A Detailed Characteristic and Financial Analysis of Financial Statements of IKEA

free essayAnalysis of financial statements is a process that allows assessing the past and current financial position and results of operation of any multinational business organization. The main goal of the analysis of financial statements is assessment of financial results of the company’s operations.

On the example of Swedish company IKEA we will consider the financial analysis of the company.

Background Information about Swedish company IKEA

IKEA was founded by Ingvar Kamprad, the inhabitant of province in southern Sweden (Scott). In 1943, the seventeen-year-old founder registered the company called IKEA. Abbreviation is the name of the farm and the name of the province, where Ingvar Kamprad grew up. The very first assortment included Christmas cards, matches and seeds. Five years later, the assortment of the company had got chairs (its first piece of furniture). The first permanent exhibition of IKEA’s furniture was opened in southern Sweden in 1953. Currently, IKEA is Swedish multinational business organization, whose main purpose is production and sale of goods for home. IKEA is a company that produces furniture and household goods for more than 60 years. This business organization owns 304 stores in 37 countries.

Characteristics of All Elements of a Business Model of the IKEA

A business model shows production of the organization, its delivering system and system of value acquiring. Therefore, business model of IKEA should be investigated (Scott).

Table 1
The elements of business model of IKEA
The elements of business model IKEA’s performance Comments
Deliveries

(supply)

1. Suppliers are all over the world Suppliers get access to the global market, technical assistance, and rent equipment
2. Cheap accessories
3. A rational system of warehousing and logistics
Manufacture 1. 14 warehouses of IKEA are logical control points, consolidating transportation centers Proactive role is an integration of supply and demand, reducing the duration of storage and costs
2. Outsourcing of production
Sales and distribution 1. Large shops, coffee-houses, services Partial solution of the problem of reducing the sales force
2. Self-service (choice without a seller): catalogues, tapes, paper, pens
3. Understandable labels and instructions
Marketing, growth strategy 1. It is not just a store, but a place of rest and pastime The aim is to encourage consumers to do easily things they have never done before
2. Merchandising, examples of housing arrangement
3 Catalogues; more than 45 million; 10 languages
4. Electronic sales analysis
Consumption, the proposed values Division of labor with consumers. Consumers can assemble furniture, deliver it and paint The goal is a consumer participation in creation of value, getting the economy
Competitive advantages Simple high-quality Scandinavian design

From the table we see that the company has a well-structured business model.

The Course of IKEA’s Growth from Inception to Its Current Position

The 25-year period of expansion from 1973 to 1998 (the initial period of development of the company was described above) had increases and recessions (Scott). However, by 1998, sales had grown from 40 million to 6.3 billion Euros, and the number of stores had increased from 7 to 120. Sales tripled (from 7.6 billion Euros in 1999 to 21.5 billion Euros in 2009). Selling and procurement prices were reduced by 20%, and the level of profit was more than 10% of sales for ten years. IKEA opened 150 stores from 2000 to 2009. One hundred and ten stores were opened in Europe, 25 – in North America, and 15 – in Asia. Thus, increasing from the moment of its inception and up to 2012, the company has reached the following indicators (IKEA International Group, 2013):

  • Total sales were 27 billion Euros.
  • 298 stores were opened in 26 countries.
  • The assortment contained about 9,500 products.
  • 139,000 people were employed.
  • 1,084 enterprises in 53 countries worked as distributors.
  • 690 million visits to the shops were fixed.
  • More than 1 billion website visitings were registered.
  • 187 million copies of catalogs were made and distributed in 22 countries.
  • Approximately two-thirds of all goods were produced in Europe.

In 2012 IKEA resold its own brand for $ 11.2 billion (IKEA International Group, 2013). Company Interogo (Ingvar Kamprad is an owner), headquartered in Liechtenstein, sold the brand for a subsidiary (IKEA Systems) (ScottA).

