Recommend Analyze Range Of Plans And Budgets Roberta Finance Essay

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Those are available to Roberta to enable her to monitor and control all of her business
activities. Also to discuss the external and internal factors that may influence the
establishment of Roberta's plans and budgets.
2. Analyze the viability of an investment of an investment proposal:
Will describe the proposal and the technique and will show that in-depth calculations of
the viability of the investment plans available to her and also evaluate the impact of the
proposals on the business and provide her with the best investment plan available for
her at the end of this part.
3. Undertake research of two large public limited companies (PLC) and in that transport
companies- with a view to understand the business better a performance audit of two
companies have been taken and we also took the financial statements and other relevant
information. We will also discuss the potential limitations of the analysis.

Part 1
Roberta Kelly is currently going through the expansion period or we can say the
business is growing rapidly and as the business is increasing the handling of the
business is also getting tougher for Roberta. As she is the only one who has to stand
there and solve all the problems that are coming up, though each of the business is
having the manager but she fights with the problem herself. Whenever the business is in
the growing period or in a starting period we actually plan things and we divide the work
of the organizations into different departments. And where in which we need to recruit
people.
The range of plan that Roberta can look up to are as follows -

1} to manage her financial data what she can do is she can create the departments within
the organization and allocate the work accordingly to the department they belong. With
the help of this the work would be distributed properly amongst the people and the
organization and she can get the data of everything very quickly. In this case she need
not take care of all the things. Like if she needs the information of the cash availability in
the organization she can just ask it to the cash collection department and can see the
available balance if she wants to see the sales of the company with in a period of time
she can get that information from the sales department. Hence we will discuss all the
departments that are necessary for her and the budgets that are necessary for Roberta to
take care of her expanding business.
A budget is an important tool of planning, controlling, motivation, and coordination.
Budgets can help in
Identifying the problems in business and promotes forward thinking by planning. A
Distinction is made
Between short-term planning and a long term planning, alternatively known as strategic
or corporate
Planning. There are number of purposes of budgeting, which include:
1. Planning
2. Coordination
3. Control
4. Communication
5. Resource Allocation
6. Motivation
7. Performance Evaluation

BUDGET IMPLEMENTATION

As we have noted, an organization's controller plays a vital role is designing and

coordinating the budgeting process. A budget may have to go through many corrections
and changes in it before it has the approval of the budget committee. Once the
committee approves the budget the periodic report from all the different managers of
the concern department will allow the committee to keep the eye on the company's
progress and attaining budget targets.
Successful budget implementation depends on two main factors - clear communication
and the support of the top management.
In general, budgets can be classified into two primary categories (Cohen, Robbins,
Young,1994, p. 171):
1) Operating budgets: - Operating budgets consist of plans for all those activities that
make up the normal operations of the firm. The main components of the firm's
operating budget include sales, Production, inventory, materials, labor, overheads and
R&D budgets.
2) Financial budgets: - Financial budgets are used to control the financial aspects of the
business. In effect, these budgets reveal the influence of the operating budgets on the
firm's financial position and earnings potential. They include a cash budget, capital
expenditures budget and Performa balance sheet and income statement.
Service revenue budgetO
P
E
Service overhead budget
Labour
Budget
Selling and administrative expense budgetR
A

T
I
N
G
Budgeted income statement&
F
I
N
Cash budget
Budgeted balance sheetA
N
C
I
A
Capital expenditure budgetL
James Oscar mckinsey 1922 budgetory control
With the help of the above figure we can clearly understand how an organization does
depends on the budgets.
It is indeed very necessary to allocate the funds appropriately to all the departments in
the organization.

