Analysis of Budgeting Processes and Capital Budgeting

This assignment involves analyzing budgeting processes and capital budgeting in different scenarios. It requires an examination of the initial budget process, performance management systems in Sicily and North Carolina, and a qualitative analysis of capital budgeting in cotton ginning plants. The assignment also includes references to academic papers and online resources related to budgeting and financial management.

DU PONT ANALYSIS AND
BUDGETING

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
DuPont Analysis.....................................................................................................................1
FluidOne's DuPont Analysis:.................................................................................................5
PART 2............................................................................................................................................7
Description and Critical Analysis of Fluidone company.......................................................7
Re forecasting Process............................................................................................................9
Variance Analysis...................................................................................................................9
Non Financial Performance Indicators.................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
DuPont Analysis and Budgeting are two financial models that are used by businesses
regularly (Seddon, 2015) . While DuPont Analysis helps to understand the changes in company's
return on equity, Budgeting ensures effective apportionment of organization's available capital to
various expenditure respectively. This report has been divided into two parts viz. Part 1 and Part
2. Part 1 of this report critically evaluates the Return On Equity (ROE) of FluidOne by
comparing its profitability, efficiency and liquidity for 2018 and 2017 using Ratio Analysis. Part
2 provides a critical analysis of budgeting process and non-financial performance indicators that
are used to improve performance management system in the organization.
PART 1
DuPont Analysis
DuPont Analysis is a model that was first propounded by DuPont Corporation. This
framework involved an analysis of fundamental performance variables which covered
profitability, efficiency and liquidity. As per this model, the return on equity of a business is
decomposed to evaluate the individual strengths and weakness of financial performance metrics.
The three main components that drive a company's ROE include operating efficiency, asset-use
efficiency and financial leverage. Therefore, DuPont Analysis is calculated as follows:
DuPont Analysis = Net Profit Margin * Asst Turnover * Equity Multiplier, where
Net Profit Margin denotes as a measuring metric of operating efficiency;
Asset Turnover denotes as a metric measuring asset-use efficiency; and
Equity Multiplier denotes as the financial leverage metric.
In the context of this assessment, a financial analysis of FluidOne's accounts have been
carried out to conduct a DuPont Analysis for the business. These have been shown below:
(a) Operating Efficiency:
One of the first constituent under DuPont Analysis is operating efficiency. Operating
efficiency means profitability. It is taken as an important criteria while decomposing the ROE of
the business since profitability is one of the main objective of any business. Therefore, any
changes made in this regard will affect the Return on Equity too. For this purpose, Net Profit
Margin is calculated to measure the operational efficacy of the business. (Pissard and et.al, 2013)
Net Profit Margin:
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The Net Profit Margin is one of the profitability ratio utilized by any enterprise to
ascertain how well the business is able to generate revenue by exercising control over its direct
and indirect costs. This ratio can be improved if the costs of the products or services sold by the
business declines substantially or if prices were for such offerings raised. This will impact the
ROE significantly. Net Profit Ratio is computed by dividing Net Profit After Tax (PAT) by Sales
for a financial year in a percentage form. It has been shown below:
Calculation of Net Profit Margin
Particulars 2018 2017
Profit for the year (A) 504942 339042
Turnover (B) 25986715 21302723
Net Profit Margin (in decimals)* 0.01943 0.01592
Net Profit Margin (%) 1.94 1.59
*Calculated for DuPont Analysis only.
From the above table it can be ascertained that FluidOne's has been able to increase its
profit for the year by 18.04% from 2017 to 2018. Also, there has been an increase in profit
generated from sales by 48.93% from 2017 to 2018 as compared to increase in sales that has
been a mere 21.99%. This shows that the company has been able to quadruple its profits on the
increased sales. This will affect the ROE in a positive manner, as every sale made by FluidOne
would result in a high contribution of earnings towards company's bottom line. This will,
eventually, increase the overall Return on Equity.
