Introduction
A huge majority of industries, such as metals, textile, paper, leather, sugar, plastics, rubber, ceramics, glass, soap, fertilizers, beverages, edible oil, pharmaceutical, and a host of others, are all heavily dependent on chemicals. All over the world the chemical industry is a major contributor to the national economy, playing both a direct and indirect role.
Ilhaq Chemicals Limited (ICL) is the pioneer and one of the largest manufacturers of industrial chemicals in Pakistan. It produces Caustic Soda, Liquid Chlorine, Hydrochloric Acid, Sodium Hypochlorite, Bleaching Earth (Shaffaf), Chlorinated Paraffin, Sulphuric Acid 80%, Zinc Sulphate, and Barium Sulphate. ICL has strategically diversified its product portfolio in order to cater for the demand of the market.
Ilhaq Chemicals Limited (ICL) was established in 2005. The factory is strategically located on the 19th/ 20th kilometre of GT Road and spread over an area of 106 acres. It is approachable from the Lahore Islamabad Motorway as well as from the main city of the Lahore, being less than an hour drive. The place is known as Kala Shah Kaku, an Industrial site which has seen the growth of industries over the past decades stretching up and beyond Gujranwala along the G.T road. Apparently Kala Shah Kaku and its neighbouring vicinities have both gained tremendous importance and become a hub of commercial, economic and educational activities. As industrialization flourished over the years, a large number of Small Township also mushroomed in and around the vicinity due to availability of livelihood to the local residential their doorstep.
Ilhaq Chemicals Limited (ICL) is the founding company for the Chlor-alkali industry. It has paved the way for other organization competing in the local market. With a growing interest for ICL products in the International market, the organization has made the necessary arrangements (and will continue to do so in the future) to cater the growing demand.
1.1 Board of Directors
The board acknowledges its responsibility for the overall strategy, management, identification and solutions for risks and challenges, sustained business prosperity and safeguarding the rights of shareholders. It endorses the best practices of the Code of Corporate Governance as an effective tool in discharging these duties in addition to enhancing the timelines, accuracy, comprehensiveness and transparency of financial and non-financial information through accountability and integrity.
Mr. Muhammad Siddique Khatri
Chairman & Chief Executive
Mr. Abdul Sattar Khatri
Director
Mr. Abdul Ghafoor Khatri
Director
Mr. Mansoor Ahmed Khatri
Director
Ms. Farhana Abdul Sattar
Director
Mr. Fawad Yousuf
Director
Ms. Noor-ul-Huda
Director
1.2 Management Committee.
The scope and purpose of the management committee is to assess the current standing of the organization and provide direction for future endeavours. This includes investment proposition in the light of current market dynamics and prevailing competition. Members include departmental heads and other top management officials who bring a wealth of experience to the table.
1.3 Corporate Governance.
Board of Directors of the company has always strived to adopt best practices towards managing the company and providing policy guidelines. The promulgation of Code of Corporate Governance through amendments in the Listing Regulations of Stock Exchanges has further defined the responsibilities of directors in this regard. Corporate Governance strengthens investors' trust and ensures a long-term partnership that helps in fulfilling the quest for achieving significant value addition, growth, and profits. The company has made significant progress towards implementation of principles contained in the Code and status of compliance is set out in the compliance statement. The Board of Directors has taken adequate measures for the implementation of the regulations of the Code of Corporate Governance issued by the Securities &Exchange Commission of Pakistan.
Section 2
Critical Evaluation and Analysis of Financial Data, Techniques and Tools to Aid Decision-Making in ICL's Strategy and Planning.
Accounting plays a critical role in decision-making. Accounting provides the financial framework for analyzing the results of an executed set of decisions and makes possible the continuous success of a business or improvement in operations. Secondly, accounting provides much of the necessary information needed in making good decisions. Thirdly, the management accountant provides knowledge of basic decision-making tools that helps find the best alternative in decision-making. It is the accountant's knowledge about preparing financial statements and his or her abilities to analyze and interpret financial statements that make the controllership function in a business so valuable to management. However, it is also important for management to have a fundamental knowledge of financial statements, particularly regarding the analysis and evaluation of financial statements to make decisions.