The normal departments that an organization need or have are the sales department,
purchase department, collection department, research and development, production
department.
And the budgets that are necessary for Roberta are the sales budget, production budget,
capital expenditure budget, cash budget, administration budget, stock budget. The
above mentioned are few budgets that are basically needed in any organization. The
problem Roberta is facing in her organization is that the work is not being allocated
properly and she has to handle each and every thing with oneself. And to solve this she
has to create the departments and for them she has to design the budget and allocate
funds accordingly. Let us now go ahead and see how these departments work -

1} sales department- this department takes care of the sales and with the help of that we
can see whether the business is making profits and are the sales are increasing or
decreasing and will help us to take the necessary steps.
Ex- with the help of this department the information of the sales of the company it
would be easy for Roberta to pull it up and she can have the record of the sales of the
company quarterly, half-yearly, and yearly. This will help her to improve the
performance of its company.
2} Accounts department- in this department all the transactions that have taken place
will have an entry and this department maintains all the records of the cash inflows and
outflows. Incase if there is some problem in the organization with the payment made or
payment received we can just contact this department and we will get the relevant
information. In this the employees do not go to the Roberta and discuss this problem
they can themselves cross check it with the accounts department. In this way Roberta is
not being disturbed much with such small things.
Ex- if Roberta has to see the balance sheet of the organization and check the
performance of the organization. This department will provide her all the information.
3} Marketing department- this department takes cares of all the marketing plans that
have being designed by the company for the particular year. This is one of the important
departments as all the sales of the company depends directly or we can say it as

indirectly on how we market our products and services. If we have marketed our
products and services in a very good manner we can gain the goodwill and we can also
increase our market share as the sales increase and the people are kept aware about the
products that we offer to our customers and services which we render to our customers.
This department's main job is to look onto our marketing strategies and how it is being
affecting on our customers as well as our competitors.
Ex- If the marketing strategy that has being approved and implemented to increase the
performance of the company in the current year and is not performing well we can make
it out with the help of this department and hence we can design another strategy and
can implement it. We can also see the cost efficiency of the strategies and choose one
amongst them which will give maximum outputs with minimum inputs.

OUTSOURCING OF WORK
The other thing that the Roberta can do is she can outsource the work to some other
company where the other company takes care of all the transactions on her company's
behalf and she can concentrate on her own business and try expanding it. She can pay
the nominal amount to other company and in return they will handle its business. The
main thing over here is to look for the company which is very well known in the market
and has goodwill in the market.

Part 2
Capital investment may be considered to be a part of capital budgeting process. It
involves both the selection of long-term investments and financing of them. And these 4
different methods of capital investment will surely help Roberta in understanding and
can further plan if she wants to take the project or not. Below mentioned are the 4
different types of method of capital investment. They are as follows
1. Payback period.
2. Accounting rate of return {ARR}.
3. Internal rate of return {IRR}.
4. Net present value {NPV}.

These methods helps us to know whether our money has been invested properly and can
get the return on investment {ROI} with the desired time and with the help of these
methods we will also be able to know which type of project is beneficial for our company
for instance if we have 2 or more than 2 projects to invest in .with the help of these
investment methods we can check the profitability of our organization in the near future
and can measure the threats or benefits if we have any in long run and in the short run
as well .. Now I will go in little depth of all the four methods and explain it individually
which make a clear picture about how these methods are different from one another and
which one is best suitable for the particular organization.

1. Payback period - "the number of years it takes the cash inflows from a capital
investment project to equal the cash outflows"

{Corina Pentland, course material 2010}

Payback period is measured in term of the net cash flows. We take the total cost of
investment which we call it in a financial management language as capital. In this
method our basic concern and the main information we need is to see the cash inflows
and the cash out flows. In other words we see the amount that has been recovered in a
particular year and how much more is yet to be recovered.
If we have two or more than two projects we can measure when we can recover the
amount invested in the project with the help of payback period and we can which of the
two projects is beneficial of our organization and which one is suitable for us to invest
our money into . THe earlier the payback period from the project or the business is
supposed to be the better to invest into.
And in the context of Roberta getting the proposal of overtaking its one of the suppliers
business and the amount she is expected to invest in this project is 1300000 and as per
the calculations done according to the payback period method she will start making
profits after fourth year and before the start of sixth year that is somewhere in fifth year.
In fifth year she will get back her money that she has invested in the project.
So according to me if Roberta has been thinking about the future and she is more
concern about running the business and investing the money into that project in respect

