Network Rail - Growing Railway Infrastructure for a Sustainable Future - Essay Sample

Introduction

Over the last few years, railway transport has proved to be among the fastest, most sustainable and more efficient means of transports as compared to other means like road and air. Network Rail is the infrastructure manager and owner of the majority of Great Britain's railway networks. The company is a government transport body, which directs all its revenues to the expansion and growth of the railway lines and infrastructures. From around the 2000s to mid-2010s, Network Rails clientele has almost doubled as a result of minimal growth in the previous decade. To deal with the increasing number of passengers, the firm is in the middle of undertaking a mega upgrade worth over $30 Billion (Transport, T. S. o. S. f. 2019). Among the new upgrades is a new high-speed rail, new intercity trains, in-cab signalling, cross rail, upgrading Thameslink and electrification of lines.

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Key Sources of Income

Network Rail is a company in the public sector, which operates as a controlled monopoly in the UK. The firm's key financial sources include direct financial grants from the United Kingdom government, fees charged on train operator companies that use Network Rails network and the revenues got mainly from the company's commercial property estate. Since financial grants are free financial awards given to a state or federal government authority, Network Rail is not expected to repay the monies given. Network Rail operates in cycles of funding of 5 years called Control Periods (CP). The UK authorities responsible for transportation in the region are the responsible bodies for the control of the firm. These governments specify exactly what they require from the organization. The governments also set out and state the amounts of money they are willing to chip in for the completion of the demanded improvement projects. The Office of Rail and Road (ORR), a non-ministerial department of the UK government responsible for the safety and economic regulation and control highways and rail networks, then defines the amount of set and fixed income (Liu et al. 2019). These are the amounts of money the company is allowed to charge its clients to prevent them from exploiting the operators who use their rail. The ORR also assesses and evaluates the exact amount of cash needed by Network Rail to run efficiently in a specified period.

Network Rail also generates funds from both the freight and train operators who operate in their network. This is the profit got form selling the services they are responsible for. Another source of finances for Network Rail is the insignificant amounts of profits generated from the company's commercial property estate. In 2019, finances got from government grants amounted to over $4.1 billion. Access charges paid by the operating companies amounted to over $2.1 billion for rail and over $58 million for freight. In the same year, the company used more than 50% of its finances to renew existing infrastructures, leaving the rest for infrastructural maintenance among other company expenses.

Since Network Rail is a controlled monopoly funded by the government, there exists no relation between share capital and loans since the company is owned, and funded by the government. From my point of view, Network Rails does not appear to be in any financial risk since all of its operations are fully funded by the government and company profits.

Elements of Working CapitalWorking capital can be defined as the variance between current assets and liabilities (Zimon 2019). Current assets include receivables, cash, inventory, and marketable securities. On the other hand, current liabilities consist of all payables. The four components of working capital include:

Cash Management

Among all the components of current assets, cash is the most important. Cash is essential for every task undertaken by the firm such as the acquisition of raw materials and marketing of finished products. It is therefore very vital for any firm to check and maintain cash balance, which is adequate, and reliable (Lyngstadaas and Berg 2016). For a finance manager in any firm, it is their responsibility to ensure a balanced outflow and inflow of cash as an effort of maintaining enough cash at hand.

Receivables Management

Company receivables are all money claims owed to the company from clients that arise from the sale of company products and services in a normal line of business. Account receivables simply represent company debtors and it is among the most important elements of working capital subsequent to inventories and cash (Lyngstadaas and Berg 2016). The size of accounts receivable depends heavily on the firm's debt collection and credit sale policies, which massively influences the needs of working capital. Liberal credit policy heightens the size of sales but increases receivables investment at the same time. Therefore, one of the finance manager's important tasks is to examine and evaluate the costs and benefits related to credit policy.

Inventory Management

The inventory contains a significant part of the total working capital. To maximize shareholder earnings, efficient inventory management must be observed. To achieve efficient inventory management, two conflicting objectives must be managed and controlled; reduction of inventory investment on one hand and maintaining a smooth raw material and sales flow on the other (Samiloglu and Akgun 2016). Finance managers are responsible for calculating inventory levels where the two objectives conflict and like cash, inventory is held by a firm for transaction, speculative and precautionary motives.

Accounts Payable Management

Creditors or accounts payable are an important element of working capital. Payables offer a spontaneous finance source of working capital (Samiloglu and Akgun 2016). Cash management is closely linked to payables management since effective management of the latter results in a smooth supply of raw materials as well as enhancing the company's reputation.