(b) Asset-Use Efficiency:
The second constituent taken into consideration under DuPont Analysis is asset use
efficiency. Here, Asset-use Efficiency means how well the company is able to utilize its assets to
generate high bottom line profits. It is taken as an important criteria while decomposing the ROE
of the business since assets such as stock, goodwill, etc. determine the type of investments the
company attracts and the company will be able to achieve cost efficiency leading to higher
growth opportunities for the enterprise (Septien and et.al 2012). Therefore, any changes made in
this regard will affect the Return on Equity too. For this purpose, Asset Turnover Ratio is
calculated to measure the asset-use efficacy of the business.
Asset Turnover Ratio:
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Asset Turnover Ratio measures how efficiently a company uses its assets to generate
revenue. This ratio varies from company to company and sector to sector depending upon the
asset make-up of that business entity. It is an efficiency ratio that calculates net sales as a
percentage of assets. It is computed by dividing turnover of the sales by (average) total assets of
the company. It shows the comparison between the two variables in relation to the prevalent
industry standards.
Calculation of Assets Turnover
Particulars 2018 2017
Turnover (A) 25986715 21302723
Total Assets (B)** 17663524 16058023
Asset Turnover [(C) = (A)/ (B)] 1.47 1.33
**To make calculations easier 'Average Total Assets' assumed to be same as Total
Assets since relevant information for the year 2016 is not available.
From the above table, it can be observed that FluidOne's Asset Turnover Ratio has
increased in 2018 as compared to 2017 by 10.53%. As this ratio is higher for 2018 in comparison
to 2017, it reflects of a healthier state of affairs in the company. In addition to this, the
incremental change in this ratio can be attributed to the rise in sales by 21.99% in 2018 from
previous year. Even though the total assets have not experienced much change in 2018 from
previous year. However, it is important to note here that the change in total assets is nearly equal
to the change in the ratio which comes to approximately 10%. If only this increase in total assets
is taken into account it can be said that there is a direct affect of change in assets on the asset
turnover ratio, which indicates that the sales are not contributing much to the efficient utilization
of assets. An increase in this case, FluidOne's ROE will be positively impacted since the
company has been able to generate sales per asset owned at a higher rate as compared to the last
year.
(c) Financial Leverage:
The third constituent taken into consideration under DuPont Analysis relates to Financial
Leverage. Here, Financial Leverage means the Equity Multiplier of a business. In this regard one
can say that this component of DuPont Model aims to analyse how well the company is able to
utilize its debts or external finance to manage business' assets. Most of the organizations use this
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source of long term finance to fund their operations as well as long-term growth. It is taken as an
important criteria while decomposing the ROE of the business since this component considers
shareholders' point of view through Equity Multiplier and signals the amount of leverage or
power equity-holders have over the assets of the business. As Return on Equity determines the
rate of earnings an equity-holder receives from a company, Financial Leverage is a notable
component to observe. Also, a business comprising debt concentrated capital structure would
lead to increased interest payments and tax deductions on such payments. As a result, it would
give rise to higher return on equity. Therefore, any changes made in this regard will affect the
Return on Equity too. For this purpose, Equity Multiplier is calculated to measure the asset-use
efficacy of the business.
Equity Multiplier:
Equity Multiplier measures that percentage of total assets held by the company which are
financed by its shareholders. Conversely, one can also say that this ratio helps in indicating the
level of debt financing present in the business for the purpose of acquisition of assets as well as
maintenance of operational activities of the entity (Clancy and et.al, 2013). This ratio varies from
company to company and sector to sector depending upon the asset, debt and equity make-up of
that enterprise. The given ratio also indicates the level of company risk to creditors. Equity
Multiplier is computed by dividing total assets of the company by its total equity.
