PGBM12 Accounting and Financial Management Assessment January 2019 cohort

This report evaluates the financial performance of Bitmap Plc through ratio analysis and discusses the working capital cycle. It also covers capital budgeting and managing finance.

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PGBM12 Accounting and Financial Management Assessment January 2019 cohort

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Contents
Part A:..............................................................................................................................................4
Part A.1: Report for board of Bitmap plc........................................................................................4
Introduction......................................................................................................................................4
Ratio Analysis of Bitmap Plc..........................................................................................................4
Profitability Ratios Analysis........................................................................................................4
Gross Profit Ratio.....................................................................................................................4
Return on Capital Employed....................................................................................................5
Liquidity Ratio Analysis..............................................................................................................6
Current Ratio............................................................................................................................6
Quick Ratio...............................................................................................................................6
Gearing Ratio Analysis................................................................................................................7
Debt to equity ratio......................................................................................................................7
Asset utilization ratio analysis.....................................................................................................8
Inventory Turnover Ratio in days............................................................................................8
Asset Turnover ratio.................................................................................................................8
Investor’s potential analysis.........................................................................................................9
Dividend per share....................................................................................................................9
Earnings per share..................................................................................................................10
Conclusion.................................................................................................................................10
Part A.2: Working capital cycle of Bitmap plc..............................................................................10
Part B: Capital budgeting and managing finance..........................................................................12
Part B.1: Application of capital budgeting investment appraisal techniques to the given scenario
.......................................................................................................................................................12
Part B.2: Critical Evaluation of the Key Benefits and Limitations of Different Investment
Appraisal Techniques....................................................................................................................17
a. The Payback Period................................................................................................................17
b. The Discounted Payback Period............................................................................................17
c. The Accounting rate of return................................................................................................18
d. The Net Present Value...........................................................................................................18

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Part B.3: Evaluation of Suitable Sources of Finance for funding this investment........................18
Part C:............................................................................................................................................20
Part C.1: Budget and its Relation with Strategic Objectives and Strategic Plans.........................20
Part C.2: Critical Evaluation of the Budgeting process and Interlinking of Various Budgets......20
References......................................................................................................................................22

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Part A:
Part A.1: Report for board of Bitmap plc
Introduction
The main purpose of report is to evaluate financial performance of Bitmap Plc for year
2016 and 2017 through use of ratio analysis as the most significant financial tool. The five most
important categories of ratio analysis that are used to evaluate the financial performance of
Bitmap Plc are profitability, gearing, liquidity, asset management and investors potential.
Ratio Analysis of Bitmap Plc
Particulars Bitmap plc
2016 2017
Amount in £000
Current Assets £ 4,150.00 £ 5,160.00
Current Liabilities £ 1,100.00 £ 1,500.00
Inventories £ 1,800.00 £ 2,360.00
Gross Profit £ 9,100.00 £ 12,200.00
Net Revenue/Sales £ 18,000.00 £ 23,000.00
Cost of goods sold £ 8,900.00 £ 10,800.00
Operating Profit Margin £ 5,100.00 £ 6,800.00
Net Profit Margin £ 3,220.00 £ 4,060.00
Debts (ALL) £ 2,000.00 £ 3,500.00
Shareholders’ Equity £ 12,000.00 £ 15,760.00
Total Assets £ 15,500.00 £ 20,360.00
Capital Employed £ 14,400.00 £ 18,860.00
Average Inventory £ 1,800.00 £ 2,080.00
Dividend Payments £ 200.00
£
300.00
Retained profit for the year £ 3,020.00 £ 3,760.00
Number of equity shares 10000 10000
Profitability Ratios Analysis
Gross Profit Ratio
This ratio measures gross profit earns by company on percentage of total sales revenue.
Formula: Gross Profit margin/Net sales or sales revenue (Brigham and Michael, 2013)
Particulars Bitmap plc

