Financial management
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TABLE OF CONTENTS
Task 1...............................................................................................................................................3
1.1 Determine how to obtain financial data and assess its validity.............................................3
1.4 Limitations of financial data..................................................................................................4
Task 2...............................................................................................................................................5
1.2 Apply different types of analytical tools and techniques.......................................................5
Task 4...............................................................................................................................................6
2.2 Analyze the budget outcomes against organizational objectives identifying alternatives.....6
Task 5...............................................................................................................................................7
3.2 Assessing the viability of project by using investment appraisal tools.................................7
3.3 Identifying the strengths and weaknesses of above mentioned investment appraisal
methods........................................................................................................................................9
3.4 Evaluating the impact of proposal on the strategic objectives of an organization..............10
References......................................................................................................................................12
3.3 Identifying the strengths and weaknesses of above mentioned investment appraisal
methods......................................................................................................................................14
3.4 Evaluating the impact of proposal on the strategic objectives of an organization..............15
References......................................................................................................................................17
2
TASK 1
1.1 Determine how to obtain financial data and assess its validity
Database is a collection of several units as the purpose of a database is to store and retrieve
related information. The that can be obtained from oracle database using three kinds of category
as per the nature and requirements of the business. There are various forms through which data
can be obtained which are given as below:
Bulk data integration and transformation- It is that kind in which data from the internal or
external source can b e obtained in the bulk quantity which offers unique. Next generation load
extraction technique that improves the data redundancy and also reduces data integration costs.
Real time data integration- It is that package which offers real time data integration,
transaction data replication and passage of data from one medium to another across several
heterogeneous systems.
Data quality and governance-Oracle enables different organizations to govern, measure,
improve and manage the quality of data including the customer and product data which help in
minimizing the exposure to future risks.
The financial data can be obtained from oracle database by using efficient function of Hyperion
financial management package that uses various resources in providing financial consolidation
and reporting which enables an entity in making quick financial decisions which helps in
financial reporting and meeting global financial results. There are various sources from which an
individual will get different financial information which are given as below:
Companies house- An individual get information regarding annual return or confirmation
statements, legal documents to be submitted for starting and running a company
HMRC- taxation reports can be obtained to show that entity had payed tax payments as a legal
evidence.
According to the international standard on auditing which specify specific standards on
the external confirmations by prescribing who are the valid external sources from which
financial data can be obtained. It indicates that the reliability of the audit evidence is greatly
affected by the external sources such as third party confirmations on a specific sources
information provided by the management. It can be taken in both manual and electronic forms as
these are considered as valid forms of evidences.
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1.4 Limitations of financial data
There are several limitations which are prevailed in the financial data of the firm. Due to
all the below mentioned limitations Unilever fails to draw valid outcomes or results from final
accounts. Moreover, business organization makes comparison of its financial statement with the
aim to assess its financial position and performance (Robinson and [Link]., 2015). Further,
company also makes comparison of its financial aspects with the competitor firm to assess their
position at marketplace. However, in this, there are several limitations which closely influence
the analysis of financial statement or data in the following manner:
Financial statements only make focus on monetary aspects and completely ignores non-financial
aspects which also have high level of influence on business performance. Moreover,
efficiency of personnel, strategic decision framework etc. are the main non-financial aspects
which makes contribution in attainment of organizational goals and objectives. This aspect
limits the significance of financial data analysis to some extent.
Further, business unit cannot derive valid conclusion or result if the financial statements are not
verified by the auditor. Moreover, audited financial statements present fair view in front of
the monetary aspects of firm (Limitations of finnacial statements, 2016). In this, company
and its stakeholders cannot make suitable decision from unaudited financial statements.
Besides this, with the aim to present better financial condition at marketplace sometimes
company make focus on manipulating data. In this, company itself and their stakeholders are
not in condition to assess the suitable outcome by analyzing the financial statements of firm
(Amiram, Bozanic and Rouen, 2015). Thus, they may subject to fraud to some extent and
thereby affects the importance of financial data.
During the formulation of financial statements Unilever recorded all the cost at their historical
value rather than market. In contrast to this, price of the assets may change over time
according to the dynamic business situation or environment. In balance sheet, amount which
is recorded by the business entity in relation to the current assets such as £12487 and £13506
on the basis of historical cost, Hence, it is one of the main aspects which closely influence
the appropriateness of balance sheet.
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Along with this, financial statements are not affected from market conditions such as inflationary
aspect. Moreover, when inflationary rate is high then amount of assets and liabilities are
relatively lower (Minnis and Sutherland, 2015). This aspect clearly shows that the values of
the firm's assets and liabilities are not being adjusted according to inflation.
