FINANCIAL REPORTING & MANAGEMENT ACCOUNTING FOR IKEA

THEODORIDIS ANTONIOS

This report is submitted in partial fulfillment of the requirements for the Executive MBA at the City College an International Faculty of Sheffield University

Supervisor: Ioannis Pasmatzis

April 24, 2012

CONTENTS Pages Abstract.......1-2 Introduction.........3-4 Financial Accounting Objectives of Cost Accounting......5 Categories of Costing..5-6 Systems of Costing.....6-7 Objectives and Characteristics of Financial Reporting..........................7-8 Companys Financial Statement......8 Management Accounting Management Accounting................9 Management Accounting Techniques10 Internal Accounting Systems..............................11-12 Percentage Analysis..........12 IKEAS Company Profile......13-14 Performance Analysis Financial Assessment....15-16

Vertical Analysis..16 Horizontal Analysis...16-17 Report on the Financial Performance of IKEA.17-18 Concepts and Techniques of Strategic Management Accounting Concepts...19-21 Techniques...21-22 Conclusion..23 Bibliography24-25 Appendices..26-44

Abstract The idea of accounting dates back approximately 10000 years. In trying to reserve the inventories, people begin to develop methods for monitoring the wealth. The transition of the hunter-gatherer to farmer establishes the human civilization. This movement had a result in the trade and barter among the two parties. Possessions such as sheeps were signs of wealth and became the medium of exchange. The first recorded money had different sizes and shapes named tokens and found in the Near East approximately 5000 B.C. The earliest record transaction is not clear for the place of origin. Since, Sumerians invented the writing may be there is the place of origin, where some attempts to define wealth with money take place. King Hammurabi manages to keep records for the transactions and contracts in his kingdom, by 2000 B.C. A more efficient attempt for accumulate the wealth is from the rise or Roman civilization. Public records included a monthly register of payments and receipts. As the years pass, an Italian merchant Luca Pacioli developed a system and published a book describing this technique in 1544. This bookkeeping is a system where every transaction is a record of a debit and a credit. Modern accounting bases upon this system. From the Italian merchants, we came to the Columbus discovery of the New York. New opportunities arose for accumulating the wealth. The use of short term stocks raised working capital for voyages. The Industrial revolution changes the needs for accounting to industry based economies and the first bank established by Goldsmiths. The father of expanding the role of accounting is the Josiah Wedgwood owner of a successful pottery business. He developed a system of analyzing the cost of materials and effects on profits. With this system, he was able to monitor the prices of products by cost and increase profit and demand. The DuPont cousins used an advanced accounting system that allowed them to be accurate in the long term planning. They bought a large interest in General Motors and established their system there in 1925. The company developed cost accounting methods that helped cut costs and streamline operations. General Motors was the pioneer in introducing a new concept in accounting. They designed flexible or adjustable budgets. Since then, new methods applied and introduced for facing the accounting problems.

In order to have some control in accounting, some regulations take place. The known system adopted, is GAAP (Generally Accepted Accounting Principles), which established in USA in 1936 and 1938 and adopted for all the listed companies. However, in 1953, GAAP updated and new standards issued. The APB (Accounting Principles Board) was the new trend, but due to poor management, replaced by the FASB (Financial Accounting Standards Board). In Europe, the system adopted is IFRS (International Financial Reporting Standards). This system allows accountants to think for themselves, since encourages principles based thoughts and not rules.

Introduction A company to start in the market share has to combine both financial accounting along with management. Identify the objectives, costs, techniques, methods for accounting, and plan, organize, control and direct its operations for management. Apart from that, there are a numerous issues that the company still needs to evaluate and pay attention for competitive position and strength (Appendices p.26). Examine the market position whether the company can grow or deteriorate following the existing strategies. Measure the success factors and resource capabilities. Check the advantage or disadvantage that the firm has. Anticipate the moves, with which the rivals will proceed, protect and improve its position. Benchmark and make strategic cost analysis. Also, use potential market and sales forecasting after observing different social and economic factors that affect purchasing behaviors. The primary roles of a business are three. First is the assistance in achieving societal objectives. Second, the business has to response to changing social demands like product safety, consumer education and safe work environment. Finally, is the economic function, where the company must meet its profit demands, provide employment, stimulate economic growth and produce goods and services. The main target of every company (Appendices p.27) is to zero in the strategies challenges that stand as obstacles to the companys future success. Until now days, there are two distinctive theories for reaching this goal. One has to deal with the capitalism system and the other with communism. Either theory does not provide independence and stability. IKEA is the second group company in the furniture industry that strives for independence. The main focus of this report will be this company. IKEA used all three types of diversification strategies, concentric, horizontal and conglomerate, with great success up to now. Selecting a beginning strategy such as diversification hides dangers and some modifications must happen in order to stay at the top. The company puts itself in uncertainty. The need of human resources and financial ones play a significant role in the stability of the company. This in the long term detracts from the focus of the company. There is heavy commitment and sustain investments in the core for the company to stay actively. Replacement of existing operations and renewals for minimizing the costs, plus make alliances. The entire above, make the company slave to its own needs, and there is not even one chance for the company to be autonomous.

Using some techniques like ratio analysis, horizontal and vertical analysis, time series, forecasting techniques and cross sectional data we will try to have a glance at IKEA group. Before proceeding in gradually identify all costs, methods and discussing the ratio analysis and comparisons for the IKEA group, it is necessary for a small bracket. Now one knows what the real dimensions in establishing a company are and which figures and number are the correct ones, in order for a company to maintain market stability and growth in the industry. Bearing in mind, it is extremely difficult for the external parties to find the weaknesses of the competitors and follow their own path in market.

Objectives of Cost Accounting Cost accounting embraces both costing-planning and control-performance. Every business uses costing methods and techniques to allocate costs to various products and services. The aim is to recover absorb all costs to form the basis for pricing and stock evaluation. There are four main objectives of cost accounting, and that are a) Determining the selling price, along with other factors like condition of market, distribution, for the company to gain profit. Thus, the information gathered should decide the revenue to be greater than the expenditure occurred so as the firm to produce the product or service. b) Controlling efficiency for being able to follow the correct decisions as a whole company or as a department, e.g., budgetary control etc. c) Preparation of financial and other statements which in turns will provide a speedy preparation of production, sales and operating decision so as to maintain a high level efficiency of finished goods. d) give the right basis for operating policies relating the cost-volume-profit (CVP) relationship, shutting down or operating at a loss, producing or buying from outsiders, replacing machinery by new ones or staying with the existent ones. Of course, every body understands the basic concept of cost in the general meaning of it i.e. amount of expenditure (notional-actual) assigned (incurredattributed). In reality, the term cost is not able to be defined exactly as depends upon the nature of the industry or business and the context in which it is applying. Thus, we must be able to distinguish between costs and assign the proper ones for the right purposes. Categories of costs Classification of the cost into different categories take place having in mind what is the purpose of the classification: a) fixed (cost remains constant within a specific time e.g. wages of labor) b) variable (cost varies with every increase or decrease in the output production volume e.g. rent) c) semi-variable (cost that is not varying proportionately but simultaneously remain stationary at all times e.g. repairs) d) product cost (part of the cost of a product e.g. cost of raw materials) e) period cost (costs that are not relating with production e.g. administration costs) f) direct and indirect (direct-easily traceable, indirect-not directly chargeable to

