5FC004 Managing Finance and Accounts

Portfolio Assessment

Module: 5FC004 – Managing Finance and Accounts

Year: 2022 Level:5
Assessment Number/Sequence:1 Due Date:5/11/2022
Module Leader: Dr Samia Mahmood Module Tutor: Arjun Dhakal
Assessment Type: Individual Word Count (if any):
Course Title: International Business Management at Biratnagar International
College, Nepal (BIC)

Submitted to: Dr Samia Mahmood, University of Wolverhampton

Submitted by: Kritagya Shrestha
2054034 Kritagya Shrestha
Submission Date: 5/11/2022

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5FC004 Managing Finance and Accounts

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Date: 5/11/2022

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5FC004 Managing Finance and Accounts

Task 1

Question – A

In any organization there are many entities such as shareholders, managers, Board
of Directors (BOD), and other stakeholders. which are interconnected directly or
indirectly, among these entities the major are the shareholders. To understand
agency relationships an individual must understand cooperate governance first.
Corporate governance deals with the processes by which shareholders of a firm
exercise control over corporate executives and managers in order to uphold their
interests (HILLIER, 2020). An organization's stakeholders consist of equity holders,
creditors, and other applicants who provide capital, as well as other participants such
as employees, clients, suppliers, and the government. Hence, the major explanation
for corporate governance is the division of ownership and management, as well as
the consequent organization issues (John & Senbet, 1998). Firms' primary aim is to
maximize their value, and how they do so is determined by the firm's organizational
structure. In major corporations, a special relationship is formed between the owner
(as the principal) and the management (as the agent), known as the agency
(principal-agent) relationship (Tekin & Polat, 2020). Now in an agency relationship
the agent is under the jurisdiction of the principal and must follow his/her directions.
examples of agency relationship in simple words when you execute a power of
attorney or when the principal hires an agent to perform some tasks; when a realtor
is hired to find a bidder for a client's property; or A company hires an agent to sell its
items in another territory.

The corporate legal entity has finite life or has uncertain life. So, to achieve
organizational goals and expectations all the entities must work harmoniously. When
there are potential disputes between principals and agents. It arises challenges in
organization and risk sharing develop because of a firm’s separation of ownership
and management, Asymmetric information is the primary source of these issues,
meaning implying an agency cost for the principal. An agency cost is a type of
internal company expense incurred because of an agent's work for a principal.

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(CHEN, 2022). To prevent such problematic scenarios, agency relationships are

important. This can be further supported by the famous Enron Scandal. Enron, an
American company, in spite of being a multibillion -dollar company, started losing
wealth in 1997. The company was accumulating a lot of liabilities and furthermore,
Enron's management concealed the losses by faking them through deceptive
accounting resulting in perplexing financial statements. The board of directors
(BODs) of Enron was mandated by law to defend and advocate shareholders'
interests, but they had few extra benefits to do so. However, many analysts agree
that the corporation's BODs failed to perform its statutory duties and refused to
accomplish its supervision responsibilities, allowing the company to lead to criminal
acts. The corporation declared bankruptcy as a result of an accounting scam that
caused billions of dollars in losses ( ADAM HAYES, 2021). The key takeaway from
this scandal is that the demise of the company was caused by management using
accounting scams to conceal losses from shareholders and the broader public.
Therefore, proper communication and agency relation is crucial.

Furthermore, the struggle to balance the interests of majority and minority

shareholders is also crucial in agency relationships. Almost always, the majority
shareholders have complete control over the company, its management, its BODs,
and so on as they own 50% or more of the shares of the company (Richey, 1990).
The minority shareholders are usually abuse and oppressed, some examples of it
types are as follows:

• When minority shareholders are unable to fully assert their rights due to a lack
of shares they hold.
• Leaving out the minority shareholder by excluding them from crucial decisions
or other meaningful roles.
• Attempting to limit the voting rights of a minority stakeholder.
• Refusing to pay dividends to minority shareholders and denying minority
shareholders access to financial documents (curleybusinesslaw, 2020).
A given guidelines or shareholders contract is the best form of legal protection for a
minority stakeholder.