Hence, in this way, all the above aspect affects the importance of financial data and
analysis in the negative direction.
TASK 2
1.2 Apply different types of analytical tools and techniques
Financial analysis is an aspect of the overall business finance function which involves
examining historical data in order to gain information about the current and future financial
heath. It can be applied in a wide range of variety of situations to provide all relevant information
to the business managers to make critical decisions. The main document which provides
significant financial information to the company are balance sheet and income statements. The
balance sheet outlines the financial position of company from time to time by identifying all
business resources of company such as financial and physical. The main elements of balance
sheet are assets and liabilities. Asset generally include both current as well as non-current assets.
Following are the various kinds of analytical tools and techniques which help company in
financial statement analysis:
Data analysis- It is a process which helps in evaluating the financial position of the company in
its market by closely monitoring each and every aspects such as data collection, processing of
data, cleaning of unwanted data and prepare data as per the need of the client.
Time series- It is another type of method which helps to forecast the time efficiency related to
the completion of its financial goals and objectives. It helps to analyzed the current as well as
past trends in the market in order to determine the future trends.
Ranking- It helps to prioritize different financial goals and objectives in ascending or descending
order such as ranking of sales performance during a single period.
Deviation- It is one of the type of statistical method which is used for comparison between two
variables such as comparison of actual variables with budgeted expenses. It helps to identify
gaps and pitfalls in the goals and objectives and helps to take corrective action.
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Ratio analysis- It is the analysis of current financial statements with their past figures. It helps to
judge interrelationship between two financial facts and figures.
Cash flow analysis- It helps to find out the changes in the position of cash from one period to
another period. It includes clear explanation of cash inflows and cash outflows.
TASK 4
2.2 Analyze the budget outcomes against organizational objectives identifying alternatives
The budgeting process is an essential component of management control systems as it
provides complete system of different functions such as planning, coordination and control for
management. The process of budgeting can be more difficult since the objectives of the
organization are more difficult to define in a quantifiable way. The budget preparation help to
judge future efficiency and effectiveness of the business. There are different types of budgets
which can be prepared by the company are the following:
Incremental budgeting- It is the traditional budgeting whereby the budget is prepared by taking
current period's budget or actual performance as a base. It involves incremental figures which
helps company in order to evaluate its performance from period to period. This also motivates
company in case of positive figures and alert them by negative figures.
Zero-based budgeting- It is that type of budgeting which don't have any staring point or base to
give a kick-start . It involves various stages in preparation of this kind of budget. The stages
includes identification of activities by managers, prioritizing activities by management and
Allocation of the resources among the business organization. Following are the different
alternative courses of action for management of bank overdraft as a source of finance taken by
the company are the following:
It is one of the type of sources of finance company can use to source its business projects
but it is also possess some amount of risk associated with it.
The amount borrowed should not exceed the agreed limit as this facility made available
in a matter of negotiation with the bank.
Interest is charged on the amount overdrawn the company needs to take care about the
interest rate to be paid to the bank on time.
This facility enables businesses to obtain short-term funding so it cannot be opt for
financing its long-term projects.
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The company needs to ensure all the hidden terms and conditions imposed by the bank
before taking this source of finance.
The amount of bank overdraft should be taken appropriately in books of account in order to
avoid legal and future complications.
TASK 5
3.2 Assessing the viability of project by using investment appraisal tools
Investment appraisal techniques refer to those which provides assistance to the business
organization in evaluating the profitability and viability of project more effectively and
efficiently (McNeil, Frey and Embrechts, 2015). For instance: Unilever has two projects with the
initial investment of £250000. In this, business enterprise can determine the profitability of
projects which will generate following cash flows during the period of five years are:
Payback pe3.2 Assessing the viability of project by using investment appraisal tools
Investment appraisal techniques refer to those which provides assistance to the business
organization in evaluating the profitability and viability of project more effectively and
efficiently (McNeil, Frey and Embrechts, 2015). For instance: Unilever has two projects with the
cumulative cash cumulative cash
Year Project A inflow Project B inflow
1 100000 100000 108000 108000
2 120000 220000 122000 230000
3 112000 332000 116000 346000
4 128000 460000 135000 481000
5 144000 604000 156000 637000
initial investment of £250000. In this, business enterprise can determine the profitability of
projects which will generate following cash flows during the period of five years are:
Payback period
Project A: 2 + 30000 / 112000
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PV factor Present
Year Project A @10% Present value Project B PV @10% value
Initial
investment 250000 250000
1 100000 0.909 90900 108000 0.909 98172
2 120000 0.826 99120 122000 0.826 100772
3 112000 0.751 84112 116000 0.751 87116
4 128000 0.683 87424 135000 0.683 92205
5 144000 0.621 89424 156000 0.621 96876
Total 450980 475141
NPV 200980 225141
= 2.3 years
Project B: 2 + 20000 / 116000
= 2.2 years
Computation of NPV
Computation of IRR
The above mentioned analysis presents that project B proves to be more fruitful and
Year Project A Project B
Initial investment -250000 -250000
1 100000 108000
2 120000 122000
3 112000 116000
4 128000 135000
5 144000 156000
IRR 36.28% 39.06%
viable for the business organization. Moreover, payback period of project B is lower than Project
A. Payback period of project A is 2.3 years whereas, it is 2.4 years in the case of project B. In
this, Unilever would become able to start to make profit one month earlier if it selects project B.