In this particular area, Network Rails is not disadvantaged since it is fully owned and financed by the government and its profits. In cash management, Network Rail ensures a smooth inflow and outflow of cash from their creditors. The company also enjoys all the benefits that arise from effective inventory management since there are no shareholders to share revenue. Network Rail does not have many accounts payable since it is funded through grants from the government.

Company Risks

With the company operating in both Scotland and the UK, Network Rail faces a considerable number of risks ranging from financial risks to other business risks. Since the company operates in international soil, a kitty must be set aside to address the frequent risks to its income and cost (Power et al. 2016). Business and financial risks that face Network Rail include operational risks, which force firms to preplan every time a risk occurs. These operational risks must be addressed as soon as possible. Risk funding is set aside to provide contingency from the expected income and cost risks. Network Rail holds a portion of its risk funding at route level with the remainder of the funds held at the company headquarters. The company also faces the risk of allocation between routes from the long procedures and paperwork since Network Rail operates in two countries (Power et al. 2016). To address this problem, the firm management ensures that all routes follow the set business plan consistently and a clear line of vision from each route's risk management is available. The firm also ensures that the risk funding is well allocated between all routes available for easier and quicker risk management.

Budget flexibility is another risk facing Network Rails. The firm ensures that they always produce a bottom-up modelling strategy in budgeting ensuring that nothing is assumed (Transport, T. S. o. S. f. 2019). This kind of budget modelling states all impacts and assumptions made in the budget to avoid wastage and over budgeting. There are additional exchange rate risks that face Network Rails as a result of its operations in international soils. These risks are mainly caused by the impacts of unexpected and random currency fluctuations on the future of the company's cash flows. The effects of such risks can be substantial since random changes in exchange rates influence the firm's competitive position. Network Rail is lucky since exchange rates in both Scotland and the UK are almost similar and it does not affect their competitive position since the firm is a controlled monopoly.

In risk management, Network Rail has succeeded in addressing the business and financial risks that arise. Effective risk management has allowed the firm to reduce risk expenses through proper planning and budgeting, which has allowed them to register profits in the last two years (Transport, T. S. o. S. f. 2019).

Corporate Restructuring

Over the last half-decade, Network Rail has experienced an upward growth with its clientele doubling. The increased number of passengers has allowed the companies using the firm's rail network to increase their services, which increased their revenues. Since Network Rail is a firm in the public sector and answerable to both Transport Scotland and the Department of Transport, there are no notable corporate, restructuring activities completed (Transport, T. S. o. S. f. 2019). In acquiring new companies, Network Rail has remained to be a sole proprietor on the rail business. There exists no single business entity, corporation absorbed, or merged with Network Rail. The company, on the other hand, has entered into a joint venture with the United Kingdom government. The two organizations come together to provide transportation services to all citizens in the UK. The government requests what they need for its citizens and provide a substantial amount of money while the rest is generated from the firm's profits.

Conclusion

Over the years, Network Rail has continued to improve its transportation services all over the UK. The firm's key sources of funding include government grants, fees charged on train operator companies, and profits generated from the company's commercial real estate. Network Rail has also succeeded in the management of working capital, with a close examination of cash, receivables, inventory and accounts payable management. The company enjoys market control since it is the only provider of rails in the UK. The firm has also succeeded in risk management through proper planning and budgeting. Over the last five years, the company has experienced immense growth although very few corporate restructuring activities have been undertaken.

Reference List

Liu, S., Lin, F., Fang, X., Yang, Z. and Zhang, Z., 2019. Train Impedance Reshaping Method for Suppressing Harmonic Resonance Caused by Various Harmonic Sources in Trains-Network Systems With Auxiliary Converter of Electrical Locomotive. IEEE Access, 7, pp.179552-179563. https://ieeexplore.ieee.org/iel7/6287639/8600701/08930478.pdf

Lyngstadaas, H. and Berg, T., 2016. Working capital management: evidence from Norway. International Journal of Managerial Finance. https://biopen.bi.no/bixmlui/bitstream/handle/11250/2434334/Working%20capital%20management%202016.pdf?sequence=1

Power, C., Mian, J., Spink, T., Abbott, S. and Edwards, M., 2016. Development of an evidence-based geotechnical asset management policy for network rail, Great Britain. Procedia Engineering, 143, pp.726-733.https://core.ac.uk/download/pdf/82783471.pdf

Samiloglu, F. and Akgun, A.I., 2016. The relationship between working capital management and profitability: Evidence from Turkey. Business and Economics Research Journal, 7(2), p.1.https://pdfs.semanticscholar.org/4d9b/9d3d381997e8222b08501b178b309e04ad34.pdf