Financial Analysis and Budgeting for Boris Badenov (Finance Module)

This report provides a comprehensive financial analysis of Boris Badenov, a public listed company, covering various financial principles and techniques. It begins with forecasting sales volume using time series analysis, discussing its advantages and disadvantages. The report then explores different sources of funds available to Boris Badenov for expansion, including share capital, bank loans, retained earnings, venture capital, debentures, and lease financing. A key focus is on budgeting, including selecting appropriate targets, creating a master budget, comparing actual expenditures to the budget, and evaluating budgetary monitoring processes. The report also delves into cost management, recommending ways to reduce costs and evaluating the potential for activity-based costing (ABC). Furthermore, the report analyzes the financial statements of Sainsbury to assess its financial viability and performance, recommending actions for improvement. The analysis includes variance analysis, financial ratio analysis, and strategic recommendations, offering a detailed overview of financial management practices.

MANAGING FINANCIAL
PRINCIPLES AND TECHNIQUES
1

TABLE OF CONTENTS
INTRODUCTION ...............................................................................................................................3
TASK 2.................................................................................................................................................3
TASK 3.................................................................................................................................................7
3.1 Selecting appropriate budgeting target......................................................................................7
3.2 Create/generate a master budget of Boris Badenov...................................................................9
3.3 Compare actual expenditures and incomes to the master budget of Boris Badenov...............11
3.4 Evaluate budgetary monitoring processes of Boris Badenov..................................................13
TASK 4...............................................................................................................................................14
4.1 Recommending ways that helps in managing cost reduction in an organization ...................14
4.2 Evaluating the potential for the use of activity based costing ................................................16
TASK 6 ..............................................................................................................................................17
6.1 Analyzing the financial statements to assess the financial viability of Sainsbury ..................17
6.2 Analyzing the financial performance of Sainsbury .................................................................29
6.3 Recommending actions to Sainsbury for making improvement in the financial performance
.......................................................................................................................................................31
CONCLUSION .................................................................................................................................32
References..........................................................................................................................................34
2

INTRODUCTION
Finance is the most crucial element of each and every business organization because in the
world of dynamic and complex environment, none of the enterprises can survive in the market
without having appropriate quantity of funds. Finance may be required for short-term, medium-term
and longer period depending upon the purpose of use (DRURY, 2013). Short term finance may be
needed for the payment of expenditures like wages and salaries, purchase material, insurance, rent,
stationery, printing etc. while long term funds may be required for fixed assets like property, plant
and equipment, machinery, business expansion, purchase new technology and introduction of new
products as well as services.
Present project report will address different types of sources that company can use to
acquire required quantity of funds. Moreover, the report will explain the importance of forecasting,
capital appraisal, budgeting and analysis of financial performance to take good quality of decisions.
Furthermore, variance analysis will be done to compare actual performance with the targets in order
to take corrective actions to mitigate adverse variances and thereby, to achieve target goals. In
addition, various ways will be suggested to reduce business cost and enlarge profitability. Besides
this, use of activity based costing (ABC) will be explained to compute cost on the basis of cost
driver.
TASK 2
As per the scenario, Boris Badenov is a public listed company which has discovered the
pricing trend of its product which is given here as under:
Y = 100 + 5X
Here, Y = Sales volume
X – Quarterly time period
Seasonal variations of product for recent quarters are as under:
3

