Financial Analysis and Budgeting for British American Tobacco (BAT)

This report presents a comprehensive financial analysis of British American Tobacco (BAT), encompassing various aspects of accounting and financial management. The analysis begins with a discussion of ratio analysis, comparing BAT's operating profit margin with that of Imperial Brands, a peer company. The report examines factors influencing the operating profit margin, including barriers to entry, brand value, monopoly pricing, and the addictive nature of tobacco products. Furthermore, the report delves into budgeting, outlining the benefits and drawbacks of annual budgets, especially in the context of rapid economic changes, such as the COVID-19 pandemic. It then explores the strengths and weaknesses of the Balanced Scorecard (BSC) and concludes with an evaluation of the discounted cash flow (DCF) technique, its strengths, and its weaknesses. The report references various academic sources to support its findings and conclusions, offering a detailed overview of BAT's financial performance and the application of key financial tools.

Assessment

Table of Contents
Introduction......................................................................................................................................3
Part 1................................................................................................................................................4
Introduction..................................................................................................................................4
Operating Profit Margin for BAT 2018 and 2019.......................................................................4
Conclusion...................................................................................................................................7
Part 2................................................................................................................................................8
Introduction..................................................................................................................................8
Benefits........................................................................................................................................8
Drawbacks...................................................................................................................................9
Conclusion.................................................................................................................................10
Part 3..............................................................................................................................................11
Introduction................................................................................................................................11
Strengths....................................................................................................................................11
Weakness...................................................................................................................................12
Conclusion.................................................................................................................................13
Part 4..............................................................................................................................................14
Introduction................................................................................................................................14
Discounted Cash Flow (NPV) technique...................................................................................14
Strengths................................................................................................................................14
Weakness...............................................................................................................................15
Conclusion.................................................................................................................................16
References......................................................................................................................................17

Introduction
This project has been completed in four different parts; each part discusses different concepts of
accounting. First part discusses about ration analyses, second part discusses about benefits and
drawbacks of using budgeting, third part discusses about strengths and weaknesses of BSC and
final part discusses about discounted cash flow.

Part 1
Introduction
BAT’s strategy is to increase its revenue by organizing different marketing campaigns to
increase the sales of the product. Its measures its success through key performance indicators
such as Ratio analyses, trend analyses, comparative income statement and cash flow statement
with other company of same sector (Owusu and et.al., 2019). Imperial Brands has been chosen as
peer group company because both Imperial Brands and BAT sales same product which is
Tobacco and associate with same industry. While measuring success taking other company as
base; it is necessary that both company should belong to same industry and size of operation
should also be same to get better result (Owusu and et.al., 2019).
British American Tobacco and Imperial Brands benefited from youth work, abuse and
dangerous conditions on tobacco farms in Malawi, according to a legitimate case filed following
a Guardian investigation. UK companies, which announced a combined income of £ 12.5 billion
a year ago, are expected to pay 7,020 young people and adults working in their investment
network, as revealed by high court reports that filed by law firm Leigh Day (Madah Marzuki and
et.al., 2020). The case alleges “unrestricted use of illegal youth labor, illegal bonded labor and
systematic display of unassisted adults and children and ruins to real work situations dangerous
with insignificant certainty against mechanical accidents, injuries and illnesses". BAT and
Imperial usually purchase the pages through outside vendors, who then purchase them from
contract breeders. Be that as it may, both groups were aware of the conditions that Malawian
farmers, including children, were observed to be, and have recently shown that they are wielding
a large amount of power over conditions in their investment chains (Madah Marzuki and et.al.,
2020).
Operating Profit Margin for BAT 2018 and 2019
An operating profit margin is an allowance or benefit that reflects the amount of profit an
organization makes from its operations, before eliminating liabilities and interest expense. It is
determined by dividing the profit for the year by the gross profit and communicating it as a rate.
EBIT (Earnings before Interest and Tax) is called margin (Lloyd and Abbey, 2009).

