This document discusses the financial management function of BAE Systems PLC. It covers topics like the role of financial management, sources of finance and their advantages/disadvantages. It provides an overview of BAE Systems, including its revenues, employees and areas of business. The company's financial management functions like investments and dividends are also summarized. The document analyzes how the economic downturn has impacted BAE Systems' performance and the strategies it is adopting to deal with the challenging environment.

1. FINANCIAL MANAGEMENT
FUNCTION- BAE SYSTEM PLC
(CASE STUDY)

2. Content
 Role and Purpose of Financial Management
Function
 Sources of Finance
 Advantage and Disadvantage of Sources of Finance
 Impact of Economic Downturn on Role of
Financial Management Function
 Case Study of BAE Systems-Plc
 State of current economy
 Conclusion

3. What is Finance?
“1) money resources, income, etc
2) the science of managing money.”
(Webster’s Dictionary)
What is the Financial Management
function?
•Actively controls and manages the financial affairs
of a company.

4. Role and Purpose of the Financial
Management Function
 Raising suitable sources of finance
 Short Term.
 Long Term.
 Investing the raised funds
 Forecasting.
 Evaluating current markets.
 Risk assessment.
 Dividend
 Distributing the financial gains amongst the shareholders.

5. Sources of Finance
Internal Sources External sources
 Personal savings  Long term sources of
 Retained profit finance
 Working capital  Medium term sources
 Sale of assets
of finance
 Short term sources of
finance
 Inorganic growth

6. Long-term sources Medium-term Short term sources
Inorganic growth
of finance sources of finance of finance
• Share capital or • Preference shares • Trade credit • Merge
equity share • Debentures/bonds • Bank Loan • Take over
• Preference shares • Public • Bank Overdraft
• Retained earnings deposits/fixed • Lease
• Debentures/Bonds deposits for • Advances received
of different types duration of three from customers
• Loans from years
• Various short-term
financial • Commercial banks provisions
institutions • Financial
• Loan from state institutions
financial • State financial
corporation corporations
• Loans from • Lease financing /
commercial banks hire purchase
• Grants from financing
Government • External
• Venture capital commercial
funding borrowings
• Asset • Euro-issues
securitisation • Foreign currency
• International bonds
(Timini, K, 2009)

7. Long term Sources of Finance
Advantages Disadvantages
 Stability  Long-term agreement
 Cost of capital  Risk
(Shadunsky, 2011)

8. Short term Sources of finance
Advantages Disadvantages
 Emergency funding  Immediate effect of
can be paid. rising rates
 Plug cash shortfalls  Additional assets to be
 Easier to secure pledged
 Lower interest rates  Not adequate
(Basu, 2011)

9. Alternative source of finance
 Chit funds
 Pledging gold
 Asset finance
 Mortgages
 Business Angels
 Peer – to – peer lending networks [USA]
 Islamic Finance
(Sofat & Hiro, 2008)

10. Economy downturn
 Natural result of the economic cycle
 Declining economic activity more lasting than few
months
 Sudden depression bought by a financial crisis
 Indicated by two consecutive quarters of a falling
GDP

11. Economy Downturn
Causes Effects
 Slowing growth  Industrial production
 Falling GDP
 Liquidity dry up  Employment
 Inflation  Real income
 Rising / falling prices of  Wholesale – Retail
goods & labor
 Changes in consumer trade
spending
 Increase in Unemployment
rate

12. Financial management function during
economic downturn
 Identifying Key Performance Indicators
(KPIs)
 Identifying and interpreting margins and
trends
 introducing measures for better pricing
 Cost control
 Maintaining Cash flow
 Forecast and budgetary controls
(Farooqi, 2011)

13. Change in financial management function
during economic downturn
Factors Influencing
Change in Source of
Investment Dividend Decision
Finance Decision
Decision
• Management • Leasing • High Dividend
Outlook • Issues of Bonds increase stock
• Competitors • Sale of assets value
strategy • Low Dividend
• Market Forecast more available
• Fiscal Incentives funds in hands of
company
• Cash Flow Budget
• Non Economic
Factors

14. BAE SYSTEMS - PLC
Global Defense, Security and Aerospace company
Formed in 30th November,1999 by GBP7.7billion merger of
two British companies - Marconi Electronic Systems and
British Aerospace.
Headquartered in London
Area of Business
Financial Information: Revenue(TTM)-19.61bn, Net
Income- 928m, Market cap- 9.41bn, Employees- 1,07,000
(Ft.com, 2011)

15. Financial management functions of
BAE Systems
 Financial operation:
- Mergers
- Sales
 Investments:
- Bonds
- Innovations
 Dividend:
- Earnings per share increased by 1.7% to 40.8p (2009
40.1p)
- Dividend has increased by 9.4% to 17.5p (2009 16.0p)
(Investegate, 2011)

16. Different sources of finance of BAE Systems
 Loans and overdrafts
 Bonds
 Creditors ( subsidiaries, joint ventures)
 Share capital
 Equity
 Preference
 Leasing
 Debentures
(BAE Systems plc, 2011)

17. Which finance is best for BAE Systems?
 From the point of view as a financial manager of
BAE systems the following are the favourable
source of finance for the company:
 Shares
 Bonds
 Leasing

18. Balance Sheet
(Data source: Morningstar Inc., 2011)
 BAE Systems’ Balance Sheet, printed 16th February 2011.
 Total Assets for 2010 (million):
 Equity (5,403) + Liabilities (18,627)
 = £24.03 billion

19. Balance Sheet
 In 2010, BAE Systems had an equity of
 £5,403m.
 • Improvement than the previous year;
 £4,663m in 2009.
 • Current ratio
 Current Assets (7,616m) ÷ Current Liabilities (11,658m)
= 0.65

20. 5 Year Summary
 Over past 5 years, liabilities and equity have been
unstable.
 Liabilities decreased in 2010 compared to 2009.
 Equity improved from 2009, still lower than 2007-
08.

21. The impact of the current economic downturn
environment on sourcing the finance for the company
• Retrenchment Strategy : Divestment of Non core
assets, Cutting operations costs, reductions in
employment, Closure of Establishments etc
• Investment Strategy : Innovation and Market
Diversification ,R & D.
• Ambidextrous Strategy : Combination of both
Retrenchment strategy and Investment strategy.
(Kitching, J 2011)

22. State of Current Economy
 Economic statistics
 Europe in crisis
 ‘BRIC emerge to be the fastest growing economies
(Rozhnov K, 2010)
(Businessweek,2011)

23. Conclusion
 The financial management function is crucial to the
success of a business organisation.
 The economic downturn has impacted BAE Systems’
financial performance on a significant level.
 The company is struggling in an area that it once
excelled in.
 The financial management should now find suitable
alternative sources of finance.

24. THANK YOU..!!!
Q & A Please..
Note: For further references please refer Executive Summary