of the long run basis then it is good enough. Because whenever a business is been
started the person who starts the business or the organization who starts the business
knows very well that they can't get the immediate profits and they plan their strategies
of the business accordingly and which helps them to serve better over a period of time .
As per the question the Roberta had been approached by Sunil Patel to sell his transport
maintenance business and he asked Roberta if she is interested in an acquisition. As the
Initial Cost is being given 1.3m and she is going to save 200,000 per annum and
Sunil has provided a five-year budget i.e.
Year 1 80,000
Year 2 90,000
Year 3 100,000
Year 4 110,000
Year 5 120,000
Therefore as the Roberta is going to save 200,000 per annum
Then the cash flow for the five years is

Year's
Cash Flow
Cumm. C.F
Year 0
1,300,000
1,300,000

Year 1

280,000
1,020,000

Year 2
290,000
730,000

Year 3
300,000
430,000

Year 4
310,000
120,000

Year 5
320,000
200,000
Therefore the Pay Back period is in the 5th year
Cumm. Cash Flow is 200,000
If assume that cash=profit
Average Profit = 200,000/5
= 40,000
Capital Employed = 1,3 00,000

2. Accounting rate of return - "Accounting rate of return compares the profit of a project
with the capital invested in it".

{Corina Pentland course material 2010}

The accounting rate of return is very much similar to ratios. The main benefit of using
the accounting rate of return is that is very easy to understand and to calculate as well.
In ARR we take all the installments and then calculate the profits i.e. average annual
profit. In this all the cash flows are used and taken into consideration. The ARR mainly
focuses on profit. And higher the ARR the higher are the profits of the organizations.
The main disadvantage of ARR according to me is that it doesn't take the time value of
money. Because money value depreciates over a period of time it always needs the
return of the investment continuously for example if I would have saved the money
1000 GBP in 2000 and now if I take it out and spend that 1000 GBP on purchasing
something I would get only few things when compared to the money if I have spend it in
the year 2000 so what is happening here the value of money id depreciating. And in
ARR it also doesn't take much of time into consideration and if Roberta is ready to
invest her money for a long period of time then it is useful for her. As in the case
mentioned Roberta doesn't have any other projects as an option if she wanted to invest
in. if she had any then we could have calculated the ARR of both the projects and
suggested her with the best one between the two .
In this project the average annual profit according to the calculations made is 40000
and the calculated ARR percentage is 3.0769 and which may increase over a period of
time.
A.R.R = Average Profit/Capital Employed x 100
Average profit = 200,000/5
= 40,000
Therefore, A.R.R = 40,000/13, 00,000 x 100
= 0.0307692x100
A.R.R = 3.0769%

3. Internal rate of return {IRR}- an alternative method of investment appraisal based on

discounted net cash flow is known as internal rate of return. However, instead of
discounting the expected net cash flows by a predetermined rate of return, the IRR
method seeks to answer the following question:
What rate of return would be required in order to ensure that the total NPV equals the
total initial cost?
In theory, a rate of return that was lower than the entity's required rate of return would
be rejected. In practice, however, the IRR would only be one factor to be taken into
account in deciding whether to go ahead with the project or not.

{Accounting for non-Accounting students 5th

edition 2001 from J.R.DYSON pg no 409}
"The rate of return on an investment" seeks to determine the rate of return needed to
ensure PV equals the initial cost: NPV = 0.

{Corina Pentland course material 2010}.

The internal rate of return basically gives you the rough idea of the return that we get on
our investment. But it helps you compare the data and which is very helpful for the
organization. With the help of IRR we can take effective decisions for our organization.
In this case we use more than two discount rates to get the better picture for our returns
on our investment. This is called trial and error method.
In the case of Roberta investing in the project and the project is expected to be
1,300,000. If the company expects the rate of return of 5%, the project will not be
accepted as its NPV is negative however the required rate of return is 4%, the project
will be accepted, because the NPV is positive. The project will be profitable provided
that the company does not require a rate of return in excess of 4%.
In this we assumed another different percentage and then we are going to calculate, I
am going to take 4% difference.