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Profitability Ratio 2016 2017
Gross Profit 50.56% 53.04%
2016 2017
49.00%
49.50%
50.00%
50.50%
51.00%
51.50%
52.00%
52.50%
53.00%
53.50%
Gross Profit Ratio
Percentage
Above bar graph reflects the gross profit percentage earned by Bitmap Plc during years
2016 and 2017. Through analyzing the above graph it can be said that there had been increasing
trend in gross profit ratio.
Return on Capital Employed
Return on capital employed is important for management point of view as it reflects the
percentage of profit earned on the total capital invested. Capital investment includes equity share
capital, retained earnings and non-current liabilities.
Formula: Net Profit after tax/ (Total assets-Current liabilities)
Particulars Bitmap plc
Profitability Ratio 2016 2017
Return on Capital Employed 22.36% 21.53%
2016 2017
20.00%
20.50%
21.00%
21.50%
22.00%
22.50%
23.00%
23.50%
Return on Capital Employed
Percentage
This ratio has been decreased in year 2017 as compared to year 2016 despite an increase
in net profit after tax. The main reason behind decrease in capital employed ratio was due to

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increase in overall capital invested in business. Although Bitmap provide very good percentage
of return on capital employed.
Liquidity Ratio Analysis
Current Ratio
This ratio is very important indicator of overall liquidity position of the company. It
measures ability of the company to pay the short time liabilities as they fall due through use short
term assets.
Formula: Current assets/Current Liabilities (Damodaran, 2011)
Particulars Bitmap plc
Liquidity Ratios 2016 2017
Current Ratio 2.77 4.69
2016 2017
0.00
1.00
2.00
3.00
4.00
5.00
Current Ratio
Times
Current ratio of 2.77 times indicates Bitmap plc has enough current assets to pay for
current liabilities for future year. This ratio has increased in year 2017 to 4.69 times reflects very
strong liquidity position of company. One thing that must be take care here that company has
enough working capital in year 2017 which it can utilized for expansion of sales.
Quick Ratio
This ratio is similar to current ratio but it is absolute measure of liquidity position as it
does not consider inventory and prepaid expenses as short term assets. Inventory is not referred
as quick assets because they cannot be easily converted into cash and cash equivalent.
Formula: (Current assets-Inventory)/Current liabilities
Particulars Bitmap plc
Liquidity Ratios 2016 2017
Quick Ratio 1.57 2.55

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2016 2017
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quick Ratio
Times
Bitmap Plc has quick ratio of 1.57 times in year 2016 and 2.55 in year 2017 that indicates
company has enough short term assets other inventory to pay for current liabilities.
Gearing Ratio Analysis
Debt to equity ratio
Debt to equity ratio is the most important capital structure ratio as it reflects the
proportion of debt over the equity.
Formula: Long term liabilities/Shareholders Equity (Davies and Crawford, 2011)
Particulars Bitmap plc
Gearing Ratio 2016 2017
Debt to Equity Ratio 29.17% 29.19%
2016 2017
29.15%
29.16%
29.17%
29.18%
29.19%
Debt to Equity Ratio
Percentage
Bitmap Plc uses more than 29% of debt capital over the equity capital which balance
capital structure of Bitmap Plc. Company uses balanced nature of capital structure in both the
years under consideration.

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Asset utilization ratio analysis
Inventory Turnover Ratio in days
This ratio measures the efficiency of management to make use of inventory for earning
maximum sales revenue. It reflects number of days required by company to dispose average
inventory in the market.
Formula: Average Inventory *365 /Cost of goods sold
Particulars Bitmap plc
Asset utilization 2016 2017
Inventory Turnover Ratio in
days 73.82 70.30
2016 2017
68.00
69.00
70.00
71.00
72.00
73.00
74.00
75.00
Inventory Turnover Ratio
In Days
Bitmap Plc requires 74 days in year 2016 to convert inventory into cost of goods sold and
it has been improved as in year 2017 company requires 70days dispose of average inventory
during the year.
Asset Turnover ratio
This ratio measures the management efficiency to utilize the assets to earn the sales
revenue.
Formula: Sales revenue/Average total assets (Krantz, 2016)
Particulars Bitmap plc
Asset utilization 2016 2017
Asset Turnover ratio 1.16 1.13