Along with this, NPV of project B is also higher as compared to Project B. In this way, business
enterprise will enjoy the return of £225141 by investing money in project B. Besides this, IRR of
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project B is also higher in comparison to other proposed investment. Thus, according to the
selection criteria, Project B will aid in growth and profitability aspect of Unilever to the large
extent. Through this, company is able to fulfil its aims and objectives more effectively and
efficiently.
3.3 Identifying the strengths and weaknesses of above mentioned investment appraisal methods
Payback period, Net present value and IRR are the most effectual tools and techniques
that assist financial analyst or business organization in making suitable investment decision. All
these methods having varied level of strengths and weaknesses that makes its different from one
another:
Payback method
Strengths
This measure helps business organization in assessing the time period within which it
would become able to cover its initial outlet (Sari and Kahraman, 2015). In this way, by
keeping in mind such fact company can make planning in relation to its near future more
efficiently.
• Further, easiness of this method is one of the main strengths that influence others to make
use of such method for making decision.
Weaknesses
Payback period method completely ignores time value of money concept. Thus, the
framework that it presents for decision-making will be unrealistic.
Besides this, it does not entail the return that will be earned by Unilever after the payback
period.
Net present value (NPV)
Strengths
NPV method offers highly realistic solution by taking into account the time value of
money concept.
It offers opportunity to make evaluation of the present value in against to the future
aspect by taking into account the suitable discounting factors.
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Weaknesses
Accuracy of such method is highly dependent on the selection of suitable cost of capital.
If financial analyst of Unilever fails to undertake suitable factor then outcome of it will be
doubtful. Moreover, it is very challenging task for the analyst to undertake suitable factor
according to the dynamic business situation.
Internal rate of return (IRR)
Strengths
IRR method provides deeper insight to the business enterprise about the return, which
will be generated by it from the proposed investments in terms of percentage. In this way, it
helps Unilever in making selection of suitable project by facilitating effectual analysis. Further,
this method also places emphasis on making evaluation of future cash flows with the help of time
value of money concept (White and Miles, 2015). In this way, it helps in making most profitable
investment decision in accordance with changing business world.
Weaknesses
Presences of two discounting factors are one of the main aspects, which make analysis,
and calculation of this method more critical. In this, financial analyst has to select two
discounting factors for determining the output. Thus, if financial analyst fails to undertake
suitable factor then it may result into inappropriate framework for decisions making. Further, for
such analysis, Unilever requires highly skilled and competent personnel who have ability to
derive valid outcome from such method of investment appraisal.
3.4 Evaluating the impact of proposal on the strategic objectives of an organization
Proposed investment has high level of impact on the following SMART objectives which
are carried out by Unilever are as follows:
SMART objectives
• Specific: To earn high return from the investment proposal such as more than 30%.
• Measurable: By using the investment appraisal techniques namely IRR business unit can
measure and evaluate the return which is associated with the proposed investment.
• Achievable: Company can achieve the specific aims and objectives by investing money
in the suitable project.
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• Realistic: 35% return which is setting down by Unilever is highly realistic in nature.
Moreover, now there are several proposals are present in the market which offer high
level of return to the investors.
Time-bound: Company has objective to recover the initial amount within the period of 2
years and 6 months. Thereafter, business unit would become able to make profit.
