Background of the Company:
Access Intelligence is basically operates in Information Technology industry and is indeed engaged into corporate communication and reputation management software. The company mainly helps in offering a fully integrated communication management platforms which helps in public relations, stakeholder management and influencing market with the clients through its Vuelio brand. It is evident that Vuelio product that has been developed by the Access Intelligence has essentially helped the company to grow the Annual Contract value as it offers integrated communication solution.
Analysis of Prime Objectives-
The main objective of the company is to provide Information Technology solutions through its software so that the clients can protect and enhance the brand, influence the customers and communicate & engage with the different stakeholders.
The key objective of this brand is also ensure to continuing development of the business is to produce right mobile application and appropriate functionality for the social media management and in addition to it providing robust systems which shall enable the client to measure the different communication activity. So in essence, Access Intelligence as a company has a clear vision to provide pioneering computer based solution through its state of Art enterprise software for communication. Which empowers the clients for efficient communication to all the stakeholders and also automate the entire process. They are also incorporating artificial intelligence in its software products for the purpose of automating the entire communication for providing clients the latest and most advanced communication software.
Discussion on the recent challenges
It is also evident from in-depth analysis of the Chairman’s report published in the annual report of Access Intelligence that the company wants to provide integrated solution for communication. The company has also been focusing on increasing quality contracts and release loss making contracts. This is one of the most important reasons where there were sales decline in the year 2017. Since the company wants to make product for the future ; it is aiming to develop product which shall enable to disrupt the reputation & Communication management industry which will help to augment the artificial intelligence capabilities, for recommending clients with the most suitable communication strategy and at the same time building communication platforms for the future.
The company is also well aware of the different kinds of risk that they are exposed such as competitive, liquidity and credit risk. Key personnel risk and capital risk both are also seeking attention of the brand. It is for mitigating these risks, the management team of Access Intelligence takes appropriate measures such as risk in the product that they are marketing. This shall enable them to become market leader in the industry segment , grow the sales team across the group in a controlled manner and also putting emphasis on training and development of the personnel. As a measure for the credit risk, the company constantly tracking the clients for payments. In order to mitigate the capital risk, Access Intelligence is disposing non-core assets and makes a proper investment decisions through incorporating various techniques for evaluating the investments in projects.
Therefore, Access Intelligence is aiming for developing product which shall enable to provide an integrated automated and decision making capability based on communication software products, power of artificial intelligence and through machine learning. This will enable to disrupt the industry by empowering clients with cutting edge communication management product for managing brands. So by enabling a competent product development and proper emphasis on sales force, the company is aiming to deliver best value for the investor’s investment in the company.
Assessment of the Capital Structure and dividend policy of the company for the last 3 years and its impacts on the performance of the company:
The details of the certain important elements are provided in the table below which will help to assess the overall capital structure and the dividend policy of the Access Intelligence and the impacts on the financial performance. The details of the EBIT, Net profit or loss, equity capital, debt capital and dividend history for the last 3 financial years for the period ending November 30th is provided below;
2017 2016 2015
Earnings Before Interest and Tax(EBIT) [in £’000) -3450 -3001 -3712
Net Profit (in £ ‘000) -2777 -1963 -3243
Equity (in £ ‘000) 323 2043 3761
Debt (in £ ‘000) 3373 3275 4116
Interest paid (in £ ‘000) 343 395 266
Dividend paid (in £ ‘000) No Dividend Declared No Dividend Declared No Dividend Declared
(Source: Access Intelligence, Annual Report, 2017, 2016 and 2015)
It can be observed from the above table that the company is highly over levered with high amount of debt capital as compared to equity capital. It can be calculated that the debt equity ratio of the Access Intelligence is 10.44 in 2017,1.60 in 2016 and 1.09 in 2015. Therefore, it can be significantly observed that the debt to equity ratio of the company has increased considerably over the last 3 years. The debt to equity ratio is extremely high for the financial year ending 2017. It is essential to mention that such a high level of debt to equity ratio will substantially increase the interest burden on the company which will essentially reduce the profitability. The reason is that debt needs to be served with appropriate irrespective of the financial performance of the company. Therefore, it is important that debt portion needed to be controlled in the entire capital structure of the company so that the company need not serve interest payment obligation from the hard earned revenue of the company (Higgins, 2012).
Considering the overall capital structure, the debt portion needed to be reduced by selling different means like selling of some assets which are not fetching enough revenue to the company. This would also help to increase the return on equity of the company.