production) g) decision making and accounting costs (decision costs-applicable only when compiled e.g. calculated when an operation mechanizes, accounting costs are historical costs) h) relevant and irrelevant costs (relevant are those costs that change by managerial decision e.g. if a manager decides to close down an unprofitable shop, this will affect the wages irrelevant are those costs that do not affect by the decision e.g. prepaid rent) i) shutdown and sunk costs (shutdown costs are those that will occur even though production stop, sunk costs are historical or past costs) j) controllable and uncontrollable costs (controllable are those costs that influenced by the ratio, uncontrollable costs that cannot be influenced) k) avoidable or unavoidable costs (avoidable are those costs that can be eliminated due to discontinuity, unavoidable costs is the opposite) l) hypothetical costs (interest on capital) m) differentials (the difference between two alternatives) n) incremental or decrement cost (costs that either increase or decrease by an alternative result, resulting the increase/decrease of the total cost) o) out-of-pocket costs (present or future cash expenditure on making a decision) p) opportunity costs (refers to alternative revenue foregone) q) traceable or untraceable costs (traceable costs are those that can easily be identify while untraceable is the opposite) p) production and pre-production cost (the cost of sequence of operations, while the pre-production cost is relating with the development costs incurred in making a trial production) r) administration costs (cost that direct the organization and control the operations) s) selling cost (cost of selling and create demand) t) distribution costs (the cost of sequence of operations) u) research costs (cost of searching something new) v) development costs (cost of the process) x) conversion cost (aggregate of total cost and factory overhead in transforming direct materials to finished goods). Systems for costing Before reaching which method for pricing the management is willing to follow, there is the final step of deciding which system for recovery (total absorption) costing for pricing the management will adopt. There are two systems and six steps that either has to control (Appendices p.28). The one is the traditional costing. Originally this system developed in manufacturing industries. A single cost driver makes sure that allocation of the indirect manufacturing costs takes

place. The number we get is the overhead rate. This in turns is multiplied by the products per unit overhead cost. As a system, it is easy to apply and for a large volume of few products, provides a clear idea for the costs of manufacturing a product. When things become more complicated, is less reliable. Further more since business environment changes, it gradually becomes outdated, managers are not able to set clear strategic decisions in terms of productions streamlining, product enhancement or discontinuation. For the above reasons, a better understanding in assigning costs came on surface. That developed an alternative system. This system is activity-based costing. There are more than one cost drivers for indirect manufacturing costs. The system provides an accurate view of how much a product cost. It also minimizes the unrelated manufacturing costs to products. Management can create effective budgets showing how cost and service relate each other for a number of service levels. It is an expensive system for implementation and the costs for running such a system are high. For the final price of the product, we must also calculate the stock valuation and there are three methods for doing that FIFO (first in first out), LIFO (last in first out), and AVCO (average cost). Objectives and characteristics of financial reporting After we have prepared the ground for accounting, it is time to move and see what the real reason for these preparations is. Once a year, shareholder(s) receive an annual report containing financial and non financial information. In turns, this financial information gives the necessary information to investors, creditors and other shareholders. Further, information concerning the social impacts of corporate decision making is enclosing. In addition, risks, consumer safety, philanthropic activities, frame the report. This document summarizes historical performance and forward-looking information. The characteristics for this document depend on relevance and faithful representation. The meaning of relevance is that information must possess both predictive value and confirmatory value, in order for the companys ability to generate cash. In turns of completion, neutrality, free from material error and bias, faithful representation is necessary, for the shareholders to have a sound echo. Some other features are comparability which helps users to see similarities and

differences between events and conditions. Another feature is consistency and permits valid comparisons among different reporting periods. Verifiability implies a consensus among different measures and objectivity is a link to it. Timeliness is crucial for information to come on time, in order to allow the parties and have better decision making. Understandability is the last characteristic. Here, whoever participates must have a clear understanding for business and the economic activities that take place. Companys financial statements There are four components of a financial statement. a) The balance sheet b) The income statement (profit and loss account) c) cash flow statement d) consolidated statements. The preparation of these reports is familiar as financial accounting.

Management Accounting Financial statements are the visible products of a business accounting system. Even though are the ones that the public pay attentions, still they represent some part of the accounting activities that support a company. The other part that has a meaning is management accounting. These reports project summaries of past events, forecasts for the future of the company or a combination of those. Since the business environment changes and globalization (inevitable and irreversible process) are the new trend, it is essential for managers and the rest of the parties that form the company to adapt to these changes with the best they can, using both financial and management accounting. Management first has to plan. This plan is then implementing by organizing, staffing and directing operations. Finally, to control these operations management has to take some actions, applying the proper techniques, to determine the results in comparison with the actual plans. The planning process makes an impact for the overall performance of the company. It can be either short or long range planning. In establishing what goals and performance objectives (useful for sub goals) are necessary and the hierarchy for these goals, management should take into account a number of key areas. These areas are products, production, marketing, advertising, research and development, company size, profit and shareholder value. Integrating and coordinating along with the format activities, staff the mission of the company. Documentation reflects the direction that the manager is willing to take, since forces the manager to provide a reason why the budget should be increased. Finally, controlling process should be continuous, due to the inability to predict the timing and impact of the external environment. From this surface approach, we can have only a broad understanding of the companys performance in turns of the goals and needs that establishes. As we move forward, and in more depth, we will have a clearer view for the company.

Management Accounting Techniques The next step for proceeding with the optimal solution for the company is to identify the proper pricing method or management tool or process. This in turns will minimize the inventory and maximize the profit. Target costing, is a product pricing method and is worldwide used by the firms. The aim is to reduce products overall cost for the given product life cycle. Next is business process re-engineering. Here, the key point is to view the business processes from scratch and not try to build new ones on the existing models. This approach aims to improve the organization business efficiency in production. Also, affects the effectiveness of primary activities along with the support ones, which exist inside and outside the business. Another technique is total quality management (TQM) which is more like a strategy rather than a process. The aim here is to improve the quality, for the finished work in all activities of the company from the infancy of the product. Just-in-time (JIT) is one strategy that most of the modern businesses try to apply. This strategy is trying to handle business costs by reducing the levels of inventory that are in store by the business. Another purpose is to eliminate the default one by the production process. A useful method for backing up the JIT is back flush accounting. Here, the costing of the produced items delays, until the production process is complete. Standard costs are then flush back through the system to assign costs to products. As a result, we have the detailed trucking of costs and the elimination of them. Benchmarking is a performance management tool. Here, the aim is to bring the lowest scale activities to a line with that of the largest scale objectives so as to match the companys corporate vision and strategy. Finally, is a new strategic management tool the six sigma. The aim is to update the quality of the business by identifying and subsequently remove the faulty processes. Variability in the business management processes and manufacturing is another factor that gets better.