Year's

N.C.F
4% diff.
P.V
Year 1
280,000
0.962
269,360

Year 2
290,000
0.925
268,250

Year 3
300,000
0.889
266,700

Year 4
310,000
0.855
265,050

Year 5

 320,000
0.822
263,040

Total
1,332,400

Less Cost
1,300,000
(32,400)
I.R.R = +rate+ (+NPV/the two NPV's added together x range of rates)
Therefore,
I.R.R. = 4 + (32,400/32,400+5,200) x 1
= 4 + (32,400/37,600) x 1
= 4 + 0.861 x 1
I.R.R. = 4.861
4. Net present value {NPV} - the Net present value method recognizes that cash received
today is preferable to cash receivable sometime in the future.

{Accounting for non-Accounting students 5th

edition 2001 from J.R.DYSON pg no 407}
In NPV method we calculate the annual net cash flows expected to arise from the
project. With the help of NPV method we will be in a position to know whether the
business is going to make profits with the given figures and the given time or not. And if
the NPV is positive we can accept the project and can go ahead and invest the money in
that project and if the NPV is negative then it risk investing in that project as it will not

give to profits in the given period and you might have to wait for some more time. And
NPV also undertakes the time value into consideration which is very beneficial for the
organization. And in the above project Roberta should not take this project according to
the NPV method the NPV is negative and she has to wait for the some more time to
cover her invest and start earning the profits.

Year's
N.C.F
5% diff.
P.V
Year 1
280,000
0.952
266,560

Year 2
290,000
0.907
263,030

Year 3
300,000
0.864
259,200

Year 4
310,000
0.823
255,130

Year 5
320,000
0.784
250,880

Total
1,294,800

Less cost
1,300,000
(5200)
As per the N.P.V is (5200), which is not good for the company because it is negative.
Company is not going to repay their cash in the 5-year period.

PART 3
RATIO ANALYSIS
Company Name
British airways

A
PROFITABILITY RATIOS
2009
2008
1
Net Profit Margin
{net profit(before tax and interest)/turnover}X100
4.46%
10.53%
2
Return on Net Assets or Capital Employed
{net profit (before tax and interest)/capital employed(net assets)}x100
21.72%
28.26%
3
Gross Profit Margin
(gross profit/turnover)x100
2.45%
10.03%

LIQUIDITY RATIOS
4
Current Ratio
Current assets/current liabilities
0.566
0.890
5
Quick Ratio or Acid test Ratio
Current assets - stock/ current liabilities
0.535
0.858

C
EFFICIENCY RATIO
6
Debtors turnover
(debtors/turnover)x365
21.51
24.42
7
Stock turnover Ratio

Cost of sale/average stock

73.40
70.35
8
Creditors turnover Ratio
(creditors/turnover)x365
113.49
119.82

D
GEARING OR LEVERAGE RATIOS
9
Total debt Ratio
total liabilities/total assets
0.823
0.711
10
Debt Equity Ratio
total debt/total equity
2.437
1.391

11
Gearing Ratio
Long term liabilities/equity shareholders fund
2.733%
1.482%

E
INVESTEMENT PERFORMANCE RATIOS
12
Earnings Per Share
Net profit(after tax and preference dividends)/no of ordinary shares
32.6
61.9

RATIO ANALYSIS
COMPANY NAME
EASY JET
A
PROFITABILITY RATIOS
2009
2008

1
Net Profit Margin
{Net Profit (before tax and interest)/Turnover} x
100
2.051%
4.664%
2
Return on Net Assets or Capital Employed
{net profit (before tax and interest)/capital employed(net assets)}x100
4.18%
8.62%
3
Gross Profit Margin
(gross profit/turnover)x100
2.25%
3.85%