Operating profit is determined by deducting all sales costs, depreciation and impairment,
and all significant operating expenses from all revenue. Operating costs include organizational
costs in addition to direct creation costs, such as fees and benefits, associated rental and
administration costs, innovative operating costs, and so on. Net income is the level of work
allowance received from total income (Lloyd and Abbey, 2009). The operating profit margin of
BAT in 2018 is 42.6%; while in 2019 is 43.1%. The reason behind decline in operating profit
margin is increase in COGS more than sales from 2018 to 2019.
Factors affecting Operating profit margin:
a) Increase in OP Margin Ratio & Decrease in GP Margin Ratio
Reduction in the proportion of non-production overheads due to economies of scale as a result of
which fixed overheads (e.g. salaries of management, office rent, etc.) are distributed over a
greater number of sales units. Cost curtailment measures (e.g. eliminating over-staffing,
promoting lean management) to reduce the impact of falling gross profit margin.
b) Increase in OP Margin Ratio & Increase in GP Margin Ratio:
Increase in sales volume causing a decrease in the proportion of both production and non-
production costs due to economies of scale.
c) Decrease in OP Margin Ratio & Increase in GP Margin Ratio
Increase in the proportion of selling, general and administrative expenses (e.g. advertisement,
management salaries, and rent) due to recent expansion of business into new markets whose
revenue potential has not yet been realized.
d) Decrease in OP Margin Ratio & Decrease in GP Margin Ratio
Operating inefficiencies (e.g. overstaffing, lower productivity, poor cost control). Increase in
competition (e.g. saturation in existing markets forcing companies to seek business in less
profitable markets).
One of the reasons behind high margin is high price, but with increase in price, demand should
be shift to other competitors serving same product at low price. The result shows that despite of
increase in price, demand is stable. This indicates that several factors such as barriers to entry,
brand equity, monopoly pricing and addictive product are responsible for this. These factors are
discussed below:

Barriers to entry: Financial aspects and trade terms are Barriers to entry that represents factors
that may hinder new entrants in a market or industry, thus limiting conflict (Dyson, 2007). These
can include high upfront costs, administrative barriers, or various barriers that prevent new
entrants from entering the industry effectively. Share barriers benefit existing companies as they
consolidate the pie and the ability to generate revenue and benefits (Mott, 2012).
Brand Value: When an organization has a positive brand value, customers are very much going
to spend a lot on their items, despite getting something very similar from a competitor for less
(Dyson, 2007). Customers basically follow a base price for working with a company they know
and respect. Because the brand-valued organization does not charge higher than its competitors
to deliver and offer the item for sale to the public, the cost divergence is kept to a minimum. The
value of the company's image allows it to take greater advantage of each deal (Mott, 2012).
Monopoly pricing: A monopoly valuation is a predictive system followed by a vendor in which
the vendor spends an item to extend their benefits with the assumption that the individual does
not have to stress conflict (Dyson, 2007). Overall, the syndication assessment assumes that
competitors do not show the possibility of earning a larger share of the total sector by attributing
a lower cost to it. Estimating a business model requires not only that the seller has significant
market power, perhaps a tight syndication or barrier or cartel infrastructure of oligopolists, but
also that the barriers to a division for that big sale are enough high to prevent a potential conflict
with the high value. In particular, the constraint on infrastructure estimation is impossible in
controversial business sectors (Mott, 2012).
Addictive product: Tobacco lies underneath an addictive object; due to an increased demand for
sustainable living value (Dyson, 2007). In any case, this factor can work when the market is in
syndication or oligopoly (Mott, 2012).
The reason for increasing in margin might be increase in price or decrease in cost of goods sold
(Dyson, 2007). But in case of BAT; the reason is increase in price because cost of goods sold has
increase more than sales revenue from 2018 to 2019.

Return on Capital employed for BAT 2018 and 2019
Factors affecting operating profit and capital employed include reduced level of debt and higher
operating profit (Bakar, 2020). BAT has pay debts to reduce it; this has reduced the capital
employed, as long term debts are part of it and results into higher ROCE in 2019. Another factor
which raises the ROCE is higher operating profit recorded in 2019.
Compare to Imperial Brands, the operating margin of the company has fallen but ROCE has
increased slightly. The reason might be reducing of Capital employed more than declining in
operating profit in 2019 (Dyson, 2004).
Conclusion
Based on comparison between BAT and Imperial, it can be concluded that; the operating profit
margin of BAT has risen from 2018 to 2019; but Imperial blue’s operating profit margin has
declined from 46% to 44% in 2019. This indicates that BAT is improving its profitability which
also closing the gap on its more profitable competitor Imperial Brands. There are many different
concepts of addiction across various disciplines, none are correct or wrong. The advanced
monetary definition is: A decent or action is addictive to a given individual if there is a positive
causal impact of the present utilization on future utilization. A given action can be addictive for
one individual yet not for another, and might be addictive for a given individual at one time but
not another.

