Business Studies students often find economic influences a difficult topic to get to grips with. Here is a current example of a firm that has been hit by tighter government budgets brought about by recession and the need to cut spending.
Promethean is the second largest manufacturer of interactive whiteboards in the world. The Blackburn based business generates 60 per cent of its turnover from sales in the USA and budget cuts in American schools have led to orders being slashed.
Promethean has just issued a profits warning and states that its turnover for the first half of the year is likely to be in the range of £80-85 million compared to analyst estimates of £100 million.
The Daily Telegraph reports that its stock market value is now £44m, a fraction of its high point of £400m. Promethean is itself being forced to cut costs including the loss of 20 jobs but the firm emphasises it is still cash positive and has not had to touch its bank facilities.
So, let’s just set out the cause and effect here:
1) Around the world, governments have been cutting back on spending to try to help reduce budget deficits as a result of recession.
2) Promethean makes interactive whiteboards and schools in the USA account for 60% of its business. As US education budgets have been squeezed, Promethean has not been selling as many products as forecast.
3) Promethean has issued a profits warning to investors because its revenues are likely to fall short of earlier predictions and they expect to make a £7m loss in the first half of the year compared to an £8m profit in the equivalent period last year. They have embarked on a series of cost cutting measures to help restore profit margins, including 20 redundancies.
4) The stock markets have reacted badly to the news and the value of Promethean’s shares has fallen. This would make it more difficult for Promethean to raise finance on the stock exchange in future. It could also leave it vulnerable to takeover.
5) Despite all this, the directors state that Promethean is cash positive and currently in good financial shape. Students should note that well managed and prudently financed businesses can survive difficult times like this, although as Promethean states, business conditions are challenging and there are no immediate signes of any improvement. Nevertheless, do not jump to the conclusion that bad news like this necessarily leads to the failure of a business.
As a footnote, cynics will be interested to note that the market capitalisation of the firm now stands at less that five times the £8.5m in fees taken by the investment banks Goldman Sachs, JP Morgan Cazenove and Gleacher Shacklock on the company’s flotation two years ago.