B
LIQUIDITY RATIOS
4
Current Ration

Current Assets/Current
Liabilities
1.39
1.54
5
Quick Ratio or
Acid Test Ratio
Current Asset - Stock/
Current Liabilities
1.326
1.326

C
EFFICIENCY RATIOS
6
Debtors turnover
(Debtors/Turnover) x 365
33.09
36.59
7
Stock

turnover ratio
Cost of sales/Average
Stock
19.44
11.65
8
Creditors turnover Ratio
(Creditors/Turnover) x
365
102.74
100.87

D
GEARING OR LEVERAGE RATIOS
9
Total debt Ratio
Total liabilities/total
Assets
0.644
0.587
10

Debt-Equity
Ratio
Total Debt/Total Equity
0.997
0.709
11
Gearing Ratio
Long Term Liabilities/
Equity Shareholders
Fund
0.997%
0.997%

E
INVESTEMENT PERFORMANCE RATIOS
12
Earnings Per Share
Net profit(after tax and preference dividends)/no of ordinary shares
16.9
19.8

Profitability ratios: - Gross profit margin and net profit margin ratios are used to make
sure that managers, owners, employees and potential investors know the profitability of
the above mentioned two companies. According to the calculations net profit margin of
British airways for 2009 is 4.46% and in 2008 it was 10.527%. As the economic
recession that has hit many countries in the world UK is one of them and many business
have being facing losses but it was not with the easy jet its net profit margin was not
effected too much, in 2008 it was 4.6639% and in 2009 it was 2.051% . Both the
companies have faced losses due to the economy slow down but easy jet managed to
incur less losses than British airways.
Liquidity ratios:- liquidity is the one of the key factor for any business. As the need of
money may occur any time so the business owners should be in a position to get the
money and should have the availability of money. The current ratio of British airways
for 2009 is 0.566%and that of easy jet is 1.39% and the current ratio of British airways
in 2008 it was 0.89% and that of easy jet is 1.54%. According to the percentages derived
we can see that easy jet has more cash availability than British airways.
Efficiency ratios: - The British airways debtor's turnover in 2009 was 21.51% but in
2008 it was 24.42% and the creditor's turnover in 2009 was 113.49% which is too high
and that of easy jet the debtors turnover ratios was 33.09% and their creditors 102.74%.
If we make the comparison of the ratios of easy jet and British airways the ratios of easy
jet are very good.
Gearing ratios: - The gearing ratios for British airways were 2.73% in 2009 and in 2008
it was 1.482%. And for easy jet it was 0.997 and 0.709. According to the ratios the
British airways is highly geared and it would very difficult for them to borrow money
from the potential market. And for the easy jet it is very good because they still have
people and institutions in the market to borrow money from.
Investment performance ratios: - The earning per share ratio of British airways in 2009
was 32.6 per share and that of easy jet shares are 16.9 per share. The earnings per share
ratio of British airways is good. But after the hit of economic slowdown the British
airways were struck badly because the earning per share ratio for them in 2008 was 61.9
per share and that of easy jet shares it 19.8 per share . Hence the easy jet didn't got
struck too badly in the economic slowdown and have managed to incur less losses.

CONCLUSION
Looking at the above profitability shets we can say that easy jets performance is better
than the British Airways. Easy jet has a safer capital structure than British Airways. Both
to creditors and the debtors it has a strong debt paying ability and low debt risk in the
long run. British Airways can improve its ratio by reducing its long term borrowing.
However, we should also be aware of the limitations of the ratio, such as price changing,
window dressing, lack of qualitative information, etc and make adjustments necessary.

REFLECTIVE STATEMENT
From the above assignment of financial management given by Corina Pentland i have
learned how to analyze the company's profitability and also how to use the accounting
tools and techniques to analyze the profitable project suitable for the particular
organization. It has being a wonderful experience to read various books of financial
management to complete this assignment and have learned many things about
accounting which i was not aware of.