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DescriptionFinancial Analysis: Tesco Plc
Financial Analysis: Tesco Plc (TSCO)
Total word count for the main text is 2,749 words excluding tables.
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Financial Analysis: Tesco Plc
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Table of Contents
Financial Analysis: Tesco Plc (TSCO) ………………………………………………………………………….. 1
Introduction ………………………………………………………………………………………………………………. 3
Question 1 ……………………………………………………………………………………………………………….. 4
Financial Statements ………………………………………………………………………………………………. 5
Question 2 ……………………………………………………………………………………………………………… 15
Profitability Ratios …………………………………………………………………………………………………. 16
Liquidity Ratios …………………………………………………………………………………………………….. 17
Efficiency Ratios …………………………………………………………………………………………………… 18
Gearing Ratios……………………………………………………………………………………………………… 20
Overall Financial Performance ……………………………………………………………………………….. 21
Question 3 ……………………………………………………………………………………………………………… 22
Question 4 ……………………………………………………………………………………………………………… 24
Conclusions ……………………………………………………………………………………………………………. 27
References …………………………………………………………………………………………………………….. 28
Appendices …………………………………………………………………………………………………………….. 30
Appendix I ………………………………………………………………………………………………………… 30
Appendix II ……………………………………………………………………………………………………….. 31
Appendix III ………………………………………………………………………………………………………. 32
Appendix IV ………………………………………………………………………………………………………. 33
Financial Analysis: Tesco Plc
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Introduction
Tesco Plc is the largest retailer in the Unite Kingdom. The company’s history dates
back to 1919 and it currently listed in the London Stock Exchange with the ticker symbol
TSCO (Oral History Society, 2015). Its trading price on April 3rd, 2023, was 263.70 (London
Stock Exchange, 2023). Tesco used to be one of the largest and most important retailers in
the world with operations in the United Kingdom, Ireland, the Czech Republic, Hungary, and
Slovakia, the United States, Turkey, Poland, Thailand, and Malaysia. Currently, the company
exited the last five markets of the previous list. Its global footprint shrunk to a minimum since
its international operations are marginal now. It sold Thai and Malaysian operations during
2020 and that resulted in the company finally increasing profits after several years. The
problem is that increasing profits through the sales of assets and business units is not
sustainable in the long term.
Tesco’s stock market performance is terrible since stock prices have fallen significantly
over the past ten years without even considering lost opportunity costs related to investing in
other companies or even market indices like the FTSE 100 which yielded major gains during
the same period. Tesco remains as a large and inefficient company unable to yield significant
profits from operating activities.
This report will analyse Tesco’s financial performance between 2019-2021 and will
propose some changes that can help reverse this situation.
Financial Analysis: Tesco Plc
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Question 1
Tesco Plc (2022) annual report and financial statements is divided into four areas:

Strategic report: The strategic report starts with some general information about the
company. This information represents relevant data and summarizes the company’s
performance over the past year. This information can be used by both internal and
external stakeholders to compare performance vs the previous year. It includes the
company’s most important KPIs and explains some of the information presented in a
previous highlights section. This section lays out the company’s overall long term
strategies including corporate social responsibility, risk management, and relevant
factors that affected Tesco’s performance or may affect Tesco’s performance in the
future

Corporate governance: This lists a short summary of the members of the board of
directors and upper management. This part is useful for investors and creditors so that
they know who is in charge of the company. It also includes how Tesco complies with
the UK’s corporate governance code. A summary of the main governance policies
followed and what actions were taken by the board of directors during the previous
year. This section basically describes how the board works, how they are elected, for
how long, how much they are paid, and how important committees work, for example,
the audit committee. This section provides useful information for investors and
regulators.

Financial statements

Other information: The last section is the shortest and includes information about
operating activities, for example, number of stores opened, non-IFRS financial ratios,
Financial Analysis: Tesco Plc
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and other alternative performance measures. This section can be used by investors to
reconcile certain parts of the financial statements that are specific for retailers.
Financial Statements
This is the most important section of the annual report. It starts with the auditor’s report
including a detailed description of auditing policies and procedures. The auditor, KPMG,
stated that the financial reports were prepared following legal requirements, but it did not
issue an unmodified opinion. The auditor expressed serious observations like:

Not receiving all the information they asked for.

Inadequate internal controls.

Financial statements are not in agreement with accounting records.
The auditor’s statement is not good and needs to be reviewed by regulators and the
company should amend their errors, but they didn’t. Investors, creditors, employees, and
suppliers should all be concerned about inaccuracies and potential misstatements presented
(Financial Reporting Council, 2016).
There are some issues that need to be clarified. The company’s financial statements
are not the same as the financial statements posted by the LSE. I adjusted the financial
reports presented in the 2021 and 2020 annual reports so that they would match those
presented by the LSE.
Financial Analysis: Tesco Plc
Tesco
Income Statement
For the years ended February, 2021, 2020 & 2019
(in millions of pounds)
2021
2020
2019
Revenue*
£57,887
£64,760
£63,911
Cost of sales
-£53,538
-£60,180
-£59,215
Impairment loss on financial assets
-£384
-£183
£0
Gross profit
£3,965
£4,397
£4,696
Administrative expenses
-£2,229
-£1,879
-£2,047
Operating profit*
£1,736
£2,518
£2,649
Net interest*
-£685
-£759
-£272
Other cost
-£252
-£462
-£738
Profit (loss) before taxes*
£799
£1,297
£1,639
Taxation
-£104
-£380
-£354
Profit from continuing operations*
£695
£917
£1,285
Discontinued operations
£5,452
£56
£35
Profit (loss) for the year*
£6,147
£973
£1,320
£6,143
£971
£1,322
£4
£2
-£2
Basic*
63.80
12.65
17.29
Diluted*
60.08
11.59
7.31
Attributable to
Tesco’s shareholders*
Non-controlling interests*
Earnings per share
Profit (loss) attributable to Tesco’s shareholders
Per ordinary share (in pence)
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Financial Analysis: Tesco Plc
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Financial Analysis: Tesco Plc
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Financial Analysis: Tesco Plc
Some notable differences affect operating profits which were originally posted at
£2,649 and £2,518 million for 2019 and 2020 respectively in Tesco. Tesco’s annual report
posts £2,206 million in operating profits for 2020. The financial reports posted by the LSE
reports £2,518 million just like the 2020 annual report.
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Financial Analysis: Tesco Plc
Tesco
Balance Sheet
As of February, 2021, 2020 & 2019
(in millions of pounds)
2021
2020
2019
Total Assets
Non-current assets
£34,971
£39,138
£36,379
Current assets
£10,807
£13,164
£12,668
£45,778
£52,302
£49,047
Total Liabilities
Non-current liabilities
£17,456
£21,122
£13,533
Current liabilities
£15,721
£17,927
£20,680
£33,435
£39,027
£34,189
£12,343
£13,275
£14,858
-£18
-£22
-£24
£12,325
£13,253
£14,834
£12,343
£13,275
£14,858
Total equity
Shareholders’ funds
Non-controlling interests
Net assets
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Financial Analysis: Tesco Plc
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Financial Analysis: Tesco Plc
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Financial Analysis: Tesco Plc
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Even though the differences are not large, regulators, investors, and creditors can be
confused, and this decreases trust on the company.
Tesco’s annual report includes three more financial statements that are included as
appendices:

Statement of comprehensive income (continuation of income statement).

Statement of changes in equity.