Calculation of Equity Multiplier
Particulars 2018 2017
Total Assets (A) 17663524.00 16058023.00
Total Equity (B) 2927019.00 2122013.00
Financial Leverage [(C) = (A)/ (B)] 6.03 7.57
From the above table, it can be observed that Fluid One Equity Multiplier has decreased
in 2018 as compared to 2017 by 20.34%. As this ratio is higher for 2017 in comparison to 2018,
it reflects of business' equity and financing strategy. From mere observation, one can see that the
change in total equity is much higher than the change in total assets for FluidOne's given
financial periods. Here, the change in total equity for 2018 and 2017 results to 37.94% whereas
there has been a 10% increase in total assets. However, for both years the equity multiplier is
reflected on the higher side indicating that the business prefers current investor funding to
finance its assets rather than creditor. It is also significant to note that even though there has been
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an increase in both variables constituting the Equity Multiplier, the company has still
experienced a decrease. A lower multiplier ratio can be attributed to the conservative behaviour
exhibited on the part of FluidOne. Also, it can mean that there has been a substantial decrease in
company's debt servicing costs as well as the overall dependency on debt financing. A decline, in
this case, will negatively impact FluidOne's Return On Equity since the company has not been
able to generate higher financing from its debt and is more reliable towards equity-holder's
funding as compared to the last year.
FluidOne's DuPont Analysis:
As mentioned above, DuPont Model analyses the profitability, liquidity and efficiency
for a given business or industry by deconstructing the Return on Equity of that company. Return
on Equity is a financial metric that measures the performance of a company. This metric It is
computed by dividing the net income earned by shareholder's fund for a given financial period.
However, when applying DuPont Model, this metric is calculated a little differently. In case of
FluidOne, the Return on Equity has been ca So investors are not looking for large or small output
numbers from this model (Sathiya and et.al, 2013). Instead, they are looking to analyse what is
causing the current ROE. For instance, if investors are unsatisfied with a low ROE, the
management can use this formula to pinpoint the problem area whether it is a lower profit
margin, asset turnover, or poor financial leveraging.
lculated as follows for 2018 and 2017:
Calculation of Return on Equity
Particulars 2018 2017
Net Income (A) 504942 339042
Shareholder's Equity (B) 2927019 2122013
Return on Equity 17.25 15.98
The above table shows that ROE for FluidOne's financial period has increased by 7.95%.
From mere observation, one can see that this incremental effect in the metric has been
experienced due to an increase in Net income as well as Shareholder's Fund of FluidOne from
2017 to 2018. Such an improvement in financial performance also signals that the business has
been able to create more profits by efficiently using its assets in the given financial period.
As per the DuPont Analysis this metric can be deconstructed in the following manner:
Return on Equity = Profitability*Efficiency*Leverage; therefore,
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Return on Equity= (Net Income/ Net Sales)*(Net Sales/Average Total Assets)* (Total
Assets/Total Equity)
Therefore, from the effect of nullification the above formula of Return on Equity (%)= Net
Income/Total Equity .
In the context of FluidOne's, ROE has been calculated below by taking the three main
constituents of the model viz. Profit margin, asset turnover and leverage, to ascertain FluidOne's
Return on Shareholder's Funds:
DuPont Analysis :
Particulars 2018 2017
Net Profit Margin (A) 0.02 0.02
Asset Turnover (B) 1.47 1.33
Financial Leverage (C) 6.03 7.57
DuPont Analysis [(D)= (A)*(B)*(C)] 0.17 0.16
As derived from the above table, the Return on Shareholder's Equity is equal to the one
calculated without the application of the given model. This shows that the application of the
model in the given case scenario has been made accurately. Also, one can analyse the strength
and weakness of each component easily under this model which would not have been possible in
the initial calculation of Return On Equity for FluidOne. As can be seen in the Net Profit Margin
component, the company has been able to stabilize its profitability for both 2018 and 2017. This
means that the company has been able to retain its power as well increase sales. Here, also one
can understand from just looking at the table that if the company wants to enhance its returns to
equity-holders further, it should focus on maximizing its sales to obtain more bottom line profit.
This will act as a boost in the company's return to equity-holders.
On the other hand, one can see improvements in Asset Turnover Ratio for FluidOne's
2018 financial period. This means that the company has been able to generate more sales for
itself by efficiently utilizing its assets this year in comparison to 2017. If linked by Net Profit
Margin, one can say that the business has experienced in generating more sales, therefore,
proving that the critical factor which needs to be scrutinized as this needs to be increased for
increasing the return on equity metric.
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Lastly, this model has been able to point out that the financial leverage, specifically
Equity Multiplier, has decreased for FluidOne's 2018 financial period in comparison to 2017.
