Financial Management and Budgeting

The assignment delves into the realm of financial management by examining core concepts such as financial accounting theory, budgeting practices (including zero-based and incremental budgeting), and the practical application of these principles across different sectors like public agencies, nonprofits, and businesses. It encompasses a range of topics from understanding financial statements to analyzing budgetary impact in healthcare and telemedicine.

FINANCIAL MANAGEMENT

EXECUTIVE SUMMARY
Financial management refers to the management of organizational financial sources.
It is the process of collecting, organizing, managing and controlling the business funds in an
adequate manner. It helps to run company's operations without any hazards. Thus, it is clear
that it helps to administrate funds in an appropriate manner and competes effectively.
FirstGroup Plc is a UK transport company that provide bus, coaches and rail services to the
citizens. It is medium sized organization that mainly operates in UK, Ireland, Canada and
United Status. In the present report, the importance of financial management will be
discussed in company's context. Various tool such as budgets and ratio analysis will be
analysed to interpret business performance and ensure optimum allocation of resources.
Further, investment appraisal techniques will be discussed to identify most profitable
proposal and take strategic investment decisions.

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Obtaining financial data and assess its validity........................................................1
AC 1.4 Review and questions financial data.........................................................................2
Task 2.........................................................................................................................................3
AC 1.2, 1.3 Ratio Analysis of FirstGroup and comparative analysis ...................................3
TASK 3......................................................................................................................................5
AC 2.1 Approaches to prepare budget with the legal requirement and accounting
conventions............................................................................................................................5
TASK 4......................................................................................................................................6
AC 2.2 Analyse the budget outcomes against organizational objectives..............................6
TASK 5......................................................................................................................................8
AC 3.1 Identify criteria to judge investment proposals.........................................................8
AC 3.2 Analysing the proposal viability...............................................................................9
AC 3.3 Strength and weaknesses on the proposals.............................................................10
AC 3.4 Evaluate the impact of proposals on the strategic objectives..................................10
CONCLUSION........................................................................................................................11
REFERENCES.........................................................................................................................11

INTRODUCTION
Financial management is the process of managing organization’s funds in an efficient
and effective manner. It becomes necessary for every business to collect and manage funds
appropriately. Thus, Certified Financial Officer plays a very important role in managing
funds of the organization. It refers to accomplishing functions such as financial planning,
procuring and collecting the financial resources of the enterprises. Moreover, it helps to
maintain effective administration of funds owned by the companies. This in turn will enable
the company to remove the operating hazards and run successfully. It estimates capital
requirements and fulfil organizational needs through determining an appropriate capital
structure. Thus, firms can collect funds at lower cost. Furthermore, it helps to take effective
capital investment decisions through investment appraisal techniques. The main objective of
financial management is about maximizing business profits and shareholder's wealth. Thus, it
becomes clear that it provides huge assistance to manage cash flows, minimise financial cost
and improve business performance. Hence, organization can compete effectively and survive
for a long term period. In this report, financial management will be discussing in context to
FirstGroup organization. It is a medium sized UK transport company having headquartered in
Aberdeen, Scotland. It provides bus, coach and rail services in UK, Ireland, Canada and US.
TASK 1
AC 1.1 Obtaining financial data and assess its validity
Financial data can be obtained from various internal as well as external sources. Every
organization prepare financial statements provide detailed information about company's
affairs. This statements are available within the organization such as income statement,
balance sheet, statement of retained earnings, cash flow and fund flow statements, statement
of changes in the financial position and others (Brigham and Daves, 2012). However,
economic reports, trade journals and published government reports are outside information
sources.
FirstGroup Company prepares their income statement to know its operational results.
The statement summarizes all the incurred expenses and generated incomes during a
specified time period. The aim of preparing this statement is to determine business profits and
losses. Surplus of revenues over the payments will indicate business loss while high
payments will raise loss to company. However, Balance sheet is a summarized statement of
FirstGroup assets and liabilities helps to determine financial status of the organization
(Kreder, 2015). It provides information regarding liquidity, solvency, efficiency and business
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turnover. In addition to it, retained earnings statement identifies the changes in retained
profits between two balance sheet dates. Another, cash flow statements is prepared to
determine the cash sources and its application through operating, financing and investing
activities whilst fund flow statement provide information regarding used finance sources and
its application in business. Thus, it became clear that company's accounts make detailed
records of each and every transaction and give information to the users. Moreover,
government publish economic reports and trade journals which provide information regarding
industrial development. It gives information about growth of different sectors thus; users will
be able to take effective trading decisions.