Internal Accounting Systems There are four broad functions a) budgetary planning b) cost finding c) cost and profit analysis d) performance reporting. The most valuable tool for either the financial or management is the master budget process. It is the quantitative expression for planning and reflects the companys objectives and goals. The master budget consists from financial and operating budgets. The role of effective budgeting is interwoven with the fundamentals of management. There are three methods for budgeting a) incremental budgeting (the budget for the current years is the starting point for the next year) b) zero budgeting (budgeting is starting from zero and gradually build) c) combination of the two (combines zero budgeting for some items and increment for some others). A useful technique for the partial or capital budgeting in explain the relationship between cost, production, volume and returns, is the Break Even analysis. At this point, the company has no profit or suffers from a loss. The limitation of this analysis is that it is hard to name a cost as all variable or all fixed. It is useful when analysing one product at a time. Expansion of the break even analysis is the cost-volume-profit (CVP). This analysis uses the information we obtain by the break even analysis. A critical point of CVP analysis is where total revenues equal total costs (fixed and variable). This analysis permits to compute target income sales. It is best to use it for short run trade offs in operational decisions. For the overall budgetary plan, there are some points that need to take into account. These are profit plan, cash forecasts, expenditure budgets, personnel budgets, production budgets and budgeted balance sheets. The other function is cost finding. By this process, the company gets estimates or actual costs for different areas of the company, depending on the method we choose to apply as already described. These estimates can be either historical or others predictive. Proceeding is cost and profit analysis. In analyzing cost and profit data for a managerial decision, it is quite difficult. A manager has to face a lot of parameters, review, estimates, compares and modify the data for decision. There are many assumptions for the calculation of the profit, while for the costs as

already mention things are straight forward. The assumptions that need a better look are the matching concept, (match income earned with the expenses and estimate amounts owing known as accruals, along with those items that are pay this year and incurs next year). Estimation is another assumption, due to the uncertain information that we have at that present moment. Further, are the changes in price, such as fixed assets. Finally, we have the wearing out of some assets, which is due to depreciation. Closing the last function is the performance report. The analytical measures obtained from the financial statements can be expressed as ratios and percentages. Theoretically and legally interpreting the accounts allow us to have access to an in depth understanding of an organizations performance. Percentages Analysis There are two percentage analyses that can be used for evaluating the performance of a company. Vertical analysis is the percentage analysis used to show the relationship of each component to the total within a single statement. This analysis is useful for assessing relationships of a companys financial condition and operations. Horizontal analysis is the percentage analysis of increases or decreases in related items, in the comparative statements. Further, calculating ratios for profitability, gearing, efficiency and liquidity we get an insight view of the situation the company faces.

IKEA companys profile Ingvar Kamprad is the father of IKEA. From the beginning, the company had to face a crucial dilemma, in order to stay in business. Should they go with those who can afford to buy cheap furniture or should they follow another strategy? They choose to go with the mass (it was the only way). Everybody wants to feel delightful in their home. Hence, the core principles for IKEA are creation, range, use (strength, workability, surface, resistance). The target market is for low and middle income urban people (Appendices p.29). The market segmentation that IKEA uses covers many areas; among them are preferences, along with psychographic and demographic areas, for each country. They impose European modernism in Scandinavian style referring to middle-class lifestyle. The marketing strategy follows the Swedish home base stereotype of clean and efficient service. By this stereotype, the company adds quality and creates a competitive advantage. Of course, the key to all businesses is to add value something that IKEA provides by the use of catalogues, measure tapes, pens and notepapers. Apart from the low prices, the IKEA strength is its ability to shift a variety of burdens to the customer, such as save money to the customer by the self assembly. To make, this proposition more attractive, they create restaurants; play grounds, long hours of operations and parking. The brand image is synonymous to cost consciousness, design sensibility, unconventionality and environmental awareness. The market positioning of the company is to make the consumer a partner for life. In some cases, they have managed it, by over passing the traditional value chain with the trade off service for cost. For the marketing mix, they have achieved to portrait the organizations goals, visualized by the customers minds. The core principle of the product is to reflect to the customer i.e. IKEA is known globally for the quality and the functional products at affordable prices. For the price, the IKEA group provides a new division of labor at low prices. For the place, they purchase the stores which locate at areas that are mostly out of the center and are distinct in design and format. For the promotion, Ikea uses catalogues to all the countries that have stores. Also, through TV advertisement, reminds the customers why they are different from

competitors. Other marketing communication activities include sponsorship and radio promotion. Finally, is the distribution strategy IKEA follows? It is another strength that they have. They follow a pattern by starting with the design, to suppliers, purchasing, distribution, stores, and customers. In concluding about the IKEA group, a brief SWOT analysis will provide a clearer view about the group. Strengths of the company are the strong relationships with its suppliers. This secures for the time, the company to have access to high-quality materials at reasonable prices. A weakness for the company is that, since it a worldwide company, it is difficult to maintain products standards. Opportunities for the company are the further capitalization to green movement so as to have less impact to customers and the environment. Finally, the threats are that since IKEA uses natural resources for the products this may have an impact to the business along with the costs, due to different regulation about the environment that each country has.

Financial Assessment For being able and evaluate the opportunities, a company has we need to conduct a thorough financial analysis. There are twelve targets that need to be analyzed. These twelve reviews are a) Financial statements review: here we see that consolidated statements do not give all the proper information as the traditional ones. Imposes, new concepts like minority, and there are no cash flows statements and dividends shown b) Accounting policies: IKEA do not provide explanations for the operating charges. They have a policy, not to interfere on the accounts of a private group of companies. Hence, we are not in a position to say which policy they follow. We do know that they make large payments to I.I. Holding (Luxemburg registered group) but still it is the property of the family c) Receivables review: there are 30 days full payments for purchasing in credit with an overdue of 1.5% interest per month. For unsatisfied customers, there is a return policy for unused items of 45 days for either an exchange or refund. Also, there is a 30% fee, of the purchase price for the cancellations of custom upholstery d) Inventory review: there is a problem with the website and inventory system that needs to be fixed, since a lot of complains arise e) Asset assessment: we are not able to comment since we do not have information about intangible assets such as goodwill f) Payables / Liabilities review: an invoice issue for every transaction payable in 30 days. IKEA can charge interest on any late payments. IKEA accepts no liabilities for any indirect, direct, consequential losses, special, incurred or suffered by customers. Also, they are under operation laws for death or injury occurred g) Budget and planning review: almost nothing to comment due to consolidated statements h) Debt and Banking review: nothing to comment apart that IKEA group manage to decrease the period of debts as we take the data from the efficiency ratios but still have debt i) Investment and Cash Management: nothing to say about cash management but for investments we know that IKEA lower their prices by 2.6% for year 2011. Continue to expand by opening other stores and re investing to the old ones. Also, they invest to new ways of power j) Employee Benefit funds review: there are a lot to be said for this assessment, but I will make a pose and say that the company is trying to fill management positions internally by keeping people into the family. They develop a system Paddle you own Canoe in which new workers sit and discuss the future in the company k)

