Fletcher Brenton (FB) FB is an independent watchmaker which has been manufacturing watches in Switzerland since 1860. FB started with pocket watches and in 1912 was one of the first businesses to design wristwatches as fashions changed. The current CEO is Stefan Fletcher who is also the only shareholder. Two key features of his finance and accounting strategy are: • never to use long-term borrowing • to pay high dividends every year. FB has always innovated in watch technology, including the use of calendar and astronomy dials, self-winding mechanisms and the design of sports and nautical watches. Its exclusive designs and limited editions have made FB’s watches collectable and in high demand, with most selling for between $55000 and $100000. The watches are handmade in its Swiss workshop before being exported to countries to sell in FB’s showrooms. Timeline of FB 2016 Recovery from the global recession of 2008–12 has been slow, with FB reporting a loss for the fourth year in a row. 2017 FB increases promotional spending on its existing range and launches two special editions. 2018 FB expands production capacity and refurbishes its workshop in Switzerland (see Appendix 1). 2020–2021 160th anniversary watch is launched (see Appendix 2). 2022 Review of FB’s accounting and finance performance (see Appendix 3). 2023 Stefan Fletcher announces plan to retire in 2025. There is no family to pass the business onto after 162 years. Scenario plans are drawn up for the leadership and future strategies of the business (see Appendix 4). Developing a new business strategy FB is facing an uncertain future. The issue of selecting a new leader for FB following Stefan’s retirement has still not been resolved. FB and its competitors are facing a number of issues including: • advances in digital technology in the sports watch market • problems with predicting demand in a volatile global economy • changes in the competitive market. The focus of the Board of Directors is to use scenario planning to help them develop a strategy for FB. Appendix 1: Extract from Finance Report on the expansion of the workshop 2018 FB purchased the property next to its workshop for $2.2m. The cost of renovation and development of the two properties was a further $2.75m. Cash was used to fund this to keep to FB’s strategy of no long-term borrowing. Appendix 2: Extract from FB’s 160th Anniversary report 2020 2020 is our 160th anniversary and has seen the launch of our limited edition watch with a selling price of 160000. However, in unprecedented times demand and sales have fallen. This, along with the depreciation of the Swiss currency, has reduced the cash balance although the directors are confident that it is sufficient to allow FB to survive. Appendix 3: Selected financial information for FB 2016–2022 | | 2016 | 2019 | 2022 | |---|---|---|---| | Revenue (m) | 14.2 | 59.0 | 24.1 | | Profit/(loss) for year (m) | (3.06) | 7.2 | (0.1) | | Inventory (m) | 12.86 | 14.9 | 16.2 | | Cash (m) | 2.9 | 6.6 | 0.8 | | Dividends paid (m) | 5.0 | 5.0 | 5.0 | | Gross profit margin | 31% | 34% | 29% | | Operating profit/(loss) margin | (24)% | 16.2% | 0.3% | | ROCE | (22)% | 32% | 0.3% | | Current ratio | 1.05:1 | 1.52:1 | 0.91:1 | | Acid test ratio | 0.29:1 | 0.63:1 | 0.41:1 | Appendix 4: Extract from the scenario planning for FB 2022 | Issue | Possible scenarios | |---|---| | Succession planning for Stefan’s retirement | Appoint new CEO | Sell FB | Close the business | | Volatility in the global market | Exchange rate volatility | Income volatility | The competitive market | | Changes in sports watch technology | Lead new technology development | Follow new technology development | Leave sports watch market |

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2024). The mark or mark type is shown in brackets.

1. AO1 Knowledge and understanding: Accounting and Finance strategy
2. AO1 Knowledge and understanding: Company accounts
3. AO1 Knowledge and understanding: Ratios
4. AO1 Knowledge and understanding: Impact of ratios on growth decisions
5. AO1 Knowledge and understanding: Impact of ratios on debt/equity decisions
6. AO1 Knowledge and understanding: Impact of ratios on other business strategies
7. AO1 Knowledge and understanding: Definition or understanding of concepts of appendix 3
8. AO1 Knowledge and understanding: Understanding of long-term borrowing – example, debts, liability
9. AO1 Knowledge and understanding: Understanding of what dividends are – reward for investment to shareholders
10. AO1 Knowledge and understanding: Any other understanding of finance and accounting concepts.
11. AO2 Application: Exclusive high priced products
12. AO2 Application: High costs - losses in 2010's only now starting to improve
13. AO2 Application: Inventory holding is high
14. AO2 Application: One shareholder – Stefan – who receives dividends every year – $5m
15. AO2 Application: Commitment to use reserves/equity over borrowing
16. AO2 Application: Current ratio seems to be driven by inventory levels
17. AO2 Application: Confidence in reserves to buffer the changes in demand/global economy and the exchange rate with Swiss Franc
18. AO2 Application: Any information from appendix 3 to support point made
19. AO2 Application: No long-term borrowing
20. AO2 Application: High dividends
21. AO2 Application: Any point from the case that supports the candidates point
22. AO3 Analysis: Only one shareholder who is also the CEO. This makes it much easier to control level of dividends paid/retained earnings for the business
23. AO3 Analysis: Demand and reputation is strong for 2019 bounce back to high $59m sales leading to available cash to spend on expansion
24. AO3 Analysis: No long-term borrowing means less debts and less interest costs increasing profits however this would also mean no available money to fund expansion which may lead to less products and revenue.
25. AO3 Analysis: FB has a weak cash position and continues to use it for the expansion, reducing reliance on lenders but could lead to over trading or bankruptcy
26. AO3 Analysis: Current ratio was strong and is now below 1 in the approach to 160th anniversary but is this driven by inventory as acid test is low by comparison.
27. AO3 Analysis: Low current ratio means inability for FB to pay off short term liabilities may lead to FB being illiquid and close down.
28. AO3 Analysis: Cash holdings are buffering external shocks on the company and the exchange rate but for how long?
29. AO4 Evaluation: Accounting and Finance strategy has been successful given survival over the last 7 years/162 years
30. AO4 Evaluation: Having one shareholder who is also the CEO has made this finance strategy easier to manage as no shareholder/stakeholder conflict but is threatening the future of the business.
31. AO4 Evaluation: The strategy shows a positive impact as there were no reliance on long-term loans leading to lower gearing ratio expenses
32. AO4 Evaluation: This depends upon external factors such as fiscal policies such as increasing tax and its effect on the accounting and finance position of FB
33. AO4 Evaluation: Business has been able to maintain its strategy of no long-term borrowing which in part comes from its reputation and selling prices that keep sales high, but how long will that last?
34. AO4 Evaluation: Purchase and development of workshop, using reserves, shows confidence in the business and its products but should they be looking for investment to grow or is it important to remain independent for its reputation?
35. AO4 Evaluation: How long can this remain viable in a global economy and constant influences.
36. AO4 Evaluation: The strategy can also have a negative impact if the lack of long-term borrowing depletes the cash and limits production
37. AO4 Evaluation: The nature of the product and reputation of the business is allowing the current strategy to work. If anything should change in these two areas the business may not survive unless you bring in external finance and change the way in which the business is run. This is a possibility once Stefan retires and priorities change with a non-shareholding CEO
38. AO4 Evaluation: Accept all valid responses.