Enhancing Financial Management in Nestle UK: A Comparative Analysis

The study examines the financial management of Nestle UK, exploring the validity of certain methods and providing a comparative analysis of financial data through horizontal analysis of profit and loss accounts and balance sheets. The findings suggest that a zero-based approach to budgeting was helpful in managing operations and achieving Key Performance Indicators (KPIs) for the company. Additionally, the study emphasizes the importance of using cost-benefit analysis to support the suggested zero-based approach.

FINANCIAL
MANAGEMENT

Table of Contents
Introduction:...............................................................................................................................1
Background of the Company:....................................................................................................1
A.C 1.1:-.................................................................................................................................2
A.C 1.4 Review and Question financial data.........................................................................4
A.C 1.2:-.................................................................................................................................5
A.C 1.3 Comparative analyses of financial data of Nestle:...................................................8
A.C 2.1:-...............................................................................................................................10
A.C 2.2:-...............................................................................................................................11
A.C 3.1:-...............................................................................................................................12
A.C 3.2:-...............................................................................................................................13
A.C 3.3:-...............................................................................................................................14
A.C:3.4:-...............................................................................................................................15
Conclusion:..............................................................................................................................15
REFERENCES.........................................................................................................................16

Index of Tables
Table 1: Financial data of Nestle and its competitor..................................................................6
Table 2: Financial ratios for Nestle UK for 2014.......................................................................7
Table 3: Horizontal analysis of the Profit and loss statement..................................................10
Table 4: Cash Flow Statement..................................................................................................10
Table 5: Horizontal analysis of the Balance sheet statement...................................................11
Table 6: Variance calculation ..................................................................................................11
Table 7: Budgeted income statement.......................................................................................12
Table 8: Expansion Proposal information ...............................................................................16
Table 9: Pay back period calculation ......................................................................................16
Table 10: Net present value calculation ..................................................................................16
1

Introduction:
This task has been designed with the purpose of assessing the financial management of a
company. In this study, Nestle UK has been used as a case study. The financial management
of Nestle UK is assessed for the years 2013 and 2014 and their financial data is compared and
analysed. To understand the financial management in a better way, the researcher has made
an effort to identify methods for procuring budgets and analyse the impact of budget
constraints. In this study, the criteria on which proposals are judged for managing finance is
assessed and the outcomes of the mentioned proposals on objectives of Nestle UK are
evaluated.
Background of the Company:
Nestle UK is a subsidiary company of Nestle SA. It is the world’s best company on nutrition
as well as health. Nestle UK is a major player in the food industry of UK and Ireland and has
employed around 8000 employees across the 23 sites (About us., 2016). The most popular
food brands that Nestle UK provides its customer base include KitKat, Nescafe, Smarties,
Buxton, Go Cat and Shreddies (Nestle.co.uk, 2015).
Figure 1: Logo of the company
(Source: Nestle.co.uk, 2015)
In addition to their immense popularity, Nestle UK is one of UK and Ireland’s major
exporters of food products. They export over £346 million worth of food products every year
to over 70 nations globally (Nestle.com, 2015).
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A.C 1.1:-
According to Brigham and Houston (2014, p.221), financial data availability is
helpful for analysts and all the stakeholders to assess the financial performance and viability
of the company. There is greater importance of the financial data for the organization in
drawing conclusion not only for decision making purpose but for overall strategic decision
making of the firm. The decision making quality to a significant level is dependent on the
financial data quality. It is important that financial data are being gathered from authentic
sources in right manner in order to make sure that it offer suitable information and
knowledge. Any individual or an organisation can obtain financial statement of a particular
company through external sources and internal sources. Bull (2013, p.215) opined that the
internal sources that can help in collecting financial data include books of accounts, internal
accounting systems and sales representatives’ reports. Van Horne (2013, p.115) added that
the external sources that can be used for collecting financial data are through company
websites, suppliers, Company houses and financial statements released by the company.
The supplier’s reports provide data about the amount spent in procuring materials and the
expenses incurred in transactions. There is greater responsibility of the manager to maintain
the accounts of expenses so that it can pass such data to the organization's accounting
department. The main sources of financial data that is available from within and outside the
company include the financial statements that present the financial accounts statement,
balance sheet and the cash inflow. Nestle is relying Companies House website for the
purpose of getting financial data in order to monitor financial activities of its competitors.