Also a deeper look into this multiplier shows that the company has been able to increase its
shareholder's equity substantially and requires to increase the efficiency of its total assets by
increasing its debt financing to enjoy more tax benefits available on interest payments as well as
provide more returns to their equity-holder.
Thus, this model has been successful in analysing the reasons behind changes in return on
equity for 2018 and 2017 of FluidOne Network pointing out those criterion which require most
attention of top management.
PART 2
Description and Critical Analysis of Fluidone company
A budget is a formal statement of predication of incomes and expenses which is based on
future plans and objectives. It is a one of the most important administrative tool which is
evaluated revenues, costs and resources in particular specific period for reflecting on upcoming
financial conditions and goals. The company perform their business under two core products -
 Data
 Mobile
For the growth of business company has estimated revenues, EBITDA after then
compares result on the basis of 2017. They grew revenue by £5m to £26m which is £21m in
2017 and EBITDA also increased which was £1.8m and now in 2018 in £0.7m to £2.4m.
Data – When analysis of income and expenses of Data business after then getting gross
profit which is compared with previous year of 2017, in 2018 it is improved by 6% to £8.7m.
Revenue continue grow and substantial investments in our acquisition operations has delivered
substance gross margin improvements (Nedelec and et.al 2014) .
Mobile – The company has working with all leading networks and in the year it will
become EE's biggest wholesale business partner and shifting from a dealer model to own billing
platform. The team of mobile can supply inventory growth in mobile connections which has
increased by 25% to 26k from 21k last year.
Budgetary Control Process
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Budgetary control is the process of evaluating several outcomes with budgeted figures for
the company for the upcoming period. It can set standard after then compare results actual
performance with budgeting figures to calculate variance. In the analysis of budgetary control
include initial budget preparation process which is related to strategic objectives. The company
has prepared there budget process according to strategic objectives.
Strategic objectives is a term of the company which is related to goals of an organization.
It is used in strategic management to set targets in proper way and there are mainly related to
mission or vision of the company. The objective are of the company- Increase customers,
improve profit of data business and mobile. Net assets improved by 40% compare to 2017 and it
is affected to balance sheet.
The initial budget process given below - Developing planning objectives – Firstly in initial budget process can develop planning
targets which is achieved by company in following years through budget. When prepare
budget of the company so it will relate to goals and objectives of a company (Giobbe and
et.al 2015) . Access and analyse historical and Actual data – It is a second stage of budget process
and in this stage can access all historical data as well as actual data which can help to
prepare current year budget. These data help to understand different situation and
overcome risk in future time period. Produce base budget – After all estimation there is prepare base budget and it will relate
to strategic objectives which is pre decided by company for following year. The base
budget is base plan of the company which can help to determine different situation of
company as well as risk. Link top down targets with bottom up budgets – In the base budget all items are
interrelated and provide all explanation regarding to company. These items are related to
targets of a company because the company structure divided into different division like
upper, middle and lower division. The manager can set targets for every section and it
will also mention in bottom up targets. Integrate and update financial statements as business condition change – If any
financial condition or market condition will change so it will update in budget. This
process is helpful in achieving strategic objectives of a company.
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 Conduct Continuous forecasting – It is including as review of budget, in this stage
evaluation of the budget and match all incomes and expenses for re-forecasting process
of budget. If company identify any changes regarding to company policies and any item
remain to add so it will rectify and add on forecasting budget (Ermasova, 2013).
 Perform real time, multidimensional modelling of planning and budgeting data – In
this stage monitor progress of budget and follow that company will follow all rules and
guidelines according to budget and control business activities. It will provide strategic
objectives and increase revenues and growth of an organisation.
Illustration 1: Initial Budget process. 2013
(Source - Initial Budget process. 2013)
Re forecasting Process
The amount of budget will be recorded on the basis of pre assumption so it will affect to
business activities. In Re-forecasting process the company will forecast of income and expenses
of a company in order to achieve their strategic goals and objectives. It is based on flexibility and
actual situation of the company. The company has applied this process in order to achieve their
vision and mission for the following year. The process is mainly applied on flexible budget
because it is changed according to situation of a company (Dupont and et.al 2012) .
