.

You go to work to get paid, right? Whether people understand that they value time as money or not, most people are applying this concept in their day-to-day life. Now, if you value your time as money, which we’ve established that most people do, why wouldn’t you value your money as time? If you have money, you have free time. If you allow your money to work for you, you can achieve your goals much faster and you of the future, will thank you.

These should be educated decisions of course, and that’s what this part of the chapter seems to be discussing when it mentions techniques for managers. I’ve never read anything about this concept and just considered it common sense, so I’m sure this chapter will have some useful insights into how I can apply this concept professionally.

KCQ 2: “Usually when we do anything there are many things we cannot do at the same time. Is what we have chosen to do the best choice, or was there a better use of our limited resources?”

This quote made me think about opportunity cost and how useful it is in everyday life. I often think to myself “man, there really isn’t enough hours in the day to achieve what I want to achieve or do what I want to do”. I’m a very motivated person in general when it comes to self-improvement, whether that’s strength or physique goals in the gym, studying to achieve the highest grades I possibly can, making improvements at work to advance in my career or even just being a better friend and man in general. Without getting too deep, this is my purpose and goal in life, to become the best version of myself in every aspect. Because I have such high standards for myself, to achieve my goals, I need to make the right decisions as often as possible, and this can be an extremely difficult position to be in. I often wonder if we had 34 hours in a day, opposed to 24, perhaps I could be further along or closer to my end goal. To bring this back to the quote, I think that everyone experiences doubt in their choices when it comes to decision making on important matters.

Let’s say I chose a restaurant to eat at which was close to home for convenience’s sake, and the food ended up being sub-par. This is a choice that could have been avoided had I not been lazy, but ultimately the only loser is my taste buds. However, if you are the manager of the restaurant and one of your customers receives a meal with expired ingredients, the accountability ultimately falls back on you not managing your stock correctly. Not only have you lost money from the ingredients and staff labour to make the meal, but you have also lost business. The customer may leave a bad review, tell their friends not to eat at your restaurant, or if the food poisoning was bad enough the company could be sued.

This goes to show there is a time and place to make the correct decision regardless of how you are feeling, poor decisions can lead to negative consequences, just as good decisions can lead to positive outcomes. There is a reason we all learn this from our parents at a young age, and this is a concept that most people carry throughout their entire life.

KCQ 3: “One important decision managers must make is how much of various products should a firm obtain (or produce) and seek to sell. These are called product-mix decisions: what relative weighting of products should a firm have.”

This is a basic concept, yet it feels worth exploring because it is essential to almost every business or firm. The idea of understanding exactly what your firm can sell and the profit it can make per product, or service is the core of having a profitable business. Thinking back to when I was working in retail at the service station, I would often get asked my opinion on which products sell most frequently and methods on which to improve these sales by my manager. Unless you have worked within the industry, you might think that the majority of profit within a service station would be fuel sales, however, the bulk of the profit is made from in-store product sales such as food, drink, electronic products, etc. That being said, making calculations from sales data such as the contribution margins for each product and unit, was important in distinguishing which products had the most and least profitability within the shop. As I worked in a relatively small service station, space was limited. Therefore, important decisions had to be made in regard to which product should occupy floor space within the store, to maximise profitability. I would work tirelessly with my manager, day-in, day-out, to try new product placements and layouts which would catch the eye of customers. I vividly remember discussing the negative contribution margins of slow-moving products such as turkish delights and bubble-mint flavoured chewing gum, which would frequently go out of date. It’s safe to say, these products didn’t stick around for very long.

Ultimately, the longer I worked there, the better I got with understanding this concept and regardless of industry, if you sell a product or service, making decisions based on sales data to market your services correctly is one of the most important aspects of a business.

KCQ 4: “Clearly, much of what we have of value today has been greatly affected and influenced by decisions and activities and events of people 40, 60, or 80 years ago (indeed, by people who lived thousands of years ago).”

Although this statement quotes the value of money using DCF techniques (NPV and IRR), I resonated with the sentiment that people before us have affected current conditions in humanity. Just like a manager’s decision to utilise DCF techniques to support long-term outcomes in a firm or business, each generation before us has laid the foundations for the continuation of society. This can be seen in all areas of society such as technological and industrial advancement, modern medicine, space exploration, sciences, food production, cultural traditions and many more. When you think about it, pretty much every convenience and pleasure we experience today has been the work of prior generations and just like the people before us, it is our duty to continue the progression of society within our lifetime as well.

Although this chapter defines us as part of a conveyer belt and “everyone eventually has to drop off”, it’s of importance to understand the value you can bring to the people and world around you, even if you are just a small part of current events. Actions you take, and decisions you make, will affect not only yourself and the people around you, but the people who come after us as well. I think that an understanding of this concept allows us to feel pride in what has been achieved prior to now, as well as allowing us to experience the world for what it has to offer today.

As stated earlier in this unit, accounting has evolved over thousands of years and countless generations into what it is today. It’s an ever-changing industry that requires adaptation in order to progress. If the influence of prior people didn’t have any effect, we would still be using clay tablets and papyrus scrolls for ledgers. Essentially, this is a fundamental concept to humanity as we know it, it’s the reason we have the ability to learn about accounting and it’s the reason we are studying (or teaching) at CQUniversity right now. Quite philosophical, I know, but this is what came to mind when I saw the quote, sorry.