Taxes review: nothing to comment apart that they pay the taxes l) Systems and Controls review: already stated for the value chain they follow. Horizontal Analysis: Through the three years in the profit and loss statement we observe that gross profit has a decrease of 7.7%, and this has an affect to increase the cost of sales. Operating profit is almost at same levels with a small decrease of 3.6%, which means that a better house holding has occurred. Taxes have decreased enormous by 20.2%, which left on the bottom line profit of 4% up. From the balance sheet, total fixed assets decrease by 10.3%, and this is because no real investment took place while variable assets have increased. Total current assets have a decrease from 11.7% to 3%, and mainly this change is due to overloading of inventory levels and the drop in receivables. Finally, total equity has dropped from 15.5% to 11.2% with an increasing total non current liability from 4.8% to 18.3%. IKEA manage to control short term liabilities and reduce other payables, which in turns reduce the overall total current liabilities from 12.1% to 7.3% (Appendices p.30). Vertical Analysis: For the year 2009, gross profit is at 46.6%. Operating cost is 33.6%, and taxes are 1.8%. This leaves an 11.8% bottom line profit. For the companys balance sheet, we have the portion of cash and securities to be the biggest with 38.6%, while property, plant and equipment follow with 38.3%. Also, group equity is high with 53.3%, and total non current liabilities have some impact with 15.9%. For the year 2010 from the profit and loss account, gross profit is at 48%, while the operating cost is at 34.1%. Taxes are at 2.5%, which leaves a bottom line of 11.6% profit. Again from the balance sheet we notice that the company follows the same strategy which had an impact with small increases/decreases in the same areas. In the profit and loss account for the year 2011, we see that gross profit is sizeable at 46.1%. Operating cost 31.6% eats up most of the revenues, and this is an area that need to cut back. Taxes are at 3.2%, leaving a net income of 12%. From the balance sheet, inventory is at 10.5% while cash and securities are at 40.2%. Group equity is at 60.7%, and total non current liabilities are at 11% (Appendices p.31).

In all three years, operating costs is the area which needs attention along with the debts. Report on the financial performance of IKEA Introduction Having IKEA profit and loss account, balance sheet and equity and liabilities we prepare 11 ratios for assessing the performance of the company for three years. The results compared together, and the calculations along with the ratios presented in the appendix (p.32-42). The report covers profitability, efficiency, liquidity and gearing ratios. Profitability The return on capital (ROCE) indicates how effectively, and efficient IKEA has deployed the resources available to it. Through out the three years IKEA has a steady increase from 11.2% to 13.74%. The figure 13.74% indicates the return by which the business earns on its capital. Gross profit ratio fluctuates from 2009 with 46.6% to 2010 with 48%. While for 2010 with 48% to 46.1% to 2011. There is a small fluctuation which indicates competitive advantage in the market, along with intensive competition, but this is because IKEA have lowered their prices by 2.6% for the year 2011. In overall, the ratio remains constant with a small indication of weak control in expenses. Finally, the net profit ratio gives us information for the business ability to survive to adverse conditions. It has improved from 21.4% to 22.5% and then decreased to 20.8%. It should be high, which here is not. In case of an increase in market competition, economic downturns or decrease in market demand for both services and goods, the company will face serious problems. Efficiency From the estimations, we observe that the trade receivable period has drop from 47 days to 31 days. This means that the ability of the company to collect cash from its credit customers gets better. In turns, the company chooses the partners or mutual arrangements are on line. The trade payable period time becomes shorter from 145days to 125days, and thus liquidity is confirming, which makes the relationship better with the suppliers.

Comparing the debtors and creditors ratio we notice that IKEA collects its cash from debtors in 25% of the time that it takes to pay its creditors. For the three years data, we observe that there is a reduction in stock turnover from 3.64 to 3.14. This means that the company boosts their inventory turnover and shrinks holding inventory time. Finally, there is an increase in the asset turnover from 0.55 to 0.59, which means that the company generates about half of its total assets in sales. The ratio should be higher but, it depends on the nature of the business. Liquidity Both current ratio and quick ratio have increased from 1.77 to 1.96 and 1.5 to 1.59 respectively. From the estimates of current ratio, we notice that the company meets short term obligations with current assets. For best results, the ratio should be high and should lie between 1 and 2. Otherwise, it may have funds tied up and may not earn high returns. While, for the quick ratio, we notice that the company can meet the extreme short term debtors. Gearing There is a decline in the gearing ratio through the three years from 76.4% to 68%. This means that there is an increase in profits and that IKEA manage to control the external risks. Conclusion Overall for the three years IKEA is performing well in terms of profitability, efficiency and liquidity. Attention should be paid to gearing since high gearing means risk. Borrowing increases risk which in turns leads to higher cost of borrowing.

Concepts and Techniques of Strategic Management Accounting Introduction This framework allows the company to rein its costs, hence provides the base for determining which costs to slash and which items to produce. Since it is an innerfocused evaluation tool, a lot of attention should be placed from the management team to provide solid financial and non financial decisions. IKEA in comparison to SATO group tries to maximize every management technique with quite success. In my opinion even though IKEA is on the second place of market share and maybe manage to come in the first, still will never make it for independence. The reason is that they will always use crutches and will not be able to overcome the inner force that drives them to growth. The long term strategies they choose will turn inwards. Of course, the concepts and techniques are only indications since there is no real evaluation of the situation. Concepts Costs: In order to minimize costs, the procurement process must be changed using flow of information through the supply chain for reducing inventory. IKEA does the opposite one, increasing inventory levels with the ambition that they will lead competition through lowering the prices. In the supply chain design, IKEA uses component commonality and component modularity not for controlling inventory but increasing inventory. Now one can be so sure about the future. IKEA has precise forecasting with little errors. Still, external threats exist. They have not managed with the strategies they chose to eliminate them. For inventory, they can use vendor managed inventory system (VMI) to reduce locations of inventory stored. Use of Activity based costing to classify inventory into different classes and maintain safe stock level. Use just in time inventory model (JIT) to eliminate waste along with back flush accounting. For transportation, IKEA can use cross docking along with sensitivity analysis, shortest path algorithms, (LPM) critical path method and (PERT) program evaluation and review technique. With the use, of technology, managers of IKEA should be able and collaborate between its stores. For warehousing, IKEA can use warehouse management system software (WHS).