FirstGroup prepare their financial statement as per the set accounting standards,
accounting rules, regulations and necessary principles and conventions (Scott, 2014).
Moreover, the statement are judged or verified by an independent auditor for publishing
purpose. Auditor are the skilled accounting professionals who inspect company's accounts
from necessary documents and give their opinion about whether it represent true and fair
position or not. It assists users in providing more prominent, reliable and valid information
about company's operation and provides assistance in their decisions making process.
AC 1.4 Review and questions financial data
Review of the financial statements is the assurance or conformity that FirstGroup
prepared its accounts in accordance with the provisions of financial reporting framework.
Applicable auditing requirements are the best way of reviewing company's accounts.
Analysing company's inventories, cash, bank, investment and fixed assets helps to review
business assets while liabilities can be reviewed through verifying bills payables, overdraft,
loans, and creditors and so on. High liabilities indicate trouble, manager's inabilities and
ineffective decisions while high amount of company's assets implies better financial
performance (Muller, 2012). In context to FirstGroup, its net assets shows an inclining trend
over the period shows that it is performing better in the market. Furthermore, according to the
profitability statements, increased sales and declined cost will help to increase profitability
and implies qualified operational performance. On contrary, decreased profitability is the sign
of poor or worst performance. FirstGroup Company improved its sales over the previous
period and generated high profits. Therefore, it can be said that FirstGroup is performing
well in the market. This in turn, company is able to operate for a long term period and survive
well.
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TASK 2
AC 1.2, 1.3 Ratio Analysis of FirstGroup and comparative analysis
Ratio Analysis
Ratios 2014 2015
Gross Profit margin 89.6% 89%
Net Profit Margin 0.8% 1.2%
Return on Capital Employed 5.57 5.48
Gearing 1.51 1.24
Asset Turnover 1.27 1.18
Current ratio 0.94 0.88
Acid Test ratio 0.71 0.62
Average debtors in days 10.2 days 8.76 days
Average creditors in days 35 days 36 days
Average age of stock 39.37 days 38.71 days
Ratio analysis can be defined as the most significant tool for understanding the actual
position of enterprise so that managers can evaluate the competency of strategies employed
so that if required potential measures can be implemented. Furthermore, these are considered
as the most common tools used for analysing the financial standing of business enterprise.
Herein, researcher has focused on analyzing the financial position of FirstGroup plc by the
means of ratio analysis. The main purpose of using this tool is that it assists in evaluating
different aspects of firm such as profitability, liquidity, solvency and efficiency (Brand and
et.al, 2014). Therefore, through the means of which management can easily understand the
actual position of business and make smart and effective decisions regarding future
contingency. Following is the ratio analysis for Firstgroup plc: Gross profit margin: It is considered as one of the major profitability ratio that assists
in comparing the gross margin of business to the net sales. Through the help of this
ratio, management measures how profitable are through the sale of its inventory or
merchandise. Herein, high gross profit margin of Firstgroup plc indicates that,
management have more money to pay its operating expenses like salaries, utilities and
rent. However, with 89% of gross profit margin in 2015 clearly signifies the
effectiveness of sales strategies employed by the top level management of Firstgroup
plc.
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 Net profit margin: It assists in measuring what percentage of sales made up of net
income. In simple terms it assist in showing how much profits are produced through
the sale of goods and services. High net profit margin clearly indicates that, top level
management has managed the level of expenditure and increased the sales
performance. Furthermore, with the help of better promotional and marketing
strategies company is able to increase its profit margin and maintain its position in
target market. Return on capital employed: It is also profitability measure which assists in measuring
how efficiently company is making the use of employed capital in generating profits.