From the further observation, it is evident that such a high debt to equity ratio, the financial performance of the company has also reduced to a significant extent. The Earnings Before Interest and Tax is £-3712 in 2015, £-3001 in 2016 and £-3450 in 2014 (all in ‘000) which reflects the fact that, this reputation management and PR software provider is constantly incurring loss in basic operation which will basically get widen if tax and interest payment are taken into consideration. Access Intelligence net losses widened to has been £-3243 in 2015 , £ -1963 in 2016, £ -2777 in 2017(all in ‘000) after interest and tax payments . So it is highly evident that net profit of the company has been in tune with the debt to equity ratio. The more the debt component in the last 3 financial years, the more the loss company has incurred. It is particularly observed that, the cost incurred in non recurring items are the main reason for huge loss. The high cost of research and development cost ( £1595 in 2017 ,£ 1664 in 2016 , £1922 in 2015) [ all in ‘000] involved in the software development has also been a major cause of loss for the company in the last 3 financial year. Therefore a substantial amount of debt has been taken for the research and development in all the last 3 financial years which increased the debt component and didn’t fetch reasonable revenue for the company. This has resulted in significant amount of loss. So finally, from the overall analysis , it can be stated that risky investment made by the company such as incurring high research and development to build new product has lead to the increase debt capital and make the company extremely over levered.
It is also evident from the in-depth observation of the published annual report of the company that the management hadn’t declared dividend any interim or final dividend in the last 3 financial year. The main reason that the management has provided to the shareholders that they are pursuing some major ongoing investment in some product development, which requiring high amount of money and hence no dividend has been declared. Since no dividend has been paid, it will certainly does not help in increasing Return on Investment for the shareholders. The non-payment of the dividend to the shareholders of the company might have a negative sentiments on the shareholders of the company. But in reality, the share price of the company has raised from £2.53 in January 2015 to £4.63 in December 2017. This is because of the fact that the investors are hoping that company will perform better in future because of the ongoing investment in research and development for implementation of new products. So the aspect of increase in valuation of the company in spite of non-payment of dividend can be substantiated by Modigliani Miller Theory of Dividend Policy. As per the Modigliani Miller Theory of Dividend Policy, dividend policy of a firm does not affect the wealth of the investors. Other things of company remained constant under certain assumptions. The management of Access Intelligence haven’t paid any dividend mainly for generating losses and ongoing heavy investment in product development with debt capital. The increase in valuation during the last 3 period when the company haven’t bared any dividend can ascertain the fact financial performance is not related to dividend policy of the firm.
The way Investment Appraisal Tools can be used by managers of the organization:
One of the most significant aspect which is evident from the close observation of the published annual report of the Access Intelligence is that the organization considers the investment and the expenditure done in the Research & Development for communication and reputation management software, as intangible assets. This is indeed an asset for Access Intelligence being a communication software platform developed by the company are the main products which are sold by the organziation. It is imperative to mention that each and every product that the company develop should have a defined useful life. This must be done based on the amount of time that a product have a useful life to generate economic benefit. It can be observed from the annual report of the company that the organization use useful life of the products to be 5 years from the date first date of sale. In order to estimate the total investment that is required total human resource cost required in development and other infrastructure cost that is required for the development of the product. It is then, the likely future economic benefit are assessed for estimating the cash flows. Any functional development of the product such as addition of any functionality in the Vuelio platforms are not capitalized and are not considered as capital investment decisions. All the impairment cost that are associated in products are negated from the cash flow and also the depreciation are charged to the cash flow for obtaining the appropriate cash flow from the project.
There are various investment appraisal tools that managers can use so as to determine the viability of the project. These are Net present value , Accounting Rate of return , Payback period. In essence these techniques help in evaluating the feasibility of the project by taking into consideration about the cash flows that can be expected from the project.
It is with the help of Net present value , the managers of Access intelligence can assess the discounted cash flow that is expected from the useful life of the product. This must be done with the exact calculation of the cost of capital that has been incurred for generating the required capital for the project. The cost of capital must be adjusted for determining the discounted cash flow. In addition to it, the there must be accurate estimation of the investment required for development of the project. The estimation of the actual investment must be done with taking into account of the requires investment for infrastructural facilities, IT cost and personnel cost and other resources that is required for development of the communication software product such integrated Vuelio platform. Thereafter the net cash flow that is arrived must be reviewed. If the net cash flow after deducting the initial investment required from the discounted cash flow is positive, the managers can actually take up the project. But if the cash flow is negative, the managers should not go ahead with the project (Carmichael, 2011).
Payback period is the another investment appraisal technique which help to determine the actual time required to recover the investment made in the project. It is highly beneficial to the investors as they actually want quick recovery of their investment (Gotze, Northcott, and Schuster, 2016). Therefore, it is for making a proper investment appraisal through this technique. Managers at Access Intelligence must ascertain the cash flows that is expected from the product that the company is developing and the investment required. The products which will provide quicker recovery of the investment amount must be invested. The main drawback of this technique does not considers the aspect of time value of money.
Accounting Rate of Return is another investment appraisal technique through which the managers at Access intelligence This particular technique of investment appraisal essentially helps to evaluate the returns that is expected from the project by taking into consideration of the investment required in a project and cash flows that is expected from a project (Dyson, and Berry, 2014).
So in essence, managers can use varied techniques of investment appraisal for product that the Access intelligence are developing which helps to analyze the project’s capability of deriving economic benefit from varied aspects. So essentially different investment appraisal technique helps in evaluating the net cash flow, some to determine the recovery time of the initial investment and some technique help to adjudge the return that is generated from the product development. Therefore managers must use different investment as discussed in above section before development of the products.