Expenses IKEA invested money in solar panels, wind turbines, which in the long run, will reduce the electricity costs and carbon footprint. Use of recycling processes and re use of those items either producing the same products or differentiated ones. Avoid overdrafts and insurances along with food expenses. Further address the rest utilities in order to minimize the expenses. Variable costs We have to focus in two sections. First is the internal economies of scale that arise from long term growth of the company. Second is the external that occur outside the company but inside the industry. For the internal scale, attention should be placed in the following areas: a) technical (production department), with specialized machinery and not necessary expensive capital inputs. IKEA as already mention pay attention to workforce by introducing a new concept of management. Check transportation with the law of increased dimensions to reduce costs. Further to keep learning from the processes (progress ratio, experience curve, learning curve effects) b) marketing, spread advertising and marketing budget. For me, there is no need for every year advertising with catalogues but for TV it is necessary c) managerial, set distinctive roles among labor with information flow on its top d) financial, try to remain credit worthy and eliminate the complains especially on the e-commerce e) network, improve inner functions in order to avoid constantly networking. After checking the internal economies of scale, we have to check the minimum efficient scale (MES) in order to find the lowest point for productivity efficiency. For the external economies of scale management has to focus on the market demand for establishing their strategies in order to gain market share. The market structure strategy of product differentiation allowed them to be sustainable. There is a need that IKEA have to pay attention. This is that the price elasticity of demand becomes inelastic than at the value end of the market. Further they have to check the consumers surplus. To avoid dis economies of scale IKEA develop in human resource management and put the service profit chain to work. Also to improve productivity and industrial relations they have to apply (PRP) performance related pays, and reward the most efficient workers. Finally, reduce costs while retain control over production. This is out sourcing.

Fixed expenses IKEA can convert the fixed expenses to variable ones. There are concerning areas that need change. Start with hiring temporary workers. Pay hourly wages instead of salaries. Increase bonus tied to sales. Utilize free technology. After performing in these areas, fixed cost analysis has to take place, as long as elimination and reduction analysis respectively. All these contribute to increase profit. Fixed assets Lease buildings and equipment instead of buying them. Since, we are talking about a group they can negotiate better trades. Land can still be owned since normally the price increases as the years pass by. Depreciation Depreciation is an expense, and the company does not have to pay in cash. This means that the firm is not oblige to pay for it but enjoys the resulting tax benefit. Higher expenses yield lower profit and taxes, hence try to control them. Budget For budgeting, a combination of incremental and zero based method should be applied. This method will help motivate, make better plans and decisions, control and evaluate the situation accurately. Pro forma Statement Necessary to gauge profitability levels in future. Accounting report IKEA launched consolidated financial statements which is a positive sign for cost reduction of paper, ink and size with a minor disadvantage of not being analytic to everybody. Finally, pay attention to the actual charge and budget amount. Techniques There are four main sections that have to emphasize in order to move on. Operations Budgets for each department Strategic projections This includes strategic planning (vision, mission, values, and strategy) and forecasting with pro forma statements (Appendices p.43). As mentioned in introduction the diversification strategy hides danger that is why IKEA has to remain focus on the following process: a) situation-target-proposal b) see-thinkdraw c) draw-see-think-plan. The necessary tools for success are SWOT analysis,

balanced scorecards, PEST analysis, STEER analysis (socio cultural) and EPISTEL (environmental). Production analysis Since there are some regulations in the E.U for protection of the consumers IKEA, obligation is to use (ISO) standards. Here, the group have to take a look if it is more profitable to buy from others, lease or build on own equipment. Financial performance evaluation Nothing to comment since we contacted a ratio analysis A three-stage procedure is that most companies follow in order to perform a sales forecast. First, an environmental forecast is essential and then an industry forecast. Finally, there is the sales forecast. Some factors affecting environmental forecast have to do with unemployment, consumer spending and saving, government expenditures, and so on. Having results for the environmental forecast we can forecast gross domestic product. This in turns along with other indicators allow us to forecast industry sales. Finally, the company prepares its sales forecast having in mind the competition. As secondary information for summing up the forecast are defining the customer base, geographical area, market conditions, positioning, and business proficiency. For me, forecasting is mostly an internal function (Appendices p.44) and relies upon factors that affect a company to growth.

Conclusion The aim of this report is to learn the different techniques for management along with planning, controlling and forecasting. Tackle the costs, techniques and methods for costing. With this knowledges, we have to manage and take a glance at a well known company IKEA. This company is the second in rank for the furniture industry, and the area of action is global. We had to compare this company with another one and analyze the performance and efficiency of those companies. IKEA is a group with excellent managers that understand the situation, while SATO loose ground. From what we can observe, the only real objection for me is the movement for increasing inventory. Of course, they have almost excellent forecasting, but still no one knows how the market will turn and what will be the outcome of this turn. It is all about estimation. May be in the long run IKEA will lose its fame due to both internal and external factors. Since the family drives IKEA for establishing an empire attention should be placed in the inner forces and how to minimize them and reach equilibrium, as an optimal solution to disturbances. As for the external factors the common enemy for them is the price elasticity, apart from the other ones. In any case, all empires for different reasons grow and die.

Bibliography 1. Glen, Brown Basic cost concepts, Globusz Publishing's. 2. John, E. Dittrich (1988) The general manager and strategy formulation, Wiley. 3. Jones Michael, (2008) Accounting 2 nd edition., John Wiley & Sons. 4. Prem, S. Maun (1995) Statistics for business and economics, Wiley. 5. Wayne, R Mondy and Sahne, R. Premeux (1993) Management 6th edition, Allyn and Bacon. 6. Richard, M.S. Wilson and Wai, Fong Chua (1994) Managerial Accounting 2 nd edition, Chapman and Hall. 7. R.G. Winfield and S.J. Curry (1994) Success in Investment 5th edition, John Murray Publishers Ltd. 8. Wayne, L. Winston (1994) Applications and Algorithms 3rd edition, Duxbury. 9. Strategic management concepts www.ehow.com 10. Strategic management techniques www.ehow.com 11. Sales forecasting www.referenceforbusiness.html 12. Alison Kennendy and David Dugdale Getting the most out from budgeting. 13. Are all of your trading partners worth it to you? http://cokins.ASCET.com. 14. Management accounting and modern business environment www.scribd.com. 15. The objectives and characteristics of financial report Encyclopedia Britannica 16. Shahrokh M. Saudagaran (1997) Financial reporting in emerging capital markets: characteristics and policy issues p.41-64, American Accounting Association. 17. History and development of Accounting www.ehow.com 18. Qualitative characteristics of financial reporting information 2011McGraw-Hill Higher Education 19. Advantages and Disadvantages of Activity Based costing www.ehow.com

20. Advantages and Disadvantages of Traditional costing www.ehow.com 21. Gaebler Ventures copyright 2001-2010 Financial Assessment 22. M.H. Ho How to deal with questions on assessing the performance of a company?- www.ehow.com 23. Break Even point Analysis definition www.accountingfor management.com 24. Carl Marx Activity based costing and Traditional costing systems http://financialsupport.weebly.com 25. Diversification http://en.wikipedia.org/wiki/Diversification_(marketing_strategy) 26. James L Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Leonard A. Schlesinger (1994) Putting the service profit chain to work Business Harvard reviews March-April 1994. 27. Organizational structure http://en.wikipedia.org/wiki/Organizational_structure 28. IKEA SWOT Analysis www.ehow.com 29. Strategic-marketing-management-of-IKEA http://ivythesis.typepad.com 30. IKEA-International-AS-Company-History http://www.fundinguniverse.com 31. Financial Summary for 2011 of IKEA - http://www.ikea.com 32. Financial Summary for 2010 of IKEA - http://www.ikea.com 33. Financial Summary for 2009 of IKEA - http://www.ikea.com