On the basis of the cited case situation, Unilever is planning to expand its business
operations and functions in the near future. In this regard, company requires enough amount of
fund for the project of business expansion. Thus, it is highly required for Unilever to take
investment decision in such a manner which offers high and positive cash flow to the firm. In
this, analysis of proposed investment entails that if company selects project A then it will get less
return in comparison to the other proposed investment. In this regard, if Unilever selects project
B then it is in condition to make profit earlier approximately one month. This in turn helps
business organization in attaining its aims. Further, company will also get high return after the
period of five years. In this way, project B will satisfy the aims and objectives f the firm.
Moreover, profit maximization is one of the main objectives behind the running of business
organization. Thus, proposal B will help company in getting the desired level of outcome or
success to the large extent. Along with this, IRR of project B is also higher in comparison to the
average industry level. In this way, project B will ensure high cash flow within the business
organization. Moreover, profit maximization is one of the main objectives behind the expansion
decision of firm. In this, Unilever will achieve its strategic goals and objectives by investing
money in Project B. Thus, proposed investment will place positive impact on the growth and
success of Unilever. It will also provide opportunity to the business organization to build or
sustain competitive edge over others by enhancing their financial aspects.
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REFERENCES
Books and Journals
Götze, U., Northcott, D. and Schuster, P., 2015. Capital Budgeting and Investment Decisions. In
Investment Appraisal (pp. 3-26). Springer Berlin Heidelberg.
White, J.B. and Miles, M.P., 2015. A Proposed Capital Budgeting Technique for Liquidity
Constrained Small Businesses. Journal of Small Business Strategy. 1(2). [Link]önbohm,
A., Schönbohm, A., Zahn, A. and Zahn, A., 2016. Reflective and cognitive perspectives on
international capital budgeting. critical perspectives on international business. 12(2). pp.167-
188.
Sari, I.U. and Kahraman, C., 2015. Interval type-2 fuzzy capital budgeting. International
Journal of Fuzzy Systems. 17(4). pp.635-646.
McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts,
techniques and tools. Princeton university press.
Minnis, M. and Sutherland, A., 2015. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Chicago Booth Research Paper. (13-75).
Amiram, D., Bozanic, Z. and Rouen, E., 2015. Financial statement errors: evidence from the
distributional properties of financial statement numbers. Review of Accounting Studies. 20(4).
pp.1540-1593.
Robinson, T.R. and [Link]., 2015. International financial statement analysis. John Wiley & Sons.
Online
Limitations of finnacial statements. 2016. Online. Available through:
<[Link]
[Link]>. [Accessed on 25th July 2016].riod
cumulative cash cumulative cash
Year Project A inflow Project B inflow
1 100000 100000 108000 108000
2 120000 220000 122000 230000
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3 112000 332000 116000 346000
4 128000 460000 135000 481000
5 144000 604000 156000 637000
Project A: 2 + 30000 / 112000
= 2.3 years
Project B: 2 + 20000 / 116000
= 2.2 years
Computation of NPV
PV factor Present
Year Project A @10% Present value Project B PV @10% value
Initial
investment 250000 250000
1 100000 0.909 90900 108000 0.909 98172
2 120000 0.826 99120 122000 0.826 100772
3 112000 0.751 84112 116000 0.751 87116
4 128000 0.683 87424 135000 0.683 92205
5 144000 0.621 89424 156000 0.621 96876
Total 450980 475141
NPV 200980 225141
Computation of IRR
Year Project A Project B
Initial investment -250000 -250000
1 100000 108000
2 120000 122000
3 112000 116000
4 128000 135000
5 144000 156000
IRR 36.28% 39.06%
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The above mentioned analysis presents that project B proves to be more fruitful and
viable for the business organization. Moreover, payback period of project B is lower than Project
A. Payback period of project A is 2.3 years whereas, it is 2.4 years in the case of project B. In
this, Unilever would become able to start to make profit one month earlier if it selects project B.
Along with this, NPV of project B is also higher as compared to Project B. In this way, business
enterprise will enjoy the return of £225141 by investing money in project B. Besides this, IRR of
project B is also higher in comparison to other proposed investment. Thus, according to the
selection criteria, Project B will aid in growth and profitability aspect of Unilever to the large
extent. Through this, company is able to fulfil its aims and objectives more effectively and
efficiently.
3.3 Identifying the strengths and weaknesses of above mentioned investment appraisal methods
Payback period, Net present value and IRR are the most effectual tools and techniques
which assist financial analyst or business organization in making suitable investment decision.
All these methods having varied level of strengths and weaknesses which makes its different
from one another:
Payback method
Strengths
This measure helps business organization in assessing the time period within which it
would become able to cover its initial outlet (Sari and Kahraman, 2015). In this way, by
keeping in mind such fact company can make planning in relation to its near future more
efficiently.