Cash flow statement. The cash flow statement is used for determining the valuation of
the company. The cash flow statement shows how much cash the company generates
through operating activities and how much cash it invests in new projects that should
allow it to grow in the future. The last section, financial cash flows shows how the
company is being financed. Tesco’s operating cash flows improved during 2021 but the
major source of cash were selling existing investments which helps today but hurts
tomorrow.
Financial Analysis: Tesco Plc
The notes to financial statements includes detailed explanations to the company’s
accounts and what accounting policies were used. It also includes more detail regarding
specific accounts which are summarized in the financial statements.
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Financial Analysis: Tesco Plc
Question 2
Financial ratios are useful for determining trends. The following ratios were obtained
from London Stock Exchange (2023) or were calculated using information obtained from
Tesco Plc (2021) and Tesco Plc (2022).
Tesco Plc
Financial Ratios
2021
2020
2019
Return on capital employed
20.63%
2.83%
4.65%
Operating profit margin
3.00%
3.89%
4.14%
Gross profit margin
6.85%
6.79%
7.35%
Return on ordinary shareholders funds
49.77%
7.31%
8.90%
Current ratio
0.69
0.73
0.61
Acid test ratio
0.56
0.60
0.49
Average inventories turnover period
15.35
15.31
15.04
Average settlement period for receivables
8.38
8.30
8.47
Average settlement period for payables
59.04
54.75
55.18
Sales revenue to capital employed ratios
1.94
1.88
2.25
34.23%
32.62%
38.65%
2.53
3.32
9.74
Profitability ratios
Liquidity ratios
Efficiency ratios
Gearing ratios
Gearing ratio
Interest coverage ratio
Calculations are presented in Appendix IV.
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Financial Analysis: Tesco Plc
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Profitability Ratios
The following trends can be observed:
The major increase in return on ordinary shareholders’ funds and ROCE is the result of
Tesco divesting several business units which generated positive investing cash flows and
gains from discontinued operations. But this is not favourable since selling assets to raise
funds means that the company’s operations will continue to shrink. Operating profit shows a
negative trend while gross margin shows changing trends. Overall, the company is having
profitability issues since it is not being able to generate sufficient profits through continuing
operations.
Financial Analysis: Tesco Plc
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Liquidity Ratios
In simple terms, liquidity ratios are too low. This means that Tesco might have trouble
paying back its short term obligations. Adequate current ratios should be 1 or more since that
means that the company has sufficient liquid funds to cover its short term obligations. The
acid test ratio is always lower especially for a large retailer with huge inventories, so that is
not really the problem.
Financial Analysis: Tesco Plc
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Efficiency Ratios
Tesco’s performance is quite irregular regarding efficiency ratios. Average settlement
period for receivables is low, which is good, but it could probably be lower since most sales
are either cash sales or credit/debit card sales which are paid immediately or after 1 or 2
maximum. Average inventories turnover is very good since Tesco is able to sell its inventories
fast. Tesco’s average settlement period iso very high which is good since that means that its
suppliers give Tesco longer credit terms. This is probably necessary due to the company’s
low liquidity. Tesco’s market power allows it to negotiate favourable credit terms.
Financial Analysis: Tesco Plc
Tesco’s sales revenue to capital employed is high which means that it is using its
assets efficiently to generate sales.
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Financial Analysis: Tesco Plc
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Gearing Ratios
Tesco’s gearing ratios are bad. Its financial leverage is increasing, meaning that the
company’s debts are growing compared to equity even after divesting several business units.
The interest coverage ratio is very low and decreasing fast, which means that the company is
at risk of not being able to generate sufficient operating profits to pay its interest expense.
Financial Analysis: Tesco Plc
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Overall Financial Performance
Tesco’s financial performance is not adequate. It probably had to divest certain
operations due to low profitability, low liquidity, and high gearing. Trends are mostly negative
which means that the company needs to work really hard to improve. Tesco used to be one of
the largest supermarket chains in the world, but its operations have receded to only the UK,
Ireland, the Czech Republic, Hungary, and Slovakia (Tesco Plc, 2022). The following graphs
show the results of Tesco’s failed policies.
Source: London Stock Exchange (2023)
Financial Analysis: Tesco Plc
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Question 3
Tesco has been struggling financially for more than a decade. Total debts continue to
increase even after divesting business units. Positive cash flows form investing activities are
never good since it jeopardizes the company’s future operations. Tesco reported negative
financial cash flows as the result of huge dividends distributed. Dividends distributed during
2021 totalled £5,858 million when the company was only able to generate £721 million in net
profits from operating activities. Tesco’s profits were higher due to gains realized from
discontinued operations (selling assets and business units) which totalled £5,426 million. The
company missed a great opportunity to decrease its financial leverage and reduce its total
debt. Instead, it decided to distribute gains to shareholders. This decision was probably made
to prevent stock value from falling further but it will hurt the company’s future operations.
Stock prices did increase due to higher dividends, but they decreased again. It was definitely
not a sustainable policy.
The company’s funding options are limited due to its poor financial performance. It
could pursue the following funding options:
1. Internal funding by retaining earnings and stop distributing dividends for a five-year
period. This decision will not be popular with shareholders that are only interested in
short term gains but investors that focus on long term sustainability will favour this
decision. This should have been done during 2021 when the company obtained £5,426
million in after tax gains from divesting assets but instead, Tesco simply distributed the
dividends. This option is unlikely to occur since Tesco’s current board and upper
management are focusing on trying to avoid stock prices from plummeting even more.
It is a very short-sighted decision, and the company will continue its decade long
decline.
Financial Analysis: Tesco Plc
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2. Internal funding can also be obtained through the sale of more assets and more
business units. Tesco’s management during the past decade has been terrible and it
has already lost tens of billions in North America and Asia resulting in the company
limiting its operations to only a handful of countries. Tesco has been selling its
productive assets for several years now and continuing to do that will not help them. It
is not sustainable for a company to continue selling its assets in order to increase
profits and obtain cash. It is even worse that it distributes the cash received instead of
reinvesting it.
3. External funding can be obtained through the issuance of long term corporate bonds.
Currently, Tesco debts are mostly related to financial leases and it does not have
significant amounts of long term debt issued. This could be a solution although it is
necessary to evaluate how rising interest rates will affect operating costs. Tesco’s
interest coverage ratio fell severely, and it is possible that potential bondholders will
demand high interest rates to compensate for growing risks.
4. External funding through the issuance of common shares. It is possible that Tesco can
raise money by issuing more shares or selling the shares it holds as treasury stock.
The problem with issuing more shares or selling treasury stock is that it will result in
decreasing stock prices but at least it will not have to pay interests.
It is always easier for companies that are performing well to obtain financing. Tesco
has been performing poorly for over a decade, so its funding sources will all be very
expensive.
Financial Analysis: Tesco Plc
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Question 4
Traditional budgeting carries several flaws because budgets are intrinsically wrong.
Unless a person knows what exactly will happen in the future, then budgets will always be
wrong. This is why budgeting processes were improved through flexible budgets and variance
analysis, but there are also other problems besides accuracy (Schmidt, 2023):

Preparing budgets is expensive because they are time consuming.

Budgets don’t necessarily align with the company’s long term strategies.

Budgets hinder innovation and change processes.

Budgets will tend to increase concentration of power within the company (even bottomup budgets).
Beyond budgeting (BB) is a novel administrative model aimed at increasing flexibility
within organisations, empowering employees, levelling down organisational hierarchy,
improving internal stakeholders’ wellbeing, developing new ways to track performance, and
reduce traditional budgeting processes (Beyond Budgeting Institute, 2023). There are
organisations where beyond budgeting can be extremely useful, especially horizontal
organisations. Beyond budgeting is based on leadership principles and managements
processes in a similar way to agile management techniques. Personally, I believe that BB can
help any type of organisation but at different levels. Many organisations like Tesco are
extremely rigid and contain many hierarchical levels. It is not reasonable to apply BB to the
entire organisation at once, but it can be applied to different business units. BB is not about not
caring about costs and financial performance, instead, it is about improving financial
performance by doing things differently.
Financial Analysis: Tesco Plc
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Some companies that can apply BB techniques to most of their operations are Nike or
Apple which focus on design and innovation processes, and logistics. Both companies are
world leaders in sales volume but none of them manufactures anything themselves. The
majority of Apple’s and Nike’s resources are allocated to developing new products, improving
existing products, quality control, and innovation. BB can be extremely helpful in these areas
since they require a lot of creative work and employees are empowered. On the other hand,
logistics processes are extremely efficient and it would probably be better to continue operating
under their current business model. BB can be very useful when applied to the correct business
units or operations.
There are two BB techniques that can be very useful for Tesco, and they are:

Decentralize leadership and empower employees.

