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BUSN20016 RESEARCH IN BUSINESS, T1, 2019

ASSESSMENT 3

PROJECT TITLE: Impact of Operating Expenses on Income Statements of Commonwealth Bank of Australia (CBA)

ASSESSMENT SHEET

June 2019

Introduction

Financial performance of a business is liable to portray the ability of the company to compete in the global market while indicating potential growth opportunities. In this regard, focus on managing operating expenses hold significant impact in supporting financial performance. As opined by Tran (2015), attempt of business entities to manage costs of operating activities can present opportunity to regulate and control functional operations. It is also crucial to manage business relations in terms of monitoring manufacturing and production policies along with relationships with stakeholders. Moreover, focus on controlling and allocating resources, including financial and human resources are crucial to manage operating costs for supporting financial improvement.

In the case of Australian banks, changing dynamics of business policies and contemporary competitive market have facilitated chances to focus on managing operations and related costs for further growth. For instance, monetary policies are essential to attract the attention of the customers for investing in Australian banks. This initiative due to effectiveness of monetary policies can eventually lead to increased profitability of respective banks (Borio, Gambacorta & Hofmann, 2017). Besides, investments of bank in controlling taxable income and operating costs including expenses for consulting services, employee remuneration, adoption of technology and related legal fees can support a bank to improve profit margin.

In the opinion of Buckley, Weber & Dowell-Jones (2015), the banking industry is devoted to deliver effective financial services to a wide range of customers and hence insurance costs, directors fees, costs of fixed assets and payroll are important factors to regulate operating expenses. Regarding these aspects, emphasis on understanding the impact of operating expenses of Commonwealth Bank of Australia (CBA) on income statement of this bank can be effective to comment on financial performance of Australian banks. It can also be influential in determining the effectiveness of functional operations and related expenses for reflecting on profit margin and ensure holistic growth of business.

Problem Statement

Rapid changes in business dynamics are accountable for restructuring financial performance of Australian banks in terms of influencing profitability. According to Jin, Shan & Taylor (2015), increase in operating expenses is liable to lower profit margin by allowing a business entity to invest more in functional activities. However, influence of operating expenses in controlling profit margin or income statement of a company can be measured through evaluating net profit after tax (NPAT) of respective company. In the context of Commonwealth Bank of Australia (CBA), increase in operating expenses has been a significant issue for this company as it has affected financial stability. As per statistical reports operating expense of the company mentioned above increased up to 10,429 $m in 2016 from 9,993$m in the previous year (Commbank.com.au, 2016). [Refer to Appendix 1]

In addition, potential risks related to shift to macro-economy and risks related to household debt have affected the financial performance of banking industry of Australia. As per statistical information, household debt increased up to 127% of GDP that influences income statement of Australian banks (Commbank.com.au, 2019). Moreover, changes in operating costs in terms of supporting the introduction of new technologies and managing increased number of customers are also effective to regulate income statement of banks (Alam, Alam & Hoque, 2019). In this context, the inability of CBA to manage records of 20 million customers and losing data of past 15 years raised a question on effectiveness of functional activities (Bbc.com, 2018). Hence, improvement in technology to protect confidential information of consumers is a crucial factor that can influence operating expenses. [Refer to Appendix 2]

Along with this, potential threats of money laundering and terrorist financing have also instigated chances for banking industries to improve legal approaches and strengthen security systems for ensuring financial growth (Daley & Wood, 2016). Attempt of banks to protect confidential data of consumers and track records of financial transactions is liable to reduce instances of breach in law. However, negligence and inadequate security systems of banks including CBA has forced financial loss (James, Sawyer & Wallschutzky, 2015). For instance, CBA has to pay $700 million for being accused of breaching anti money laundering regulations (Doran & Janda, 2018). Moreover, business expansion and the increased number of customers have resulted in rise in operating expenses. The operating expenses of CBA increased up to 11,269$m in 2019 (Commbank.com.au, 2019). [Refer to Appendix 3]