• Further, easiness of this method is one of the main strengths which influence others to
make use of such method for making decision.
Weaknesses
Payback period method completely ignores time value of money concept. Thus, the
framework which it presents for decision making will be unrealistic.
Besides this, it does not entails the return which will be earned by Unilever after the
payback period.
Net present value (NPV)
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Strengths
NPV method offers highly realistic solution by taking into account the time value of
money concept.
It offers opportunity to make evaluation of the present value in against to the future
aspect by taking into account the suitable discounting factor (Schönbohm, Zahn and
Zahn, 2016).
Weaknesses
Accuracy of such method is highly dependent on the selection of suitable cost of capital.
If financial analyst of Unilever fails to undertake suitable factor then outcome of it will be
doubtful. Moreover, it is very challenging task for the analyst to undertake suitable factor
according to the dynamic business situation.
Internal rate of return (IRR)
Strengths
IRR method provides deeper insight to the business enterprise about the return which will
be generated by it from the proposed investments in terms of percentage. In this way, it helps
Unilever in making selection of suitable project by facilitating effectual analysis. Further, this
method also places emphasis on making evaluation of future cash flows with the help of time
value of money concept (White and Miles, 2015). In this way, it helps in making most profitable
investment decision in accordance with changing business world.
Weaknesses
Presence of two discounting factors are one of the main aspects which make analysis and
calculation of this method more critical. In this, financial analyst has to select two discounting
factors for determining the output. Thus, if financial analyst fails to undertake suitable factor
then it may result into inappropriate framework for decision making (Götze, Northcott and
Schuster, 2015). Further, for such analysis, Unilever requires highly skilled and competent
personnel who have ability to derive valid outcome from such method of investment appraisal.
3.4 Evaluating the impact of proposal on the strategic objectives of an organization
On the basis of the cited case situation, Unilever is planning to expand its business
operations and functions in the near future. In this regard, company requires enough amount of
fund for the project of business expansion. Thus, it is highly required for Unilever to take
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investment decision in such a manner which offers high and positive cash flow to the firm. In
this, analysis of proposed investment entails that if company selects project A then it will get less
return in comparison to the other proposed investment. In this regard, if Unilever selects project
B then it is in condition to make profit earlier approximately one month. This in turn helps
business organization in attaining its aims. Further, company will also get high return after the
period of five years. In this way, project B will satisfy the aims and objectives f the firm.
Moreover, profit maximization is one of the main objectives behind the running of business
organization. Thus, proposal B will help company in getting the desired level of outcome or
success to the large extent. Along with this, IRR of project B is also higher in comparison to the
average industry level. In this way, project B will ensure high cash flow within the business
organization. Moreover, profit maximization is one of the main objectives behind the expansion
decision of firm. In this, Unilever will achieve its strategic goals and objectives by investing
money in Project B. Thus, proposed investment will place positive impact on the growth and
success of Unilever. It will also provide opportunity to the business organization to build or
sustain competitive edge over others by enhancing their financial aspects.
16
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[Link]
REFERENCES
Books and Journals
Götze, U., Northcott, D. and Schuster, P., 2015. Capital Budgeting and Investment Decisions. In
Investment Appraisal (pp. 3-26). Springer Berlin Heidelberg.
White, J.B. and Miles, M.P., 2015. A Proposed Capital Budgeting Technique for Liquidity
Constrained Small Businesses. Journal of Small Business Strategy. 1(2). [Link]önbohm,
A., Schönbohm, A., Zahn, A. and Zahn, A., 2016. Reflective and cognitive perspectives on
international capital budgeting. critical perspectives on international business. 12(2). pp.167-
188.
Sari, I.U. and Kahraman, C., 2015. Interval type-2 fuzzy capital budgeting. International
Journal of Fuzzy Systems. 17(4). pp.635-646.
McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts,
techniques and tools. Princeton university press.
Minnis, M. and Sutherland, A., 2015. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Chicago Booth Research Paper. (13-75).
Amiram, D., Bozanic, Z. and Rouen, E., 2015. Financial statement errors: evidence from the
distributional properties of financial statement numbers. Review of Accounting Studies. 20(4).
pp.1540-1593.
Robinson, T.R. and [Link]., 2015. International financial statement analysis. John Wiley & Sons.
Online
Limitations of finnacial statements. 2016. Online. Available through:
<[Link]
[Link]>. [Accessed on 25th July 2016].
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References
Books and journals
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