Part 2
Introduction
The report consists of analyzing the benefits and drawbacks of annual budgets and their
relevance in the modern economy during periods of rapid change like Covid19 pandemic
(Klammer, 1972). Books, journals and some internet sources have been used as academic
sources for completing this part. Books and Journals used to get information about general
theories and previous researches on how to make annual budgets. On the other hand; online
sources have been used to get information on current trends and update on methods of annual
budgeting. Internet sources also used to get data on impact of covid19 pandemic on annual
budget preparation methods of various organizations of different sectors (Ahmed and Al Reyaee,
2014).
Benefits
Some of the benefits of annual budgets are:
Planning: Annual budgets can relate to a financial year or program. These financial plans help
their manufacturers prepare for the coming year and make the necessary changes to meet their
financial goals. Annual spending plans help people manage their money more easily (Scapens,
and et.al., 1984). For partnerships, governments and various associations, annual financial plans
are essential and regularly ordered in order to establish the types of revenue and expenditure
needed; the resources, responsibilities and value needed to support activities over time within
one year; and income used for reinvestment, executive liability or discretionary purposes
(Donev, Hoffmann and Blab, 2020).
Coordinating: Operational financial plans also have an organizational function. By combining
spending plans into an expert overall financial plan, operational spending plans help align the
exercises of the various parts of the company by providing a unified strategy (Bierman Jr and
Smidt, 2012). Financial plans can be organized in two different ways. Initially, the planning of
activities in a large company needs to be reduced somewhat. In many organizations, leaders of
various authoritative parties receive ready-made financial plans for the coming year. As these
spending plans flow to higher levels in society, they are looked at and brought together and, in

the meantime, there are contradictory features between the organized activities of the various
authoritative parts of the community take out (Hung and West, 1991).
Performance is coordinated for extended contracts, product building plans are enabled by
creative plans, suitability between product offers is exacerbated, and roles in advertising
activities or tenders are evaluated, and so on. To put it plainly, the operating expenditure plan,
when fully ratified, will be put together as a means of organizing the exercises of the whole
society to ensure that the fund is not completed or misused.
Control: asks the board to consider the future, perhaps the key element of a budget group and
control framework (Trigeorgis, 1995). It empowers the board to look ahead, to set out detailed
plans to achieve, expect and deliver on the goals of every office, business and (in a perfect
world) of every administrator past the purpose and direction of the society (Baker and English,
2011).
Motivation: Budgets can be used to influence representative attitudes and performance. Financial
plans should be participatory, involving the co-operation of those affected. Also, low-level
employees are on the line of work every day, so they are well-educated. Their information is
mandatory (Daunfeldt and Hartwig, 2014). Spending plans can be used to motivate as members
hide spending goals like their own since they took part in the turn of events. Data should be
exchanged between members of the expenditure. Motivation is adversely affected by forced
consumption. In addition, there is a relationship between the commission's problem and the loss
of control over negative emotions (Prendergast, West and Shi, 2006).
Drawbacks
Problems with the subjectivity of financial estimates:
The realization of accounting estimates is a very complex cycle that involves obtaining all the
necessary data on the subject, understanding the specific accounting evaluation options that
evolve as a result of routinely keeping books and public laws, seeing the results of those
alternatives and differentiate the need for subsequent critical reassessment. Accounting
assessments can be viewed from different collection perspectives. Above all, standard setters
take accounting gases into account when formulating accounting principles (Schall, Sundem and
Geijsbeek, 1978).
Behavioral aspects of budgets:

Management can create negative budgeting attitudes in several ways. One of these is to use
spending plans or appearing to be used, extracting every ounce of profit from producers, or
simply recognizing entertainment unaided or as a means of capacity (Ryan and Ryan, 2002). If
spending changes are seen as "horrible news", subscribers quickly change their behavior to
overcome negative ratings. Significant administrative moves may not be made due to severe
penalties. Unless senior management is happy to see the need for flexibility, realism and
progressive change, the board will quickly cut down on maintenance (Dayananda and et.al.,
2002).
Focus of budgets on Shareholder value to the exclusion of other stakeholders:
The focus of budgets on providing value to shareholder results into exclusion of other
stakeholders like banks, suppliers, investors and internal stakeholders. Due to this other
stakeholders might feel demotivate.
Pace of change in technology, and covid19 pandemic in modern economy making outdated
before the year is complete:
Budgeting is lengthy and time consuming process; it includes utilization of lots of resources and
funds. Due to its slower pace; it unable to catch the pace of change in technology, and covid19
pandemic in modern economy making the whole budget outdate before the year is complete.
Conclusion
The creating a budget process takes officials away from the current, day-to-day business
management and pushes them to think long-term. This is the main aim of planning, whether or
not the board does not dominate the objectives set out in the spending plan - whether it is
considering a bad situation and money the organization and how it can be improved. A spending
plan is a broad financial agreement that sets out the normal course for achieving your company's
financial and operational goals. Planning is a fundamental advancement in successful money
organization. In fact, even the smallest business will benefit from creating a formal agreement
for its future activities.

