Financial Management: Profitability Analysis, Budgeting, and Balanced Scorecard in Healthcare Organizations

In this assessment we will discuss about financial management and below are the summaries point:- Part 1 focuses on comparing the profitability of GSK Plc and Roche Holding AG for the years 2016 and 2017 using key ratios. Part 2 discusses the advantages, disadvantages, and circumstances under which Zero Based Budgeting would be used. Part 3 explores the benefits and limitations of the balanced scorecard approach and discusses process failure.

Running head: FINANCIAL MANAGEMENT
Financial Management
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Table of Contents
Part 1:...............................................................................................................................................3
Introduction:................................................................................................................................3
Organisational profiles of GSK Plc and Roche Holding AG:.....................................................3
Profitability analysis of GSK Plc and Roche Holding AG for the years 2016 and 2017:...........4
Conclusion:..................................................................................................................................9
Part 2:.............................................................................................................................................10
Introduction:..............................................................................................................................10
Advantages and disadvantages of Zero Based Budgeting:........................................................10
Circumstances under which Zero Based Budgeting would be used:.........................................12
Conclusion:................................................................................................................................13
Part 3:.............................................................................................................................................13
Introduction:..............................................................................................................................13
Benefits and limitations of balanced scorecard:........................................................................14
Process failure:...........................................................................................................................17
Conclusion:................................................................................................................................18
Part 4:.............................................................................................................................................18
Introduction:..............................................................................................................................18
Financial issues to be considered before undertaking investment decision:.............................19

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Conclusion:................................................................................................................................21
References and Bibliographies:.....................................................................................................22

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Part 1:
Introduction:
The current section would provide a brief comparison of the profitability positions of
GSK Plc and Roche Holding AG for the years 2016 and 2017. For determination of the
profitability position of these two healthcare organisations, three useful ratios have been used.
These ratios mainly constitute of return on capital employed, operating profit margin and
earnings per share. The comparison of these ratios would help in understanding the financial
performance of the two chosen organisations in the years 2016 and 2017.
Organisational profiles of GSK Plc and Roche Holding AG:
GSK Plc is a UK-based pharmaceutical firm dealing with inventing, developing,
producing and marketing vaccines along with other health products in the global marketplace. It
is listed on FTSE 100 having market capitalisation of almost £81 million in 2016, which is the
fourth biggest in the stated index (Gsk.com 2019). The main products that it sells in the global
arena comprise of Flovent, Avodart, Advair and other medicines. The organisation has the
objective of becoming the most trusted and innovative healthcare in the global marketplace. In
2010, GSK Plc made the acquisitions of Laboratorious Phoenix for $253 million and it has
employees of nearly 95,400 in 2018.
Roche Holding AG is involved in pharmaceuticals and diagnostics business in
Switzerland, Germany and other European nations (Roche.com 2019). It is a Swiss global
healthcare organisation operating under two divisions, which include diagnostics and
pharmaceuticals. In addition, the organisation is focusing on maintaining competitive advantage

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through simplification of its business processes by retaining the best talent. At present, it has
employee base of 65,000.
Profitability analysis of GSK Plc and Roche Holding AG for the years 2016 and 2017:
For assessment of the profitability position of GSK Plc and Roche Holding AG for the
years 2016 and 2017, the ratios that have been considered mainly include return on capital
employed, operating profit margin and earnings per share. The detailed evaluation of these ratios
is presented as follows:
Return on capital employed:
In the words of Vogel (2014), return on capital employed gauges the efficiency of an
organisation in utilising its capital for profit generation. This ratio is used mainly by the investors
for determining the suitability of investment within the organisation (Williams and Dobelman
2017). The detailed calculation of this ratio for the two organisations is presented briefly as
follows:
Table 1: Return on capital employed of GSK Plc and Roche Holding AG for the years 2016
and 2017

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(Source: Gsk.com 2019: Roche.com 2019)
2016 2017 2016 2017
GSK Plc Roche Holding AG
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
6.48%
13.71%
25.95% 23.85%
Return on capital employed
Figure 1: Return on capital employed of GSK Plc and Roche Holding AG for the years
2016 and 2017
(Source: Gsk.com 2019: Roche.com 2019)
. From the above figure, it could be observed that the return on capital employed for GSK
Plc has increased from 6.48% in 2016 to 13.71% in 2017, while the ratio for Roche Holding AG
has fallen from 25.95% in 2016 to 23.85% in 2017. The main reason behind the increase in this
ratio for GSK Plc is the rise in operating profit, while for Roche Holding AG; there has been
decline in operating profit in 2017. Over the years, it has been projected that the trend for few
medicines would continue to lose exclusivity in US and Europe markets, which would affect the
operating income of Roche Holding AG as well in future. However, despite the downfall in the
ratio for Roche Holding AG, it is still considerably higher in comparison to GSK Plc. Thus, in
terms of return on capital employed, Roche Holding AG is enjoying competitive advantage over
GSK Plc in the global market.