In order to assess the validity of the financial data gathered from internal and external
sources Nestle makes sure that it has audited both auditors that is internal and external. The
auditors present outside makes assessment of the financial statement in relation with
reliability, accuracy and timeliness. In case of Nestle it is necessary for organization to ensure
that the financial data being undertaken is valid. Further, with the motive to ensure reliability
of financial data main focus must be on controls along with the central transaction
processing. This system can directly assist in reducing the chances of errors which are being
present in the financial records of Nestle. It can directly assist company in meeting its desired
goals and objectives. Moreover, internal auditing is also one of the most appropriate way
which is generally self consulting activity and in turn improves the effectiveness of risk
management. Main role of internal auditor is to provide support to external auditor where in
depth analysis of financial statements take place during financial audit. On the other hand to
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ensure validity of the data external auditor is also appointed by shareholders to verify that
financial statements are true and fair. Along with this, it is known whether the funds of
business are utilized in proper manner or not. Therefore, it is also fruitful in case of Nestle
where business can assess the validity of the data.
The benefits of divulging financial data is extremely important as it assists the
processes of audit and allows the necessary party to assess the financial viability of the
company. The financial data can be assessed in terms of possibilities of internal checks or
whether it is based on the culture of the organisation.
The external sources of financial data that can be obtained are generated from
company websites, suppliers’ reports (Cheng, 2013). This information is beneficial to the
company to review their performance in years and allows the owners to make decisions for
improving output. It also assists auditors to prepare audit reports of the company. The data
sources from outside the company are helpful for investors and stakeholders to assess the
performance of the company.
In the context of entering into a partnership, the financial data is beneficial for
companies to judge the performance of the other organisation before deciding on finalising
the deal. Sole proprietorship, joint ventures and partnerships all provide varied structures of
working ethics and financial statements provide the financial performance of the company.
The validity of the data can be verified by looking into their annual reports, financial
statements and auditor reports (McCafferry, 2014). These present a firm idea of the
company’s actual performance. Different types of investment decision needs to made for
entering new business environment. Firstly, financial investor needs to decide where to invest
and how to invest. For a careful investment decision considered the country’s GDP rate,
exchange rate and government policy regarding foreign investment.
The higher the GDP rate higher the return from investment. Good GDP rate indicates
the developed market which consists of largest and most industrialised country which is
lawful and unwavering government properly maintained that’s why developed market is
considered as the safest investment decision with a stable economic growth and profitability,
which are G8 countries and others European countries. Countries exchange rate influences
the financial investment decision as the share values increases and company can make profits.
Countries with different types trade restrictions with international body is risky for
investment decisions as they got low liquidity which affect the future return during periods.
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Above shown is the income statement of Nestle for the year 2015 which represents all
the income along with expenses of business. The entire data being mentioned by Nestle in
this income statement is true as information has been verified by the auditors of the business.
Further, this data is valid as it is verified by various financial experts and due to this basic
reason it has become possible for Nestle to know its real financial position in the market and
supports in knowing efficient utilization of resources within the workplace (Drake and
Fabozzi, 2012). So, with the help of this it can be clearly stated that for knowing accuracy
and appropriateness of financial data appointing external and internal auditor is effective. On
the other hand, accuracy of financial information of Nestle is also associated with GDP of
country and exchange rate as in case if company earns higher income then it contributes in
growth of GDP and in turn exchange rate fluctuates through this.
A.C 1.4 Review and Question financial data
When review and questioning of financial data is required to be involved in financial
statements then Nestle needs to make sure that accounting department of the firm complies
with the standards that are needed by International Financial Reporting Standards. It is
essential for the accounting department to check whether the data is reliable, comparable,
timely, consistent to make sure that it serves the purpose of demonstrates the clear picture of
the organization's financial position.
The below table makes comparison of the financial data of Nestle and one of its
competitors (portrayed as company A).