Appendices

The signs of Strength and Weakness in a companys competitive position Signs of Strength Resource strengths, core competencies competitive capabilities Find the distinctive competencies in the Value Chain Strong Market Place or Leading Ahead of Rivals in expanding into Global markets along with an e-commerce Brand name and reputation Growing customer base and Loyalty Favorable strategic group Well position in attractive market segments Strongly differentiated products Cost advantages Above average profit margin Above technological and innovational capability A creative alert management Ample financial resources Signs of Weakness Confront with completive disadvantage Losing ground to rival firms Erode market share and below average growth in revenues Short of financial resources Weaker brand name or slipping reputation with customers Trailing in product development and product innovation capability Lose ground due to strategies Weak in areas when there is market potential (foreign markets, e-commerce) High cost producer Small to be a major factor in market Not in good position to deal with emerging threats Sub par product quality Lacking skills, resources and competitive capabilities in key areas Weak distribution capability

Overall Strategy Plan Overall Strategy Plan

Mission of Company

Marketing Audit

SBU Mission

Purpose The Business Valuation Target Market SWOT Analysis

Strategic Buying Frame for SBU

Micro Macro Environment for Marketing Mix Strategies Implementation Financial Programs Target of Sales Image Target Target and Care of Customers Cash and Finance forecasts

Valuation of Market Share and Reorganize

Six steps for traditional total absorption costing 1. Record all the costs 2. Classify all the costs 3. Allocate all the indirect costs to the departments of a business 4. Reallocate costs from service support departments to production departments 5. Calculate an overhead recovery rate 6. Absorb both the direct costs and the indirect costs into individuals products Six steps for activity-based costing 1. Record all the costs 2. Classify all the costs 3. Identify activities 4. Identify cost drivers and allocate overheads to them 5. Calculate activity-cost driver rates 6. Absorb both the direct costs and indirect costs into a product or service

Targets of a Company

Overall Strategy

Targets for Market Share Profit

Objective Strategies

Market Attraction Allocation Ability

Market Coverage, Productivity

Strategic Focus

Life Cycle

Target Sections, Product Position

Customers

Structure of Market Fit of Products

Competition

Targets of Rivals

Threats of Competition Opportunities in Market

Sections and Frame Plan

Advantages

Customer Needs Competitive Supply and demand

4Ps

Mix Market

Elastic Response Profit Margins

Systems, Structure, Loyalty

Implementation and Organization

Humans

Market Performance

Horizontal Analysis
Consolidated Income Statement of IKEA for years 2011-2010-2009

Increase / Decrease In m illion of Euro

Rev enue Sales Cost of sales Gross Profit Operating cost Operating income Total financial income and expence
Income before minority interests and taxes

Tax Income before minority interests taxes Minority interests Net income

2011 25173 24700 13773 11400 7808 3592 165 3757 781 2976 10 2966

2010 23539 23100 12454 11085 7888 3197 76 3273 577 2696 8 2688

2009 2011-2010 2010-2009 Percentage 1634 1693 21846 7% 7,70% 1600 1700 21400 7% 7,90% 1319 576 11878 10,60% 4,80% 385 1117 9968 3,50% 11,20% 80 686 7202 1% 9,50% 395 431 2766 12% 15,60% 89 67 143 1% 46,80% 484 364 2909 15% 12,50% 204 193 384 35% 50,20% 280 171 2525 10% 6,80% 2 1 9 25% 11% 278 154 2534 10% 6%

Consolidated Balance Sheet Statement of IKEA for years 2011-2010-2009 Assets

Increase / Decrease 2009 2011-2010 2010-2009 14206 191 1776 2652 267 31 16858 76 1807 3116 972 299 2797 161 559 14334 127 2621 20247 684 2361 37105 608 4168

In m illion of Euro
Property, plant and equipment Other fixed assets Total fixed assets Inv entory Receiv ables Cash and Securities Total current assets Total assets

2011 16173 2416 18589 4387 2077 16828 23292 41881

2010 15982 2683 18665 3415 2238 16955 22608 41273

Percentage 1,20% 12,50% 9,90% 1,20% 0,40% 10,70% 28,50% 9,60% 7,20% 20% 0,75% 18,30% 3% 11,70% 1,50% 11,20%

Consolidated Balance Sheet Statement of IKEA for years 2011-2010-2009 Equity and Liabilities
Increase / Decrease 2009 2011-2010 2010-2009 19775 2570 3066 4509 1173 213 1395 144 70 5904 1029 283 7251 617 473 4175 316 912 11426 933 1385 37105 608 4168

In m illion of Euro
Group equity Long term liabilities Other non current liabilities Total non current liabilities Short term liabilities Other payables Total current liabilities Total equity and liabilities

2011 25411 3123 1469 4592 7107 4771 11878 41881

2010 22841 4296 1325 5621 7724 5087 12811 41273

Percentage 11,20% 15,50% 27,30% 4,70% 10,90% 5% 18,30% 4,80% 8% 6,50% 6,20% 21,80% 7,30% 12,10% 1,50% 11,20%

Note: We are measuring the change between years, say 2011 and 2010, the euro amounts for 2010 becomes the base figure for expressing these changes in percentage form. For example, total fixed assets have adecrease by figures 76. This decrease expressed in percentage is computed as follows 76 / 18665=0,4%

Vertical Analysis
Consolidated Income Statement of IKEA for years 2011-2010-2009
Percentages 2010 2009 100% 100% 98% 98% 53.9% 55.5% 48% 46.6% 34.1% 33.6% 13.8% 12.9% 0.33% 0.7% 14.2% 13.6% 2.5% 1.8% 11.7% 11.8% 0.035% 0.04% 11.6% 11.8%

In m illion of Euro Revenue

Sales Cost of sales Gross Profit Operating cost Operating income Total financial income and expence
Income before minority interests and taxes

Tax Income before minority interests taxes Minority interests Net income

2011 25173 24700 13773 11400 7808 3592 165 3757 781 2976 10 2966

2010 23539 23100 12454 11085 7888 3197 76 3273 577 2696 8 2688

2009 21846 21400 11878 9968 7202 2766 143 2909 384 2525 9 2534

2011

100% 98% 55.8% 46,10% 31.6% 14.5% 0.7% 15.2% 3.2% 12% 0.04% 12%

Note: The percentage figures for each year are expressed in terms of total sales for the year. For example, the percentage figure for operating cost for 2011 is (7808 / 24700) *100 Consolidated Balance Sheet Statement of IKEA for years 2011-2010-2009 Assets
Percentages In m illion of Euro
Property, plant and equipment Other fixed assets Total fixed assets Inv entory Receiv ables Cash and Securities Total current assets Total assets