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Operating profit margin:
As pointed out by Robinson et al. (2015), operating profit margin denotes the percentage
of profit an organisation makes after it has incurred variable production costs like raw materials
and wages. The detailed calculation of this ratio for the two organisations is presented briefly as
follows:
Table 2: Operating profit margin of GSK Plc and Roche Holding AG for the years 2016
and 2017
(Source: Gsk.com 2019: Roche.com 2019)

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2016 2017 2016 2017
GSK Plc Roche Holding AG
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
9.32%
13.54%
27.82%
24.40%
Operating profit margin
Figure 2: Operating profit margin of GSK Plc and Roche Holding AG for the years 2016
and 2017
(Source: Gsk.com 2019: Roche.com 2019)
According to the above figure, it could be seen that the operating profit margin of GSK
Plc has risen from 9.32% in 2016 to 13.54% in 2017, while the same for Roche Holding AG has
declined from 27.82% in 2016 to 24.40% in 2017. The main reason that the ratio for Roche
Holding AG has declined over the year is due to the fact that it has adopted aggressive pricing
strategy, coupled with rise in cost of direct materials and labour costs in the global healthcare
industry. On the other hand, the ratio for GSK Plc has risen over the years is due to the change in
management strategy leading to decline in overall operating expenses of the organisation over
the year. Although both the organisations have experienced a sharp increase in revenue in 2017,
GSK Plc has managed to keep its operating expenses under control, which is not the case in case
of Roche Holding AG. However, despite such increase, GSK Plc is not able to match with the
operating margin generated by Roche Holding AG in 2017. Hence, in terms of this ratio, the

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competitive position of Roche Holding AG is better in comparison to GSK Plc in the global
healthcare industry.
Earnings per share:
Earnings per share, termed as net income per share, is a profitability or market prospect
ratio, which gauges the amount of net profit earned per share of stock outstanding (Wahlen,
Baginski and Bradshaw 2014). Hence, a larger organisation would need to divide its earnings
among increased shares of stock in contrast to a smaller organisation (Islam 2014). The detailed
calculation of this ratio for the two organisations is presented briefly as follows:
Table 3: Earnings per share of GSK Plc and Roche Holding AG for the years 2016 and
2017
(Source: Gsk.com 2019: Roche.com 2019)

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2016 2017 2016 2017
GSK Plc Roche Holding AG
£-
£2.000
£4.000
£6.000
£8.000
£10.000
£12.000
£0.314 £0.188
£11.242
£10.117
Earnings per share
Figure 3: Earnings per share of GSK Plc and Roche Holding AG for the years 2016 and
2017
(Source: Gsk.com 2019: Roche.com 2019)
As per the above figure, it could be witnessed that the earnings per share of GSK Plc
have decreased from £0.314 in 2016 to £0.188 in 2017, while the same for Roche Holding AG
has fallen from 11.24 CHF in 2016 to 10.12 for CHF in 2017. A higher ratio is always
favourable compared to a lower ratio, since this implies that the organisation is more profitable
and it possesses the ability of distributing more profits to its shareholders (Rani, Yadav and Jain
2015). In case of both GSK Plc and Roche Holding AG, the ratio is observed to decline from
2016 to 2017, which denotes that they would not be able to distribute increased profits to their
shareholders.
The above table makes it evident that the amounts of net income for both organisations
have increased from 2016 to 2017. However, this has been offset by the increasing number of
outstanding shares issued by both the organisations in 2017. The situation is significant for GSK