Evaluate performance based on industry benchmarks.
Tesco’s current organisational structure is tall with the board and five committees that
directly report to them. Tesco is divided by several hierarchical levels, and it has a very rigid
and inflexible structure (Dudovskiy, 2016).











CEO
Board of Directors
Executive committees (Audit, Corporate responsibility, Nominations, Remuneration,
Disclosure)
Vice-presidents (Funds, Personal Relations, Marketing and Advertising, Human
Resource Management, etc.)
Upper managers
Assistants
Regional managers
Store manager
Middle store managers
Lower store managers
Salesclerks and store personnel
Financial Analysis: Tesco Plc
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Tesco is the opposite of an agile organisation and that is hurting its performance with
declining sales and increasing costs. Some of the proposed changes would include eliminating
vice-presidents and replacing them by upper managers that perform the same duties. Executive
committees should include existing board members only. Middle store managers can also be
eliminated. This will flatten the organisation and reduce bureaucracy. Regional managers are
still needed because Tesco is still operating internationally.
Tesco’s performance should be evaluated against its peers, for example, Aldi or
Sainsbury. Tesco is much larger so comparisons should be adjusted to size and market share,
but Tesco should apply efficiency KPIs and compare them to direct competitors. Tesco’s
biggest problem is that it is inefficient which results in low profitability. Other smaller
supermarkets are more efficient and are performing better.
Financial Analysis: Tesco Plc
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Conclusions
Tesco’s performance over the past decade can only be described as a disaster. It used
to be one of the largest supermarket chains in the world and its current profitability now
depends on selling assets and business units. Tesco retreated from the United States,
Turkey, Poland, Thailand, and Malaysia during the last decade resulting in 2,136 stores being
closed (Tesco Plc, 2022). Tesco lost several billions as a result of international closures being
North America by far its worst failure (Davey and Holton, 2013). But reducing its international
operations did not help Tesco become more profitable nor more efficient. Actually, the
opposite occurred with shrinking sales and profit margins.
Tesco needs a complete overhaul since it is not able to create value for its
shareholders. Over the past ten years, Tesco’s share price decreased from 307.32 to 263.70
(April 4 2013 to April 4 2023) losing more than 14% of its value (London Stock Exchange,
2023). Comparing Tesco against the FTSE 100 during the same ten years shows that an
investor buying £100 in Tesco stock back then would have £85.81 today, while investing £100
in the FTSE 100 would result in £219.04 today (London Stock Exchange, 2023).
Tesco is an extremely tall,, rigid, and bureaucratic organisation and certain techniques
proposed by Beyond Budgeting can help the organisation. Eliminating hierarchical levels and
measuring performance by benchmarking against competitors can help it become more
efficient.
Fixing Tesco’s problems is not an easy task since they are used to working that way.
But changes are necessary regardless of how hard or painful they are.
Financial Analysis: Tesco Plc
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References
ACCA Global (2023). Forming an audit opinion. [online] www.accaglobal.com. Available at:
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-examsstudy-resources/f8/technical-articles/forming-an-audit-opinion.html [Accessed 3 Apr. 2023].
Begenau, J. and Salomao, J. (2018). Firm Financing over the Business Cycle. The Review of
Financial Studies, 32(4), pp.1235–1274. doi:https://doi.org/10.1093/rfs/hhy099.
Beyond Budgeting Institute (2023). Beyond Budgeting Institute. [online] Beyond Budgeting
Institute. Available at: https://bbrt.org/ [Accessed 4 Apr. 2023].
D’Amato, A. (2019). Capital structure, debt maturity, and financial crisis: empirical evidence
from SMEs. Small Business Economics, 55. doi:https://doi.org/10.1007/s11187-019-00165-6.
Davey, J. and Holton, K. (2013). Tesco quits U.S. and takes $3.5 billion global writedown.
Reuters. [online] 17 Apr. Available at: https://www.reuters.com/article/us-tesco-resultsidUSBRE93G06O20130417 [Accessed 4 April 2023].
Dudovskiy, J. (2016). Tesco Organizational Structure – Research-Methodology. [online]
Research-Methodology. Available at: https://research-methodology.net/tesco-organizationalstructure/ [Accessed 4 April 2023].
Financial Reporting Council (2016). Auditor’s Responsibilities for the Audit | Financial
Reporting Council. [online] Frc.org.uk. Available at: https://www.frc.org.uk/auditors/auditassurance-ethics/auditors-responsibilities-for-the-audit [Accessed 3 Apr. 2023].
London Stock Exchange (2023). TESCO PLC (TSCO). [online]
www.londonstockexchange.com. Available at:
https://www.londonstockexchange.com/stock/TSCO/tesco-plc/company-page [Accessed 4
Apr. 2023].
Oral History Society (2015). From market trader to global player: oral history and corporate
culture in Tesco, Britain’s largest supermarket. Oral History, [online] 43(1), pp.52–62.
Available at: https://www.jstor.org/stable/24345921 [Accessed 3 Apr. 2023].
Financial Analysis: Tesco Plc
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Ross, S.A., Westerfield, R., Jaffe, J.F. and Jordan, B.D. (2019). Corporate finance. New York,
Ny: Mcgraw-Hill Education.
Schmidt, J. (2023). Beyond Budgeting. [online] Corporate Finance Institute. Available at:
https://corporatefinanceinstitute.com/resources/fpa/beyond-budgeting/ [Accessed 4 Apr.
2023].
Tesco Plc (2021). Annual Report and Financial Statements 2020. [online] Tesco Plc, pp.1–
176. Available at:
https://www.tescoplc.com/media/755761/tes006_ar2020_web_updated_200505.pdf
[Accessed 4 Apr. 2023].
Tesco Plc (2022). Annual Report and Financial Statements 2021. [online] Tesco Plc, pp.1–
220. Available at: https://www.tescoplc.com/media/757589/tesco_annual_report_2021.pdf
[Accessed 4 Apr. 2023].
Financial Analysis: Tesco Plc
Appendices
Appendix I
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Financial Analysis: Tesco Plc
Appendix II
31
Financial Analysis: Tesco Plc
Appendix III
32
Financial Analysis: Tesco Plc
33
Appendix IV
Tesco Plc
Financial Ratios
2021
2020
2019
Return on capital employed
=6147/29799
=973/34397
=1320/28391
Operating profit margin
=1736/57887
=2518/64760
=2649/63911
Gross profit margin
=3965/57887
=4397/64760
=4696/63911
Return on ordinary shareholders funds
=6147/12325
=973/13275
=1320/14858
=10807/15721
=13164/17927
=12668/20680
=(108072069)/15721
=(131642433)/17927
=(126682617)/20680
=365/(53538/
((2069+2433)/2))
=365/(60180/
((2617+2433)/2))
=365/(59215/
((2617+2264)/2))
=365/(57887/
((1263+1396)/2))
=365/(64760/
((1396+1550)/2))
=365/(63911/
((1550+1415)/2))
=365/(53538/
((8399+8922)/2))
=365/(60180/
((8922+9131)/2))
=365/(59215/
((9131+8773)/2))
=57887/29799
=64760/34397
=63911/28391
=15670/45778
=17061/52302
=18959/49047
=1736/685
=2518/759
=2649/272
Profitability ratios
Liquidity ratios
Current ratio
Acid test ratio
Efficiency ratios
Average inventories turnover period
Average settlement period for receivables
Average settlement period for payables
Sales revenue to capital employed ratios
Gearing ratios
Gearing ratio
Interest coverage ratio
FM Essay specific requirements:
Introduction:
Introduce the background and general situation of the company, which should be combined with
financial management. (To have a citation, it must be an academic citation)
Question 1:
1. Download the company’s three major financial statements for 2019-2021 from the London
stock exchange platform, including: balance sheet, profit and loss statement, and cash flow
statement. Note that the three forms are consolidated statements.
2. Identify at least three stakeholders, such as the government, shareholders and suppliers. It is
necessary to specifically explain which data in the three major reports these three stakeholders
care about? Or say which data is critical to the three stakeholders and why.
Question 2:
The 12 ratios must be calculated, and a reference must be added for each ratio. Each ratio needs
to be compared, including the data of 2019, 2020, 2025, and 13 years, to analyze the reasons for
the data to become better, and to give suggestions to the company if the data becomes worse.
Question 3:
Simply explain the company’s operating results, the company is committed to long-term
development, and financing is essential. Financing distinguishes between external financing and
internal financing; whether external or internal financing distinguishes between long-term
financing and short-term financing, it is mentioned. In terms of the company’s operating
conditions, for example: if a company is profitable and rising year after year, it is relatively easy to
obtain external financing, and it is easy to obtain loans from banks and so on.
Question 4:
1、First of all, give the definition of Bbeyond Budget, distinguish the difference between BB and
traditional Budget, and briefly explain the application of BB in modern enterprises. (with
citations)
2、Identify and describe two possible budgeting techniques that a company could utilize. It is
necessary to specify the type of BB that can be referenced. (Define the generation, there must be
a reference)
3、Based on your company’s circumstances, conduct a critical evaluation of the selected BB
technologies to assess the suitability of both technologies for your company.
Conclusion:
Based on the comprehensive analysis of the four issues and the company’s future development
direction, constructive suggestions are put forward. To combine with the knowledge of Financial
Management, the position should be high.
Comprehensive requirements:
1、The financial statements must have been downloaded from the London Stock Exchange (LSE);
2、As long as it involves definitions, there must be academic references, including the reference
list in the article;
3、Express your own views and opinions based on the knowledge you have learned, and make
constructive suggestions for the company.
Important information
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affected by Exceptional Circumstances you may submit an Exceptional Circumstances
Affecting Assessment claim form by 7 days from the published assessment submission
deadline. If you do not submit by the deadline indicated without good reason your claim
will not be considered.
Please take proper precautions to safeguard your work and remember to make
backup copies of your data. The University provides all its students with storage
space on the University server and you should save and back up any work in
progress on this server on a regular basis. Computer failure and theft of your
equipment or storage media are not considered exceptional circumstances and
extensions cannot be granted for work lost for these reasons.
Page 1 of 11
Word count requirements
The word count for this assignment is 2,500 (10% rule applies) words.
You must state on the front of your assignment the number of words used and this will
be checked.
The main text for this assignment must be word-processed in Arial, font 12, double
spacing, minimum 2cm margins all around.
You must observe the word count specified in this assignment brief. The School has a
policy of accepting variations to the recommended word count of plus or minus 10%.
What does this mean for you?
Markers will mark your work up to the word count maximum plus 10% and then will
stop marking; therefore, all words which are in excess of the word count plus 10% will
not be marked.
Where your word count is more than 10% below that specified, it is likely that this will
result in a lack of analytical depth or relevant content, which will be reflected in the
mark assigned.
What is in the word count?
The word count includes:

the main text, including in-text reference citations and quotations.
The word count does not include:


Appendices. These may be used to include supporting data, which may be too
detailed or complex to include as a Table. They are not a device to incorporate
material, which would otherwise cause you to exceed the word limit.
Title page
Contents page
Abstract/executive summary
Tables, figures, legends
Reference lists
Acknowledgements
Page 2 of 11
Spring Term Assessment
Financial Management – Open assignment. This is worth 100% of your final mark
for the module
This assignment is an individual project aimed at assessing your ability to understand
key financial statements of a company, and its relevant performance, critically evaluate
funding options based on this performance and engage in a discussion about the
adoption of beyond budgeting techniques and processes.
Assessment preparation:
You should identify the Annual reports of a company that has the following
characteristics:
a. The company is listed in the London Stock Exchange (LSE);
b. The company belongs to the following super sectors: Technology, Health Care,
Real Estate, Automobiles and Parts, or Retailers.
Identify
your
preferred
company
form
the
LSE
website:
https://www.londonstockexchange.com/resources/trade-resources?tab=rules-andregulations. After you have identified a company of interest, engage in online research
to download and save the relevant annual reports of your company (including all
appropriate financial statements) from 2019 to 2021 from the LSE. That is, three years
of publicly available information.
Assessment details:
You are required to use the data found in the annual reports to compile a report that
provides insights on the topics covered in the questions below.
Question 1:
Describe the main areas of your annual reports and elaborate on what these reports
are communicating and to which key stakeholders. Identify at least three stakeholders
and justify the reason why each stakeholder might use these reports, reflecting your
company in particular. Then, present the main financial statements in a compiled form
as they appear in the annual reports. Make use of the Appendix to place these
statements.
Question 2:
Assess the financial performance of the company you selected in four key areas:
profitability, efficiency, liquidity and gearing. This assessment should be done over
three years. You should prepare the main ratios for each area as follows (12 ratios) in
total):
● Profitability: Return on Capital Employed (ROCE), Operating profit margin,
Gross profit margin and Return on Ordinary shareholders Funds (ROSF) ratios.
Page 3 of 11
● Efficiency: Average inventories turnover period, Average settlement period for
receivables, average settlement period for payables and Sales revenue to
capital employed ratios.
● Liquidity: Current and Acid test ratios.
● Gearing: Gearing and interest cover ratios
Comment on the profitability, efficiency, liquidity and gearing of your selected company
over the three years using these ratios. Your comments should justify changes (or
stability) of performance from 2019 to 2021 using a combination of ratios and other
income statement information.
Question 3:
You are now in a position where you know the most recent performance of your
company. As all companies, your company is interested in engaging in various
investment activities to expand, grow and survive in the long-term. However, to survive
in the long-term, they also need to settle their short-term finances. Based on your data
on question 1 and 2, identify and describe four possible funding options that your
company can use at the moment. Consider two sources: internal and external. Identify
two sources for each category, showing a good balance between short and long term
sources. Then, justify the suitability of these sources and the main reason why your
company can use each. Some critical evaluation is required here as well.
Question 4:
Your company is willing to engage in Beyond Budgeting (BB) and abandon their
problematic and laborious traditional budgets. You are an expert in the topic, and you
are required to evaluate this decision for the company.
You are required to:
1. Critically evaluate the effectiveness of BB in modern organisations.
2. Identify and describe two possible BB techniques that your company can utilise.
3. Assess the suitability of these two techniques for your company by critically
evaluating the selected BB techniques in light of your company.
Please see below for some suggested literature as a starting point. However, you
should search and identify further appropriate academic literature to support your
analysis in this question.
● Hope, J., & Fraser, R. (2003). Who needs budgets?. Harvard Business School.
● Bourmistrov, A., & Kaarbøe, K. (2013). From comfort to stretch zones: A field study
of two multinational companies applying “beyond budgeting” ideas. Management
accounting research, 24(3), 196-211.
● Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A
survey of North-American budgeting practice. Management accounting
research, 21(1), 56-75.
Page 4 of 11
Format and Mark Allocation
Your assignment should be written in the format below and should be capable of being
read as an independent and complete document. The following schedule sets out the
main areas to be examined in your report:
1. Provide a brief introduction (around 250 words) which (10%):
a. Introduces your company briefly;
b. Sets out the aim and purpose of the report;
2. Break your main body into parts as advised by the questions provided and
present your answers in parts (2,000 words):
a. Annual report analysis and financial statement presentation (15%)
b. Ratio analysis and comments (25%). To calculate the ratios in question
2, please refer to Appendix 1 of this document and use the table provided
as a presentation format.
c. Sources of finance analysis (20%)
d. Beyond Budgeting discussion and evaluation (25%)
3. Draw a brief conclusion (around 250 words) (5%).
4. References: please remember to include, in the references, the hyperlinks of all
the annual financial statements that you have used to calculate the ratios so we
can verify your calculations. In this regard, figures used in ratios must be clearly
cross referenced to the financial statements indicating company names, year,
and page numbers. Please remember that any other information from any
sources should be correctly cited
END OF ASSESSMENT TASK
Page 5 of 11
Appendix 1
Company name
Ratio
Name/Titl
e
Definition/
Operating
profit
margin