2011 16173 2416 18589 4387 2077 16828 23292 41881

2010 15982 2683 18665 3415 2238 16955 22608 41273

2009 14206 2652 16858 3116 2797 14334 20247 37105

2011

2010

38,60% 5,80% 44,40% 10,50% 5% 40,20% 55,60% 100%

38,70% 6,50% 45% 8,30% 5,40% 41,10% 55% 100%

2009 38.3% 7.2% 45.5% 8.4% 7.5% 38.6% 54.5% 100%

Consolidated Balance Sheet Statement of IKEA for years 2011-2010-2009 Equity and Liabilities
Percentages In m illion of Euro
Group equity Long term liabilities Other non current liabilities Total non current liabilities Short term liabilities Other payables Total current liabilities Total equity and liabilities

2011 25411 3123 1469 4592 7107 4771 11878 41881

2010 22841 4296 1325 5621 7724 5087 12811 41273

2009 19775 4509 1395 5904 7251 4175 11426 37105

2011

2010

60,70% 7,50% 3,50% 11% 17% 11.4% 28.3% 100%

55,30% 10.4% 3.2% 13.6% 18.7% 12.3% 31.1% 100%

2009 53.3% 12.1% 3.8% 15.9% 19.5% 11.2% 30.8% 100%

Note: Each assets is expressed in terms of total assets, and each liability and equity account is expressed in terms of total liabilities and stockholder's equity. For example, the percentage figure for long term liabilities for 2011 is (3123 / 41881) *100

Vertical Analysis for IKEA for 2011

28,3% Total Current Liabilities 60,7% Group Equity

Vertical Analysis for IKEA for 2010

31,1% Total Current Liabilities 13,6% Total Non Current Liabilities 45% Total Fixed Assets

55,3% Group Equity

55% Total Current Assets

Vertical Analysis for IKEA for 2009

30,8% Total Current Liabilities 15,9% Total Non Current Liabilitites

45,5% Total Fixed Assets

53,3% Group Equity

54,5% Total Current Assets

Horizontal Analysis for IKEA 2011-2010-2009

Total Fixed Assets Total Current AssetsGroup Equity 53,3% 54,5% 45.5% Total Non Current Liabilities Total Current Liabilities 15,9% 30,8%

100% 90%

P e r c e n t a g e

80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5

44,4% 55,6% 60,7% 2011 11% 28,3% 45% 55% 55,3% 2010 13,6%

31,1%

Horizontal Analysis for IKEA 2011-2010-2009

Inv entory 9,6%

40 P e r c e n t a g e 35 30 25 20 15 10 5 0 1
28,5%

Receivables 20% 2010-2009

Long Term Liabilities 4,7%

Cash & Securities 27,3% 18,3%

2011-2010

Short Term Liabilities 6,5%

7,2%

0,75%

8%

Calculation of ratios Profitability ratios for IKEA for 2011 Profit before tax plus loan interest Return on capital employed (ROCE) = Long term capital Earnings before taxes and interest = Average Capital Employed 3757 + 165 = 28534 = 28534 3922 = 13.74% IncomeBMinorityI and T + TFI and Ex = Equity + Long Term Liabilities = =

Capital Employed = Equity + Long Term Liabilities = 25411 + 3123 = 28534 Equity = Total Assets Total Liabilities = 41881 (4592 + 11878) = 25411 For 2010 is 12% and for 2009 is 11.2% Gross Profit Gross profit = Sales Note: Sales refers to goods sold only For 2010 is 48% and for 2009 is 46.6%. Net profit before tax Net Profit Ratio = Sales = 24700 5130 = 20.8% = 24700 11400 = 46.1%

Net Profit = Gross profit * Gross Profit Margin = 11400 * 0.45 = 5130 Gross Profit Margin = Gross Profit / Total Revenues = 11400 / 25173 = 0.45 For 2010 is 22.5% and for 2009 is 21.4%.

Efficiency Ratios for IKEA for 2011 Average debtors Daily basis = Credit sales per day = 24700 / 365 2077 = 31 days

For 2010 is 35 days and for 2009 is 47 days. Average creditors Daily basis = Credit purchases per day = 13773 / 365 4771 = 125 days

For 2010 is 144 days and for 2009 is 145 days. Debtors collection period (in days) = Creditors collection period (in days) 125 31 = 0.25

Cost of Sales Stock turnover = Average stock =

13773 = 3.14 times 4387

For 2010 is 3.2 times and for 2009 is 3.64 times. Sales Asset turnover = Average total assets = 41881 24700 = 0.59 times

For 2010 is 0.55 times and for 2009 is 0.55 times.

Liquidity ratios for IKEA for 2011 Total Current assets Current ratio = = Total Current liabilities 11878 23292 = 1.96

For 2008 is 1.69, for 2009 is 1.77 and for 2010 is 1.76. Current assets stock Quick ratio = Current liabilities For 2009 is 1.5 and for 2010 is 1.5. Gearing ratio for IKEA for 2011 Long term borrowings Gearing ratio = Total long term capital For 2010 is 76.4% and for 2009 is 76.4%. = 4592 3123 = 68% = 11878 23292 - 4387 = 1.59

Annual Sales for IKEA

30

25

Sales of Goods

21,2

21,4 23,1

24,7

20
17,3

19,8

15

14,8

10

9,5

0 2000 2005 2006 2007 2008 2009 2010 2011

Years

From the data plotted we observe that there is an upward trend with no seasonality. Holts method for forecasting is the most appropriate.
HOLT'S METHOD FOR FORECASTING
Time period 1 2 3 4 5 6 7 Year 2005 2006 2007 2008 2009 2010 2011 Sales 14,8 17,3 19,8 21,2 21,4 23,1 24,7 Level 14,8 16,05 18,2375 20,4219 21,8086 23,3996 24,9906 Trend Forecast Error 0 0 0,625 14,8 2,5 1,40625 16,675 3,125 1,79531 19,64375 1,55625 1,59102 22,217188 -0,8172 1,59102 23,399609 -0,2996 1,59102 24,990625 -0,2906
alpha beta 0,5 0,5

MAD = (2,5+ 3,1+ 1,5+ 0,8+ 0,2+ 0,2) / 6 = 1,38

Holt's Method
30 25
19,8 23,39 22,2 23,1 21,2 19,6 16,6 14,8 21,4 24,99 24,7

20 Sales
14,8

17,3

15 10 5 0 2005

2006

2007

2008

2009

2010

2011

Actual data

Forecasting data

Years

Since forecast errors are normally distributed we may use MAD to estimate standard deviation of our forecast errors. Hence, Se = 1.25MAD = 1.725. This means that sales are accurate within 1.725 for the years measured.

