Understand The Planning, Budgeting And Forecasting Concepts Of Finance Management - Accounting and Finance Assignment Help

Assignment Task

ASSIGNMENT BRIEF 

The maximum expected word count is 4500 words for the given tasks below excluding references (any additional text will be discarded for evaluation).

 

LO 1: Understand the planning, budgeting and forecasting concepts of finance management

“A budget is a short-term plan of how an organization quantifies the operational activities required to achieve its long-term strategy.

It is a common mistake to assume that automation alone will bring necessary budget process improvements to an organization. Automating an inefficient or unintelligent budget process just makes the same process faster, not better.

The reality is traditional practices that govern budgeting, planning, forecasting, reporting and risk management are becoming obsolete in the context of a fast-paced digital marketplace and a volatile and uncertain global economy. Long established budget practices provide a false sense of security and fail to cope with the speed and volatility of today’s markets.

Additionally, the traditional budgeting process is widely decried, both by FP&A personnel—who must reconcile the requests from business managers with the targets handed down from the Csuite—and the business line managers they support—who view the budget process as a bureaucratic exercise, a distraction from their job, a drag on their time, and a purely finance-driven process.

As you consider a new budget system for your organization, remember this is the optimal time to evaluate the current strategies that can help your organization develop a more agile and intelligent budget and forecasting process, use this process as decision-making tool rather than a negotiation, and positively change your organization’s perception on budgeting, planning and forecasting techniques.”

Question 1: Concerning the above views on budget systems, explain relevant strategies and practices that you would consider for your chosen organization to improve its budgeting, planning and forecasting techniques.

 

LO 2: Understand the control of performance management and internal control environment for risk control

In many smaller, unincorporated businesses such as sole traders and unlimited partnerships, the responsibility for internal controls often lies with the owners themselves. In most cases, the owners are fully engaged in the business itself, and if employees are engaged, it is usually within the capability of the owners to remain fully aware of transactions and the overall state of the business.

As organizations grow, the need for internal controls increases, as the degree of specialization increases and it becomes impossible to remain fully aware of what is going on in every part of the business.

In a limited company, the board of directors is responsible for ensuring that appropriate internal controls are in place. Their accountability is to the shareholders, as the directors act as their agents. In turn, the directors may consider it prudent to establish a dedicated internal control function.

The point at which this decision is taken will depend on the extent to which the benefits of function will outweigh the costs. The directors must pay due attention to the control environment. If internal controls are to be effective, it is necessary to create an appropriate culture and embed a commitment to robust controls throughout the organization.

Question 2: Answer the following questions.

a] About the above-given opinion, explain in your chosen organization, what are/could be the various factors that impact responsibility centres to bring out the type of responsibility each of these centres have. Also, analyze the performance measures established as controls that you believe would be appropriate to monitor and evaluate the performance of each of these responsibility centres.

b] Describe the business of your chosen organization. Briefly explain the various types of internal controls mechanism put in place to control the operational risks in your organization.

c] Explain the role and importance of Audits in your chosen organization. Also mention the different types of Audits that exist while describing the role of the Internal Audit department towards assessing the adequacy of accounting systems.

 

LO 3: Understand the financial statement and decision analysis, including risk management

What’s keeping UAE businesses awake at night?

The Middle East encompasses a broad range of economic, financial, political and social risks on a regional and country-specific basis. ICAEW’s Economic Insight: Middle East is a quarterly economic forecast specifically for the finance profession, which has shared the following outlook as at Q4 2016:-

• Risks to an already-weak oil price. Even in a more positive scenario, oil prices will not return close to the $100 per barrel (pb) averaged in 2010–2014. Our baseline forecast remains below $60pb until 2019.

• Rising tax burden. Businesses are concerned about potential tax increases and spending cuts to shore up government finances. This could prompt lower demand, administrative burdens for businesses (a particular blow to small and medium-sized enterprises), or loss of retained earnings for future investment. Moves to boost employment of national born workers could also place a strain on business.

• Exchange rate risk.

•. While pressure on exchange rate pegs has eased, businesses remain worried about the potential impact on costs if a move to more flexible exchange rates seems likely.

• These worries are keenest where set government budgets mean large deficits. Oman, Bahrain and Saudi are most exposed with fiscal ‘breakeven’ oil prices $30–$50pb above current levels.

“A full implementation of President-elect Trump’s policy proposals would lower oil prices by $10pb by 2020.”

Question 3: Evaluate the above given information in terms of impact underpinning organizations in UAE requiring to embrace for a long term effort by the government to close fiscal deficits and raise increased revenues from the non-oil economy. This could also place many pressures on businesses, particularly w.r.t higher labour costs, weaker consumer demand, and the loss of retained earnings for future investment strategies & better liquidity practices.