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2016 2017
1.11
1.12
1.13
1.14
1.15
1.16
1.17
Asset turnover ratio
Times
From the above graph it can be concluded that management at Bitmap Plc has been able
to earn 1.16 times of sales in year 2016 and 1.13 times in year 2017 through use of total assets. It
can be said that there is need to improve the efficiency through utilizing more assets to earn the
sales.
Investor’s potential analysis
Dividend per share
It refers to amount of earning that is received by investors in form of dividend for
investing in company’s share.
Formula: Total dividend paid/Number of shares
Particulars Bitmap plc
Investors potential 2016 2017
Dividend Per share
£
0.02
£
0.03
2016 2017
£-
£0.01
£0.02
£0.03
£0.04
Dividend Per Share
In Pound

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Dividend per share has been very low as compared to earnings per share earned by
Bitmap in the respective years. However dividend per share has increased in current year that
reflects growth of the company in terms of revenue and profit.
Earnings per share
This ratio measures amount of earnings per share earned by company after bearing all the
expenses including preference dividend.
Formula: Net profit available for equity shareholder’s /Number of shares (Moles and Kidwekk,
2011)
Particulars Bitmap plc
Market Ratio 2016 2017
Earnings per share
£
0.32
£
0.41
2016 2017
£-
£0.05
£0.10
£0.15
£0.20
£0.25
£0.30
£0.35
£0.40
£0.45
Earning Per Share
In Pounds
Earnings per share of Bitmap Plc have improved from £0.32 in year 2016 to £0.41 in year
2017 reflecting an improved profitability performance in year 2017.
Conclusion
Overall financial performance of Bitmap Plc has been improved in year 2017 as
compared to year 2016 but it is recommended to the management of company to pay more
attention to asset management policies of the company.
Part A.2: Working capital cycle of Bitmap plc
Working capital cycle is also known as operating cycle (Cash cycle) of a company and it
is used to measure the average time required to turn the inventory into cash. It means working
capital cycle will provide information on how much time company takes to complete one
complete cycle of business process. It includes purchasing of inventory, inventory sell time,
collection of money from customers and again using the earned cash into purchase of inventory.

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Formula to calculate the working capital cycle period is as follows:
Days inventory outstanding (DIO) + Days sales outstanding (DSO) – Days payable
outstanding (DPO)
Bitmap plc
Financial Item 2016 2017
Amount in £000
Opening Inventory £ 1,700.00 £ 1,800.00
Closing Inventory £ 1,800.00 £ 2,360.00
Average inventory £ 1,750.00 £ 2,080.00
Cost of goods sold £ 8,900.00 £ 10,800.00
Opening Account Receivable £ 1,600.00 £ 1,600.00
Closing Account Receivable £ 1,600.00 £ 2,300.00
Average Account Receivable £ 1,600.00 £ 1,950.00
Credit Sales (All Sales) £ 18,000.00 £ 23,000.00
Opening Account Payable £ 1,500.00 £ 1,500.00
Closing Account Payable £ 1,500.00 £ 1,100.00
Average Account Payable £ 1,500.00 £ 1,300.00
Bitmap plc
Working Capital Cycle in days
Ratios Formula 2016 2017
Days inventory outstanding
(DIO)
Average Inventory *365 /Cost
of goods sold 71.77 70.30
Days sales outstanding (DSO)
Average account Receivable
*365 /Net Credit Sales 32.44 30.95
Days payable outstanding (DPO)
Average accounts
payable*365/Cost of goods
sold 61.52 43.94
Working Capital Cycle In days 42.70 57.31
(Phillips, P.P. and Stawarski, 2016)
As per above calculation of working capital cycle of Bitmap Plc it can be said that asset
management policy at Bitmap Plc was not efficient as company has taken 43 days to convert
inventory into cash in year 2016 and 57 days in year 2017. It means company has taken more
days to convert inventory into cash. In year 2017, company has paid more early to suppliers as in
year 2016 which indicates company requires more cash for working capital purpose. It is advised
to company to strictly follow its asset management policies.