If to talk about the current position, in 2012, 11 new stores in nine countries were opened,;the development of solutions for e-commerce has been continued and 8,000 new employees hired (IKEA International Group, 2012). The total revenue of the years 2008-2012 (billions of euros):

  • 2008 – 21.5;
  • 2009 – 21.8;
  • 2010 – 23.5;
  • 2011 – 25.2;
  • 2012 – 27.6.

The Factors Leading to IKEA’s Success as an International Brand

The factors, which lead to the success of IKEA International Group, should be described (Scott);

  1. Conscientious satisfaction of customer needs. IKEA has positioned its customer as the major acquisition of the firm. The company policy is to satisfy the customer at any costs.
  2. Execution of its mission (to make better everyday life of many people). Potential of further business expansion of IKEA is in the development of solutions that enable customers to create environmental conditions at home.
  3. The availability and transparency of information. It created a relationship of trust and ensured growth of the company and its long-term profitability.
  4. Focus on the lowest price. Low price is the cornerstone of IKEA business idea and concept of the organization. Method of pricing is administrative, based on mid-market prices of these kinds of goods. Maximal costs of production are determined by the desired price and the desired rate of profit.
  5. Quality. The observance of environmental strategy at all stages of product development is responsibility of the company.

As we can see, IKEA has a number of factors that distinguish it from others and make it competitive.

Detailed description of the Accounting Framework of the Netherlands

The parent company of IKEA group (Ingka Holding) B.V. is in the Netherlands, so accounting of Netherlands should be described. Currently, in the Netherlands, the annual accounting includes statements, directors’ report and other information. Accounting reports consist of a balance sheet, income statement, explanatory note, etc. Accounting records must provide such information, which would allow forming an opinion about the financial position, profit and losses, as well as solvency and liquidity of the organization. ‘Substance over form’ is an overriding criterion of accounting.

According to the accounting of IKEA, financial analysis was completed. During 2011, the total sales increased by 6.9%, operating performance of stores increased by 2.7%. Company’s market share grew in almost all the countries. Despite the increase of value of some of the materials, the company has reduced the cost of goods by 2.6%, improving their quality. It was made possible because of the lower costs throughout the supply chain. The amount of savings was used to reduce the price. The company ended the year with strong growth and high income. Almost all market sales grew. The overall sales rose by 6.9% and amounted to 24.7 billion Euros. Total revenue was 25.2 billion Euros in 2011 financial year. 3% of sales were paid to IKEA International Group as a franchise of IKEA’s rightholder (IKEA International Group, 2012).

As a result of growth of purchase prices and planned reduction of retail prices, the gross profit decreased to 44.2%. Operating expenses, including one-time costs, were partially reduced. Consolidated result from financial operations increased due to a decrease of interest rates on loans. Net profit increased by 10.3% and amounted to 2.97 billion Euros. The total amount of cash and investments decreased slightly to 16.8 billion Euros. The company did not have losses associated with the payment of debts; all investments were made for its own expense. Moreover, IKEA has paid off loans totaling 1.6 billion Euros ahead of time. The effective tax rate (20.8%) was higher than tax rate of the last year (17.6%), and corporate income tax amounted to 781 million Euros. Property tax in 2011 amounted to 155 million Euros (the property tax of 2010 amounted to 150 million Euros). Equity multiplier rose to 61%. Shareholders’ equity amounted to 25.4 billion Euros in 2011. Dividends were not paid to the owner (IKEA International Group, 2012).

The profitability of the store was the following: 34.07% (2010) and 37.9% (2011) (IKEA International Group, 2011).

In 2011, profit of IKEA was amounted to 2.966 billion Euros. If compared with 2010, there was an increase on 278 million Euros.

Thus, IKEA is a company that has Swedish background, the center in the Netherlands, a multiple structural business model, a course to a consumer and a number of factors leading to its success. Financial accounting of IKEA International Group was really a criterion of its current position. It confirms our thesis, as financial accounting of the Netherlands was the index, exponent and it provided an opportunity to analyze the main financial indicators of IKEA.