Quarter Seasonal effect
Quarter 1 Nil
Quarter 2 -20.00%
Quarter 3 40.00%
Quarter 4 -20.00%
Forecasting sales volume, sales price and total sales
Quarter Sales volume
(Y = 100+5X)
Sales price Total sales value
(Sales volume * sale
price)
Quarter 1 100 + 5(20) = 200 units 1000 200000
Quarter 2 100 + 5[20-(20*20%)]
= 180
1000 + (1000*2%) =
1020
183600
Quarter 3 100 + 5[16+(16*40%)]
= 212
1020 + (1020*2%) =
1040.4
220564.8
Quarter 4 100 + 5(22.4-(22.4*20%)]
= 189.6
1040.4 + (1040.4*2%)
= 1061.21
201205.42
Advantage of time series:
It is an effective quantitative and qualitative technique that provides huge assistance to Boris
Badenov's management to accomplish their target objectives by the means of forecasting. The
benefits of time series analysis are given below:
 It helps to forecast future trend of given data on the basis of their past behaviour. The
tendency of historical occurrence shows potential increase or decrease in sales for the future
period (Cross, n.d.). This prediction provides assistance to make strategic policies and take
decisions to mitigate unfavourable trend.
 Analysis and comparison of past sales behaviour over a period reveal seasonal effects that
helps to create more realistic estimation for the future (Box and et.al., 2015). Such seasonal
4

pattern is more important for the forecasting of products which demand is fluctuates
seasonally.
 It provides assistance to Boris to measure both financial as well as endogenous growth in the
future period.
Disadvantage of time series:
 In the present age of volatile and tougher business environment in which external
environment is changing at faster pace, trend analysis may not provide correct estimation
(Cross, n.d.). Thus, it can be said that in long term period, the trend analysis is not very
useful tool for forecasting.
 Historical analysis does not provide correct information regarding what will be happen in
future. It may be increase or decrease depending upon the market volatility (Shumway and
Stoffer, 2013).
2.2 Assessing the sources of funds available to Boris Badenov for the expansion in Europe and UK
There are number of sources available to Boris Badenov to raise funds for the business
expansion in the country of Europe and United Kingdom. These sources are given below:
Share capital
The most common source of finance for Boris is to acquire funds by using the form of share
capital. Boris can issue both the ordinary and preference share capital in the market and sale to the
potential investors so as to obtain funds in required quantity (Tong, 2012). Differences between
both the sources are given below:
 Preference share capital: This type of share has two preference over equity shareholders.
One is regarding payment of fixed rate of the dividend and other is regarding repayment of
capital at the time of liquidation. Preference shareholders are not owners of the company.
 Ordinary share capital: It is also known as equity share capital and they have no preferences
regarding repayment of capital and payment of dividend (Manning, 2013). Equity
5

shareholders are owners of the company and they can control business operations by using
voting rights.
By issuing both the shares, Boris can gather finance for its expansion program. If it issues
preference share capital than it is necessary for the company to pay fixed and timely dividend to the
shareholders while, it is not necessary in case of equity shares. On contrary, investors will invest
money with an objective of getting high return in terms of dividend and capital appreciation (Cole,
Kanz and Klapper, 2015). Henceforth, they examine risk and return associated with their funds and
take appropriate decisions. While, its disadvantage is that it dilutes controlling rights to the equity
shareholder which they can use to control daily operations.
Bank Loan
Another source to gain extra money is borrowing through financial institutions such as bank.
They provide funds for different durations according to the requirement. Boris Badenov can take
long term borrowings from bank to meet its capital requirement of expansion. Bank provides loan
for a fixed time period at an interest rate. Benefit of obtaining funds from bank loan is that it can be
repaid in instalments. Moreover, it does not diversify business control to the lenders. While, its
drawback is that it imposes fixed financial burden in the form of interest. Moreover, Boris has to
comply with legal formalities to acquire funds (Ge, Kim and Song, 2012). For instance, lender
grants loan after demanding collateral security or guarantee so that lending can be secured.
Furthermore, they evaluate risk involved in it and provide loan in case if Boris is able to bear debt
interest and pay it timely.
Retained earnings:
Balance of profit remaining after the distribution of dividend is known as retained earnings.
Boris Badenov can use its retained earnings for the business expansion in Europe and UK. Benefit
of this is that it does not impose any financial cost to the company while its drawback is that
excessive ploughing back of profits can create adverse impact on the investors (Badri and
6