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Table 1: Financial data of Nestle and its competitor
Description: CK 2014
(£000)
Company A
2014 (£000)
CK 2013
(£000)
Company A
2013 (£000)
Sales
revenue:
28,500 22178 25500 24340
Cost of goods
sold (COGS):
(21300) (15780) (21000) (16660)
Gross profit: 7200 6398 1,500 7680
Administrative,
selling and
operating
expenses:
(6600) (4638) (4500) (5260)
Net profit: 600 1760 450 2420
Gross profit ratio: GP/ Net sales * 100
Year 2014
= 7200/ 28500 * 100 = 25.26%
Year 2013
= 1500 / 25500 * 100
= 5.88%
COGS/ Net sales * 100
For year 2014
= 21300/ 28500 * 100
= 74.73%
Year 2013
= 21000 / 25500*100
= 82.35%
Above shown are some of the ratios which are linked with Nestle company. In case of
COGS this ratio has declined in the year 2014 as compared with previous year. This is
indicating that inventory management of business is poor where organization is not at all able
to manage its inventory in proper manner. In short, poor management can have adverse
impact on the organization and can act as hurdle while accomplishing main goals and
objectives. On the other hand, gross profit ratio of business has also increased in the year
2014 as compared with 2013. This is representing that Nestle is able to earn higher profits
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and have proper control on all the major expenses of the business. Apart from this, firm is
able to perform efficiently in the market and this has allowed in accomplishing the desired
objectives of the entity.
On considering this data related with financial analysis the accounting department of
the firm would make sure that they possess reliability. For instance, when making
computation of gross profit the accounting department can question that whether such figures
of COGS calculated are reliable or not. For COGS of Nestle they can question that is there is
probability that figures of 21300 and 21000 can enhance to demonstrate lower profit for tax
benefit. In order to make sure such the gross profit is comparable. The department of
accounting would make sure that data can be compared with both, the organization's
historical data.
Before making collection of competitors data question can be raised regarding
whether it has been gathered from credible sources and how reliable they are. Before making
any conclusion or drawing recommendation it is important that accounting department would
question regarding the timeliness of the data in terms that whether it is one year old. Further
they can review on external factors that has influenced the competitors as it resulted in terms
of lower gross profit.
Changes in the accounting policy can put significant effect in use of assumptions
estimations which is related to the consolidated financial statement. If an accounting policy
relates specifically to a note (balance or transaction) it is presented within the relevant note so
from a balanced statement investor might get wrong information about the company (Dyson,
2003). Year under year review can create the misconceptions as every years environmental
factors are not same which also can create the wrong signals to the investor. “Creative
accounting practices” and “window dressing” which involves alterations of accounting data
and information which affect the future revenue, policies, assets and liabilities from those
report future investor might get wrong message about the current company.
Most of the investor wants to increase their long term purchasing power but inflation
creates a threat to investor as its put their goals at risk then investors might move their money
at a lower inflation rates market because increased inflation rate tends to raise interest rates
too or where government can put the fixed interest rates for certain period. In addition, fast
moving sector where technology can play an important role because investor can’t judge the
decision by seeing only the past year financial information as environmental factors are not
same for every year as it’s a fast moving sector.
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A.C 1.2:-
There are many kinds of investigative elements that are obtainable to companies
include monetary records presenting different types balance statements, weighing scale.
These tools not only help the stakeholders assess the company performance, it also guides the
auditors to monitor the actual performance of the company. Stakeholders must have thorough
knowledge about the company before deciding to invest and financial statements provide the
valid documents necessary for making the decision (Fakhfakh, Zouari and Zouari-Hadiji,
2012).
Review and analysis is done by incorporating 6 financial ratios. Each ratio is
constructed on the financial accounts from the yearly statement from Nestle and allows
analysis of the actual performance of the company in both years.