Apart from this, adequacy of a bank to manage its operating costs projects the efficiency of the organisation to manage resources and operate functional activities (Ogilvy & Vail, 2018). It is also effective to comment on financial performance in terms of inspecting profit margin. Besides, operating cost can determine financial performance through managing net profit after tax that reflects in the income statement of a company. In case of CBA, net profit after tax has decreased to 8,492$m in 2019 from 8,915$m in 2018 (Commbank.com.au, 2019). Furthermore, the inability of this bank to check 778,370 accounts properly and reluctance to check 53,506 reports related to transactions of more than $10,000 using the IDMs (intelligent deposit machines) have presented challenges for this company to encounter financial loss (Doran & Janda, 2018). [Refer to Appendix 3]

Hence, focus on evaluating the influence of operating costs on income statement of CBA by calculating net profit after tax (NPAT) can enable chances to measure financial growth of this bank. It is also significant in understanding effectiveness of resource allocation and utilise technological advancements for improving operational activities (Bodle, Cybinski Patti & Reza, 2016). Moreover, focus on assessment of operating expenses can also present chances to identify potential areas of further growth while following legal instructions. Besides, it can be advantageous to maintain the standards of accounting for regulating operational activities and ensuring improvement in financial performance (Ahmed & Ndayisaba, 2016).

Aim, Objectives and Scope

The prime aim of this research would be to explore the implication of operating expenses on the income statement in regard to functional activities and financial performance of the CBA (Commonwealth Bank of Australia).

The main objectives of this study can be listed as below-

●      To evaluate the influence of financial performance in holistic business growth of CBA

●      To identify factors that can be effective to control operating expenses of CBA

●      To identify how operating expenses of CBA influences income statements

●      To formulate effective suggestions for controlling operating costs and supporting the financial growth of CBA

Attempt to examine the influence of operating costs on the income statement of the bank mentioned above would be effective to comment on effectiveness of resource allocation capability of the bank. Moreover, it would support to evaluate financial performance of the bank by assessing income statements and commenting on net profit after tax (NPAT), gross profit and annual revenue (Ongayi et al. 2018). This can also support to understand potential aspects of financial growth of this company while calculating profit ratio. Besides, it would deliver chances to identify major factors that influence financial performance of the bank and evaluate relationships with stakeholders to promote business growth. Along with these, operating costs can also help to measure return on investment (ROI) and express payment system (EPS) for evaluating technological and legal aspects to influence profitability of the aforementioned Australian bank (Laing & Dunbar, 2015).

Justification for Research Project

This research would focus on identifying implications of operating costs on income statement of CBA to understand the effectiveness of the bank for controlling resources. It would also help to locate functional efficacy and the financial performance of the bank. Moreover, operating expenses being a parameter to measure initiatives of the bank to regulate functional activities can help to assess business strategy of the company (Tang, Chen & Lin, 2016). Besides, it can support to assess financial market of Australia in terms of evaluating growth prospects of financial service providers including CBA. Moreover, the research would be beneficial to focus on utilisation of fixed assets and funds for reducing operating expenses and generating maximum profit for ensuring business growth (Yen, Sarath & Ahmed, 2016).

Apart from this, analysis of the impact of operating expenses on the income statement would also help to comment on accounting standards (Wines & Scarborough, 2015). It would generate opportunity to comment on tax implications while tracking changes in profit margin and calculating net profit after tax (NPAT) of the CBA. In addition, emphasis on identifying factors that have affected operating costs can extend chances to modify process of financial and human resource allocation (Yapa, Kraal & Joshi, 2015). It can also allow Australian banks to focus on improving corporate image in terms of maintaining international financial standards. Furthermore, the research would contribute to develop an understanding of cash flow stability and tax implications while measuring social and legal aspects for supporting gradual improvement in financial performance (Joubert, Garvie & Parle, 2017).