2.1 ICL's last three years Financial Statements. Table 1
Income Statement
2009
Rs'000
2008
RS'000
2007
Rs'000
Revenues
Cost of sales
Gross Profit
Operating Expenses
Finance Costs
250,000
200,000
180,000
150,000
150,000
125,000
50,000
30,000
25,000
26,000
8,000
22,000
Nil
20,000
Nil
Profit before Tax
Income Tax Expenses (at 25%)
16,000
4,000
8,000
2,000
5,000
25,00
Profit for the period
Balance Sheet
12,000
6,000
3,750
210,000
90,000
90,000
Non current Assets
Property, Plant and Equipment
Goodwill
Current Assets
Inventory
10,000
Nil
Nil
220,000
90,000
90,000
25,000
15,000
14,000
Trade Receivables
13,000
8,000
7,000
Bank
nil
14,000
15,000
38,000
37,000
36,000
Total Assets
258,000
127,000
126,000
Equity and liabilities
Equity Shares of Rs. 1 each
100,000
100,000
100,000
Retained Earnings
14,000
12,000
11,000
114,000
112,000
111,000
Non-Current Liabilities
8% loan notes
100,000
nil
Nil
Current-Liabilities
Bank Over draft
17,000
nil
Nil
Trade Payables
23,000
13,000
15,000
Current Tax payables
4,000
2,000
Nil
44,000
15,000
15,000
Total equity and liabilities
258,000
127,000
126,000
2.2 Critical Analysis
After critically analysing above Financial Statements we came to know that (Extracts from the Chief Executive's report :)
Increasing trend of sales: Increase in sales revenue of 39% in 2009, and 20% in 2008
Gross profit margin up from 16.7% to 20% in 2009 and 2008
Doubling of the profit for the period
Now according to these results we will critically consider the Impact of resource decision, both internally and externally, on Ilhaq Chemicals Limited's (ICL) Performance and effectiveness. First of all we have to analyse the available resources in company's strategic plan.
Section 3
Critical Impact of Resource Decisions, both Internally and Externally, on ICL's Performance and Effectiveness.
3.1 Resources
A good starting point to identify company resources is to look at tangible, intangible and human resources.
Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identifies and valued in the firm's financial statements. Intangible resources are largely invisible, but over time become more important to the firm than tangible assets because they can be a main source for a competitive advantage. Such intangible recourses include reputational assets (brands, image, etc.) and technological assets (proprietary technology and know-how). Human resources or human capital are the productive services human beings offer the firm in terms of their skills, knowledge, reasoning, and decision-making abilities.
3.2 Tangible and Intangible Resources
ICL's Resources
Main Characteristics
Key Indicators
Tangible
ICL's borrowings capacity and its internal funds generation determine its capacity to weather fluctuations in demand and profits overtime.
Debt to equity ratio
Ratio of net cash to capital expenses
Credit rating
Financial
Physical
The physical resources of ICL are related to plant, equipment, assets, technology and raw materials
Resale Value of Assets
Age of Capital Equipment
Power Plants
Intangible
ICL's stock of technology in the form of prosperity technology ( copyright, patents, trade secrets) and expertise in the application of technology (know-how)
Technological
Reputation
ICL reputation with customers through the ownership of brands, established relationships with customers, reputation of the company's products. Reputation of the ICL with suppliers, employees, government and the community.
Brand recognition
Price premium over competing brands
Percent of repeat buying
Level and consistency of ICL's Performance
Human Resource
The training and expertise of employees determine the skills available to ICL.
The adaptability of employees determines key aspects of strategic flexibility of ICL.
The commitment and loyalty of employees determines the capacity of ICL to attain and maintain competitive advantage.
Educational, Technical, and professional qualifications of employees
Compensation relative to ICL
Record of labour disputes
Employee turn over
3.3 Assessment of ICL's Performance and Effectiveness
The International Development Research Centre ( IDRC) and Universalia Management Group have constructed a frame work to help organizations assess themselves. This approach is helpful in decision making to improve the performance and capacity.
Figure 1.
Organization's performance is made visible through the activities it conducts to achieve its mission. Outputs and their effects are the most observable aspects of an organization's performance. According to the above approach there are three main factors that affect the Organization's performance namely, External Environment, Organizational Capacity, and Organizational Motivation.
Organizational capacity
IT refers to the resources, knowledge, and processes employed by the organization. For example:
ICL's has good infrastructure, technology, and financial resources to meet its operations.
Mr. Muhammad Siddique Khatri and his team of Directors are responsible for the overall strategy, management, identification and solutions for risks and challenges, sustained business prosperity and safeguarding the rights of shareholders
IT has large number of competent workers that are working under good condition these are near about 4000 employees , 40 of them are permanent and others are at daily wages or contract basis.
It has two chemical plants in Lahore, one is manufacturing chemicals and second is manufacturing products from these chemicals and it also uses the waste on plant is second as a raw material.
It has a large product length as captured to its competitors in Pakistan.
It uses modern technology to manufacturing chemicals.
It is the king of the chemical manufacturing industries.