Table 2: Financial ratios for Nestle UK for 2014
Ratio analysis 2013 2014
1) Gross profit Ratio calculation:
Formula: Gross profit ratio = Gross
profit / Net Sales * 100
12437 / 92518 * 100
13.44
10268 / 91612 * 100
11.2
2) Net Profit Ratio calculation:
Formula: Net profit ratio = Net
profit after tax / Net sales
10445 / 92518
0.11
14904 / 91612
0.16
3) Current Ratio calculation:
Formula: Current Ratio = Current
Assets / Current liabilities
30066 / 32917
0.09
33961 / 32895
1.03
4) Acid test ratio calculation:
Formula: Acid test ratio = (Current
assets - inventory) / current
liabilities
(30066 - 8382) / 32917
0.65
(33961- 9172) / 32895
0.75
5) Asset turnover ratio
calculation: 92158 / 120442
91612 / 133450
0.68
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Formula: Asset turnover ratio =
Sales / Total assets
0.76
6) Return on capital
ROCE = Operating profit / (Total
assets / Current liabilities)
13068 / (120442 /
32917)
3580.27
10905 / (133450 /
32895)
2692.59
 Gross profit ratio: The gross profit ratio of the year 2013 stood at 13.44 and reduced
marginally to 11.2 in 2014. The stability of the ratio shows that the company is
healthy in financial aspects and such minor fluctuations are natural in the ever-
changing economy. Net Profit ratio: The net profit ratio states the overall success of the business by
assessing the profit ratio generated. As per the data, Nestle had net profit ratio of 0.11
in 2013 and 0.16 in 2014. This shows that the profitability of the company saw an
increase (Bull, 2013). Current ratio: The current ratio below 1 is not a good sign. As per the data, in 2013
the current ratio showed poor performance at 0.09 whereas there was improved result
in 2014 and the ratio stood at 1.03. Acid test Ratio: This ratio is a strong indicator of the sufficiency of a company’s
short-term assets to cover the immediate liabilities. Companies must have acid test
ratio above 1 to be declared a healthy company (About us, 2016). As per the data of
Nestle, the ratio in 2013 stood at 0.65 and 0.75 respectively. This is a warning for the
company to better its results. Asset turnover ratio: It shows the efficiency of the company in handling its assets.
Higher ratio means better performance. The ratio in 2013 and 2014 stands at 0.76 and
0.68 respectively and shows that the company performed better in 2013.
 Return on capital: This financial ratio measures the profitability of the company and
the effectiveness of the use of capital (Gaskell and Ashton, 2008). Higher Return on
capital states better utilisation of capital. Keeping the data in mind, the return on
capital in 2013 was 3580.27 and 2692.59 in 2014. The performance declined in 2014,
but it can be due to the market changes.
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Overview of ratio analysis: It is clear from the financial data and ratio analysis of Nestle
that their performance has shown steady growth in terms of revenue and their performance
has been marginally better than 2013. These minor changes can be attributed to the effect of
inflation on the prices of raw materials and commodities for production. The ripple effect of
inflation falls on the interest rates and it influences the prices of imports and duties for which
the company needs to pay more. Nestle being a food industry deals in commodities that must
be distributed as quickly as possible. These kinds of companies require quick decision
making as there is barely any time to assess the performance of the past performances.
Financial data can indeed help the company but in fast moving industries, the need to adapt
strategies quickly is very important (Götze, Northcott and Schuster, 2008). If the figures
obtained from ratio analysis are to be noted, the profit margins showed improvement whereas
the gross profit margin reduced slightly. This proves that the brand strength of Nestle is
capable of maintaining sustainable profit margins. However, the market conditions in UK
have slightly dented the profit margins of the company. The ratio analysis show growth of
Nestle and provides the information that despite market conditions, Nestle has achieved
sustainable profit. However, the limitations that curb their performance are the performance
of its rivals by creating substitute products and disturbing the level of profits.
There is greater need among stakeholders regarding the information presented through
financial analysis. As such assist in decision making process in an effective manner. All the
range of financial ratios being calculated are effective for stakeholders associated with
Nestle. Further, different parties are associated with company such as customers, suppliers,
shareholders, government etc and they are interested in knowing financial position of
business. Therefore, different type of ratios computed supports in satisfying this need. Gross
and net profit ratio is interesting for shareholders and financial institutions. Through these
ratios it becomes easy for them to know the earning capacity of the business (Grewal and
et.al., 2011). Further, in case of current and quick ratio it is being used by internal
management of the business through which it is possible to know the liquid funds present
with Nestle. Asset turnover and return on capital employed are used by investors so as to
ascertain the amount of return. Therefore, in this way different ratios are being undertaken by
stakeholders for knowing the financial performance of business.
A.C 1.3 Comparative analyses of financial data of Nestle:
Financial statements of Nestle UK are taken to conduct a comparative analysis of their
performance in the fiscal years 2013 and 2014. Wholey (2014, p.69) commented that
comparison of performances of the company using financial details can help the company,
10

investors and stakeholders to assess the financial performance and identify areas that need
attention. The horizontal analysis of the financial statements of Nestle UK for the years 2013
and 2014 are provided below to assess their financial performance in the years. It is beneficial
to identify whether their performance is enough to interest shareholders and suppliers.