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Plc, as the number of shares issued has increased from 3,382 in 2016 to 11,537 in 2017, while
the same has increased from 785 in 2016 to 962 in 2017 for Roche Holding AG. Due to this, the
earnings per share of the two organisations have declined in 2017. However, it is noteworthy to
mention that the ratio still seems to be better for Roche Holding AG compared to GSK Plc and
hence, investing in the shares of the former would be a profitable option for the investors (Faello
2015).
Conclusion:
From the above discussion, it is apparent that for conducting the profitability analysis of
GSK Plc and Roche Holding AG, return on capital employed, operating profit margin and
earnings per share have been taken into consideration. In terms of all the ratios, it has been found
that the position of Roche Holding AG is found to be more favourable compared to GSK Plc
because of increased revenue and controlled operating expenses over the year. Over the years, it
has been projected that the trend for few medicines would continue to lose exclusivity in US and
Europe markets, which would affect the operating income of Roche Holding AG as well in
future. Moreover, Roche Holding AG has not issued too much additional equity shares in the
market owing to which earnings per share have not declined significantly, as in the case of GSK
Plc. Hence, it could be inferred that Roche Holding AG is enjoying competitive edge over GSK
Plc in the global healthcare market in terms of profitability.
Part 2:
Introduction:
The current study discusses the concept of zero based budgeting (ZBB). The ZBB is a
process of budgeting where all the expenditures need to be rationalised for every new financial
period. The method of ZBB begins from "zero base" and each activity within a company is

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examined for its requirements and expenditures. Then the Budget is prepared for the upcoming
period, disregarding the fact that the current budget could be either higher or lower than the
earlier period (Miller 2018). The first part of this study introduces the features of ZBB, followed
by the advantages and disadvantages of ZBB and finally we take a look on the best way to
implement ZBB based on different aspects, which are related to it.
Advantages and disadvantages of Zero Based Budgeting:
The advantages are discussed below -
Accuracy -
As opposed to the traditional budgeting process, in which just some random variations
are being made to the budget of the earlier years, ZBB makes each sector to overview each and
every commodity cash flow and calculate the operational expenses (Lin and 2017). This would
help in reducing the expenditures as it would clearly give an overview of these expenses against
the anticipated performance.
Efficiency -
ZBB assists in allotment of resources (sector wise), as it does not pay any attention to the
past figures. However, it pays a close attention to the real figures.
Reduction of unnecessary functionalities -
This process allows to recognise those events, which would allow the activities to take
place in a (cost effective) manner that would lead to the reduction of (unproductive) and
unnecessary functionalities.
Budget inflation -

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In ZBB process each and every commodity is to be authenticated, zero based budgeting
method beats the weaknesses of budget inflation or in other words, incremental budgeting (Ryu
2015).
Cooperation and communication -
This process helps in better cooperation and communication among the employees of
various sectors, as it allows them to take part in the decision making process.
The disadvantages are discussed below -
Time consuming -
ZBB is a very time consuming process for any organisation or a public sector company to
compute each and every year in contrast to (incremental budgeting), which is a very simplistic
process (Codesso et al. 2015).
Lack of expertise -
Providing a detailed analysis of each and every commodity that has been incorporated in
the budget is not always a easy process, it involves providing training to the managers this would
incur additional expenditures for the company (Nnoli, Adeyemi and Onuora 2016).
Circumstances under which Zero Based Budgeting would be used:
The best ways to implement ZBB are discussed below -
Integrating ZBB with core (FP & A), as ZBB could not be considered as an alternative
option to (current planning and budgeting cycles. However, it needs to be treated as an
ancillary method, which is to be continued after an interval of two or three years in order

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to pay attention to expenditures on strategically crucial functionalities and actions
(Nnoli, Adeyemi and Onuora 2016).
ZBB process helps to pay attention to actions that would bring maximum returns to the
company from the market. Few of the companies limit the utilisation of ZBB for actions
such as- (SG & A) and other fields of overhead activities, whereas there are huge figures
of indirect activities that are not clearly rationalised. This helps to focus on limited areas
of the company in order to achieve more advantages for a limited investment without
excessively causing problem to directly customer dealing activities. There are a few who
utilise ZBB to newly established business activities only, also to limit requests for extra
funding while using other processes of budgeting for current functionalities.
Bringing together operational and financial information to a single zone could be
achieved through ZBB (Budding, Grossi and Tagesson 2014). The successful
implementation of ZBB could be achieved if the managers are having proper knowledge
and foresightedness of the drivers for the various expenditures. It also engages easy
access to information through the (volume of the functionalities, productivity and
resource consumption).
The capability to model the creative relationship between the (volumes of
functionalities) and the resulting means and census needs is crucially vital as the
managers are required to make informed decisions about how changing the (volumes of
functionalities) and various service levels affect the expenditures.
Conclusion:
In conclusion, it could be cited that ZBB makes the company reassess the framework for
their table of accounts, also the expenditures accounts, in order to assure their structure and