For SATO group data from 2004 up to 2011 we do not have a clear view about the forecasting. In order to have a better understanding a few years will be added. Annual Sales for SATO
120 100
77,9 104,1 69,7 82,1 55,6 71,1 74,1 77,3 40,5 100,6 81,4

80

Sales

60 40 20 0

19,4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Years

We can observe an upward trend so Holts method again is the appropriate technique.
Years Actual Sales 2000 55,6 2001 77,9 2002 71,1 2003 69,7 2004 82,1 2005 74,1 2006 77,3 2007 100,6 2008 104,1 2009 81,4 2010 40,5 2011 19,4 Level 55,6 66,75 71,7125 73,34063 79,44453 79,16035 79,35317 90,58629 100,4563 94,9522 68,36211 37,55154 Trend 0 5,575 5,26875 3,448438 4,776172 2,245996 1,219409 6,226263 8,048125 1,272024 -12,659 -21,7348 Forecast 55,6 72,325 76,98125 76,789063 84,220703 81,406348 80,572583 96,812555 108,5044 96,224225 55,70308 Error
22,3 -1,225 -7,28125 5,310937 -10,1207 -4,10635 20,02742 7,287445 -27,1044 -55,7242 -36,3031 alpha beta 0,5 0,5

Holt's Method
120 100 80
55,6 77,9

96,8 76,9
71,1

76,7

84,2 81,4

80,5
77,3

100,6

108,5 96,2
104,1 81,4

Sales

60 40 20 0

72,3 55,6

69,7 82,1

74,1

55,7
40,5 19,4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Years
Actual Sales Forecasting Sales

Annual Sales of IKEA - Bar Graph

30 25 20
19,8 17,3 14,8 21,2 21,4 24,7 23,1

Sales

15 10 5 0 2000
9,5

2005

2006

2007

2008

2009

2010

2011

Years

Annual Sales of SATO - Bar Graph

120 100
82,7 100,6 104,1

Sales of Goods

80 60 40 20 0

74,1

77,3

81,4

40,5

19,4

2004 2005 2006 2007 2008 2009 2010 2011 Years

Sales Growth for IKEA

Year 2005 2006 2007 2008 2009 2010 2011 Actual 14,8 17,3 19,8 21,2 21,4 23,1 24,7 Sales Growth
0,168918919 0,144508671 0,070707071 0,009433962 0,079439252 0,069264069

%
16,8918919 14,4508671 7,07070707 0,94339623 7,94392523 6,92640693

Forecast Sales Growth

0

14,8 16,7 19,6 22,2 23,4 25

0,128378378 0,173652695 0,132653061 0,054054054 0,068376068

12,8378378 17,3652695 13,2653061 5,40540541 6,83760684

Sales Growth = (Sales this year - Sales last year) / Sales last year

Sales Growth for SATO

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Actual 55,6 77,9 71,1 69,7 82,1 74,1 77,3 100,6 104,1 81,4 40,5 19,4 Sales Growth
0,401079137 -0,087291399 -0,019690577 0,177905308 -0,097442144 0,043184885 0,301423027 0,034791252 -0,218059558 -0,502457002 -0,520987654

%
40,1079137 -8,7291399 -1,9690577 17,7905308 -9,7442144 4,31848853 30,1423027 3,47912525 -21,805956 -50,2457 -52,098765

Forecast 0 55,6 72,3 76,9 76,8 84,2 81,4 80,6 96,8 108,5 96,2 55,7

Sales Growth

0,300359712 0,06362379 -0,00130039 0,096354167 -0,033254157 -0,00982801 0,200992556 0,120867769 -0,113364055 -0,420997921

30,0359712 6,36237898 -0,130039 9,63541667 -3,3254157 -0,982801 20,0992556 12,0867769 -11,336406 -42,099792

Since forecast errors are not normally distributed we can not use MAD to estimate standard deviation of our forecast errors.

Cross Section Data SALES IKEA SATO 2005 14.8 74.1 2006 17.3 77.3 2007 19.8 100.6 2008 21.2 104.1 2009 21.4 81.4 2010 23.1 40.5 2011 24.7 19.4

Note: Sato sales are in millions, while IKEAs are in billions. So by that we can understand that there is no real comparison to these groups as far as the sales. Clearly, the sizes of the companies even thought both are groups are not comparable. IKEA goes global, while SATO international. GROSS PROFIT IKEA SATO 2008 9.7 46.045 2009 9.9 33.7 2010 11.085 17.9

From the data we observe that IKEA manage to increase the gross profit while SATO decreases. This means that IKEA have managed to control cost of sales. NET INCOME IKEA SATO 2008 2.28 -2.15 2009 2.53 -6.8 2010 2.68 -15.1

Financial expenses along with operating costs for SATO are out of control, while IKEA increases slowly which of course means better control. TOTAL FIXED ASSETS IKEA SATO 2008 16.28 66.32 2009 16.81 67.89 2010 18.66 54.95

IKEA manage to invest in property, plant and equipment and reduced the other fixed assets, while SATO goes down in spite of the 2009 increase. TOTAL CURRENT ASSETS IKEA SATO 2008 18.84 52.36 2009 20.25 44.66 2010 22.61 43.82

There is an increase for IKEA and vies versa for SATO. This means that almost in every area of the assets IKEA has a better understanding of the situation and forecasting with strong cash for negotiations.

TOTAL NON CURRENT LIABILITIES IKEA SATO

2008 6.57 31.24

2009 5.9 41.39

2010 5.62 33.81

IKEA reduce the non current liabilities while SATO has ups and downs. TOTAL CURRENT LIABILITIES IKEA SATO 2008 11.11 88.51 2009 11.43 88.96 2010 12.81 90.14

Both groups increase their current liabilities which mean that both do not have the ability to maintain stability in short term obligations. GROUP EQUITY IKEA SATO 2008 17.43 30.17 2009 19.72 23.59 2010 22.84 8.63

IKEA increase the group equity while SATO has difficulties. Overall the comparison is of course faint. IKEA is the second larger furniture group which maintains global market presence while SATO just barely makes it international. SATO by 2011 has entered on a special procedure of payoff for the depts., mainly because of the economic crisis.

Strategic Projections Planning

Factors affecting a companies growth

Factors

Ikea-Sato

Ikea-Sato

Ikea-Sato

Ikea-Sato

Ikea-Sato

Ikea-Sato

Ikea-Sato

2005 Good management of company Good cash flow statement Sufficient knowledge and experience Good team members Technical expertise Good site management Commitment to customer satisfaction Availiability of capital Availiability of skilled workers Good relations with clients Internal efficiency Maintaining high quality of products Availiability of bank loans and other credit Political stability and peaceful environment Effective organization structure Competitive prices of products / services Market specialization Open economic policy of government Government assistance / tax incentives Technological edge Upgrading and educating members Use of new technology and automation Focus on job safety and security Active in innovation Active in research and development Diversity expertise Forming joint venture

2006

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2011

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* indicates excellent performance # indicates medium performance ! indicates bad performance - do not know