Horizontal analysis of the Profit and loss statement (Excerpts from the annual report of
Nestle UK, 2014)
Table 3: Horizontal analysis of the Profit and loss statement
List of items Year 2013 (£) Year 2014 (£) Variance
Sales comparing 92,157 91,611 546
Operating profits
(trading)
14,046 14,018 28
Operating Profit 13,068 10,905 2163
Profit Before taxes 12,437 10,268 2169
Profit for the year 10,445 14,904 (4459)
Table 2: Profit and loss excerpts from Annual report of Nestle UK, 2014
(Source: Nestle.com, 2015)
The horizontal analysis conducted using the above data of profit and loss statement of Nestle
UK shows that the operational expenses in 2013 was better utilised in 2013, however the
consolidated profit that was generated between the two years show that 2014 had profits of
£4459 more than in 2013.
Cash Flow Statement (Excerpts from the annual report of Nestle UK, 2014)
Table 4: Cash Flow Statement
List of items 2013 (£) 2014 (£)
Cash flow before change in
assets and liabilities
17,420 17,228
Cash generated from
operations
18,206 17,199
Operating cash flow 14,992 14,700
Increase / Decrease in cash 702 1033
Cash at the end of the year 6415 7448
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Table 3: Consolidated Cash Flow Statement from Annual report of Nestle UK, 2014
(Source: Nestle.com, 2015)
Horizontal analysis of the Balance sheet statement (Excerpts from the annual report of
Nestle UK, 2014)
Table 5: Horizontal analysis of the Balance sheet statement
List of items 2013 2014 Variance
Assets
Total current Assets 30066 33961 (3895)
Total Non-current
Assets
90376 99489 (9113)
Total Assets 120442 133450 (13,008)
Liabilities of the
company
Current liabilities 32917 32895 22
Non-current liabilities 23386 28671 (5285)
Total Liabilities 56303 61566 (5263)
Total equity 64139 71884 (7745)
Total liabilities and
equity
120442 133450 (13,008)
Table 4: Balance sheet statement from annual report of Nestle UK, 2014
(Source: Nestle.com, 2015)
The horizontal analysis of the balance sheet for the years 2013 and 2014 present the
information that the variance in current assets, liabilities show better results in 2014 than the
year 2013. The overall variance between assets and liabilities also showed a positive return of
£13,008 between the years. The analysis can be further reviewed with the use of six financial
ratios (gross profit, net profit, current, acid test, asset turnover and return on capital ratio) of
the ratio analysis that will be mentioned in the next part of the study (Mumford, Schultz and
Osburn, 2001).
The horizontal analysis of the balance sheet for the years 2013 and 2014 present the
information that the variance in current assets, liabilities show better results in 2014 than the
year 2013. The overall variance between assets and liabilities also showed a positive return of
12

£13,008 between the years. The analysis can be further reviewed with the use of six financial
ratios (gross profit ratio, net profit ratio, current ratio, acid test ratio, asset turnover ratio
and return on capital) of the ratio analysis that will be mentioned in the next part of the
study.
A.C 2.1:-
Table 6: Variance calculation
Description Budgeted (£000) Actual (£000) Variances (£000)
Sales: 20000 19000 -1000
Cost of goods
sold:
(14000) (14200) 200
Gross profit: 6000 4800 -1200
Operating selling
and administrative
expenses:
(4200) (4400) 200
Net profit: 1800 400 -1400
Tax: (380) (120) 260
Profit for the
year:
1420 280 -1140
While making comparison of the budgeted as well as actual income statements it can
be viewed that there is greater variance in sales that is -1000 that has led to reduction in the
profitability for the year in comparison with the budgeted one. There is significant difference
among actual and budgeted performances so that starting point for the budget 2015 would
have been actual performances and adjustments would be done accordingly. There is
presence of certain issues and recommendations which are determined in the previous task
that can be utilized for making adjustments for forecasting. The recommendations are relating
with increasing the investment for training of personnel. Further it includes sales of un-
productive assets or renting it to increase funds. On considering the analysis carried out
budgeted income statement of the company for the year 2015 is as follows:
Table 7: Budgeted income statement
Description: 2015 (£000)
Sales: 29200
COGS: (18340)
Gross profit (GP): 10860
Operating, selling and administrative
expenses:
Wages: 1800
Training: 600
Advertising: 1600
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Others: 3400 (7400)
Net profit: 3460
Tax: (728)
Profit for the year: 2734
In above statement it is evident that sales projected is higher in comparison with last
year that is suitable for increasing the advertising. In 2014 actual advertising cost was 600
whereas the budget increases to attain the strategic targets.