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Question – B

Startups are companies that want to introduce their creation or services to the
market. For this financing is one of the most important resources that an
entrepreneur will require. Finance is often associated with obtaining and investing
money. Source of finance is the second phase of start-up. There are two types of
finance: entrepreneurial and corporate finance. In corporate finance there are ban ks
and the capital market. Some of the entrepreneurial source of finance and support
for start-up business are:

Crowdfunding – If the business is on a large scale, then personal cash or friends

and family aren't an option for funding your firm, crowdfunding may be the way to go.
This type of funding has grown in popularity because of platforms such as
Kickstarter, Indiegogo, and Gofundme, and it is based on modest donations (Kaja
Dubielska, 2020). There are different forms of crowd funding for example: donation,
reward, lending, equity-based crowdfunding (Andreoli, 2018).

Angel Investor - An angel investor is a wealthy person who provides financial

assistance to small firms or entrepreneurs in return for equity ownership in the
company (Morrissette, 2007). Since, the entrepreneur is giving equity to an angel
investor, the company doesn't have to pay back the finances. This type of source of
finance is probably the best because the angles will mostly aid the entrepreneu rs by
mentoring or managing help to help succeed their business.

Venture capital - Venture capital (VC) is a type of equity investment and a type of
financing provided by investors like rich venture capitalist, investment banks, or
financial organizations. Venture capital is often distributed to small businesses with
great growth potential, or to businesses that have developed rapidly and are ready to
expand further (Gompers & Lerner, 2001).

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Government grants and subsidies- A government grant is essentially free mon ey

given to small business owners to help them launch and develop their business. A
grant is not easy to obtain just because it is free money. Applying for a grant requires
a lot of effort and planning, and they are extremely competitive, therefore small
businesses should only apply for grants that they are eligible for (Schooley, 2022).

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Task 1 References
ADAM HAYES, 2021. The Agency Problem: Two Infamous Examples. [Online]
Available at: https://www.investopedia.com/ask/answers/041315/what-are-some-famous-scandals-
demonstrate-agency-problem.asp#toc-the-enron-scandal
[Accessed 2 May 2022].

Andreoli, J., 2018. Early Sources of Funding (1): Incubators, Accelerators and Crowdfunding. In:
Entrepreneurial Finance: The Art and Science of Growing Ventures. Cambridge: Cambridge University
Press, pp. 23-59.

CHEN, J., 2022. Agency Problem. [Online]

Available at: https://www.investopedia.com/terms/a/agencyproblem.asp
[Accessed 2 May 2022].

curleybusinesslaw, 2020. What Is Minority Shareholder Oppression in Texas?. [Online]

Available at: https://curleybusinesslaw.com/minority-shareholder-oppression-texas/
[Accessed 2 May 2022].

Gompers, P. & Lerner, J., 2001. The venture capital revolution. Journal of economic perspectives,
15(2), pp. 145-168.

HILLIER, 2020. Corporate Finance, 4e. 4 ed. London: McGraw-Hill UK Higher Ed.

John, K. & Senbet, L. W., 1998. Corporate governance and board effectiveness. Journal of Banking &
Finance, 22(4), pp. 371-403.

Kaja Dubielska, 2020. Overview Of Top Funding Sources To Grow Your Startup. [Online]
Available at: https://www.vestbee.com/blog/articles/overview-of-top-funding-sources-to-grow-
your-startup
[Accessed 4 May 2022].

Morrissette, S., 2007. A profile of angel investors. The Journal of Private Equity, 10(3), pp. 52-66.

Richey, R., 1990. Balancing the Rights of Majority and Minority Shareholders in Take -Out Mergers.
In: 25, ed. Trends in Delaware Law. New Eng: L. Rev., p. 699.

Schooley, S., 2022. The Best Small Business Government Grants in 2022. [Online]
Available at: https://www.businessnewsdaily.com/15758-government-grants-for-small-
businesses.html
[Accessed 6 May 2022].

Tekin, H. & Polat, A. Y., 2020. Agency Theory: A Review in Finance. Journal of Social Sciences of Mus
Alparslan University, 8(4), p. 1323–1329.

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Task 2

Question – A

Ratios 2020 2019

Profitability ratios
𝐺 .𝑃 3372 3487
Gross Profit Ratio (𝑠𝑎𝑙𝑒𝑠 × 100% ) 37.21% (9062 × 100% ) 38.64% (9022 × 100% )
𝑁 .𝑃 507 821
Net Profit Ratio (𝑠𝑎𝑙𝑒𝑠 × 100% ) 5.59% (9062 × 100% ) 9.10% (9022 × 100% )
871
Return on Capital Employed 17.59% (4951 × 100% ) 23.41% (1211
5172
× 100% )
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
(𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
× 100% )

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 507 821

Return on Asset (𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 × 6.98% (7258 × 100% ) 11.46% (7258 × 100% )
100% )

