AF4S31 Strategic Financial Management Assessment Answer

Task A

Budget

A budget is a thorough financial plan that details the predicted methods for achieving the financial and operational objectives of a firm. A budget is referred to as a "budget" in this article.  In order to carry out effective financial planning, budgeting is an activity that must first be carried out.  Even the most unassuming business stands to benefit from the formulation of an all-encompassing, well-written plan to direct its future activities, and this can be accomplished with relatively little effort (Nosov et al. 2021).

Advantages

A budget provides a strategic framework for allocating financial resources and determining appropriate courses of action. This stimulus encourages the organization or individual to deliberate their financial limitations. Consequently, evaluating their level of expertise and making well-informed decisions are advantageous (Wadesango et al. 2019). The implementation of a budget enables individuals to evaluate the established objectives and strategies, thereby facilitating the determination of how future financial resources should be allocated.  When creating a budget, it is essential for management to take into account the company's raison d'être and the assumptions it makes about the business environment. Through periodic reconsideration of these challenges, the organization has the opportunity to generate alternative hypotheses and subsequently alter its operational methods.

A well-organized budget should display the amount of cash that is received as well as the amount that is required to maintain business operations. This information is utilized by the treasurer in order to plan for and make accurate projections regarding the company's cash requirements. Cash is the form in which the money is distributed.

When there is just a limited amount of money available for fixed assets and working capital, management has to make difficult choices in order to invest the money in the areas that will yield the maximum return. A company is able to evaluate the numerous assets it holds as well as the returns they may generate by generating a budget, which enables the company to select the investments that will provide the largest return and prioritize those investments.

Businesses and individuals can make the most of their financial resources by ensuring that money is dispersed in the most effective manner feasible. This necessitates the application of strategic resource allocation in order to achieve maximum output and monetary return. Implementing a budget, which can create competition between various businesses and individuals, has several benefits, one of which is the enhancement of one's ability to maintain a detailed awareness of one's own financial condition. Because of this, they are able to provide precise forecasts regarding the procedures and expenses that are linked with the generation of income.

The process of creating a budget is characterized by a high level of organization and structure, which facilitates the examination and execution of strategic objectives and operational decisions for both businesses and individuals. A budget's primary purpose is to prevent resource and financial waste or misallocation by establishing a well-organized framework that facilitates their effective application (Nosov et al. 2021).

Disadvantages

A budget can be a time-consuming process, particularly if the workplace is disorganized and the budget needs to be modified multiple times. In this scenario, the amount of time required might increase significantly. A technique of budgeting that is well-structured, familiarity with the process among staff members, and the usage of budgeting software by the organization can each contribute to a reduction in the amount of time required to create a budget. Because it involves a significant number of employees, participatory budgeting may require a significant amount of additional time. It's possible that the guidelines for budgeting stipulate that each department gets a set portion of the overhead costs. This could lead to disagreements among the administrators of the various departments on the equitable distribution of the costs. In most cases, a budget will concentrate on the manner in which money will be spent on certain activities as well as the anticipated outcomes of commercial dealings. They do not discuss matters that are more up to interpretation, such as the quality of the products or services that the customers receive. These additional concerns may be factored into the budget, but in practice, this is not done very often. When developing the yearly budget, the top management team of an organization may come to the conclusion that the organization should direct all of its efforts on achieving the objectives outlined in the budget for the next year. If there is a shift in the way the market operates at any point during the current fiscal year, this could become an issue. In this situation, the corporation would be better off if it changed its plans based on how the market is changing rather than sticking to a strict budget, because the market is constantly shifting.

Task B

The cash budget is as follows:-

The above table reflects that the cash budget is on the higher side. The receipts are more than the expenses. The sales have been estimated to increase by 10 percent in every month. The term "cash budget" refers to the overall budget that accounts for all cash coming in and going out of the business. The split of time into periods should be kept to a minimum in order to facilitate effective management and enable timely identification of possible problems resulting from variations in cash flow. One of the goals of this budget is to pro-actively forecast the timing of cash inflows and outflows. This provides a firm with the ability to limit the danger of depleting its cash position by disbursing more cash than it obtains. It is common practice to support the provision of timely feedback and notice to management regarding immediate cash requirements by designing the cash flow budget in such a way that it can do so. This is accomplished by concentrating on the data collected on a monthly or quarterly basis.

Task C

Many people believe that effectively allocating money is the single most essential objective of the contemporary financial system. When deciding whether or not to invest in long-term initiatives, it is necessary to give careful thought to a number of different considerations. These are the kinds of decisions that are extremely important for businesses to make because they can have an effect on the company's growth, profitability, and risk profile, all of which contribute to the company's overall size and value. Investment appraisal, which is also known as capital budgeting, is a method that is used to evaluate the viability of a project by determining whether or not the rate of return on the capital spent is sufficient for the project. This evaluation could be done either in absolute terms or in relation to the returns that could be made from pursuing alternative business opportunities. An examination of historical performance is another method for determining when the optimal moment is to invest (Arjunan 2022).