Ratio Calculations
sources
2019
2020
2021
Relevant
Financial
Statemen
t
Page
number
of annual
report
located
(year)
Operating
Profit/Sale
s revenue
300/800
280/900
310/850
SofFP
=0.38
=0.31
=0.36
Compan
y name
(2017), p.
120.




Formulae
Page 6 of 11


Example Feedback Form
Module code: MAN00012M
Module Title: Financial Management
Generic marking criteria
G1: Argument
G2: Structure
G3: Use of sources
G4: Referencing
G5: Presentation
Module specific learning outcomes relevant to this assessment
S1: Identify the principles of financial accounting, financial reporting, management accounting
and financial management.
S2: Understand and critically evaluate the basis of preparation of financial statements.
S3: Acquire an understanding of company performance through the analysis of accounts.
S4: Understand the nature and purpose of a range of management accounting techniques.
S5: Understand and evaluate alternative sources of finance available to organisations.
Comments on assessment criteria:
The marker will insert feedback based
on the generic marking criteria and
module specific learning outcomes.
Suggestions for improvement:
Date:
Marker:
Page 7 of 11
1st
70100
Generic Assessment
Criteria
ARGUMENT inc
CRITICALITY

Answers the
question set fully and
thoughtfully linking
their answer to
broader discussions in
the discipline and/or
developing new
perspectives on the
question

Articulates a
clear position on the
issue

Presents a
strong, focused
argument, well
supported by
impressive analysis
and evidence

The points being
made are clear and
convincing for the
reader throughout the
work
STRUCTURE

Has an engaging
introduction that
contextualizes the issue,
states the subject and the
focus of the work and line of
argument that will be taken

Has well-structured
paragraphs, that have one
main idea and strong
supporting material

Has good links
between paragraphs that
result in work that flows well

Has a powerfully
convincing conclusion
USE OF SOURCES inc.
QUOTATIONS

Understood and
integrated complex
and/or theoretically
sophisticated material
into their own work.

Demonstrated
excellent independent
research skills by
sourcing additional
scholarly material
relevant to topic

Has used direct
quotations only when
absolutely necessary

Paraphrased
sources well and
integrated points into
their own argument to
good critical effect rather
than describing position
of others
Page 1 of 11
REFERENCING
PRESENTATION

The reference
format (in-text citation
and Reference List) is
used accurately
throughout

Formatting of
Reference List correct

No spelling
or grammatical
errors

Appropriate
tone and use of
language

Correct
punctuation
2:1
60–
69

Answers the
question set clearly
and in sufficient detail

Articulates a
clear position on the
issue

Presents an
argument with relevant
analysis and
supporting evidence

The points being
made are clear to the
reader

Other
perspectives on the
issue are
acknowledged even if
criticality is not fully
present

Has a clear
introduction that states the
subject and purpose of the
work and line of argument
that will be taken

Has well-structured
paragraphs that have one
main idea and supporting
material

Links between
paragraphs are there but
could be stronger

Has a clear conclusion
which brings together the
main points and answers
the question

Demonstrates
understanding of
arguments and esp.
critiques found in source
material & integrated
them well into own
argument.

Has included
additional material into
their paper to strengthen
analysis or broaden
understanding

Good use of
paraphrasing

Direct quotations
used, but linked well to
points being made
Page 2 of 11

The reference
format (in-text citation
and Reference List) is
used accurately except for a few minor
errors of formatting

One or two
minor spelling and
grammatical errors

Appropriate
tone and use of
language

Correct
punctuation

Mostly answers
the question set–
some irrelevance

Presents a basic
argument with some
analysis but
predominantly
contains description /
summary and little or
no criticality

The points being
made can be followed
with some effort

Has an introduction
that states the subject and
argument of the work, but is
not totally clear

Has separate
paragraphs that have one
main idea and some
supporting material

Some links between
paragraphs work

Has a conclusion
which repeats the main
points

Demonstrates
understanding of the
arguments used in
source material

Has used and
integrated the
recommended reading
well.

Tendency to be
over-reliant on direct
quotations rather than
paraphrasing, breaking
the flow of their writing
and argument.

The reference
format (in-text citation
and/or Reference List)
has consistent and/or
frequent errors
⮚ Addresses the
question but in a
3rd
roundabout way
40-49
and/or goes off on a
tangent
⮚ The argument is not
clear with more
summary and “telling
the story” than
analysis
⮚ The point of the work
becomes lost in
places
⮚ It is difficult to discern the
focus of the work in the
introduction
⮚ Has poor paragraph
development – main ideas
are left undeveloped or
there is more than one
main idea in paragraphs
⮚ Links between
paragraphs are absent or
not clearly stated
⮚ Has a conclusion with
little detail / unclear
⮚ Basic understanding of
source material
⮚ Insufficient sources
used, with the effect of
being over-reliant on a
few or poor quality
sources.
⮚ Frequent use of direct
quotations to the point
of distraction for the
reader
⮚ The reference
⮚ Uses language
format (in-text
which
citation and
occasionally
Reference List) is
gets in the way
not Harvard and/or is
of meaning or is
used inaccurately
not appropriate
to the audience
⮚ Marker not confident
that secondary
⮚ Frequent
citations are
spelling and
accurately presented
grammatical
errors
2:2
5059
Page 3 of 11

Mostly
accurate spelling
and grammar
usage but needs
careful
proofreading – a
few careless
errors