Potential Outputs

The research intends to comment on financial performance of Australian banks in terms of measuring influence of operational expenses on income statement of CBA. Successful completion of this research would be effective to understand efficacy of operations management department of CBA to allocate resources. It would also support to identify factors including remuneration of employees, insurance costs, maintenance of fixed assets, and adoption of technology and tax implications to reflect on financial performance (Xu, Davidson & Cheong, 2017). Moreover, the research would contribute to explore the perspective of financial resource management by assessing investment in operating expenses. This can ultimately support in assessment of financial statements for calculating return on investments (ROI) and gross profit (Wong & Joshi, 2015).

In addition, it would help to determine the influence of the factors to increase or decrease operating costs that ultimately impacts on financial performance of an organisation. Besides, implications of operating expenses to control financial performance or net profit margin would also be explored in this research. It can explain the relationship between operating expenses and profit margin by calculating net profit after tax (NPAT) (Taplin et al. 2019). It would also help to measure effectiveness of functional operations of financial service providers including CBA. Along with this, the research can contribute to understand required costs and changes in financial performance due to compliance with accounting standards and legal guidelines while adopting advanced technology to improve holistic performance (Zeller, Kostolansky & Bozoudis, 2019).

Conceptual Framework

Figure 1: Conceptual Framework

(Source: Developed from Borio, Gambacorta & Hofmann, 2017)

Research Hypothesis

H₀: Operational expenses do not hold statistically significant impact on net profit after tax (NPAT) for regulating income statement of Commonwealth Bank of Australia (CBA).

H₁: Operational expenses hold statistically significant impact on net profit after tax (NPAT) for regulating income statement of Commonwealth Bank of Australia (CBA).

Methodology

Identifying a particular method of research allows opportunity to conduct a systematic and scientific study for meeting research aim and objectives (Bell, Bryman & Harley, 2018). This particular research project would follow a secondary method of research to collect relevant information on the influence of operating expenses on revenue and NPAT (net profit after tax). Moreover, descriptive research approach would be applied while adopting a quantitative research method to identify the influence of operating expenses on the income statement of CBA.

Research Approach and Data Source

This study would follow a secondary method of research while applying positivism philosophy, descriptive design and deductive approach. According to Kumar (2019), selection of positivism philosophy allows opportunity to collect quantifiable and observable data to obtain reliable research outcomes. In this particular case, incorporation of positivism philosophy would be essential to interpret raw data into meaningful information. Moreover, descriptive design can support to describe patterns in obtained data sets and comment on variables that influence operating costs (Flick, 2015). Deductive approach, on the other hand, would help to test the research hypothesis based on existing theories. It would also be advantageous to develop a research strategy for interpreting obtained secondary data and address research hypothesis while establishing causal relationship between research variables (Walliman, 2017).

Apart from these, the research would apply a secondary method of research to collect required information from secondary sources including books, scholarly journals, websites, newspaper articles and company reports (Bryman, 2016). In addition, quantitative method would be significant for this study to gather raw data and interpret those for demonstrating influence of operating expenses on the income statement of CBA. In this context, annual reports of the bank and official website of CBA would be major sources of data that would help to gather statistical data. Now, as CBA is dealing with issues of decreasing net profit margin, attempt to apply this deductive research approach would help to collect information on the financial performance of the company. It would also support to evaluate implications of net profit, gross profit, expenses for technological adoptions while understanding the influence of return on investment (ROI).

Since data points required for this research is operational expenses and net profit after tax (NPAT), prime data sources would be annual reports and official website of Commonwealth Bank of Australia (CBA). Hence, keywords such as operating expenses , net profit after tax , income statements and income tax expenses would be used to track data points. This would be effective to comment on effectiveness of financial performance of CBA while understanding influence of operating expenses on profit margin. Based on the selected method, data points and snips of data sources can be presented as below-

Figure 2: Income Statements 2015

(Source: Commbank.com.au, 2015)

Figure 3: Income Statements 2016

(Source: Commbank.com.au, 2016)

Figure 4: Income Statements 2017

(Source: Commbank.com.au, 2017)

