Apple Finance Department Essay

Tags: apple ethical standards ethics finance foreign exchange rate management risk management senior management

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Total Length: 2125 words ( 7 double-spaced pages)

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Introduction and Company Overview

Apple is an integrated designer and marketer of consumer electronics. The company’s products include computers, smartphones, tablets, wearables, as well as the software that powers these devices. Apple is based in California, but contracts out manufacturing to third parties, typically in China. It runs physical retail stores, and online stores, in dozens of countries around the world. The global nature of Apple’s business presents significant challenges for the finance department. In recent years, the company has been so profitable that it had massive cash holdings. These have typically been either returned to shareholders via dividends, and or invested in short-term securities, both of which provide more work for finance. This paper will serve as an introduction to the finance function within Apple.

Finance Touches Everything

In most companies, and Apple is no exception, the Finance department operates as its own team, but it serves all of the other teams, as well as the company as a whole. The essential truth is that everything a company does is an economic transaction. There are either direct financial implications (i.e. money changing hands) or there are indirect implications (actions generate either costs or profits), and all of this must be measured. Since everything the company does has financial implications, finance touches on all areas of the company.

At the individual, transactional level, finance is responsible for things like ensuring suppliers get paid, revenue is collected, and expense accounts are settled. For a company the size of Apple, these functions are vast and varied, and the finance team is responsible for the smooth execution of all of them.

Where the most serious work is done, the work that a lot of non-financial talent might be unaware of, is at the high level. This includes risk management, portfolio management, and the management of financial returns. Key areas that the finance team must consider are optimal capital structure, foreign exchange exposure, and controls. Much of the following explanation of the finance function will focus on these key subject areas.

Risk Management

Risk management in finance encompasses a lot of different things. The most basic concept is that most risk from a corporation’s perspective is financial. Risk reflects what might happen to the company’s valuation. Valuation is subject to a lot of unknowns, and these unknowns carry with them a downside. Risk management seeks to balance the need to grow, with the need to minimize downside risk. By identifying and analyzing the uncertainty of activities in business, and putting some numbers to the potential outcomes related to those uncertainties, the risk management team at Apple is able to advise senior management about the potential consequences of different courses of action (Investopedia, 2018).

In a smaller company, there is risk associated with things like theft and fraud, so risk management often pertains to things like signing authority for spending, and tracking inventories. For a larger international company like Apple, foreign exchange rate and other forms of macroeconomic risk are important. Macroeconomic risk is risk associated with either interest rates, or other major changes in macroeconomic conditions, that might have a direct financial impact on the company.

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Interest rate risk, for example, is higher when the company has issued bonds or has other obligations that are at a set rate.

Foreign exchange rate risk can be a substantial source of risk for international companies. Apple’s products are assembled in China, from parts that are made either in China or other parts of Asia. Apple might pay USD for the finished goods from its suppliers, but what the supplier charges Apple will relate at least in part to the local market conditions. Furthermore, when Apple sells overseas, it collects foreign currency, which must be converted back to USD for financial reporting purposes. This is what is known as translation risk. Think of it this way – if Apple sells a computer in the UK for £1500, and that is worth $2000 today, what happens when the rate changes? Maybe that £1500 is only worth $1800 tomorrow. Apple just took a 10% haircut on its UK revenues, strictly because the exchange rate changed. It might have left that £1500 in the UK, but because it is reported in the US, Apple faces risk associated with translating that figure back to USD for reporting purposes.

There are also transaction risks. These would be if Apple sells a computer in, say, Cape Town, and a level of rand equivalent to $2000. If the company does not trust the value of the South African rand, it might choose to take as much revenue as possible out of South Africa and send it back to the United States. At that point, the company is taking on transaction risk, where the value of the transaction can vary significantly in terms of the value at the time of the transaction versus the value at the time the money is taken out of the country and converted.

Apple has a lot of money on its balance sheet, a result of being so profitable. Some of this money is sent to shareholders in the form of dividends. The choice of whether to pay dividends or to reinvest the money is one of the things that the finance team has to advise senior management about. The finance team would evaluate the different projects available to Apple, and compare the potential returns of those projects with the potential returns that it can win from simple using that money to pay dividends to shareholders. There are implications of this decision, including with respect to capital structure, and it is the job of the finance department to outline what those trade-offs might be.

The money that Apple keeps may be earmarked for investment in growth, but until actual growth opportunities arise, that money needs to be invested so that the company can earn a return on it. Thus, a critical role for the finance department is to ensure that Apple’s surplus profits are invested in a way that maximizes shareholder return. There came a point when the company had so much money, both in cash and marketable securities, that Apple shareholders demanded the executives begin paying dividends….....

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References

Dobson, J. (1993) The role of ethics in finance. Financial Analysts Journal. Vol. 49 (6) 57-61.

Investopedia (2018) Risk management. Investopedia. Retrieved June 22, 2018 from https://www.investopedia.com/terms/r/riskmanagement.asp

Investopedia (2018) Modern portfolio theory. Investopedia. Retrieved June 23, 2018 from https://www.investopedia.com/walkthrough/fund-guide/introduction/1/modern-portfolio-theory-mpt.aspx

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