It also has its own carriage container to distribute the chemicals in all over the Pakistan.
Section 4
The Risks attached to environmental changes of ICL, the consequences and appropriate responses.
By Jill Jaeger and Marcel T.J. Kook
Many people, individually and collectively, contribute, often inadvertently, to the suffering of others while improving their own Well-being. This can result from environmental changes which are linked across scales and between geographical regions through both biophysical and social processes.
External operating environment ( The Wider Macro Environment) refers to the external environment factors in which the organization carries out its activities. There are also many risks attached with a particular environment For example:
4.1 Political and Legal Factors and Risks
Political and Legal Condition of country affects the business. Pakistan's Political condition is not too strong and due to continuous change in government, policies and regulations regarding different business also changing rapidly. For example after February 2008 election Prime Minister of Pakistan announced 31 % increase in the wages of workers in his first speech. Due to this the monthly wages becomes 6000, which is for unskilled workers. In the same speech he put up ban to establish a union in any factory. But this announcement remained with out implement. Ilhaq Chemicals implemented this policy on the same day. So we can say that the policies and political environment influencing the ICL's productivity and effectiveness.
4.2 Economic Factors and Risks
Political and Economic conditions are strongly related, if a country is politically strong then economic condition will be better. The most growing competitor of the Ilhaq Chemicals Limited is Sitara Chemicals that is increasing its product line and length towards IC . Now Ilhaq Chemicals Limited needs more Finance to increase its product line. But due to the weak financial and economic condition of Pakistan ILC is facing problems to take long term loans. So it increased its Bank Overdraft in 2009 which is not very good in long term for ICL.
4.3 Social and Cultural Factors and Risks
This is the most difficult element of the macro environment to evaluate, manifesting itself in changing tastes, purchasing behaviour and changing priorities. Core cultural values are those firmly established within a society and are difficult to change. ICL has a unique and intrinsic relationship with its community. In this respect it is working near about nine different projects for the welfare of its workers, local community and adjacent areas. For example ICL has installed 40 clean drinking water hand pumps for the local residents. Other areas have been identified for boring and providing clean water, ICL also working to raise the standard of the local schools. Up gradation and renovation have been planed. Free eye camp was setup a couple of years ago for the local residents.
Health and safety is a bigger problem in Chemical Industry in Pakistan. Usage of chemicals is injurious to health during because there are no security equipments. Working duration is 10 to 11 hours a day. In some sectors, work being very hard and workers easily become victim of diseases. Workers also become disable for the time being or permanent because of different accidents at work place.
ICL Realizes that our natural resources are limited and while we have to perform our business as a manufacturing concern, we also have duty and responsibility to protect and preserve the nature and environment. The company provides and maintains, so far has practicable equipment. Systems and working conditions are concerned, a safe and risk fee environment to all its employees, visitors, contractors and the local public.
4.4 Technological Factors and Risks
Technology is a macro- environmental variable that has influenced the development of products. A change in technological environment has affected the products and services that firms produce and the way in which firms carry out their operations. ICL is using latest technology to manufacture its chemicals. As Sitara Chemical is strong competitors of ICL so Ilhaq Chemicals Limited need modern technology to compete its competitors not only in production but also marketing its products.
Internal environment refers to internal factors that influence the direction of the organization and the energy displayed in its activities. For example:
Incentive and rewards systems; ICL recently introduces different reward schemes for the employees to increase the performance of the company.
The organizational 'climate' or 'culture'; the tremendous success of ICL has attracted high profile employees from near and far. The skilled / semi skilled workers mostly belong to this area and its surrounding vicinity. The establishment of ICL brought about a revolutionary change in the life style of the people of the area.
The history and traditions of the organization; with a rich and illustrious history, ICL is the founding company of the Pakistan for the Chlor-alkali industry. It has paved the way to for other organizations competing in the local market.
Clarity and acceptance of the organization's mission; ICL's mission is known and agreed by the staff and the mission is operational zed through program goals, objectives and activities.
Extent of shared norms and values promoting teamwork and pursuit of organizational goals; ICL is committed to deliver the highest quality of chemicals in chosen segments of operations. Its purpose is honour this promise and continues to meet and exceed both its customers and stakeholders expectations.
Figure 2
Capacity development can take place at the micro level of individuals and project teams, at the meson level of organizations, and at the macro level of national economic and legal institutions. Currently, the UNDP defines capacity development as an ongoing process to increase the abilities of an individual or an organization to perform core functions, solve problems, and define and achieve objectives.
According to the Financial statements of ICL it is clear that ICL is using its available resources effectively and efficiently to increase its profit. We can se that sales revenue is increasing only 20% and then in 2009 39% but profit is increasing 100% that is double as compare to the previous years.