Liquidity Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 1390 1182
Current Ratio( ) 0.60 ( 2307 ) 0.59 (
1989
)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶.𝐴−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 370 332
Quick Ratio ( ) 0.1604 ( ) 0.1669 ( )
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2307 1989

Efficiency ratio
45 47
Account receivable day 1.81 (2days) (9062 × 1.90 (2days) ( ×
9022
𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
( × 365) 365) 365)
𝑆𝑎𝑙𝑒𝑠

Account payable day 90.44 (91days) 82.43 (83days)

𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 1410 1250
( × 365) (5690 × 365) (5535 × 365)
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 5690 5535

Inventory turnover ( ) 5.57 (6times) ( ) 6.51 (7times) ( )
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 1020 850

507 821
Dividend Coverage Ratio 1.69 ( 300 ) 2.34 ( 350 )
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
(𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑)
𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑙𝑜𝑎𝑛 2851 3208
Gearing Ratio (𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑑 × 57.58% (4951 × 100% ) 62.03% (5172 × 100% )
100% )
871 1211
Interest coverage ratio 4.05 times ( ) 8.24 times ( )
215 147
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
( )
𝑓𝑖𝑛𝑐𝑖𝑎𝑙 𝑐𝑜𝑠𝑡

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5FC004 Managing Finance and Accounts

The above given table is the ratio analysis of the Wandy plc company. A ratio
analysis is used to examine the financials of a firm as well as the pattern of the
company's results over time (Bloomenthal, A, 2021). The profitability, liquidity,
efficiency, gearing, and investor ratios are the five primary types of ratios. As
mentioned in the above table there is a ratio analysis of the year 2019 and 2020 of
the Wandy company. By comparing these ratios analysis of th e year 2020 to its
previous year the company’s performance is determined as follows.

The profitability ratio - The profitability ratio compares a company's ability to

generate revenue to its expenses and other costs associated with generating
revenue over a given time. It is used by internal and external users. It is important
because it represents a company's final performance, or how efficient and profitable
the company is (Collis, et al., 2012). The following are the types of profitability ratio.

Gross profit ratio – It is obtained by comparing gross profit to sales revenue. It has
got a slight decrease from the previous year. In 2019 it was 38.64% whereas in 2020
it is 37.21%. Here it is in percentage form which can be don e by multiplying the
answer by 100. Commonly, higher the gross profit ratio the better because it
indicates that the company is making profit greater than its costs.

Net profit ratio- This ratio assesses a company's overall profitability by considering
all direct and indirect costs. The Wandy plc company has seen another decline in
this in comparison to the previous year. A decline from 9.10% to 5.59%. Generally,
decreasing net profit means the company is using ineffective cost structure or poor
pricing approaches. In this case of wandy it may be mainly due to the pandemic
situation on the high street.

Return on capital employed (ROCE)- The (ROCE) of wandy’s has seen a massive
decrease from 23.41% to 17.59%. This ratio shows the percentage return on the

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funds invested in the company by its shareholders. A high and constant ROCE is an
indicator of a well-managed corporation because it demonstrates that a company
continually makes good use of its resources.

Return on assets (ROA)- ROA has dropped from 11.46% to 6.98%, generally the
higher the percentage is the better. It shows how profitable the company is in
comparison to its total assets. In other words, it determines profit per asset value.
Wandy’s has seen yet another decrease in this area.

Liquidity ratio - Liquidity ratios is calculated to assess a company's capacity to

satisfy debt obligations and margin of safety. Liquidity ratio deals with short term
obligations and cash flow (Hillier, 2021).

Current ratio is a liquidity ratio that indicates the company’s ability to cover its short-
term debts. It is assessed by dividing current assets and current liabilities. The
current ratio of Wandy’s in 2020 was 0.60. This means that the company has just
enough current assets to cover its current liabilities.

Quick ratio – the inventory takes longer time to liquidate thus, when in the time of
cash crunch quick ratio is calculated. It is like a quick ratio but here inventory is
deducted from current assets. The quick ratio in 2020 was 0.1604 of Wandy’s which
is comparatively low from a good quick ratio prospective which amount to 1 or
greater.

Efficiency ratio represents a company’s ability to create income from its assets. It
also shows how effective management is at managing day-to-day business
operations.

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Accounts receivable days shows the average time taken by the consumer to clear
their debts. Here the time taken by the consumer is 2 days and has seen n o change
in 2020.

Account payable days has gone up to 91 days from 83 days. Which is a good sign
for the company because it gives Wandys enough time to use its short-term debts to
pay for its activities.

