31 Financial risk management

The company and Group's activities expose it to a variety of financial risks including: market risk (including foreign currency risk and cash flow interest rate risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group uses derivative financial instruments to hedge certain foreign exchange exposures.

Credit risk

Credit risk is managed on a Group basis except for credit risk relating to accounts receivable balances which each entity is responsible for managing. Credit risk arises from cash and cash equivalents, as well as credit exposures to Wholesale and to a lesser extent Retail customers, including outstanding receivables and committed transactions. For Wholesale customers, management assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. For those sales considered higher risk, the Group operates a policy of cash in advance of sale. Sales to Retail customers are settled in cash, major credit cards or by PayPal. The Group regularly monitors its exposure to bad debts in order to minimise exposure. Credit risk from cash and cash equivalents is managed via banking with well-established banks with a strong credit rating.

Foreign currency risk

The Group's foreign currency exposure arises from:

  • transactions (sales/purchases) denominated in foreign currencies;
  • monetary items (mainly cash receivables and borrowings) denominated in foreign currencies; and
  • investments in foreign operations, whose net assets are exposed to foreign currency translation.

The Group is mainly exposed to US dollar and euro currency risks. The exposure to foreign exchange risk within each company is monitored and managed at Group level. The Group's policy is to economic hedge a portion of foreign exchange risk associated with forecast overseas transactions, and transactions and monetary items denominated in foreign currencies.

The Group's policy is to hedge the risk of changes in the relevant spot exchange rate. The Group uses forward contracts to hedge foreign exchange risk. As at 26 April 2014 and 28 April 2013, the Group had entered into a number of foreign exchange forward contracts to hedge part of the aforementioned translation risk. Any remaining amount remains unhedged.

Forward exchange contracts have not been formally designated as hedges and consequently no hedge accounting has been applied. Forward exchange contracts are valued at fair value.

Currency exposure arising from the net assets of the Group's foreign operations are not hedged.

At 26 April 2014 if the currency had weakened/strengthened by 10% against both the US dollar and euro with all other variables held constant, profit for the period would have been £2.0m (2013: £1.8m) higher/lower, mainly as a result of foreign exchange gains/losses on translation of US dollar/euro trade receivables, cash and cash equivalents, and trade payables.

The figure of 10% used for sensitivity analysis has been chosen because it represents a range of reasonably probable fluctuations in exchange rates.

The Group's foreign currency exposure is as follows:

Group
US Dollar
£m
2014
Euro
£m
US Dollar
£m
2013
Euro
£m
Financial assets
Trade receivables0.117.50.414.2
Cash and cash equivalents1.412.55.76.3
Assets1.530.06.120.5
Financial liabilities
Trade payables(1.1)(10.2)(1.8)(6.9)
Liabilities(1.1)(10.2)(1.8)(6.9)
Net exposure0.419.84.313.6

The US dollar and euro overdrafts form part of an offset arrangement and as such each currency is netted off against other cash balances in the same currency and is not recognised as an overdraft in its own right.

Cash flow interest rate risk

The Group has financial assets and liabilities which are exposed to changes in market interest rates. Changes in interest rates impact primarily on deposits, loans and borrowings by changing their future cash flows (variable rate). Management does not currently have a formal policy of determining how much of the Group's exposure should be at fixed or variable rates and the Group does not use hedging instruments to minimise its exposure. However, at the time of taking new loans or borrowings management uses its judgement to determine whether it believes that a fixed or variable rate would be more favourable for the Group over the expected period until maturity. Sensitivity analysis has not been provided due to the low level of loans and borrowings within the Group. The Group's significant interest-bearing assets and liabilities are disclosed in notes 24 and 25.

Liquidity risk

Cash flow forecasting is performed on a Group basis by the monitoring of rolling forecasts of the Group's liquidity requirements to ensure that it has sufficient cash to meet operational needs. The maturity profile of the Group's liabilities is analysed in notes 25 and 26.

Valuation hierarchy

The table below shows the financial instruments carried at fair value by valuation method:

Group
Level 1Level 2Level 3Level 1Level 2Level 3
20142013
£m£m£m£m£m£m
Assets
Derivative financial instruments
– forward foreign exchange
contracts
1.4
Liabilities
Derivative financial instruments
– forward foreign exchange
contracts
2.3

The level 2 forward foreign exchange valuations are derived from mark-to-market valuations based on observable market data as at the close of business on 26 April 2014.

Fair value losses of £3.7m (2013: gain of £2.6m) relating to the movement on open forward foreign exchange contracts have been recognised in other gains and losses.

The notional principal amount of the outstanding forward foreign exchange contracts at 26 April 2014 was £122.8m (2013: £40.9m).

Derivative financial instruments

The table below analyses the Group's and company's derivative financial instruments which will be settled on a gross basis. The amounts disclosed in the table are the contractual undiscounted cash flows.

GroupCompany
2014
£m
2013
£m
2014
£m
2013
£m
Forward foreign exchange contracts
– held for trading
Outflow(73.7)(23.4)
Inflow49.117.5
Net derivative exposure(24.6)(5.9)

All cash flows will occur within 18 months.

All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative.

The table below analyses the Group's and company's derivative financial instruments. The amounts disclosed in the table are the carrying balances of the assets and liabilities as at the balance sheet date.

GroupCompany
2014
£m
2013
£m
2014
£m
2013
£m
Derivative financial assets
Forward foreign exchange contracts1.4
Total derivative financial assets1.4
Derivative financial liabilities
Forward foreign exchange contracts2.3
Total derivative financial liabilities2.3

All financial derivative instruments are due within 18 months.

Trading derivatives are classified as a current asset or liability. The full fair value of a derivative is classified as a non-current asset or liability if the remaining maturity of the derivative is more than 12 months and as a current asset or liability, if the maturity of the derivative is less than 12 months.

Capital risk management

The Group's objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders, and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital employed. Net debt is calculated as total borrowings (including 'current and non-current borrowings' as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital employed is calculated as 'equity' as shown in the consolidated balance sheet plus net debt. The Group is in a net cash position at 26 April 2014.

The Directors have concluded that the company is best served by retaining current cash reserves to support growth. Consequentially, a recommendation will be made to the AGM that no dividend is payable for 2014 (2013: £nil).

Financial instruments by category

Group
Assets at fair value through profit and loss 2014
£m
Loans and receivables 2014
£m
Total
2014
Assets at fair value through profit and loss 2013
£m
Loans and receivables
2013
£m
Total
2013
Trade and other receivables excluding prepayments33.933.931.931.9
Derivative financial instruments1.41.4
Cash and cash equivalents86.286.254.554.5
Financial instruments – assets33.986.2120.11.486.487.8
Group
Liabilities at fair value through profit and loss
2014
£m
Other financial liabilities at amortised cost
2014
£m
Total
2014
£m
Liabilities at fair value through profit and loss
2013
£m
Other financial liabilities at amortised cost
2013
£m
Total
2013
£m
Borrowings0.10.10.40.4
Derivative financial instruments2.32.3
Trade and other payables excluding non-financial liabilities86.286.276.376.3
Financial instruments – liabilities2.386.388.676.776.7
Company
Loans and receivables
2014
£m
Loans and receivables
2013
£m
Trade and other receivables excluding prepayments37.416.4
Cash and cash equivalents43.314.7
Financial instruments – assets80.731.1