You have just been appointed as the chief finance risk officer of Agorwu limited, a Ghanaian manufacturing company. On your first meeting with the Chief Executive officer of the company, the following information were made available to you. The company is involved in forestry management, timber production, and the export of specialist woods used in the production of fine musical instruments- so called “singing wood”. The company, has a reputation as the world’s finest producer of woods for the production of concert-grade grand pianos. Agorwu has a thirty-year contract to supply all of the piano wood requirements for a leading manufacturer based in japan, in addition to numerous small-scale contracts with clients around the world who specialize in producing high-quality hand-made classical stringed instruments from violins to double bass. The trees used in piano production take around sixty years to reach to the required level of maturity, but the maple used for the backs of the stringed instruments takes much longer, and these tresses are more susceptible to disease. This long lead time requires careful planning by the staff at Agorwu, who face huge uncertainties about the long-term demand for such items. In addition, significant amount of working capital is tied up in the forestry stock because even once felled, the slow air-drying processes mean that wood cannot be sold for several years. There is also a high level of uncertainty within the company’s current business environment. The primary geographic market for products is South East Asia, in the countries of Japan Singapore, and china, but both the European and North American markets are in decline, except for cheap student grade instruments that are now being produced in huge numbers under factory conditions in china. Chinese producers have also gained a foothold in the professional grade of instrument making, by sending staff over to train in the leading instrument- making schools of Europe, and using these masters to train local staff back in China. The Chinese instruments are made using local, tropical woods rather than the spruce and maple commonly used in Europe, but the resulting instruments are highly rated by many professional players, and are priced at less than half of their traditional equivalent. In contrast to the market for classical instruments, that for hand-made guitars is growing. In recognition of this Agorwu entered into a joint venture arrangement in 2018 with the US based company that supplies wood to North American. Under the terms of the joint venture agreement, in which costs, income, and profit are shared 50: 50 between the two parties, Agorwu takes responsibilities for forestry management and felling, while the US party then stores, dries, prepares and manages the sale and distribution of the wood. Due to different climatic conditions, the trees grown Ghana are not the same as those in US although maturity cycles are similar. The resulting tone wood is however, very well suited to the US guitar market. Analysis of the accounts of Agorwu for the last two years reveals the key statistics as shown in the table below. 2018 2019 GHS000 GHS000 Total sales revenue 24,243 23,759 Sales of Japan (1 client) 10,255 9,788 Local sales 6,580 7,150 UK sales 2,920 2,150 North America sales 4,488 4,671 Market Capitalization 27,153 33,264 Long- term fixed rate debt 3000 30,000 Short term variable rate debt 800 750 Net profit from operations 3879 4158 Ratio of bad debts\sales 8:100 6:100 Debtor days 95 82 Working capital per Cedi of sales 16 16 Credit rating 65\100 65\100 All revenue from trade sales and transactions within Ghana are priced in cedi, but sales to all other geographic areas are priced in local currencies. Contract prices are fixed on felling the selected trees an average of 24 months before delivery. It is common practice for clients to use their own experts to select trees while still growing, as the sound of the tree when knocked with a mallet indicates the quality of core wood. Required: As the chief financial risk officer of the company, write a memorandum to the CEO Discussing: a) The nature of financial risks faced by the company b) The potential impact of the risks identified in (a) above on the financial statements of the company. c) The various tools you will use to manage the risks identified in (a) above
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Case Study Question You have just been appointed as the chief finance risk officer of Agorwu limited, a Ghanaian manufacturing company. On your first meeting with the Chief Executive officer of the company, the following information were made available to you. The company is involved in forestry management, timber production, and the export of specialist woods used in the production of fine musical instruments- so called “singing wood”. The company, has a reputation as the world’s finest producer of woods for the production of concert-grade grand pianos. Agorwu has a thirty-year contract to supply all of the piano wood requirements for a leading manufacturer based in japan, in addition to numerous small-scale contracts with clients around the world who specialize in producing high-quality hand-made classical stringed instruments from violins to double bass. The trees used in piano production take around sixty years to reach to the required level of maturity, but the maple used for the backs of the stringed instruments takes much longer, and these tresses are more susceptible to disease. This long lead time requires careful planning by the staff at Agorwu, who face huge uncertainties about the long-term demand for such items. In addition, significant amount of working capital is tied up in the forestry stock because even once felled, the slow air-drying processes mean that wood cannot be sold for several years. There is also a high level of uncertainty within the company’s current business environment. The primary geographic market for products is South East Asia, in the countries of Japan Singapore, and china, but both the European and North American markets are in decline, except for cheap student grade instruments that are now being produced in huge numbers under factory conditions in china. Chinese producers have also gained a foothold in the professional grade of instrument making, by sending staff over to train in the leading instrument- making schools of Europe, and using these masters to train local staff back in China. The Chinese instruments are made using local, tropical woods rather than the spruce and maple commonly used in Europe, but the resulting instruments are highly rated by many professional players, and are priced at less than half of their traditional equivalent. In contrast to the market for classical instruments, that for hand-made guitars is growing. In recognition of this Agorwu entered into a joint venture arrangement in 2018 with the US based company that supplies wood to North American. Under the terms of the joint venture agreement, in which costs, income, and profit are shared 50: 50 between the two parties, Agorwu takes responsibilities for forestry management and felling, while the US party then stores, dries, prepares and manages the sale and distribution of the wood. Due to different climatic conditions, the trees grown Ghana are not the same as those in US although maturity cycles are similar. The resulting tone wood is however, very well suited to the US guitar market. Analysis of the accounts of Agorwu for the last two years reveals the key statistics as shown in the table below.
All revenue from trade sales and transactions within Ghana are priced in cedi, but sales to all other geographic areas are priced in local currencies. Contract prices are fixed on felling the selected trees an average of 24 months before delivery. It is common practice for clients to use their own experts to select trees while still growing, as the sound of the tree when knocked with a mallet indicates the quality of core wood.
Required: As the chief financial risk officer of the company, write a memorandum to the CEO Discussing: a) The nature of financial risks faced by the company b) The potential impact of the risks identified in (a) above on the financial statements of the company. c) The various tools you will use to manage the risks identified in (a) above
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