Inventory turnover of Wandys in 2020 is 6 times which means that the inventory is
sold and restoked every 1-2 months. This is rather a good ratio where the sales and
restock rate is balanced even though the ratio has decreased slight from previous
year.

Dividend coverage ratio (DCR) went down to 1.69 to 2.34. which is not very
concerning because it is considered a healthy ratio. A DCR below 1.5 may be
concerning. Wandy’s net profit was £507 million in 2020 from which they paid £300
million dividend to its shareholders.

Gearing ratio is the capital employed to debt. Gearing ratio of wandy’s went down to
57.58% from 62.3%. It is normal for a well-established company like wandy’s. it
means that the owner’s funds have leverage over company’s debts.

Interest coverage ratio shows the capacity of a business to pay interest on its
outstanding obligation. This is the only financial ratio of wandy’s that has dropped
nearly half from 8.24 to 4.05 times. The main reason for this can be the decrease in
almost all the factors which are used by wandys to pay interest.

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Question – B

Investors can use and analyze the above given ratios like dividend yield, earning per
share (e.p.s). to make decisions about their investment on Wandy’s. For example,
the dividend coverage ratio of Wandy’s. They paid £300 million in 2020 to its
shareholders even though the company went through a lot of challenges and
downturn that year. The ratio is at suitable level, so investors do not have to worry
about not getting dividend from the company.

After seeing the increased account payable days to 91 days f rom the financial
statement, normal or new suppliers may find it hard to give goods and services on
credit to Wandy. But an experienced supplier or Lender would be happy to give their
goods just to make a relationship with the Wandy company brand as it has built its
image over the last 125 years. Lender also sees the gearing and profitability ratios of
the company.

To sum up, ratios are a very integral part of exploring the financial situation of the
company every year, month or even days. Understanding the current situation of
Wandy company it has seen decrease in major ratios like gross profit, return on
capital, current ratio. Which is understandable due the pandemic situation. However,
this decline shows an alarming rate for the company. Different other ways could be
used to find the drop in ratio. Nevertheless, inventory turnover period has shown
significant change which can become a plus point to readjust and regrow other ratios
as well.

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Task 2 References
Bloomenthal, A, 2021. Ratio Analysis. [Online]
Available at:
https://www.investopedia.com/terms/r/ratioanalysis.asp#:~:text=Ratio%20analysis%20is%20a%20q
uantitative,cornerstone%20of%20fundamental%20equity%20analysis.
[Accessed 6 May 2022].

Collis, J., Holt, A. & Hussey, R., 2012. Profitability ratio. In: Business Accounting : an Introduction to
Financial and Management Accounting. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan,
pp. 222-225.

Hillier, D. e. a., 2021. Corporate Finance. 4th ed. London: McGraw-Hill Education.

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Task 3

A budget is a monetary plan that shows the income to be earned, the costs to be
paid, and the resources to be used over a specified time period. In other words, a
“financial and/or quantitative plan of action” is defined as a budget. The budgeting
process consists of developing and implementing a budget. Budget planning and
forecasting, budget execution, budget control, and budget review are all part of this
process. A budget is essential for any business because it allows it to keep track of
its cash flow (McLaney & Atrill, 2020). Hence, using a budget can assist
corporations in making more informed financial decisions.

There is no doubt that the world is developing rapidly, and new things are bein g
introduced every year hence, to keep up with all these changes the development of
budget is important. In recent years, it has been argued that huge firms' budgeting
systems are overly inflexible or rigid. Traditional budgeting, according to Hope and
Fraser (2003), should be abandoned. Following this, the "Beyond Budget" Forum
was formed, which promotes discarding traditional budgeting in favor of a variety of
possibilities that can be abandoned as circumstances change. Traditional budgetin g
is a method of estimating your company's revenue and expenses for the following
year based on the previous year's budget (Zeller & Metzger, 2013).

Beyond budgeting is the concept that organizations must abandon budgeting du e to

its intrinsic flaws, particularly when used to construct contracts. Beyond budgeting
recommends that, instead of traditional budgeting, a few other tactics, such as rolling
forecasts and market-related targets, can be adopted. (Dyson, 2020). Beyond
budgeting is more like revolutionary development in the budgeting system.
Traditional budgeting system should be discarded because it has made it difficult for
many businesses to respond quickly and flexibly to market conditions. Traditional
budgeting has fostered an organizational culture of mistrust, power play, and lack of
openness. It also consumes excessive corporate resources (performancecanvas,
2017). Adapting beyond budgeting has its own perks. It provides a ton of support to
decentralized firms that aim to transfer decision -making power to frontline
management and employees. Likewise, Traditional budgeting aims only on
managing numbers while beyond budgeting aims on value concept, corporate goals

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and plans. Three widely used development of budgeting alternatives are discussed
extensively below.