Considering the present condition of Firstgroup plc it can be said that slight down fall
in ROCE ratio from 5.57 to 5.48 means that very little decrease in dollars of profits
generated on the each dollar of capital employed. By the means of this ratio, investors
can easily evaluate the capability of firm in generating higher returns so that smart
and effective decisions can be made regarding future investments (Brigham and
Ehrhardt, 2013). Gearing: Debt/equity ratio is important for the stakeholders in understanding the
liabilities that business have during the reporting period. According to the above table,
decreasing gearing ratio from 1.51 to 1.24 indicates that top level management has
raised funds through equity which indeed decreases the liability of business. Asset Turnover: Through the help of this ratio, management can easily evaluate the
ability of company's assets in generating the sales. In the present case, slight downfall
in asset turnover ratio indicates that, Firstgroup plc is unable to make the use of its
assets in optimum manner which indeed leads to decrease the value of asset turnover
from 1.27 to 1.18. Liquidity position: Looking at the liquidity position of Firstgroup plc it can be said
that, ability of firm in making use of current assets in mitigating short term financial
needs is declining due to which both current and quick ratio are showing poor results
(Uechi and et.al., 2015). Decreasing current ratio indicates that firm is unable to
satisfy short financial needs while declining quick ratio indicates that company is
unable to overcome short term financial obligations. Average collection and payment period: On the basis of above ratio analysis table it
can be said that, decreasing debtors collection period means company is collecting
due payment (2015) more quickly in 8.76 days as compared to (2014) within 10.2
days. While on the other hand, goodwill in the market has helped the course of
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Firstgroup plc as creditors has increased the period of payment for the firm which
assist in floating the working capital in more effective way.
 Average stock period: Decreasing average age of stock clearly indicates that demand
of Firstgroup plc products and services has increased in the market due to which they
are able to refill the inventory in 38.71 days in 2015 as compared to 2014 39.37 days.
TASK 3
AC 2.1 Approaches to prepare budget with the legal requirement and accounting conventions
Budget: It is a financial tool which is used by the managers to administrate funds.
Managers prepare budget through estimating probable incomes and expenditures for future
period. It assists managers to remove operational difficulties and ensures hazard free
operative functions. The main purpose of budgetary process is to determine forecasted
incomes and expenses and maintain surplus cash availability in the business. Through
communicating strategic plans to various departments’, managers of the companies will be
able to monitor and control resources effectively (Diamond, 2012). Moreover, after ending
the budgetary period, managers evaluate the forecasted figures with the actual business
performance in order to determine variances. Thus, corrective actions can be taken to remove
adverse variances and ensure successful operations.
Incremental budgeting: It is the traditional approach of budget preparation. According
to this approach, every year budget is prepared on the basis of historical data. All the cash
incomes and payments will increases through adding some amount. It does not consider the
market changes and draft budget by increasing historical revenues and expenditures. The
benefit of this budgetary method is that it takes lower time and cost to the company.
Consistency approach is used to construct budget; hence improves comparability. However,
it is not a good method as it does not assess operating functions and their importance in future
context (Jones, Zalányi and Érdi, 2014). It increases all the cash payments without
considering the organization’s need for incurring it. Thus, undesired expenses also get
improved results in high business cost and lower profits. Further, no incentive is available for
the department or division manager for reducing cost.
Zero base budgeting: This method involves the determination of future operational
requirement. As per this method, it is essential for the mangers to identify future operating
activities initially. It helps in more accurate forecasting of revenues and expenditures for FY
(Adams, n.d.). It does not assume that all the historical operating functions will be continuing
for the upcoming period. Hence, it eliminates undesired functions which impose cost on the
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company. Furthermore, it considers the market changes for budget construction. The
budgeting approach provides huge assistance in optimum allocation of company’s resources
for different functions (Kumar and Sahni, 2016). In addition to it, bottom-down approach
helps to encourage workers as they are involved in budget preparation. On contrary, the
disadvantage of this technique is that it takes lot of time and imposes high cost to the
company. Moreover, high managerial skills are required for drafting a budget.
First Group Company prepare their budget through using this technique. Company’s
managers determine future business receipts and payments to identify the net cash flow. It is
the legal requirement of the managers to draft budget from time-to-time. Budget committee
managers have to determine all the expected future business incomes and allocate business
resources in different operational activities in an efficient manner. They have to define budget
timeline, estimate cost of resources, dates and amount of revenues and expenses to construct
budget. After it, FirstGroup budget committee has to develop final budget and need to present
it to management board for approval to fulfil the legal requirement.
According to UK legislation, it is not the legal obligation to companies for preparing
budget for the future period. It is only a managerial tool which managers can prepare for their
business target achievements. There is no any separate act for drafting budgets in companies.
Moreover, no provision has been made in company’s law for budget construction henceforth,
it can be said that firms have a choice to prepare budget or not without any legal
requirements. But still, it is almost prepared in all the organizations for managing business
functions and to operate successfully.
Moreover, cash basis is used as accounting convention; hence non cash transactions
are eliminated from the budget. Thus, it is different from profit determination which is
helpful in effective cash management. Financial constraints are that without constructing the
budget, FirstGroup is not able to manage funds appropriately (Marina and et.al, 2016).