Shows a
reasonable grasp
of academic style
and vocabulary
⮚ Fails to answer the
question set
CF
⮚ No evidence of an
30-39
argument or any use
of evidence
⮚ The point of the
entire work is
confused
⮚ Fragments of
disconnected
material, no one
perspective
established
⮚ Has an introduction which
is confused or serves little
purpose for the reader
⮚ Has little sense of
paragraphing –
paragraphs are too long
or too short – main ideas
and supporting material
are confused
⮚ Has a conclusion that
does not round the work
off but raises more issues
⮚ Has not demonstrated
sufficient grasp of
source material
⮚ Poor judgment in
selecting sources –
poor quality and/or
non-scholarly
⮚ Work is dominated by
direct quotations with
short passages of
commentary in
between
⮚ The reference
⮚ Uses language
format (in-text
which often gets
citation and
in the way of
Reference List) is
meaning and/or
not Harvard and/or is
is entirely
used inaccurately
inappropriate for
an academic
⮚ Marker not confident
piece of work
that secondary
citations are
⮚ Frequent
accurately presented
spelling and
grammatical
⮚ Missing items from
errors
the Reference List
⮚ Does not address
the topic or answer
the question
⮚ No argument or
evidence provided
⮚ There does seem to
be any real point to
the work or it
answers an entirely
unrelated question
⮚ No introduction in the
accepted sense
⮚ Little attempt to organise
into paragraphs – very
confused
⮚ No conclusion
⮚ Little evidence of
understanding source
material
⮚ Poor judgment in
selecting sources –
poor quality and/or
non-scholarly
⮚ Reliant on Wikipedia or
lecture notes for
construction of work
⮚ Work is almost entirely
made up by direct
quotations or bullet
points
⮚ The reference format ⮚ Sentences that
(in-text citation and
cannot be
Reference List) is
understood
not Harvard and/or is ⮚ Student should
used inaccurately
be counseled re
⮚ Marker not confident
use of academic
that secondary
English and
citations are
referred for
accurately presented
specialist help.
⮚ Missing items from
the Reference List
F
0-29
Page 4 of 11
FM Workshop 2 solutions
Question 1
Cash is not always equal to profit because the income statement which generates the profit
figure is prepared on the accrual basis. This means that some revenues giving rise to the profit
figure may not have been received in cash. Likewise, some of the expenses considered before
declaring the profit figure may not have been paid. Moreover, some non-cash items such as
depreciation, and bad debt affect the profit figure but not the cash balance.
Question 2
Ratio
2014
2013
(410/3150+400)*100
(215/820+100)*100
=11.55%
=23.37%
ROSF OR ROE
(270/3150)*100
(100/820)*100
=PAT/(Capital+ Reserves)
=8.57%
=12.20%
Gross profit margin
(1000/3200)*100
(400/1000)*100
=(GP/Sales) *100
=31.25%
=40.00%
Net profit margin
(270/3200)*100
(100/1000)*100
=(PAT/Sales) *100
=8.4%
=10%
Current ratio
3132/780
827/335
=CA/CL
=4.02 times
=2.47 times
Profitability:
ROCE
=PBT/(Capital+Reserves+Debentures)
1
Acid test
2852/780
707/335
=(CA-Stock)/CL
=3.66 times
=2.11 times
Average settlement period for debtors
(1920/3200) * 365
(307/1000)* 365
=(Debtors/Sales) *365
=219 days
=112 days
Average settlement period for creditors
(440/2200) *365
(190/600)*365
=(Creditors/Purchases) *365
=73 days
=116 days
Average stock turnover period
Average inventory
= Average inventory/ cost of sales *365
=(200+280)/2= 240
(150+200)/2= 175
Average inventory
= (opening+ closing inventory)/2
240/2200 x365
[If opening and closing inventories are not
available, take only the closing one)
= 40 days
175/600 x365
Gearing ratio
400/(400+3150)*100
100/(100+820)*100
=Debt/(Debt+Equity)*100
11.27%
10.87%
PE ratio
EPS
EPS
=Market value/EPS
270/2800
100/700
=£0.096 per share
=£0.143 per share
2.00/0.096
1.80/0.143
=20.83
=12.59
= 106 days
Analysis:
The profitability ratios exhibited negative changes from 2013 to 2014. Gross profit has been
decreased by 9.75% while the net profit margin is down by 1.6% in 2014. ROCE was almost halves
in 2014 compared to 2013 and around 1/3rd of ROE in 2013 was slashed in 2014. While in 2014,
2
the sales revenue has increased over 3 times of 2013, higher cost of sales, administrative, and
selling and distribution costs increased rapidly (between 3 to 4 times) in 2014. Lower profit before
income and tax and increased equity in 2014 had negative impact that implies that the company
could not use the new equity as efficiently as it did in 2013. However, the falling rate, around
1/5th of ROSF or ROE (10% to 8.4%) was relatively slower than other ratio that partially explained
by the higher interest expenses and lower tax burden in 2014. The efficiency ratios may provide
further insights on the extent of effective operations.
The average settlement period for debtors in 2014 was increased that perhaps explain the
company’s drive to increase sales by allowing debtors to take credit for longer term and 66 days
reduction in average stock turnover period in 2014, compared to 2013. The quicker settlement
period for creditors in 2014 helped the business to gain some market reputation; however, the
combined effect of longer debtors’ days and shorter creditors’ days probably create pressure on
the business’s liquidity that deterred its capacity to invest its money somewhere more
productive. The business should seriously consider the generous settlement period for debtors
as they are taking more than 7 months to pay off their debts to the business.
The current ratio and acid test ratio both show much improvement in 2014 than 2013. Both years
show the business maintain a healthy liquidity ratio though the business should consider the
industry trend, trade barriers, natural disaster etc. and whether they need to maintain this high
liquidity. Frame Ltd can also invest some of its cash to its long-term asset to improve the
profitability.
Gearing ratio shows the company maintains a low level of gearing over the years indicating it
intends to maintain a low-risk profile. This has been increased in 2014 than 2013 with the issue
of new shares and debentures. Further computation of interest cover ratio may show how
capable the company was to cover the interest.
3
The earnings per share (EPS) in 2014 was dropped by 5p per share in 2014, which is almost a third
of 2013. This can be explained by the lower profit and higher number of shares issued in 2014.
Due to the higher market price of shares which shows investors’ confidence and lower EPS on
Frame Ltd, price-earnings ratio was increased in 2014 by a third compared to 2013. However, the
managers should maintain a cautious approach that the market’s confidence on them for future
outlook may change.
4
FM Workshop 3 Answers
Before attempting the workshop task, you should be able to distinguish between the
performance management and control function of budgets. You should also be able to
recognise the purpose of management control for organisations.
NB: The answers in the workshop questions are indicative, showing the relevant place in the
paper where you can find them, as well as offering some further explanations. However, you
need to enrich these answers based on our discussion in the workshop.
Workshop task: You are required to read the case study of Oilco, by Østergren & Stensaker,
2011) and answer the following questions:
1. According to the “Consortium for Advanced Manufacturing” “Beyond Budgeting
Roundtable”, what are the main principles of Beyond Budgeting?
According to these bodies, there are two categories of principles: the leadership and the
process principle.
a) Leadership principles: focus on customer outcomes, organise as a network of lean
accountable teams, enable everyone to act and think like a leader, give teams the
freedom and capability to act, govern through a few clear values, goals and boundaries,
and finally, promote open-information self-management.
In other words, the leadership principle system instils a more decentralised and
accountability-oriented system of thinking. This thinking aims at increasing organisational
flexibility when setting targets, by focusing on customer outcomes such as customer
satisfaction, customer retention or customer quality. In other words, the BB instils an analysis
of the company planning, through the inclusion of non-financial factors as well, to reduce the
short-terminism of financial targets. However, they put the customer at the centre of this
system, as the main beneficiary of an organisation. After all, it is customers that keep
businesses alive. For BB to be effective, freedom and autonomy should be given to
organisational members to act and also position their work to be in line with customer needs.
In doing so, they need to adhere to organisational values, rather than strict rules and
regulations, and also use the element of transparency in their work to exude accountability,
full sharing of information and also take corrective action if desired outcomes are not
achieved. That way, organisational members will have more inclusion in the business, and as
a result more motivation, as their actions are going to be visible to the organisation. Moreover,
through BB, they should be able to position themselves and their actions to see how these
two are connected with the success of their organisation, thus having a sense of belonging
and higher understanding of the organisation (and increased motivation as a result). These
principles aim at reducing compartmentalisation of the business and dysfunctional
behaviours, which was the case through budgeting, and also increase positive organisational
behaviours and goal congruence.
b) Process principles: set relative goals for continuous improvement, rewards should be
shared, success based on relative performance, planning should be a continuous and
inclusive process, controls should be based on relative indicators, resources should be
available as needed, and finally, coordinate interactions dynamically.
These principles adhere to the implementation of BB in practice, by delineating how planning,
target setting, and rewards should be accomplished. In practice, planning should be done,
and performance targets should be set on a relative basis to reflect the continuous changes
in customers, markets, competition and in general, the external environment of the
organisation. Performance of relevant areas should also be measured according to those