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Part B: Capital budgeting and managing finance
Part B.1: Application of capital budgeting investment appraisal techniques to the given
scenario
Given Data
Years Particulars Project A Project B
Machine A Machine B
Year 0 Initial Investment -£ 500,000.00 -£ 500,000.00
Year 1 Cash Inflow £ 300,000.00 £ 20,000.00
Year 2 Cash Inflow £ 250,000.00 £ 50,000.00
Year 3 Cash Inflow £ 200,000.00 £ 150,000.00
Year 4 Cash Inflow £ 150,000.00 £ 200,000.00
Year 5 Cash Inflow £ 50,000.00 £ 250,000.00
Year 6 Cash Inflow £ 20,000.00 £ 300,000.00
Year 6 Residual Value £ 50,000.00 £ 50,000.00
Method 1 Payback Method
For Even cash inflows For Uneven Cash Inflows
Initial Investment A+ B/C
Cash Inflow per Period
Where:
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A
(Reilly and Brown, 2011)
Cumulative Cash Flows of Machine A
Years Machine A Cumulative
Year 0 -£ 500,000.00 -£ 500,000.00
Year 1 £ 300,000.00 -£ 200,000.00
Year 2 £ 250,000.00 £ 50,000.00
Year 3 £ 200,000.00 £ 250,000.00
Year 4 £ 150,000.00 £ 400,000.00
Year 5 £ 50,000.00 £ 450,000.00
Year 6 £ 20,000.00 £ 470,000.00
Cumulative Cash Flows of Machine B
Years Machine B Cumulative
Year 0 -£ 500,000.00 -£ 500,000.00
Year 1 £ 20,000.00 -£ 480,000.00

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Year 2 £ 50,000.00 -£ 430,000.00
Year 3 £ 150,000.00 -£ 280,000.00
Year 4 £ 200,000.00 -£ 80,000.00
Year 5 £ 250,000.00 £ 170,000.00
Year 6 £ 300,000.00 £ 470,000.00
Results Machine A Machine B
Payback 1.80 4.32
1 year 10 months 4 years 4 months
Recommendations using payback method: Payback period of Machine A is very low so
it is suggested to Toyland ltd to choose Machine A for investment purpose.
Method 2 Discounted payback method
Formula:
It is same as payback but in this all the
cash flows are discounted then formula
of payback is applied
Cost of capital or discounted rate 10%
(Schlichting, 2013)
Cumulative Cash Flows of Machine A
Years Cash Flows PV Cumulative PV
Year 0 -£ 500,000.00 -£ 500,000.00 -£ 500,000.00
Year 1 £ 300,000.00 £ 272,727.27 -£ 227,272.73
Year 2 £ 250,000.00 £ 206,611.57 -£ 20,661.16
Year 3 £ 200,000.00 £ 150,262.96 £ 129,601.80
Year 4 £ 150,000.00 £ 102,452.02 £ 232,053.82
Year 5 £ 50,000.00 £ 31,046.07 £ 263,099.89
Year 6 £ 20,000.00 £ 11,289.48 £ 274,389.37
Year 6 £ 50,000.00 £ 28,223.70 £ 302,613.06
Cumulative Cash Flows of Machine B
Years Cash Flows PV Cumulative PV
Year 0 -£ 500,000.00 -£ 500,000.00 -£ 500,000.00
Year 1 £ 20,000.00 £ 18,181.82 -£ 481,818.18
Year 2 £ 50,000.00 £ 41,322.31 -£ 440,495.87
Year 3 £ 150,000.00 £ 112,697.22 -£ 327,798.65
Year 4 £ 200,000.00 £ 136,602.69 -£ 191,195.96
Year 5 £ 250,000.00 £ 155,230.33 -£ 35,965.63