Moreover, production budget and material requirement budget help to determine the required
business production and able to meet customer’s demand efficiently. Another, flexible budget
provide an estimation of probable future results with varying sales volume. It measures the
ability of managers to take effective decisions. Further, detection and elimination of adverse
variances also provide great assistance to the managers for achieving strategic operational
objectives (Schroeder, Clark and Cathey, 2013).
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TASK 4
AC 2.2 Analyse the budget outcomes against organizational objectives
As per the scenario, budget is prepared for six months period ending on June.
According to the budget, business generates cash incomes through sales and loan proceeds
whilst cash payments arise due to purchasing of material, wages, fixed cost, building on
lease, advertisement fees, corporation taxes, capital expenses and other repayment of loan.
Net cash balance is determined through comparing business receipts and expenditures
(Deegan, 2012). Thereafter, closing balance has been determined through adding opening
cash balance to the net cash flow.
Analysis of budget: Constructed budget indicates that the company will generate
higher sales over the period. The sales receipts shows a rising trend as it got increased from
2110£ to 2444£ but although the sales got increased at fluctuating rate. The absolute and
percentage changes in sales are presented here:
Percentage increase in sales Absolute changes in sales Percentage increases (%)
Jan - -
Feb 46 2.1800947867
March 8 0.3710575139
April 55 2.5415896488
May 65 2.9292474087
June 160 7.01
Thus, it becomes clear that in the month of January, sales was 2110£ which got
increased to 2156£ while percentage increases up to 2.18%. Thereafter, if the sales got
increased by 8£, then the percentage increases is 0.37% which is lower than the previous
period. However, in the subsequent months, sales got increases at inclining rate. The sales
receipts got increased by 55£, 65£ and 160£ whereas percentage changes are 2.54%, 2.92%
and 7% respectively. In the month of June, sales got increased at high rate of 7%. Moreover,
company generate amount of 4000£ of loan receipts in the month of January and enhances
total cash receipts.
Under the expenses, total payments got increased from 2018£ to 3345£ in the last
month. The absolute and percentage changes in the expenses figures are calculated here as
follows:
Percentage increase in Absolute changes in cash Percentage increases
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expenses expense
Jan - -
Feb 335 16.6005946482
March 2734 116.1920951976
April -2280 -44.8201297425
May 60 2.1375133595
June 478 16.6724799442
The table indicates that in January, company incurred cash expenditures of
2018£ which inclined to 2353£ in the next period. The absolute and percentage changes
are 335£ and 16.60%. It has been inclined because of increase in the material expense,
taking building on lease and arising advertisement cost. However, in the month of March,
payment shows a very high increase as it got inclined by 2734£ and 116%. The main cause of
such increase is raising capital expenditures of 2750£. On contrary, April shows a declined to
cash payments by 2280£ and 44.82%. Elimination of capital expenses are the reason behind
such decreases. Thereafter, it got enhanced by 2.13% and 16.67% respectively. This is;
because of arising loan repayment and corporation taxes. Due to the impact of
fluctuating incomes and expenses, net cash flow got changed to 4092£ to (901£). Excess of
predicted revenues over the payments avail surplus cash balance while high cash payments
than revenues indicates deficit net cash flow. Furthermore, it impacted the closing cash
balance in both the direction.
Following decisions can be taken to overcome the shortcomings and surplus cash
availability. One of the important ways of mitigating the deficit balance is to improve
the total sales. It can be done by lowering selling prices and effective marketing planning
and strategies. Advertisement and marketing efforts will help to raise public awareness about
the offered products and services (Titman, Martin and Keown, 2015). Moreover, company's
offerings at affordable prices will lead to enhance product’s demand and total sales. Along
with this, maintaining effective control over the expenditures will reduce the company's cost
and results in fall in total payments. This in turn enables business to have surplus cash
availability for operational purpose (McKinney, 2015). Regularly monitoring of the operating
functions will assist managers to control business payments and have sufficient cash available
for running daily functions. Another suggestion to eliminate adverse balance is that company
can make use of overdraft facility as bankers are agreed to provide overdraft to the extent of
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750000£. Furthermore, previous month cash can be reinvested; further to earn returns on it. It
helps to improve cash earnings and favourable net cash flow.
TASK 5
AC 3.1 Identify criteria to judge investment proposals
FirstGroup Company should evaluate the available investment proposals for taking
qualitative decisions. There are different investment appraisal techniques available to
FirstGroup for assessing the project return, described hereunder:
Pay back period: Required time duration to re-earn the initial investment of the
proposal is called payback period. It is very easy to determine the recovery period of the
proposal (Venables, Laird and Overman, 2014). The selection criteria of this method says that
FirstGroup company should invest their funds in such proposal that have lower pay back
period and reject other.