Effectiveness of corporate Governance at Access Intelligence:
It is evident from an in-depth analysis of the corporate governance of Access Intelligence that the company is not following a highest level of corporate governance. The corporate standards does not follow the highest and the most diligent level of corporate governance. The management has put forward a rationale for this, as Access Intelligence being an AIM company, the organization is not required to follow the UK corporate Governance Code as mandated by the Financial Conduct Authority. The management clearly stated that that the group is only committed to follow the corporate governance standard as per it commensurate with its size. The application of the highest degree of corporate governance should be high if the company is willing to increase the size of the company. Since the company’s management is reluctant to put a effective corporate governance mechanism, it can be clearly stated that management is not willing to increase the size which is indeed a matter of concern of the investors. So it can be rightly stated that corporate governance principles are not followed effectively in the company and therefore highest standard of corporate governance are not followed in the company’s corporate system (Wintoki, M.B., Linck, J.S. and Netter, 2012).
It could also be analyzed that though there is proper board for taking crucial decisions and responsibilities and some special committees such as audit committee, remuneration committee and nomination committee that has been constituted by the board for internal controls. As per the details of the audit committee , it is evident that audit committee only met two time in the financial year 2017 and only examine only financial affairs that too to a limited extent. The extent of responsibilities are only limited to internal controls, accounting policies, compliance to the accounting standards and appointment of external auditors. Therefore is no proper mechanism through which financial fraud could be prevented and hence it can be stated that the internal controls is also ineffective to a significant extent. Corporate fraud is mater of concern and the procedures to deal with corporate fraud is not properly mentioned in details within the corporate mechanism of the company. One of the most important aspect that must be pointed out that the there is no specific details of independent directors that is present in the board of the Access Intelligence. This is a matter of high concern as there may be high degree of misuse of powers by the directors of the company.
The analysis of the corporate governance mechanism of the Access intelligence also revealed the fact that there is no risk management committee. A business is essentially exposed to several types of risks. Either it may be financial and non financial in nature. The directors of the company didn’t not formed any special risk management committees which makes the company vulnerable to various risks (Tricker. and Tricker, 2015). So in essence it can be rightly said that the there is no special risk management within the company and hence the corporate governance mechanism to mitigate the risk is absolutely ineffective.
It is recommended that the organization must have a better corporate governance mechanism which will help to govern the company in a much better way and take decisions which will highly benefit the investors who have put their hard earned money in the company. The presence of a good corporate governance would also ensure that good internal control practice and therefore would help in avoiding malpractices and frauds in the corporate systems of the organization.
Conclusion:
The primary corporate objective of the firm is to provide shareholder’s value for their investment. The management is ensuring this by developing product which will help the company to be one of the pioneers in the communication software industry. Therefore, for developing high technology communication software, the company is incorporating artificial intelligence in the software product which shall enable the clients to automate the communication and also make recommendation for the appropriate communication needs of the clients. It is evident from the overall analysis of the company’s annual report that high amount of resources are being used in terms of capital for developing these sort of products which mainly aims at delivering high degree of value and also at the same time ceating value for the shareholder’s investment. The company also didn’t paid any dividend to the shareholders only because to keep the financial resources with the company, so that resource could be implemented in the product developed rather than giving to the shareholders. So with the investment in the high technology & artificial intelligence enabled product the company would surely provide high value to the shareholder’s investment and fulfill the corporate objective of the firm.
References:
Websites :
Access Intelligence , Annual Repot 2017 (2018). [online] Accessintelligence.com. Available at: http://www.accessintelligence.com/investors/reports-and-results/ [Accessed 13 Sep. 2018].
Access Intelligence , Annual Repot 2016 (2017). [online] Accessintelligence.com. Available at: http://www.accessintelligence.com/investors/reports-and-results/ [Accessed 13 Sep. 2018].
Access Intelligence , Annual Repot 2015 (2016). [online] Accessintelligence.com. Available at: http://www.accessintelligence.com/investors/reports-and-results/ [Accessed 13 Sep. 2018].
Books and Journals:
Ameer, R. and Othman, R., 2012. Sustainability practices and corporate financial performance: A study based on the top global corporations. Journal of Business Ethics, 108(1), pp.61-79.
Carmichael, D.G., 2011. An alternative approach to capital investment appraisal. The Engineering Economist, 56(2), pp.123-139.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
Dyson, R.G. and Berry, R.H., 2014. Capital investment appraisal. Developments in Operational Research: Frontiers of Operational Research and Applied Systems Analysis, p.59.
Giroud, X. and Mueller, H.M., 2010. Does corporate governance matter in competitive industries?. Journal of Financial Economics, 95(3), pp.312-331.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Torugsa, N.A., O’Donohue, W. and Hecker, R., 2012. Capabilities, proactive CSR and financial performance in SMEs: Empirical evidence from an UK manufacturing industry sector. Journal of business ethics, 109(4), pp.483-500.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Wintoki, M.B., Linck, J.S. and Netter, J.M., 2012. Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), pp.581-606.
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