Part 3
Introduction
A Balanced Scorecard is a critical management performance metric used to differentiate and
improve the different business capabilities of internal and external products. The Balanced
scorecards are used to measure and insert associations (Rompho, 2011). Sharing information is
critical to delivering qualitative results as leaders and leaders collect and validate data and use it
to make better choices for society. Scholar Dr. Robert Kaplan and business executive and scholar
Dr. David Norton has invented the balance scorecard (Koesomowidjojo, 2017). The Harvard
Business Review first published it in a 1992 article "The Fair Scorecard - Measures That Guide
Performance". Both Kaplan and Norton previously took metric action and made changes to
provide non-financial data.
Strengths
1. Reduces short term threats by linking performance measurement to long term strategy:
Today’s managers will see the impact of measures on performance. However, they rarely
consider estimating a key part of their approach (Nørreklit and Mitchell, 2014). For example,
those responsible for new systems and imaginative work cycles that are expected to achieve
progressive performance, at that point can continue to use similar immutable money tokens that
they have been using for a long time, steps such as profit margin, development ratios, and pay for
work. These leaders bombard not only to learn about new steps with new goals and circles on the
screen, but also to check if their old steps are relevant to the new tasks (Debnath, and et.al.,
2018).
2. Unlike traditional budgeting, the BSC doesn’t rely solely on subjective and often manipulated
accounting data:
For financial statements to be useful, they should be detailed. Unfortunately, these reports often
rely on thoughtful and abstract decisions, offer deceptive tests, and fall out of control due to the
motivating forces of fatigue (Muda, Erlina and AA, 2018). The creators examine the occasional
situation of keeping the books unaided from late history and talk about what went wrong in each
of these cases. At that point, they will continue to propose some systems to help pioneers
improve accuracy in money laundering, including ways to identify fake numbers and see ideas

verbal showing deceptive behavior. However, BSC should not rely solely on this accounting data
(Cheng, Humpreys and Zhang, 2018).
3. The 4 aspects of the BSC include a financial aspect which is included in traditional budgeting
but in addition includes 3 other aspects (customer, internal process, learning/innovation):
One of the best things about balanced scorecard is that it looks at hierarchical performance from
different perspectives (Olve, Roy and Wetter, 2001). Ideas are the dimensions of the
presentation, or focal points that implement the approach. It takes a few ideas, usually four, to
understand society as a structure made up of cooperative components, such as watch cogwheels
or a fine watch. Together, these components build respect, seek customer and partner satisfaction
and make big money (Biazzo and Garengo, 2012).
4. Allows the inclusion of high-quality objective external data as Key Performance Indicators:
Include information from outside major objectives, for example, learning and development,
business measures, customer feedback, and financial information (Olve, Roy and Wetter, 2001).
This information is both monetary and non-monetary (Biazzo and Garengo, 2012).
5. The BSC can be used to drive strategic change within an organization.
6. The BSC is flexible and the KPIs can be chosen to suit the particular company that is using it
Weakness
1. Time and Financial Cost Investment
Balance scorecard requires good investment of funds. It only provides long term solution, not
short-term solutions. An organization must address the framework effectively and consistently,
which entails costs in terms of time and money (Hoque, 2014). All manufacturers need to see
how the facility works, which can increase preparation costs. Given the lack of internal
capabilities, it may be necessary to hire external consultants to help you put the framework in
place and find out how to use it. It may also be necessary to include program purchase and
support costs (Hepworth, 1998).
2. Stakeholder Acceptance and Usage
Every employees requires Balance scorecard system to work effectively, but implementing this
system in actual life is complex and difficult to understand by employees. This will result into
deny by employees to invest in this advanced system. Those who are abusive may have to switch
to another framework (Hoque, 2014). However recognition is achieved, the preparation must