Figure 5: Income Statements 2018

(Source: Commbank.com.au, 2018)

Figure 6: Income Statements 2019

(Source: Commbank.com.au, 2019)

Data Collection Method and Technique of Data Analysis

Secondary method of data collection would be applied in this research to gather statistical information on implication of operating costs on income statement of CBA. In this regard, quantitative research method would be selected to collect quantifiable information and conduct statistical analysis for meeting research aim and objectives (Flick, 2015). Moreover, statistical information on financial performance of CBA would be obtained from reliable sources including annual reports of the company of the past five years ranging from 2015 to 2019. In this regard, official or commercial website of the company would also be considered. Besides, suitable data points, in this context, would be operating expenses and NPAT (net profit after tax) of the bank mentioned above. In addition, collected data would be evaluated using analytical tools of Microsoft Excel and IBM SPSS. The former one would be used to keep records of the data while the latter would help to interpret the raw data and develop statistical tables and graphs.

Along with this, collected information would be evaluated using relevant graphs and charts developed using the aforementioned software tools. Furthermore, descriptive analysis, correlation analysis, T-test and chi-square test would be performed using IBM SPSS. These would help to explore the relationship between research variables and test the hypothesis of this study to address research questions (Walliman, 2017). Focus on evaluating secondary quantitative data collected from annual reports of past five years of CBA would also be effective to comment on financial performance of the bank. It would also support to identify efficacy of financial resource allocation to identify potential areas of growth. Moreover, initiative to statistically analyse collected data on operating expenses and net profit after tax can present opportunity to comment on total income and expenses of the bank mentioned above.

Research Project Organisation

This research project would be segmented into five different chapters that would contribute to the study for identifying influence of operating costs on the income statement of CBA. The chapters can be explained as following-

➢    Chapter 1: Introduction - This chapter will demonstrate the aim, objectives and hypothesis of the study while providing a brief description of research background and problem statement. It will also provide information on company background and research deliverables to carry out further study.

➢    Chapter 2: Literature Review - It will review and analyse existing literature for identifying factors that can influence operating expenses and eventually influence profit margin. It will also discuss relevant theories and concepts for generating ideas on financial performance of Australian banks.

➢    Chapter 3: Research Methodology - This chapter will discuss appropriate method to conduct the study. It would deliver knowledge on the process of data collection and analysis to meet research aim and objectives.

➢    Chapter 4: Findings, Analysis and Discussion - It will provide evaluation of obtained data and discuss the findings of the study.

➢    Chapter 5: Conclusion and Recommendations - This chapter will conclude the entire research and link objectives of the study with research findings while proposing recommendations to address research questions. Moreover, areas of further research and limitation of current research will also be highlighted in this chapter.

Budget and Scheduling and Justification

In order to conduct this study, following estimation of budget can be considered, although this is subject to vary depending on research requirements-

Table 1: Budget of the Research Project

Since this study has focused on identifying implications of operating costs of CBA on income statements through assessing net profit after tax (NPAT), access to secondary sources for conducting literature review would require approx $2500 to collect information from books and scholarly journals. In addition, an amount of $2500 would be needed to collect statistical information regarding financial performance of CBA. In this regard, information would be collected from online web portals of the company as well as news articles and annual reports that may cause changes in estimated budget. As analysis of obtained information would require $3000 as it would require software to develop graphs, charts and data illustrations.

Gantt chart

Figure 7: Research Schedule

References

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Appendices

Appendix 1: Operating Expenses of CBA in 2016

(Source: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/2016_Annual_Report_to_Shareholders_15_August_2016.pdf)

Appendix 2: Household Debt (% of GDP)

(Source: https://www.commbank.com.au/content/dam/commbank-assets/business/industries/2019-03/risk-and-issues-2019.pdf)

Appendix 3: Five Year Financial Report of CBA (from 2015 to 2019)

(Source: https://www.commbank.com.au/content/dam/commbank-assets/about-us/2019-09/cba-annual-report-2019-spreads.pdf)