Mohamad, 2014).
Venture capital:
Another way to raise funds is venture capital. In fastest growing business, investors are
interested to invest their money so as to get high return (Cox, 2014). Thus, Boris can use this source
and obtain funds from venture capitalists such as merchant banks and investment specialists.
Debentures:
It is an acknowledgement and promise given to the holder regarding payment of fixed
amount of interest during fixed interval of time and repayment of principle on the maturity. Boris
can issue debentures to get long term debts to finance its expansion project. Benefit of this is that it
is not secured by assets or collateral security. Buyers purchase it by believing on issuer’s reputation.
Lease:
Boris can acquire fixed assets through using lease financing. With the help of this, company
can acquire land, building and machinery at some rental charges for a fixed duration. Its benefit is
that Boris does not need to purchase the assets and drawback of this is that rental charges involves
some interest as finance cost.
TASK 3
3.1 Selecting appropriate budgeting target
Budgeting is an advance or future planning of business operations. It takes into account the
expenditures and revenues for the future period. In the present age of changing and highly
fluctuating business environment, it is essential for Boris Badenov to maintain an appropriate
budgetary target to carry out its functions smoothly and effectively. This in turn, company can
survive for a longer period (Cox, 2014). In such respect, special focus should be given to decide
realistic expenditures and revenue targets so that Boris will be able to get competitive advantage
over the competitors. With reference to Boris, historical analysis of actual and budgeted targets will
help to determine more realistic figures related to set standards for future years.
7

Revenue
Boris Badenov's actual revenue was increased by 7.69% from 4900 to 5300 in 2014.
However, its targets revenue was increased by 21.15% from 5200 to 6300. It indicates that Boris set
very high targets as compared to the actual turnover trend. On contrary to it, in 2014, budgetary
turnover was increased by 28.57% from actual result of 2013. Thus, according to it, Boris expects
that revenue will increase by approximately 28.57% p.a..
Material:
Actual material cost in 2014 was increased by 20.2%. Hence, in order to improve sales,
Boris also enhanced its target material cost to 1300 by 31.31% which was comparatively higher
than the increase in revenue that was of 28.57% and it was not good for the company.
Labour
Actual labour cost was remained constant in both the years while target cost was increased
by 3.45% from historical actual labour cost of 870. Thus, it was correct estimation because of the
possibility of recruiting more workers and little increase in their wages rate.
Depreciation:
It is a fixed cost which remained constant to 200. Thus, it can be said that in future, it will
remain constant to this current level.
Maintains cost:
Actually, it was decreased by 68.97% to 45 in 2014. Due to this, Boris Badenov declined its
target for maintains cost in 2014 to 25. It assumed 80% decline from previous year's actual
maintains cost of 145. Moreover, in both the years, variances are 16% and 80% respectively. It
indicates that standard cost of maintains cost is very low.
Inspection charges:
In 2014, Boris forecasted 100% increase in the inspection charges and increase it from 10 to
20. Similarly, actual cost was improved by 100% which indicates that target cost achieved.
8

Fuel and power cost:
Actually, it was increased by 11.54% in 2014 and therefore, Boris expected that fuel and
power cost would also be increased by 15.38%. However, in 2014, variance was arisen by 3.33%.
Sales and distribution cost:
In both the years, variance was arisen by 8.57% increase in the sales and distribution cost.
While, in 2013, actual sales and distribution cost were lower whereas in 2014, they got increased.
Supervisory charges:
In 2013, actual cost exceed the limit while in 2014, it was under the standard limit to 190. In
this year, management estimated 19% increase in supervisory charges while in actual, it was
decreased by 5.26%.
3.2 Create/generate a master budget of Boris Badenov
Master budget is a business plan about future sales, production, purchase etc. It is a strategic
plan for the forthcoming period which accumulates results of all the potential operations. Master
budget is an aggregation of all the functional cost of all the departments such as material, sales,
purchase, overheads etc (Cox, 2012).
Production budget: This budget helps to determine potential number of units which Boris need to
produce in future years.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Estimated units 200 180 212 190 782
Add: Ending
inventory
30 50 85 113
Less: Opening
inventory
15 30 50 85 28
Required
production ( In
units)
215 200 247 218 880
Sales budget: It helps Boris Badenov to determine number of units that it will sale in future
years.
9