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Year 6 £ 300,000.00 £ 169,342.18 £ 133,376.55
Year 6 £ 50,000.00 £ 28,223.70 £ 161,600.25
Results Machine A Machine B
Discounted payback method 2.14 5.21
2 years 2 months 5 years 3 months
Recommendations using discounted payback method: Discounted payback period of
Machine A is very low so it is suggested to Toyland ltd to choose Machine A for
investment purpose.
Method 3 Accounting Rate of Return
Formula Average Accounting Profit
Average Investment
(Zimmerman and Yahya-Zadeh, 2011)
Particulars Machine A Machine B
Annual Depreciation £75,000.00 £75,000.00
Calculation of Average Accounting Profit/Income
Machine A
Years Year 1 Year 2 Year 3 Year 5 Year 6
Cash Inflows
£
300,000.00
£
250,000.00
£
200,000.00
£
50,000.00
£
20,000.00
Less:
Depreciation
£
75,000.00
£
75,000.00
£
75,000.00
£
75,000.00
£
75,000.00
Accounting
Income
£
225,000.00
£
175,000.00
£
125,000.00
-£
25,000.00
-£
55,000.00
Average
Accounting
Income
£
74,166.67
Accounting
Rate of Return
Machine A 14.833%
Machine B
Years Year 1 Year 2 Year 3 Year 5 Year 6
Cash Inflows
£
20,000.00
£
50,000.00
£
150,000.00
£
250,000.00
£
300,000.00

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Less:
Depreciation
£
75,000.00
£
75,000.00
£
75,000.00
£
75,000.00
£
75,000.00
Accounting
Income
-£
55,000.00
-£
25,000.00
£
75,000.00
£
175,000.00
£
225,000.00
Average
Accounting
Income
£
65,833.33
Accounting
Rate of Return
Machine 2 13.167%
Decision: In both the machines the accounting rate of return of Machine A is much
greater than machine B, so it is advised to choose machine A.
Method 4 Net Present Value
Formula Present Value of Cash Inflows - Present
Value of cash outflows
Cost of capital or discounted rate 10%
(Arnold, 2013)
Particulars PVF @ 10% PV of Machine A
@ 10%
PV of Machine B
@ 10%
Year 1 0.909 £272,727.27 £18,181.82
Year 2 0.826 £206,611.57 £41,322.31
Year 3 0.751 £150,262.96 £112,697.22
Year 4 0.683 £102,452.02 £136,602.69
Year 5 0.621 £31,046.07 £155,230.33
Year 6 0.564 £11,289.48 £169,342.18
Residual Value 0.564 £28,223.70 £28,223.70
Present Value of Cash Inflows £802,613.06 £661,600.25
Particulars Machine A Machine B
Present value of cash
Inflows £802,613.06 £661,600.25
Present value of cash
outflows £500,000.00 £500,000.00
NPV £302,613.06 £161,600.25

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Decision: On the basis of NPV of both the machines it is highly recommended to the
company to select Machine A
Method 5 Internal Rate of Return
Formula
Discounted rate taken 15% and 40%
(Baker and Powell, 2009)
Particulars PVF @ 15 %
PV of
Machine A @
15%
PVF @ 40 % PV of Machine
A @ 40%
Year 1 0.870 $ 260,869.57 0.714 $
214,285.71
Year 2 0.756 $ 189,035.92 0.510 $
127,551.02
Year 3 0.658 $ 131,503.25 0.364 $
72,886.30
Year 4 0.572 $
85,762.99 0.260 $
39,046.23
Year 5 0.497 $
24,858.84 0.186 $
9,296.72
Year 6 0.432 $
8,646.55 0.133 $
2,656.21
Residual Value 0.432 $
21,616.38 0.133 $
6,640.52
Total $ 722,293.48 $
472,362.71
NPV $ 222,293.48 $
(27,637.29)
IRR of Project A 37.24%
(Bragg, 2010)
Particulars PVF @ 15 %
PV of
Machine B @
15%
PVF @ 40 % PV of Machine
B @ 40%
Year 1 0.870 $
17,391.30 0.714 $
14,285.71
Year 2 0.756 $ 0.510 $