1
targets and not for fixed predetermined targets. All organisational parts should work in
connection with each other with a shared effort to achieve those targets and claim the
rewards for meeting these relative targets. For resource allocation, BB exudes a needed-toallocate basis. Resources are allocated to the most key areas of the business as needed to
meet their targets and they are accountable for these resources. That is the opposite of
budgets, where resources were given on a justification basis using zero-budgets (power and
authority were also used to influence this allocation). Finally, the targets should be set using
key areas of concern for the business i.e., competitor KPIs. In other words, in practice, BB
instils a planning and performance measurement system that is capable of incorporating
external environment changes, by bringing the organisation in line and also measuring
performance on a relative basis. Through BB, the business life is wrapped around key events
in its external environment to make sure they survive accordingly.
2. What were the issues of Oilco’s traditional budgets and why did the company adopt
Beyond Budgeting?
In order to answer this question better, we need to first refer to the characteristics of this
organisation. This will help us understand why budgets are no longer useful and why BB was
adopted. Oilco is a large oil and energy company with around 30,000 employees worldwide.
It is partly owned by the Norwegian State and its main activities include exploration and
production of oil, gas, and other energy sources. So, Oilco is an international energy provider.
Therefore, Oilco operates in an international setting in a very volatile industry, that of the
energy provision industry. They also require high levels of liquidity; they need to attend to
their technological and financial risks associated with this industry and they need to have
extensive collaborations with their suppliers and contractors. We are therefore talking about
a company that is operating in a very volatile, constantly changing and risky industry.
Therefore, budgets are not helpful for them since they cannot make sense of this volatile
environment. That was the main, general, reason why they adopted BB techniques.
Before the BB adoption, Oilco was using traditional budgets. Performance measurement was
mainly done by the finance function of the company and was mainly associated with financial
performance targets. More non-financial factors were managed by the HR function. What the
company had, therefore, was a compartmentalised performance management system where
targets were met for different purposes and not aligned with each other. As the paper
indicates “the organisation was characterised by ambiguous goals that were at times
conflicting because they came from different divisions. Therefore, it was this alignment that
the company required by introducing BB. The old budgets did not bring the organisation
together into meeting their mission and vision. Under BB, they were hoping this would change.
At the operational level, budgeting was setting targets based on forecasts, which were easily
out of date, hence the conflict between target setting and forecasting. Oilco had also noticed
that its managers were engaging in gaming the budget and using influence to get resources
allocated to their area of responsibility. Moreover, the company had a lot of extensive and
expensive offshore activities, which meant that the budgets were not reflecting reality in
these ventures. Another issue was that managers, through relying on the budget targets,
believed falsely that they could manage the future. However, that was not the case, as the
company environment was rapidly changing. Finally, the budgeting process was very timeconsuming and expensive and was required to be abolished. For those reasons, Oilco turned
to BB.
3. What were the main principles of Beyond Budgeting in Oilco and what processes were
adopted to implement those principles in practice?
2
Oilco’s BB implementation was based on 5 principles:
a) Performance should ultimately be about outperforming peers.
b) Employees and managers should do the right thing in the actual situation guided by
the Oilco Booklet “Ambition to action”, a set of decision criteria and authorities, and
sound business judgement BB around core values).
c) Resources should be available or allocated case by case.
d) Business follow-up should be forward-looking and action oriented.
e) Performance evaluation should be a holistic assessment of delivery and behaviour.
To implement those principles into practice, three separate processes were devised: target
setting, planning and resource allocation.
Target setting: targets were set outside the planning process to focus only on targets and not
how to reach them or the necessary resources. These targets were addressing where the
company is headed and reflected into targets related to external expectations and competitor
performance. That way, targets became tied to the ambitions of the managers, and by
extension, the business.
Planning process: After targets were set, the planning process was there to delineate how to
reach these ambitious targets. Plans are developed based on business unit (or divisional)
plans and the goal is to be action-oriented, but realistic and based on expected consequences.
The planning process was, where required, either top-down or bottom-up delineating the fact
that a level of decentralisation was required in the planning process. Once the targets were
set and the plan was complete, all strategic goals and actions were set, and distributed to the
relevant responsibility centres. The company wanted to increase learning and growth of the
relevant areas through this process. Peer pressure from this transparency was also hoped to
increase performance and goal congruence.
Allocation of resources process: Dynamic and continuous resource allocation where and when
needed. Here, the aim was to allocate resources to the most beneficial to the organisation,
overall, projects. That is why we have a project selection setting and approval of funds here.
4. Outline the practical elements of the BB implementation in Oilco by drawing examples
from both divisions. Your analysis should reflect the practical considerations for target
setting, planning and resource allocation changes due to BB.
Implementing BB in the Global Exploration division, the operations part of the company:
In both divisions (for question 4 and question 5 respectively), the processes of target setting,
planning and allocating resources were affected accordingly with BB. For that reason, our
attention will focus on changes in these areas for both questions.
Target setting: now targets were set on the outside-in fashion, compared to the bottom-up
process. With budgets, targets were set with front-line managers. Now budgets are set based
on market opportunities and competitor movements, and targets depend on the market and
competition action. Moreover, because targets are now set for the corporation as a whole
and not within sub-units, relevant managers and employees have a sense of the whole
organisational strategy and achievement.
Planning: Relative criteria were used to measure performance. Previously, fixed targets were
used to measure performance which meant that meeting those targets was necessary,
irrespective if they created value or not. With BB, performance was measured in relative
targets, meaning that targets are not fixed anymore, and they are relative to if they are
creating value or not. Relativity means they are flexible to incorporate the creation of value.
For example, a lower cost is preferable as a target, however, that target is flexible if quality is
3
undermined. Moreover, plans are now used to meet the set targets based on the realistic
conditions and forecast of the division’s operations. With budgets, plans were set on how to
meet the fixed, predetermined targets. Now, plans are set to meet relative targets and these
plans are changing, through the form of corrective actions, by reflecting actual circumstances
that may arise during operations. Planning is now more realistic and flexible to reflect the
external environment and issues that may arise in operations.
Resource allocation: Criteria set for projects and dynamic resource allocation. With BB,
projects are assessed based on both quantitative (e.g., NPV) and qualitative (e.g., numbers
and quality of human resources) measures to evaluate resource allocation to projects.
Projects are not assessed based on budget constraints. That way, projects are allocated
resources based on the creativity and innovation of managers, the analysis of their benefits
to the corporation and not strictly on monetary terms.
Implementing BB in the Global Business Services division, the service provider part of the
company:
Target setting: attention was shifted away from mere financial targets to include a variety of
financial and non-financial targets, for example, the level of service. These targets are also
reflecting key strategic objectives of the organisation as a whole. Similar to the operations
division before, these targets are now set from top-level managers, because they can make
sense of the corporate strategies better. However, this is the only part of centralisation in
target setting. When we are talking about meeting those targets, the actions to be taken are
at the discretion of the relevant managers who are given those targets. At the same time,
these managers may restructure their targets, and break them down into sub-targets, to meet
their original KPI set from the top.
Planning: Because targets are not more realistic and relative, the planning focus of this
division is now shifted from controlling costs to actually controlling their activities, in a
proactive manner. In other words, the division is now focusing on forecasting situations and
operations and adjusting their plans based on that, instead of waiting for things to happen
and then taking corrective action. This requires an analysis of the market and making sure
that actions are taken before the services are provided by this division to other parts of the
business.
Resource allocation: The resource allocation was made based on aggregate numbers now,
that reflected the provision of a whole service instead of breaking down the elements of the