Company requires latest machinery, equipment for production, and more working capital to run its days to day operations.
ICL is using overdraft which is more expensive, it should use a long term debt (Loan) or raise its equity.
Section 5
Evaluation and Analysis International Aspects of Financial Strategy
5.1 Financial resources of organizations
Following are the main sources of finance for any business.
Short term sources of finance:
Bank overdraft
Trade Credit
Leasing
Bank loans
Credit cards
Long term sources of finance:
Bank loans
Share capital
Debentures
Asset sales
Venture capital
Retained profit
Owners' capital
Government, local authority or grants
If the company wants to raise the new capital from the sources other than retained profits, it should establish whether it needs long term or short tern capital.
Short term capital can be obtained either by taking longer to pay suppliers, or by asking the company's bank for a short tem loan of bigger overdraft facility.
Raising more long term capital would require the issue of more share capital or more loans. The ability to raise capital by issuing new shares will depend on the status of the company.
The main source of new lending to companies, both long term and short term , is the banks.
After analysing the last three years financial statements of ICL we came to know that company has increased its share capital through bank overdraft in the year 2009 while it was nil in 2008 and 2007, Trade payables also increased in 2009 but on the other hand we can see that ICL has increased its sales revenue and then overall profit.
The formation of working capital programmes and accurate , accountable forecasts are all ingredients of efficient cash management, which can directly link through to improved profit margins and share capital. Treasury management is all about the efficient management of liquidity and financial risk. Some of the major roles/functions of Treasury management are as follows:
Cash management
Currency management
Funding management:
Banking
Corporate finance
Venture Capital Financing
After critically evaluating the role of treasury management of ICL in financing and control of working capital we can see that they are
Expending the risk coverage
ensuring that policy is still relevant
Reporting and measuring the performance
Reducing the risk of operational errors
Enabling timely and accurate cash flow forecasts
Meeting strategic plans
Optimizing return on investment
They are streamlined and flexible to contribute to the achievement of strategic business goals
Strategic planning
Strategic planning is often done under duress because it is required. Strategic planning is important yet many such plans are found on bookcases, not on the desktops being used. Decision making in business strategy and planning has vital importance. Simple decisions usually need a simple decision-making process. But difficult decisions typically involve issues like these:
Uncertainty - Many facts may not be known.
Complexity - We have to consider many interrelated factors.
High-risk consequences - The impact of the decision may be significant.
Alternatives - Each has its own set of uncertainties and consequences.
Interpersonal issues - It can be difficult to predict how other people will react.
ICL is using a systemic approach of decision making about finance, business strategy and planning. An organized and systematic decision-making process usually leads to better decisions. Without a well-defined process, our risk making decisions that are based on insufficient information and analysis. Many variables affect the final impact of our decision. However, if we establish strong foundations for decision making, generate good alternatives, evaluate these alternatives rigorously, and then check our decision-making process, we will improve the quality of our decisions.
5.3 International Aspects of Financial strategy
International financial markets face a variety of risks and they are collectively known as international finance risks. The premier financial institutions of the world apply various principles and practical applications to deal with the risks of international finance.
Financial risks usually are those kinds of risks which are related to finance or money. The financial risks related to investments include capital risk, currency risk, as well as liquidity risk. The debt related risks include interest rate risk and credit risk.
The various risks that influence international financial markets usually include the following:
Political risk
Financial risk
Economic risk
Country risk
Market risk
Exchange rate risk
Operational risk
Legal risk
Hedging risk
Systemic risk
These types of risk can influence the decision making procedures involved in portfolio investment, foreign direct investment (FDI), and bank credit. Currently, the financial services industry has become much more aggressive and the international market participants are getting the exposure to increased financial risks than earlier. The reasons behind this are:
The globalization of financial markets
The unpredictability or volatility of the international financial markets
The complex structure of the new types of investments
The increase in the global supply of loan able funds
The intense international market competition, which is increasing day by day
Section 6
Contemporary Management Accounting Methodology to Support the Effective Management and Control Resources.
6.1 Management Accounting Systems
In addition to understanding and utilizing financial statements and Financial Accounting tools, it is important that both accountants and management have a good understanding of management accounting concepts and tools. One of the most effective tools is comprehensive business budgeting. The objective of comprehensive budgeting is to prepare a set of financial statements in advance. The end result of the budgeting process is a planned set of financial statements. Business operations, revenue and expenses associated with Budgets of the organization, and can only be effectively controlled:
If these operations are planned in advance ,and
If actual operations are regularly compared with the planned one.