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precision, which would allow the company to enhance the supervision process. The method of
ZBB begins from "zero base" and each activity within a company is examined for its
requirements and expenditures. If any company is utilising an (incremental budgeting) process to
planning and budgeting bases depending upon the figures of the previous period, the ZBB model
would be preferred as a first "enterprise-wide" model for creative relationships that would be
linking the functionalities of various business operations.
Part 3:
Introduction:
A balanced scorecard is utilised mainly for combining financial as well as non-financial
performance measures in order to ensure sound approach to management control. The concept
was formulated by Norton and Kaplan in 1992 (Hoque 2014). With the help of these measures, it
becomes easy for the managers to investigate their firms from various perspectives.
Benefits and limitations of balanced scorecard:
The balanced scorecard provides a number of benefits to the global business
organisations, which are elucidated briefly as follows:
Better strategic planning:
With the help of balanced scorecard, it is possible to form a powerful framework for
communicating strategy. The business model would be visualised in a strategy map that assists
the managers in thinking about cause and effect relationships between the various strategic
objectives (Busco and Quattrone 2015). The method of developing a strategy map assures that
consensus is arrived at over a group of interrelated strategic goals. This implies that performance

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results and significant drivers or enablers of future performance are detected for developing an
overall picture of the strategy.
Enhanced strategy communication and execution:
Having a single-page picture of the strategy enables the organisations in communicating
strategy both externally and internally. This is because communicating strategy through visuals
is beneficial rather than communicating the same orally. The plan on page helps in gaining
overview of the strategy along with assisting in involving external stakeholders and staffs in
review and delivery of the strategy (Cooper, Ezzamel and Qu 2017). It is to be borne in mind that
it is always difficult for individuals to assist in executing a strategy that they do not understand
effectively.
Better alignment of initiatives and projects:
With the help of balanced scorecard, thee organisations could be able to map their
initiatives and projects to the various strategic goals. This assures that initiatives and projects are
concentrated heavily on delivering the most strategic goals.
Enhanced performance reporting:
With the help of balanced scorecard, it becomes easy in guiding the design of dashboards
and performance reports. This assures that management reporting concentrates on the most
significant strategic issues along with assisting organisations in monitoring the execution of the
plan.
Better organisational alignment:

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The balanced scorecard assists the organisations in better alignment of their
organisational structure with the strategic goals. For sound execution of a plan, the organisations
are required to assure that all support functions and business units are working towards the
identical goals. By combining the balanced scorecard into the units, it becomes easy to
accomplish the same along with linking strategy to operations.
Better process alignment:
The balanced scorecard, if implemented effectively, would help in aligning organisational
processes like risk management, budgeting and analytics with the strategic priorities. This would
help in formulating an effectively strategy-focused organisation.
However, balanced scorecard suffers from a number of drawbacks and they are described
briefly as follows:
Cost and time:
The accurate use of balanced scorecard needs a complete understanding of the process
and if the organisation does not have any internal expertise for its usage, it might engage the use
of an external consultant to obtain assistance with the process. The individuals associated in the
process of strategic planning and using the approach for managing processes and identifying
outcomes require having knowledge of the working procedure of the scorecard (Valmohammadi
and Ahmadi 2015). For realising the full effectiveness, the organisation has to understand the
theory behind the use of balanced scorecard, the significance of accomplishing balance
throughout the different measures and the ways through which the tools could be used for
process improvement.

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Incomplete information:
The usefulness of balanced scorecard is reliant on the value of information, which is
driving the process. Although the tool could work, it is possible only when the correct elements
have been chosen for review and the information utilised for analysing progress is correct,
complete and pertinent to the area addressed (Lueg 2015). For example, in analysing the
suitability of training efforts, the number of individuals trained is not pertinent compared to the
training received (Antonsen 2014).
Staff resistance:
Although there are strong supporters of balanced scorecard, there might be some
employees who might tend to resist the implementation of the same. This is especially true when
implementation needs the staffs to invest additional time or go through training activities for
learning about the balanced scorecard and its usage. The organisations effective in the balanced
scorecard application need to obtain the support of all individuals in the organisation for
accomplishing maximum success.
In few big organisations, there has been successful implementation of balanced
scorecard. In the research work of Niven (2014), two sources of the failure of balanced scorecard
have been identified in large organisations, which include design and process.
Process failure:
The most common causes related to the failure of balanced scorecard are as follows:
 Lack of commitment of the senior management
 Very few individuals engaged