Jones (2010, p.249), budget is a quantifiable economic plan that is based on a certain period.
The major functions it fulfils include mapping, controlling, co-ordinating, communicating,
instructing and motivating. McCafferry (2014, p.50) added that budget can be used as a
performance measurement tool and a decision making tool for various organisations.
The budgets can be prepared either top down or bottom up approach. Zero based and
incremental budget helps forecasting. The top down approach as stated by Schick (2013,
p.110) explained that this approach can be used to develop a total budget and be broken down
to component parts within the same budget. It is beneficial as a predefined budget to work on
removes the chances of over-budgeting. However Oggier et al. (2015, p.275) argued that it
can be seen upon by employees as an unfunded mandate.
Nestle should adopt Zero-based budgeting in their business since the magnitude of their
business is large and widespread. Nestle UK should prepare budgets by justifying all the
expenditures. The most crucial activities can be monitored and resource allocation can be
properly done as per needs. Budget is developed by business after considering the financial
constraints as Nestle operates on wider basis due to which sometime many issue arises linked
with allocation of funds. Further, business has many expenses and in order to track the major
expenses budget is being prepared. It is prepared on monthly or weekly basis. Moreover,
through development of appropriate budget it is possible to enhance the profitability level of
the enterprise as right amount is allocated in business operations which are fruitful for
business in every possible manner (Murphy, 2001). Financial constraint is one of the integral
parts of budget development and it is possible to deal with this issue when appropriate budget
is being prepared. Further, development of budget within Nestle supports in achieving targets
as funds of the organization are utilized properly and higher funds are left for development
purpose of business.
Financial constraints are also present in budget where sometime it becomes difficult for
Nestle to know the actual amount of funds required in carrying out overall operations.
Finance as a limitation acts as hurdle which has direct impact on overall performance of the
company. Business is required to deal with the challenge of financial constraint where this
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limitation has to be managed so that overall performance of enterprise may not be affected
due to this. Achievement of target is also considered as one of the main issues where budget
preparation does not highlights the time period in which targets can be accomplished easily.
It is one of the main limitations associated with budget preparation. Legal requirement are
also linked with budget preparation where accounting conventions have to be followed and
complied with at the time of developing any specific budget. It is the major duty of financial
accountant to ensure that business complies with all the conventions as its non compliance
may have unfavourable and adverse impact on the organization. Therefore, these are the key
areas which have to be undertaken at the time of developing budget. For instance, in case the
company is has made the target but has constrain in relation to meeting that thus it would
affect the attainment of such target. This to a greater extent reflects the contradiction among
both the things. Thus setting of the budget needs to be as per the availability of the funds with
the business.
A.C 2.2:-
May and June was the highest profitable month of the year. Moreover, it can also identify
that the company’s revenue has been decreased in January and February in compared with the
May and June. Financial statement shows January and February are the lowest profitable
month compare to May and June.
 Company needs to use the effective advertising program as soon as they granted loan
from bank so that they don’t need to pay interest for one month.
 Purchased cost of material is higher where company needs to take expert advice while
purchasing material so that they can ignore excessive cost.
 Cost cutting approach should be followed by the organisation where they can reduce
expenses like buying raw materials, licensing fees, business rent and rates, business
consultancy fees and advertising and promotional fees etc (Needles, 2010).
 Without any investment plan the company has borrowed £4000k from the bank at the
beginning of the year where they need to pay interest for rest of the year. They could
have taken expertise advice before borrowing this huge amount of money so that they
could minimise the financing cost (Bull, 2013).
 From this budget example I can see that company could use outsourcing to save some
money.
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 Company could use productivity based pay methods for its efficient labour because
higher the efficiency less the labour cost.
 Company could adopt the proper waste management so that they can find out the
performance gap within company production line.