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Sales unit 200 180 212 189.6 781.6
*Sales price 1000 1020 1040.4 1061.21
Total sales 200000 183600 220564.8 201205.42 805370.22
Direct material purchase budget: Boris can prepare this budget to determine the number of units
which it has to purchase from outsiders to ensure production in required quantity.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Budgeted
production
215 200 247 218 880
* direct
material per
unit
1 1 1 1 1
DM required
for production
215 200 247 218 880
Budgeting
closing DM
20 25 30 35
Less:
beginning DM
10 20 20 20
Total purchase 225 205 257 233 920
Cost each unit 2 2 2 2 2
Material cost 450 410 514 466 1840
Labour budget: It shows total direct labour cost and number of hours which will be need to
produce goods in required quantity.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Planned
production
215 200 247 218 880
* labour hours 1.5 1.5 1.5 1.5 1.5
Budgeted
labour hour
322.5 300 370.5 327 1320
* Cost per
direct labour
hour
1 1 1 1 1
Budgeted
direct labour
cost
322.5 300 370.5 327 1320
10

Factory overhead budget: It shows manufacturing overheads which are required to produce
budget for a given level of production.
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Planned production 215 200 247 218 880
* variable overhead rate 0.75 0.75 0.75 0.75 0.75
Total variable
overheads (fuel and
power and maintance
cost )
161.25 150 185.25 163.5 660
Add: Fixed
Depreciation 200
Inspection charges 30
Total overheads 890
Selling and administrative expenses budget:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Budgeted
selling
expenses
Sales
commission
10 15 20 30 75
Advertisement 20 25 30 35 110
Free sample 15 15 15 15 60
Total sales and
distribution
expenses
45 55 65 80 245
Supervisory
charges
50 55 60 65 230
Total 95 110 125 145 475
3.3 Compare actual expenditures and incomes to the master budget of Boris Badenov
After preparing the budget, it is also essential for the management to compare actual result
with the targets. So that, variance can be identified in terms of both favourable and unfavourable. It
helps to take remedial actions to mitigate adverse variance and enjoy success by achieving targets in
successful manner.
Master budget Actual 2014 Variance %
11

Revenue 8053 5300 2753 34.19
Operational cost
Material 1840 1190 650 35.33
Labour 1320 870 450 34.09
Machinery depreciation 200 200 0 0.00
Inspection charges 30 20 10 33.33
Fuel, power and maintenance
cost 660 335 325 49.24
Sales and distribution cost 245 190 55 22.45
Supervisory charges 230 190 40 17.39
Revenue: Above table reflects that Boris decided sales target was 34.19% higher than
actual. It indicates that Boris did not achieve its sales target set by the management. It may be
caused due to less market demand, ineffective services and cheaper availability of goods from the
competitors etc. Thus, it can be suggested that Boris management has to deliver excellent quality
products at cost effective prices. Thus, more customers can be attracted and sales can be enhanced.
Material: Actual material cost is lower by 35.33% as compare to target cost of 1840. Thus,
it will decrease actual cost of production and increase profitability. It may be caused due to large
availability of products at cheaper prices. Hence, it will affect Boris operational in favourable
manner which is good.
Labour: Actual cost is 870 whereas target cost is 1320 which results in favourable variance
of 450 by 34.09%. Hiring talented and experienced workers at less wages rate may be the reason
behind less labour cost. It will help Boris to decline actual cost of production and enhance
profitability to a great extent (Cox, 2013).
Depreciation: It remains constant to 200 because it is a fixed cost which has no relationship
12