 

LO 4: Know the shareholder/ corporate value creation, including M&As and disposals

Mergers and acquisitions (M&A) executed in UAE markets in 2016 highlight companies’ well implemented wealth management that contributes to the general economy and the private sector, analysts told Mubasher.

Statistics by Mubasher show that the top M&A deals carried out in the UAE totaled AED 657 billion ($178.99 billion) in 2016 and involved 13 companies.

First Gulf Bank’s (FGB) merger with the National Bank of Abu Dhabi (NBAD) led M&A deals in the Gulf country. The merger deal will result in creating the UAE’s largest financial institution with total assets worth nearly AED 655 billion ($178 billion).

Coming in second place on the list is Al Safwa Islamic Financial Services’ merger with Mubasher Financial Services (MFS), which brought about Al Safwa Mubasher Financial Services as of 16 November 2016, with a capital of AED 563.88 million.

M&A deals carried out under the current difficult economic circumstances help companies boost their financial positions and their competitive edge as well as help reduce costs and operating risks, commented market analyst Mohamed Al-Azmy.

Market analyst Nawwaf El-Tayea noted that one of the main benefits of M&A deals is that they reduce the time needed to create a new company. He added that these deals often result in quick revenues for the companies.

Question 4: Answer the following questions.

a] Define the factors that will drive shareholder value in your organisation. Also describe, giving reasons, if or if not a focus on shareholder value creation will lead to better decision making in your organisation?

b] What is the meaning of Value-Based Management and evaluate the methods to measure achievements in an organization. Describe the key factors that drive corporates to undertake to restructure such as M&A etc.?

c] Explain the steps involved and describe the key steps followed in an M&A and divestment transaction.

 

Analyze the following situation and provide your opinion.

Acme Engineering is evaluating options for its steel fabricating division. In 2013, the division has sales of $ 400 million but reported an operating loss of $ 35 million. The company believes that the division has the potential to turn around but ACME’s senior management has not been able to focus their attention on this division as it constitutes only 25% of its total sales with the balance coming from its heavy machinery division which had sales of $ 1,200 million and an operating profit of $ 150 million.

Describe, giving reasons, what should, in your view, be a possible restructuring option that the company could consider for its steel fabricating division assuming that division has a value of $ 80 million. Also briefly outline the process that the company should follow to implement your suggested option.   

 

Question 5: Answer the following questions.

a] In your chosen organization, explain what are the different types of businesses and financial risks faced by it in the conduct of normal business operations and the decisions involved in it?

b] What is meant by internal risk environment in an organization? Analyze the given situation below and provide your opinion as to what led to the failure of the said institution.

Case Study 1: Washington Mutual

• 2004 : Embarked upon a lending strategy to pursue higher profits by emphasizing high-risk loans
• 2006 : High-risk loans began incurring high rates of delinquency and default,
• 2007 : Mortgage-backed securities began incurring rating downgrades and began incurring losses due to a portfolio that contained poor quality and questionable customers. (Source: Wall Street and the Financial Crisis: Anatomy of a financial collapse began incurring losses due to a portfolio that contained poor quality and fraudulent loans and securities. Its stock price dropped as shareholders lost confidence and depositors began withdrawing funds, eventually causing a liquidity crisis at the bank)
• 2008: Seized by its regulator, the Office of Thrift Supervision (OTS) Placed in receivership with the Federal Deposit Insurance Corporation (FDIC) Sold to JPMorgan Chase for $1.9 billion.

 

Case Study 2 – Barings Bank

On February 26, 1995, Barings Bank (Barings) - the United Kingdom's (UK) oldest and one of its most reputed banks - declared it was bankrupt. The bank with a total net worth of $900 mn had suffered losses in excess of $1 bn.

These losses were the result of the gross mismanagement of the bank's derivatives trading operations by Nicholas William Leeson (Leeson), the General Manager of Barings Future in Singapore (BFS).

BFS had been established to look after the bank's Singapore International Monetary Exchange (SIMEX) trading operations. Leeson's job was to make arbitrage profits by taking the advantage of price differences of similar contracts on the SIMEX (Singapore) and Osaka stock exchanges. Despite not having the authority, he traded in options and maintained an unhedged position. He acted beyond the scope of his job and was able to conceal his unauthorized derivatives trading activities.

Due to the senior management's carelessness and lack of knowledge of derivatives trading, the bank landed up in a major financial mess.

When Barings finally went into receivership on February 27, 1995, it had an outstanding notional futures position on Japanese equities and bonds of US$ 27 bn (US$ 7 bn on Nikkei 225 equity contracts and US$ 20 bn on Japanese government bond (JGB) and Euro yen contracts).

Analysts said that the situation demanded that banks the world over must tighten their internal control procedures.

c] Based on the above case study explain in your opinion the risk management instruments that could have been applied for avoiding a financial risk situation.

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