The actual objectives of Nestle involve enhancing market share along with profitability of
the enterprise. Further, in order to accomplish these objectives it is necessary to prepare
budget for the welfare of company (Nickels, McHugh and McHugh, 2011). Through budget
Nestle track its expenses and in turn higher funds are saved. The objective of increasing
profitability level has been accomplished easily as major expenses are reduced to extent and
this in turn brings favourable results for the enterprise. Apart from this, company can easily
focus on the crucial areas where investment is needed and overall funds can be saved for its
betterment.
A.C 3.1:-
The success of every firm depends on capital investment decision made by them. It is
significant that decision regarding investment is based upon clear and suitable evaluation of
the proposal for investment. Greater amount of business funds are engaged in investment
which implies that any fault in this can affect the survival of the firm to a greater extent.
There is greater role of the firm in having clear and particular policies related with capital
expenditure for ensuring that investment are done wisely and is able to make generation of
desired profits and outcomes. Varied firms tends to make utilization of various investment
appraisal tools. These includes the following:
 Payback period
 Net present value
 Internal rate of return
 Accounting rate of return
The firm make utilization of combination of more than one of such tool. However in
case of small businesses such might not be applicable. In order to evaluate the capital
investment proposals NPV and payback period are most commonly used techniques with the
help of which managers of Nestle can easily take investment decisions. Further, it allows in
allocating proper funds into the project which can give higher returns. Generally in Net
present value technique the profitability of specific project is being identified for future as it
is calculated by discounting the cash flow so that appropriate judgement can be done.
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Moreover, in payback period the time period required in recovering the initial
investment is examined. In case Nestle wants to invest in two proposal linked with expansion
where project A investment is 300,000 and project B has 400,000. After computing NPV it
has been found that NPV of project A is 120,000 and of B is 175,000. Further, payback
period of project A is 2 years and of B is 1.4 months. This is because project B is yielding
higher return within lesser duration of time. Therefore, considering the applicability of both
techniques it has been found that project B must be considered by Nestle. On the other hand it
is necessary for organization to develop specific policies regarding capital expenditure so that
real amount of investment can be recovered in lesser time period and higher profits can be
earned easily (Rasid and et.al, 2011). No doubt capital expenditure decisions require heavy
investment and due to this reason specific policies are required to be developed so that
maximum return can be obtained easily for the amount invested by business and this in turn
can act as development tool for Nestle. Moreover, it becomes possible to enhance
profitability level and in turn provides competitive advantage to organization operating in the
market.
A.C 3.2:-
This section would consider two proposals which are being proposed to Nestle so that
it can make its expansion. There is greater demand for Nestle in the market but in order to
make analysis of the profitable one it is important to make utilization of capital budgeting
tool. The two proposal are project A and Project B. The data extracted from the two proposal
and testing of its validity is being done so that its strength and weakness can be determined in
an effective manner.
Table 8: Expansion Proposal information
Year Project A Project B
0 -15000 -20000
1 4000 5000
2 4500 4500
3 3500 8000
4 7000 5000
5 5000 6000
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Payback period: This technique is considered to be most effective as it supports in knowing
the time period in which the invested amount can be recovered easily. The project that has
shorter pay back period can be chosen as it would assist in recovering the amount of initial
investment within shorter time period. However expansion plan with longer payback period
needs to be rejected.
Table 9: Pay back period calculation
Year Project A Project B
Cumulative cash
flow of Project A
Cumulative cash
flow of Project B
0 -15000 -20000 -15000 -20000
1 4000 5000 -11000 -15000
2 4500 4500 -6500 -10500
3 3500 8000 -3000 -2500
4 7000 5000 4000 2500
5 5000 6000 9000 8500
Payback period of project A = 3+3000/ 7000 = 3.42 years
Payback period of project B = 3+ 2500/ 5000 = 3.5 years
Net present value
It takes into time value of money into account. Thus future value of cash inflow can
be determined in an effective manner. Such assist in making selection of the most suitable
project. The project that has greater net present value can be chosen as it would yield
maximum return in long run. However expansion plan with lower net present value needs to
be rejected.