Variance Analysis
Variance analysis can be concise as an analysis of the difference between planned and
actual numbers. It is provided actual picture of the company which is represented over
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performance and underperformance for particular accounting period. The company has using this
analysis to compare standard and actual cost of raw materials.
Proposed budget of Fluidone company
2018 2019
Customers 22000 25000
Rate 13.18 12.82
Revenue 290000 320450
Less: Expenses
Advertising 2500 2780
Accounting, Legal 2100 2320
Depreciation 5200 5746
Interest Expense 4400 4862
Sales Promotion Expenses 15000 16575
Payroll 60000 66300
Rent 22000 24310
Utility Expenses 15000 16575
Commission 6000 6630
Taxes 17000 18785
Total Expenses 149200 164883
Expense Per Customer 6.78 6.60
Contribution 6.4 6.22
Less:Fixed Expenses
Fixed Marketing Expenses 25000 25000
Fixed Administrative Expenses 35000 35000
Total Fixed Expenses 60000 60000
Net Profit 80800 95567
Break Even Point (Fixed Cost/
Contribution) 9375 9642
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Investment (Cost) 209200 224883
ROI [Investment(cost)/ Net Profit] 38.62 42.50
Actual Budget of Fluidone company
2018 2019
Customers 20000 23000
Rate 12.18 11.8
Revenue 290000 320450
Less: Expenses
Advertising 2200 2500
Accounting, Legal 2000 2250
Depreciation 4900 5450
Interest Expense 4000 4560
Sales Promotion Expenses 15500 16000
Payroll 58000 65200
Rent 22200 24300
Utility Expenses 150500 16560
Commission 5000 6430
Taxes 18000 18685
Total Expenses 149200 164883
Expense Per Customer 6.8 6.89
Contribution 6.5 6.25
Less:Fixed Expenses
Fixed Marketing Expenses 24000 24000
Fixed Administrative Expenses 33000 33000
Total Fixed Expenses 60000 60000
Net Profit 78800 94657
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Break Even Point (Fixed Cost/ Contribution) 9375 9642
Investment (Cost) 209200 224883
ROI [Investment(cost)/ Net Profit] 38.62 42.5
From the above table it has been analysed that there is preparing forecasted budget of a
company to achieve their strategic objectives and monitor of all activities which is related to
business. When compare standard result with actual result so there is getting many differences.
Non Financial Performance Indicators
Non financial performance indicators presents result of performance management system
in order to achieve required result of a company. With the help if these indicators company can
measure performance of a company from another company which is based on non financially
terms (Piercy, 2014) . Performance management system is a set of measures that help of a
business to operating their operations in effective manner to achieve their goals and objectives.
The non financial performance management system is created for consequences of the shortage
in financial based performance measure. In non performance indicators include various
indicators which are -
 Key performance Indicator – It is also used for measure performance of the company but
it is categorised in financial indicator and non financial indicator.
 Bench marking – It is used by company to measure performance of a business from other
business.
 Financial Governance – It will use by company to solve problems of the company which
is related to financial problems.
The company has applied benchmarking for their performance management system and
achieve their goals and objectives easily. Benchmarking means minimum expected result. It is a
measurement of quality of a company's policies, programs, procedures, strategies and it will
compare with standard measurements or similar measurements of its peers. It is used and applied
in the management of a business foe evaluate best performance from other companies. It is
required made comparison between different companies with average reasons. With the help of
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this approach organization can better understand developments and improvements in the best
possible way. The approach can non recurring event but it is applied in an organization as
continuous process to improve performance of the organization (Schick, ., 2014).
CONCLUSION
From the above report, it can be concluded that DuPont analysis helps in identifying key
reasons that are important for improving the return on shareholder's funds. This assessment
indicates that FluidOne has been maintaining higher ROE in recent years and can improve this
performance further by increasing its profits and financial leveraging position in its business
environment. The company has analysis of budgeting process to achieve their strategic
objectives. For the objective apply benchmarking to evaluate the performance and maintain
performance management system.
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