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 Keeping scorecard at the top
 Overly long process of development
 Treatment of the balanced scorecard n the form of a one-time measurement project
 Treatment of the balanced scorecard in the form of a system project
 Recruitment of inexperienced consultants
 Introduction of the balanced scorecard only for compensation
The primary factor behind such failures is ineffective communication within a business
organisation. This implies that all individuals could not gain an overview of the concept and
hence, they might even oppose them. The balanced scorecard approach is not a single-time
project; instead it is a continuous process. Moreover, it converts strategy to operating terms,
aligns the firm to strategy along with formulating strategy. All of such elements need to be
supported wholly by the top management and there is clear requirement of executive leadership
(Lueg 2015).
Conclusion:
The findings in the section denote that although the concept of balanced scorecard is
observed to be beneficial in numerous big organisations, care needs to be taken at the time it is
implemented in smaller organisations, in which the nature of business is completely different.
The findings of the section go beyond the scope of knowledge about the implementation of
balanced scorecard signalling that the factors resulting in successful usage of balanced scorecard
in both small and large companies are not adequate to ensure success. The usefulness of balanced
scorecard is reliant on the value of information, which is driving the process. Although the tool
could work, it is possible only when the correct elements have been chosen for review and the
information utilised for analysing progress is correct, complete and pertinent to the area

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addressed. The change in frequent strategy needs revision of the balanced scorecard concept,
which is a significant factor ascertaining the failure or success of implementation.
Part 4:
Introduction:
Before making any investment decision, it is crucial to consider a number of factors that
might have impact on the investment decision-making process. For large organisations, the
selection of projects could be a big challenge. This is because they might have a number of
feasible alternatives that might increase their overall profitability. However, due to the lack of
funding sources, it is not possible to select all the projects. Moreover, there are certain financial
issues that need to be taken into consideration before undertaking investment decision on project
selection. These issues are crucial, as the success or failure of the particular project depend on
these issues.
Financial issues to be considered before undertaking investment decision:
The financial issues that the managers need to consider before undertaking investment
decision are presented in descending order of the weight of issue and they are elucidated briefly
as follows:
Estimated return from the project:
Returns are identified as the estimated rise in profit and other benefits. The organisations
make investments so that their long-term financial profitability could be increased (Rossi 2015).
These profits are recognised due to rise in sales or minimisation in operating expenses. When an
organisation is analysing various projects, it needs to prioritise projects with increased returns.

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The organisation is needed to take into consideration the trend of earnings, since this is a long-
term investment. Therefore, it needs to undertake projects that would ensure sustainable profits.
The business managers are required to question the figures that the team has presented in
terms of return percentages along with asking for a debrief on the ways through which the
figures are calculated and the estimated accuracy of such figures (Camilleri 2016). The most
feasible methods constitute of net present value (NPV) and payback period (PBP). The cardinal
number to any project investment is the estimate of NPV, which is the profitability of the project
along with the rate at which the initial outlay is recovered, would be critical for ascertaining
feasibility.
Net present value (NPV):
With the help of this technique, it is possible to signify the estimated value to be obtained
from any specific investment or project. In case, a project provides a positive NPV, it would lead
to positive net income for the organisation. On the other hand, if the scenario is different, the
project might not be fruitful for the organisation, as it might result in net loss.
Internal rate of return (IRR):
IRR is utilised for assessing the viability of a project or investment. If the IRR of any
project exceeds the cost of capital of a firm, the manager could consider this project to be
desirable. On the contrary, if the value of IRR does not exceed the cost of capital, it is necessary
for the manager to reject the specific project.
Accounting rate of return (ARR):

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With the help of this investment appraisal technique, it becomes possible to gauge the
estimated profit margin from any particular capital investment. In other words, the profit level
from investments could be ascertained easily with the help of simple projects and thus, the
capital projects could be evaluated effectively. In addition, this technique assists in estimating
investment risk and the capability of any investment in providing adequate returns (Eliasson and
Börjesson 2014).
Payback period:
This method helps in determining the time required in order to recover the initial outlay
incurred for a project. In case, the timeframe is below the estimated project life, the project is
viable and vice-versa.
However, the most superior measure is the NPV technique, as it considers time value of
money by using cost of capital, which is not with the other techniques (Van Der Stede 2015).
Conclusion:
Based on the above discussion, it could be stated that there are various financial issues
that the managers of the business organisations need to consider before they undertake
investment decisions in selecting projects. These issues mainly include estimated return from the
project, hedge options, contingencies, source of funding, involvement with the external parties
and cost consideration. This is because these identified issues would have direct impact on the
expected profitability of the organisation in future. The estimated return is deemed to be a
popular metric owing to its simplicity and versatility.

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