Rolling budget. In this, budgets are still prepared incrementally, but as the year
passes, the first month's budget is subtracted and the first month of the next year is
added. As the year progresses, this technique is repeated month after month. This
budgeting system can be suitable if the business experiences many changes like
new products or speedy growth. This strategy ensures that the budget is less out of
date than with a pure incremental budgeting system. But the result of this budgeting
system is that a company will always have a budget that extends one year into the
future (accountingtools, 2022). hence, it is especially useful when future
expenses and/or activities cannot be reliably forecasted. It can be further
understood by the following example: A Company has chosen 12-month timeframe,
with an opening budget covering January through December. After a month, the
January period is over, therefore it now sets a budget for the following January,
retaining a 12-month timeframe that runs from February of this year to January of the
upcoming year.

Advantages:

• As uncertainties are removed, budgeting becomes more precise.

• Managers must continually reassess their finances.
• The budget is more current.
• The budget timeframe ought to be nine to twelve months in advance (Chen &
Huang, 2021).
The disadvantage of this strategy is that it may not produce a more attainable
budget than the standard financial plan because the budget periods earlier to the
incremental month being introduced are not altered. Moreover, there are some
speculations that this method of budgeting is useful (accountingtools, 2022).

The prospect of reconstructing the corporate budget from the ground up can be
terrifying for many organizations. Cleaning the financial record and starting over

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would be a last option in the worst-case scenario and would never be considered
under normal conditions. However, an increasing number of firms are opting for an
intensive style of budgeting called 'Zero-based Budgeting.' Zero based budgeting
(ZBB). This strategy ignores the former year's budget. Budgets are created using a
whole fresh set of assumptions and results for the upcoming year. So new
circumstances are considered, nevertheless zero-based budgeting suffers from
many of the issues related with incremental budgeting (Dyson, 2020). This method
is based on sustained improvement and needs rather than the budget of the past.
Budgeters in ZBB review and justify each program and expenditure at the start of
each budget cycle in order to secure financing. ZBB can budget any kind of cost, like
Capital expenditures, operational expenses, sales, general, and administrative costs,
marketing costs, variable distribution, and cost of goods sold (Pyhrr, 2012). Some
of the advantages of ZBB are:

• The resulting budget is properly justified and in line with the strategy.
• Increases operational efficiency by indicated assumptions.
• keeps corporations informed of how much money is coming in and going out
This can help corporations avoid spending money that they don't have.
Hence, money is saved.
The cons of ZBB are it is risky, confusing, and time costing since the budget is
created from scratch every single year. For groups with limited resources, this could
be prohibitively expensive. When potential savings are uncertain, it is risky (deloitte,
2022).

Budgets are set using an activity analysis technique in Activity-Based Budgeting

(ABB). ABB emphasizes on the costs of activities required to manufacture and sell
goods and services. It divides indirect expenses into distinct pools of homogeneous
activity costs. The cause-and-effect criterion is used by management to determine
key cost drivers for each of these indirect-cost pools. ABB consists of three major
steps: identifying cost drivers, estimating total units, and estimating cost per unit
(Cooper & Slagmulder, 2000). An example of ABB can be assuming a company
plans to sell 1,000 units of its product during the next month at a cost of $5 per unit.
The corporation will estimate the cost of items sold at $5,000 using activity-based

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budgeting. The biggest advantage to using ABB over traditional budgeting is that
it provides additional insight into why resource consumption is not linear with
output volume. The biggest disadvantage of ABB is that it is expensive and time
demanding as expenditures linked with a business operation are tracked, and all
technical details must be documented (corporatefinanceinstitute, 2022).

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Task 3 References
accountingtools, 2022. Rolling budget definition. [Online]
Available at: https://www.accountingtools.com/articles/what-is-a-rolling-
budget.html#:~:text=A%20rolling%20budget%20is%20continually,one%20year%20into%20the%20fu
ture.
[Accessed 4 May 2022].

Chen, Y. & Huang, M., 2021. Bottom-up (top-down) rolling budgeting and job autonomy:
consequences for the role of role overload and managerial performance. Asia-Pacific Journal of
Accounting & Economics, 28(1), pp. 1-21.

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