Net present value (NPV): The method assumes that money has time value over the
period henceforth; all the cash flows should be discounted to predict their future value.
Identified cost of capital will be use for discounting purpose. As per the method, difference of
discounted initial investment and cash inflow is known as NPV (Isaac and O'Leary, 2013).
FirstGroup has to invest money in proposal which have highest NPV.
AC 3.2 Analysing the proposal viability
FirstGroup Company needs to make investment in fixed assets such as plant and
machinery, equipment and others. Henceforth, better quality of capital budgeting decisions is
very important for First Group Company. Investment appraisal techniques provide huge
assistance to FirstGroup to determine the most viable project and to make investment.
FirstGroup company have two capital investment proposals of 120000£ and 150000£ thus
payback period and NPV are calculated as under:
Table 1: Payback period of project A
Year Project A Cumulative cash flows
0 -120000 -120000
1 24000 -96000
2 38000 -58000
3 58000 0
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4 72000 72000
5 89000 161000
Table 2: Payback period of project B
Year Project B Cumulative cash flows
0 -150000 -150000
1 16000 -134000
2 32000 -102000
3 42000 -60000
4 60000 0
5 120000 120000
Table 3: NPV of project A
Year Project A Discounted value
Discounted cash
flows
0 -120000 1 -120000
1 24000 0.909 21816
2 38000 0.826 31388
3 58000 0.751 43558
4 72000 0.683 49176
5 89000 0.621 55269
Total 81207
Table 4: NPV of project B
Year Project B Discounted value
Discounted cash
flows
0 -150000 1 -150000
10

1 16000 0.909 14544
2 32000 0.826 26432
3 42000 0.751 31542
4 60000 0.683 40980
5 120000 0.621 74520
Total 38018
According to payback period, First Group Company should adopt project A. The
reason behind this is that it takes lower time to 3 year to recover its initial investment of
120000£. Moreover, as per the discounted cash flow method, project A and B has NPV
amounted to 81207£ and 38018£. It is higher in Project A which indicates that this project is
more viable for FirstGroup. Thus, it should be recommended that FirstGroup Company
should invest in this project. It will provide more benefits to the business.
AC 3.3 Strength and weaknesses on the proposals
Pay back period: Project A and B have payback period of 3 year and 4 year. It is
lower in project A indicate that FirstGroup company will recover initial cash outlay of
120000£ earlier than proposal B. Therefore, FirstGroup Company should accept this
investment proposal. On contrary, the weakness of this method is it ignores time value of
money (Dorfman and Cather, 2012). Moreover, it does not consider the post pay back profits
which may be higher and provide more profits to the business than others.
NPV: Both the proposals have NPV of 81207£ and 38018£ higher in project A. The
strength of this technique is that it considers the time value and determines future value of
cash flows. Thus, it can be said that it provide more accurate estimation about proposal
return. Further, it considers overall project profitability and assesses how proposal is viable
for the company. However, weakness is it is very difficult to predict an accurate discount rate
(Lasher, 2013). Henceforth, incorrect determination of cost of capital may lead to harmful
investment decisions and vice versa.
AC 3.4 Evaluate the impact of proposals on the strategic objectives
On the basis of above identified results, it can be suggested to FirstGroup that the
managers should invest in proposal A. It is recommended because of lower recover period
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and high NPV. Through investing funds in these proposal, FirstGroup company will be able
to generate huge profits of 81270£ and maximize their business profitability. Moreover, the
initial cash outflow of 120000£ will be recovering within the time period of 3 years lower
than proposal B. Thus, it is clear that investment appraisal techniques provide assistance to
the company to achieve its strategic objectives. It helps to improve company's operational as
well as financial performance to a great extent.
CONCLUSION
The present project report concluded that financial management provide huge
assistance to collect required funds and manage it efficiently. The report explained that ratio
analysis is a tool that helps to analyse and interpret company's performance. It helps to
determine operational difficulties and remove it through taking strategic decisions. Budgetary
is a managerial tool that administrates allocation of company's resources in an adequate
manner. On the contrary, capital budgeting is a technique helps to take qualified investment
decisions and helpful in decision-making. Thus, it helps to run business operation
successfully and ensure long-term survival.
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Titman, S., Martin, J.D. and Keown, A.J., 2015. Financial management: Principles and
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