Table 10: Net present value calculation
Year Project A Project B
Discounting
factor @ 10%
P.V of
project A
P.V of
project B
1 4000 5000 0.909 3636 4545
2 4500 4500 0.826 3717 3717
3 3500 8000 0.751 2628.5 6008
4 7000 5000 0.683 4781 3415
5 5000 6000 0.621 3105 3726
Total 17867.5 21411
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present
value
Initial
investment 15000 20000
Net
present
value 2867.5 1411
Net present value of project A is 2867.5 and of project B is 1411.
Above shown are the two proposals in which investment is possible by business and it
represents that project A expansion plan proposal must be selected by business as it would
yield greater profitability within minimum duration of time. Further it would recover the
amount of initial investment within shorter span. Thus investment in such would be beneficial
for the company.
A.C 3.3:-
One of main weaknesses of the Project B greater initial investment is needed for this
proposal which is greater than Project A. This might not be a problem in case the returns are
significantly higher than Project A. The attached returns of this proposal is the major concern
as even though the Project A requires 15000 as investment but it has been estimated that it
would yield higher returns in each and every aspect. This is from the view point of payback
as well as NPV. In addition to this there is presence of some other risk included in this
proposal that is it requires greater proportion of capital expenditure budgets of Nestle taking
into account the size of the firm. The likely return of project B is lower and there are other
external factors that can affect the project in future course of time.
On the other hand the strength of project A is that it needs lower investment that
leaves more capital budget which can be spend anywhere. The shorter payback and higher
NPV means higher return for Nestle. With the use of low proportion of capital expenses there
is lower risks that affects the overall state of the organization's financials so in case any
external factor affects then the project remains worth taking.
The advantages of the proposal:
 Flexible budgets that allow changes as per market and organisational needs
 Focused operations that is a result of the compact budget system
 Lower costs and execution is simpler that prevents wastage of resources
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The weaknesses on the other hand involve:
 Resources can get intensive due to the tight budget constraints
 Managers may manipulate the budget according to their terms (Fakhfakh, Zouari and
Zouari-Hadiji, 2012)
 There may be a bias towards short-term planning and budgeting
Feedback on the proposal:
As a manager I would consider this strategy as a best method to evaluate business proposal,
in light of the fact that every single system has shortcoming in any case, shortcomings of one
procedure is some way or another dispensed with by qualities of the other method.
Proposal A must be employed by business as its main strength is that funds can be recovered
easily and in lesser period of time. Further, it is possible for Nestle to expand its operations in
lesser period of time. One of the main weakness of this proposal is that high investment is
needed. Therefore, this strength along with weakness has to be considered by management of
Nestle at the time of allocating funds in the project.
A.C:3.4:-
The zero- based approach proposed has its own benefits and faults. The strategic
objective of Nestle UK, to allocate budgets according to the required areas of operation can
influence the volume of the work that they can carry forward. These tools present the
financial expenses and the projected budgets that will be required to conduct operations.
McCafferry (2014, p.52) opined that the tools used can help in presenting the valuation of the
company and the performance barriers that need improvement. Cost benefit analysis can help
the company assess the strengths and weaknesses of the alternatives that gratify the financial
transactions and functional requirements of the company. The zero-based approach suggested
can benefit from this variable as it helps in determining whether the investment made can
produce profitable outcomes. It can also help Nestle UK to compare differences in projects
involving different costs and can assist in analysing whether the expected benefits outweigh
the costs. Overall the proposal will have positive impact on the business where expansion of
Nestle operations can take place easily and in appropriate manner. Further, business
enterprise can easily focus on its strategic objectives which involve enhancing profitability
along with the market share. Nestle focuses on expansion of business operations and due to
this reason allocation of funds in project A is quite fruitful and this in turn can act as
development tool for the enterprise (Needles, 2010). Moreover, another strategic objective is
optimum utilization of available funds which is also possible by allocating funds in this
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project for longer period of time. Business can obtain higher return and can provide long term
benefits to enterprise.
Conclusion:
This study focused on the financial management of Nestle UK. The validity of these
methods is also explained. The researcher then provides a comparative analysis of the
collected financial data through horizontal analysis of the financial statements that includes
profit and loss accounts and balance sheets. This analysis provided variances in finance that
were positive in nature. Zero based approach of the budgeting was identified as helpful for
Nestle UK in managing operations and the KPI’s of the company was stated to show the
feasibility. Lastly, the researcher stated the need of using cost benefit analysis to support the
zero-based approach suggested.
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