In order for analysts to make an educated conclusion regarding the possible return on an investment, they require a comprehensive evaluation methodology. It is essential to evaluate the benefits and drawbacks of each potential approach or methodology for satisfying this criterion, and to adapt at least some of these approaches to the requirements of the project that is currently being worked on. In order to provide trustworthy evaluations of potential investment avenues, the analyst needs to possess a sufficient level of expertise. Because there is such a wide array of frameworks and approaches to choose from when analyzing investments, it stands to reason that various investors will employ distinctive collections of standards and traits while conducting their analyses.

The Net Present Value method is all about discounting a stream of predicted future cash flows down to their present value in order to calculate a net present value. When cash is flowing into the company rather than leaving it, this is considered a positive cash flow. When cash is flowing out of the company, this is considered a negative cash flow. Because of when the initial investment was made, its nominal value and its current value are same. This is due to the fact that the timing of the initial investment. At the conclusion of the evaluation period, cash flow may be comprised of sales revenues or the value of an asset that has been depreciated. The cash flows into and out of the investment throughout the course of its existence are subjected to discounting so that their present values can be determined.

The NPV is the value that can be calculated by discounting future cash outflows and present cash inflows. The Net Present Value might also be negative if the present value of cash outflows exceeds the current value of cash inflows. The analysis' results will be significantly impacted by the discount rate. It's possible that the discount rate is reflective of a combination of company-wide objectives. It may stand for the price of employing internal resources, the interest on loans used to fund capital efforts, or some other monetary-related factor. The cost of drawing on someone else's assets is another possible interpretation. This number was brought up before because it may stand in for the bare minimum rate of return required to entice investors from outside the company in the capital project (Maheshwari, Maheshwari and Maheshwari 2021).

Using a modified version of the Net Present Value calculation approach, the Profitability Index makes comparisons across different kinds of endeavors. It is possible to utilize the Profitability Index to compute the rate of return on a specific investment; however, it is unable to compute the entire cash return on a capital outlay. To determine the value of the index, first subtract the net cash inflow from the net cash outflow after taking into account any discounts. It is possible to use something called the Profitability Index, which calculates the ratio of cash inflows to cash outflows, in order to compare projects that have very different levels of cash flow.

The ways to planning for capital expenditures that were discussed each have their own set of benefits and drawbacks. A straightforward and efficient method for gauging an investment's liquidity is the payback period, which is measured in years. However, throughout the course of time, the value of money might change, and this strategy ignores the relevance of cash flows recognized after the repayment period has concluded. The time value of money is not taken into consideration while using the Discounted Payback Period approach, despite the fact that the method takes into account cash flows received after the payback period has ended. According to Liu and 2022, "Net Value" is a way for assessing the worth, in today's dollars, of the potential earnings that will be earned by an investment.

Despite this, it is not an extremely helpful tool for appraising the value of investments of varying amounts. The Net Present Value analysis has been refined a little bit in order to create the Profitability Index. It is utilized in the process of determining how much cash is made in relation to the amount of money spent. This metric is essential since it makes it simpler to evaluate different kinds of initiatives. However, many industry professionals believe that return on investment is the best metric to use when evaluating the performance of an investment. Calculating the Internal Rate of Return is the first step towards accomplishing this goal. However, there is a possibility that the business will not be able to reinvest its internal cash flows at the Internal Rate of Return. Therefore, it is doable to conduct a study using a modified internal rate of return (Pan, Wei and Zeng 2022).

References

Arjunan, K., 2022. A New Method to Estimate NPV and IRR from the Capital Amortization Schedule and the Advantages of the New Method. Australasian Accounting, Business and Finance Journal, 16(6), pp.23-44.

Liu, Y., 2022, July. Evaluation Method Based on NPV and IRR. In 2022 2nd International Conference on Enterprise Management and Economic Development (ICEMED 2022) (pp. 816-820). Atlantis Press.

Maheshwari, S.N., Maheshwari, S.K. and Maheshwari, M.S.K., 2021. Principles of Management Accounting. Sultan Chand & Sons.

Nosov, A., Tagirova, O., Fedotova, M. and Novichkova, O., 2021. Forecasting as a way to reduce the risks of a cash flow deficit in agricultural organizations. Scientific Papers. Series: Management, Economic Engineering and Rural Development, 21(2), pp.417-424.

Pan, Y., Wei, K. and Zeng, X., 2022, March. Comparison of NPV and IRR and conflict resolution. In 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022) (pp. 1556-1560). Atlantis Press.

Qudratovich, E.A., 2022. Basis of Efficient Cash Flow Management of the Enterprise. International Journal on Economics, Finance and Sustainable Development, 4(12), pp.5-11.

Wadesango, N., Tinarwo, N., Sitcha, L. and Machingambi, S., 2019. The impact of cash flow management on the profitability and sustainability of small to medium sized enterprises.

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