6.1.1 Budget
A budget is basically a plan expressed in monetary tabards. The plan covers income, expenditure and capital investment ( buying fixed assets).
6.1.2 Budgetary Planning
Budgetary planning is concerned with preparing the short- to medium-term plans of the organisation. It will be carried out within the framework of the strategic plan. An organisation's annual budget could be seen as an interim step towards achieving the long term or strategic plan. Budgets are important source of information because they provide a system for ensuring communication, coordination and control within an organization.
The objectives of budgetary planning and control systems are as follows.
To ensure the achievement of the organization's objectives
To compel planning an decision making
To communicate ideas and plans
To coordinate activities
To provide a framework for responsibility
To establish a system of monitoring and control
To motivate employees to improve their performance
The budgetary control process can be explained with the help of the following chart.
Figure 3
6.1.3 Characteristics of a Budget
A good budget is characterised by the following:
Participation: involve as many people as possible in drawing up a budget.
Comprehensiveness: embrace the whole organisation.
Standards: base it on established standards of performance.
Flexibility: allow for changing circumstances
Feedback: constantly monitor performance.
Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres.
6.2 Critical Analysis of ICL's statement of comprehensive Income. Table 2
Budgetary statement of comprehensive income 2009 2008 2007
Revenue 230,000 174,000 145,000
Cost of Sales (N-1) 184,000 139,200 116,000
Gross Profit 46,000 34,800 29,000
Operating Expenses 23,000 17,400 14,500
Profit before Tax 23,000 17,400 14,500
Note 1.
Cost of sale of ICL includes all budgets such as material, labour and overhead.
6.3 A comparison of Actual revenue with Budgeted revenue shows that there is a
favourable trend in sales
Cost of Sales of 2007 and 2008 is higher than budgeted by 3% but in 2009 is same as budgeted i.e. 80% of revenue
Budgeted Operating expenses are 10% of the revenue and actual operating expenses are slightly high than, it is due to efficient working of management.
Section 7
Importance of Communication For Information Providers in Organization
Organization communication lays the keystone to every organization for upbringing and grooming the environment of that particular organization. Most experts on organizations, management and leadership, assert that effective communications is the foundation for effectiveness in any type of organization. They assert there can't be too much communication. Some leaders misinterpret communications to be the same as paperwork or bureaucracy and so they're averse to a high degree of communications. As leaders and managers mature, they realize the need to effective convey and receive information, and efforts at communications (internal and external) increase substantially.
It can be categorized in two steps
7.1 Internal Communication
Effective internal communications start with effective skills in communications, including basic skills in listening, speaking, questioning and sharing feedback. Internal communication may be:
Upward Communication
It is communication that occurs in an organization from peer to the managerial level.
Downward Communication
It is the communication that takes place from the upper echelon to its employees and can be in the shape of some orders and instructions that required to be followed.
Dyadic Communication
It is more friendly and informal communication that occurs between peers of same organizations. It takes place as exchanging ideas amongst each other being the subordinate of that organization.
7.1.1 Downward communication of Ilhaq Chemical Limited
ICL has developed a basic set of procedures for how routine tasks are conducted and included them in standard operation manual.
Managers of ICL have face-to-face contact with employees once in every two weeks.
Mangers ensure that all employees are receiving yearly performance review, including their goals for the year. Updated job descriptions, accomplishments, needs for improvements, and plans to help the employees accomplish the improvements.
7.2 External communication
Public relations are conducted through the media that is, newspapers, television, magazines, etc. Publicity is mention in the media. Organizations usually have little control over the message in the media, at least, not as much as they do in advertising. Regarding publicity, reporters and writers decide what will be said.
Regarding public relations, consider: What groups of stakeholders do we want to appeal to and how? What impressions do you want each of your stakeholders to have? What communications media do they see or prefer the most? Consider advertising, collaborations, annual reports, networking, TV, radio, newsletters, classifieds, displays/signs, posters, word of mouth, direct mail, special events, brochures, neighbourhood newsletters, etc. What media is most practical for you to use in terms of access and affordability? What messages are most appealing to each stakeholder group so we can say that external communication may be with:
With Stake Holders
With Government
With Suppliers
Ilhaq chemicals limited have good relation with its stake holders, suppliers and government of Pakistan.
Conclusion.
Ilhaq Chemical Limited (ICL) is only five years old company but according to the analysis of its last three years financial statements we came to know that it is making progress by leaps and bounds by the maximum utilization of its available tangible and intangible resources. There is increasing trend in sales and in annual profit. On the other hand ICL is required to increase its product line to get competitive advantage in national and international market and it is only possible when it will overcome its internal and external threats and especially economical and technological risks.