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37,807.18 25,510.20
Year 3 0.658 $
98,627.43 0.364 $
54,664.72
Year 4 0.572 $ 114,350.65 0.260 $
52,061.64
Year 5 0.497 $ 124,294.18 0.186 $
46,483.61
Year 6 0.432 $ 129,698.28 0.133 $
39,843.09
Residual Value 0.432 $
21,616.38 0.133 $
6,640.52
Total $ 543,785.41 $
239,489.50
NPV $
43,785.41
$
(260,510.50)
IRR of Project B 18.60%
Decision: Machine A has highest IRR, so it is recommended to make investment in
machine A to gain maximum benefit.
Part B.2: Critical Evaluation of the Key Benefits and Limitations of Different Investment
Appraisal Techniques
a. The Payback Period
The payback period refers to the amount of time that is required for recovering the cost of
an investment. The major benefit of using a payback period method for determining the
feasibility of a capital project is that it is relatively easy to apply and is less time-consuming. It
can be easily applied for computing the time-period required for a capital project to realize the
breakeven point. However, the method suffers from the limitation of not incorporating the use of
concept of time value of money for determining the potential feasibility of a capital project. As
such, the results obtained with the use of this method lacks reliability as cash flows received
during initial phase of a project can receive higher weight as compared with subsequent cash
flows in the future context. The method is used in real-business context when a business tends to
make relatively small investment and therefore does not require considering other factors such as
discount rates in determining project profitability (Baker and Powell, 2009).
b. The Discounted Payback Period
The discounted payback period can be regarded as the time period required for the initial
cost of project to become equal to the discounted value of the future cash flows. The major
benefit of this method to the business is that it provides a measure of the project profitability by
considering the time value of money. The major drawback is that it does not consider the cash

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flows from a project after achieving the breakeven point and thus does not determine its overall
profitability position. The method is used by businesses for comparing the discounted payback
period with the initial investment and thus taking the investment decision.
c. The Accounting rate of return
It can be described as the percentage return realized from the net income of a proposed
capital investment. The major benefit of the method is that it is relatively simple to apply while
the drawback is that it does not consider the time value of money. It can be used in to take
decision whether to invest in a project that involves considering the factors such as annual
expense or depreciation expense (Feldman and Libman, 2011).
d. The Net Present Value
The method estimates project profitability on the basis of the difference between present
value of cash inflows and outflows. The benefit of the method is that it is easy to use and also the
results obtained are reliable as it takes into account the concept of time value of money. The
drawback of the method is that it cannot be used for making comparison of the projects having
different investment amounts. It is largely used for making a decision regarding the acceptance
or rejection of a project as the projects with higher NPV are accepted for mutually exclusive
projects.
e. The Internal Rate of Return (IRR)
It provides a measurement of the rate of return of an investment when the net present
value becomes equal to zero. It considers the time value of money and thus provides better
results that accounting rate of return. It does not prove to be quite useful in selection of projects
that are mutually exclusive. The method is used by businesses for comparing the IRR with the
cost of capital in taking decisions regarding the acceptance of a project (Baker and Powell,
2009).
Part B.3: Evaluation of Suitable Sources of Finance for funding this investment
 Bank Loans: Toyland Ltd can utilize the bank loans for accessing finance for meeting its
capital requirements for purchasing new machinery to meet the future demand of its
products. It can be regarded as most effective method for gaining access to secured funds
by the company over a fixed period of time. Thus, the companies can avail large amount
of funds at a lower rate of interest. It can adopt the use of working capital loan for
overcoming the short-term requirement of cash and raise finance in an easy manner.
 Hire Purchase: It is type of asset finance that enable firms to gain a control over asset for
a specific period of time and paying rent or installment to meet its depreciation and
interest to cover capital cost. This type of agreement can prove to be useful for the
company to purchase expensive assets by gaining financial assistance. It can be regarded
as an effective financial solution that is available for businesses to purchase an asset