service and creating a budget and resource allocation for each and every one of them. That
created less tedious and time-consuming processes. Moreover, resources were allocated
based on a “when-needed” throughout the year, instead of once every year. This meant that
the division was flexible in using resources as long as they reflected a proper judgement,
creativity of ideas in using these resources and also proper connection to value creation.
Employees were also empowered here because they offered input as to how to use resources
more effectively through this allocation. As a result “decisions can be made in a more timely
manner, by incorporating real-time information, and making action plans decisions more
flexible”. This brings about the most effective use of resources to be allocated in an effective
manner and ensures the organisation is not falling behind in resources because of poor
resource management.
4
General Comment:
It is evident from both divisions that the adoption of BB brought about a lot of changes in the
way things were done in the business. Mindsets were changed, a shift in focus was
implemented to ensure the managers and employees are focusing on value creation instead
of just cutting costs and meeting targets. Employees were empowered, the organisational
parts were aligned with each other and decisions in the organisations were based on realistic,
real-time situations reflecting changes in the external environment of the organisation.
5. Was the implementation of BB to Oilco completely unproblematic? Outline some
issues of BB that the authors identified and discuss them in light of the company.
The BB in Oilco did not come without issues. After all, BB is a process of restructuring
organisational processes and shifting organisational members’ mindsets.
The paper shows two types of issues. Ones that actually occurred in the company and the
ones the authors identify as potential problems. Both are useful and you need to distinguish
between both. You can use them in your assessment as well. Some indicative examples from
Oilco are the following:
a) As far as target setting was concerned, targets were set based on external elements.
Budgeting was also set on internal targets. Therefore, targets were still instilling a level
of constraint to the organisation. Moreover, since targets were external with BB, it
was not certain that they were objective, as they were based on how the managers
were interpreting market and competitor signals.
b) Another form of gaming was now imminent for managers: project gaming. Similar to
budget gaming, managers could as easily game the projects to get theirs passed
through the screening process and get the resources allocated.
c) Some employees did not like the transparency imposed upon them with BB, because
they felt it would point out negative achievements. They are also now more pressured
to produce results.
d) The KPIs used for strategy innovation (corrective action in other words) were not
reflecting dialog and interaction between departments. That has the potential risk of
the strategy not being implemented well, especially the overall strategy, when the
external environment changes rapidly. In other words, managers and employees in
areas of responsibility are focusing a lot on their KPIs as much as overlook their effect
on other areas of the business, thus implementing irrelevant strategies.
e) Controllers of the business under BB are not faced with controlling financial targets
anymore, but with controlling for the general strategy and strategic implementation
of the business. That requires additional skill that these controllers might not have.
f) Power shift: from division area power to project power. Now power rests with good
projects and the relevant managers and employees. This shift in power might not be
welcomed by organisational members. Another example, in the GED Division: The top
management level of the division now sets the relative targets and lower-level
managers, and employees feel left out, as they do not have budget responsibility and
no participation in the management team. They felt their influence in the planning
process was reduced.
General Paper comment: This paper demonstrates the ideas and philosophy/principles of
Beyond Budgeting, and how these were applied in an international organisation. Through
analysing the implementation of BB ideas and principles in two relatively different divisions,
5
the paper demonstrates the practical changes a company is undergoing by adopting beyond
budgeting. The paper also shows that BB is not perfect, and that BB has some issues. The
issues identified are indicative and can apply to any context and you can use every aspect of
the paper to help you with your assessment.
6
FM Workshop 4 Answers
Question 1
The cost of capital is the required rate of return that a shareholder requires, in order to be
attracted and invest in a business (or accept a business investment for that matter, that is
using this investor’s money). This is affected by the interest rate of alternative investments,
the inflation and the risk of projects. The riskier an investment is, the higher the cost of capital,
because the investors would like to be compensated more for putting their money into such
an investment.
In the NPV, we use this cost of capital required by shareholders to bring future outflows into
the present terms and compare them with the initial outlay of an investment. That way, we
consider the cost of capital in our decision and we find out if an investment is actually giving
back a positive wealth to the shareholders, by incorporating the return they require. With
such a return, or cost of capital, is it worth investing using the NPV?
Question 2
NPV is an appraisal method that shows how much money we can receive by an investment
now, if we compare the investment cost with the future cash inflows of this investments,
translated into present terms, using the cost of capital. In other words, NPV shows, in present
terms, if an investment will give shareholders increased wealth in the future, as this wealth is
translated to money now, using the appropriate cost of capital required by the same investors.
In general, investments with high NPV, or zero, should be accepted, as they actually generate
positive wealth for investors. If we need to choose between alternatives, the one with the
higher NPV is preferred.
The NPV is better than ARR or PP because it incorporates the time value of money. Usually,
money value changes in the future and it might not be the same as we have now. Therefore,
for an investment, I need to bring the future value of an inflow, to the present, to assess and
compare investments of the same value. That is because I need to compare cash flows that
have the same value irrespective of fluctuation and risk. That is why the NPV is using the cost
of capital as a discount rate to bring future inflows into present terms, so as to see the possible
aggregate benefit of an investment in the same terms, and make a decision based on those
terms. That is also the reason why the NPV is sensitive to the time value of money, because
it actually considers it and in fact, negates it, to assess an investment. NPV is actually affected
by the time value of money in that sense.
Question 3
The young entrepreneur can turn to a business angel to ask for assistance, and eventually
finances for such an idea. The point here is that this endeavour is risky as the market for
home-gym equipment has been very competitive over the years, especially after the
pandemic where everyone is seeking ideas to workout at home. Therefore, a venture
capitalist would not be attracted to such an idea. However, a business angel might be
interested as they can have the mindset to support it and also forecast its potential. Moreover,
the new entrepreneur will be benefited by the already existing skills, expertise and network
of the angel to start developing and marketing the product. Of course, it will depend on the
product, however, the angel might be able to help even with identifying a specific market for
the product.
Your analysis here should start with the above statement and be enhanced by whatever ideas
we will discuss in the workshop.
Question 4
Apple is a huge corporation with large international networks, a lot of available funds and a
vast amount of assets, even non-tangible assets to secure a big loan for research and
development, marketing and producing this product. Retained earnings can be used as well,
in combination with the loan. Moreover, the information that Apple is willing to engage in the
automobile industry, will be available at some point to the stock exchange market and might
attract potential investors who will buy Apple’s share, raising its prices and create more
available funds to be put into the car project.
Your analysis here should start with the above statement and be enhanced by whatever ideas
we will discuss in the workshop. Make sure you justify your answers as we did in the workshop.
Question 5
a) At BEP, profit = 0 i.e. Contribution = Fixed cost
Based on a demand of 100 units, fixed cost = 20 x 100 = £2000
Contribution per unit = Selling price per unit – Variable price per unit
= 150 – (50 + 20 + 6 + 16)
= 150 – 92 = £58
BEP = Total fixed cost/Contribution per unit = 2000/58 = 35 units
b) Margin of safety
= [(Budgeted sales – BEP sales)/Budgeted sales] x 100
= [(150 (100 – 35)) / (150 x 100)] x 100
= 65%
Current sales need to fall by 65% before we start making a
loss.
c)
X
150
Y
120
Z
110
50
20
6
16
92
24
30
12
24
90
10
40
6
32
88
Contribution per unit
Material consumed per unit
Contribution per kilo
Ranking
58
4.17
13.91
III
30
2.00
15
II
22
0.83
26.5
I
No. of units to be produced
Material consumed (kg)
28.00
116.6
150
300
100
83.33
Selling price per unit
Less: Variable cost
Materials
Skilled labour
Unskilled labour
Variable overheads
TOTAL
Contribution
Less: Share of fixed cost
1624
2000
4500
4500
2200
4000
8324
10500
-2179
Even with the most profitable allocation of resources, the company is making a loss. The
company can increase profitability by producing more products for product Z, the most
profitable one. How? By allocating resources to product Z from the least profitable product,
product X.

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