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without requiring paying for its full value. The company is only required to pay an initial
amount and the remaining balance and interest are paid over a period of time. The
transfer of ownership of an asset passes to the company on paying full value after a
specific period of time (Gibson, 2011).

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Part C:
Part C.1: Budget and its Relation with Strategic Objectives and Strategic Plans
A budget can be described as a financial plan developed for gaining an estimate of the
income and expenses to be incurred for a specific period of time. It enables an entity to plan for
meeting the future expected income and expenses on the basis of future plans and objectives. It
can be stated as the forecast of the financial position of a company that assists in development of
strategies on the basis of future plans and objectives (Baker and Powell, 2009).
There is a strong relation between the strategic plan and the budgeting process of an
organization. The strategic plan provides an overall direction and goal for achievement of the
business objectives while budget leads in generation of financial resources for meeting the
strategic goals and objectives. The budget determines the future financial needs and plans for an
organization on the basis of expected profitability and cash flows. As such, it leads in
development of strategic objectives for an organization to guide its overall organizational
processes and systems. The strategic objectives leads in development of vision-based goals that
an organization need to achieve in the future context. The strategic planning is done as per the
strategic goals developed for ensuring that an organization mission and resources are effectively
aligned with each other. The strategic planning cannot only be defined as the process of raising
the capital as per the budgetary plan developed but also defines the overall direction to the
company for meeting the stakeholder expectations (Baker and Powell, 2009).
Part C.2: Critical Evaluation of the Budgeting process and Interlinking of Various Budgets
Budgeting process can be regarded as the practical implementation of a business plan for
achieving the future growth objectives. The budgeting process initiates with development of
goals and objectives to be achieved followed by developing an estimate of the future income and
expenses. This is followed by developing the budget and implementing the plan developed for
creating strategic goals and objectives to be achieved. The budgeting process can be described as
a critical process assisting in the planning of business operations. It assists effective interaction
and communication across various organizational departments by involving their participation
and involvement in strategic decision-making process. It provides a standard benchmark for the
business managers to compare their actual results with the budgeted performance and identify
the gap in performances. Thus, it assist the business managers to identify the reasons of reduced
performance and thereby development of effective strategies for overcoming the gaps identified.
The master budget consist of interlinking of various types of individual budgets such as
operational, capital expenditure and cash budgets that combine tighter to develop the final
budgeted outcome and results. Operating budget provides the detail regarding the various
expenses to be incurred by a business on its daily operational activities whereas capital budget

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provide an estimate of the expenses to be incurred in purchasing large assets whereas cash
budget helps in tracking the inflows and outflow of cash from its various activities (Damodaran,
2011).

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References
Arnold, G., 2013. Corporate financial management. USA: Pearson Higher Ed.
Baker, K. and Powell, G. 2009. Understanding Financial Management: A Practical Guide.
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Bragg, S. 2010. Business Ratios and Formulas: A Comprehensive Guide. US: John Wiley &
Sons.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Canada: Cengage
Learning.
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Feldman, M. and Libman, L. 2011. Crash Course in Accounting and Financial Statement
Analysis. USA: John Wiley & Sons.
Gibson, C. 2011. Financial Reporting and Analysis: Using Financial Accounting Information.
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