CASE STUDY

Case Study

Case Study

Introduction

Accounting, budgeting, and their interaction in a financial information system provide the basis for making many capital allocation decisions. Historical revenues, income, and expenditures are useful in assessing fiscal conditions and long-term asset (i.e., infrastructure) conditions. Understanding past and present financial performance is often a necessary precursor to planning future delivery of services and developing acquisition strategies for supporting infrastructure. Consequently, accounting and budgeting methods should be structured to permit consistent evaluation of the following basic elements of the capital allocation process: condition assessment, planning, financing, and acquisition. Accounting and budgeting convey different meanings among the managers, planners, and personnel who employ them. Both are critical components that must interact to achieve the goals and objectives of an organization. Accounting may be described as a system used to record, classify, and summarize business activity (Meigs and Meigs 1996). Accounting is also considered the function of maintaining the financial information and on-going analysis necessary to provide management and outside interests with the facts needed to make decisions (Grigg 1988). Budgeting has numerous definitions, but generally refers to the internal approval, external adoption, and allocation of funds required in the operation of an organization (Garner 1991). When the two interact as a system, accounting provides the basis needed for budgetary control. Funds are the accounting and budgeting entities used to segregate revenue, income, and resources for specific activities and functions. Revenue is money received from some form of assessment, such as property taxes, sales taxes, excises, or intergovernmental aid. Income is money earned from the sale of goods or services, such as water distribution, wastewater disposal, license fees, and building permits. Resources is a broad term referring to the assets used in providing services, such as revenue, income, property, and equipment.

Learning Out comes

understand and apply contemporary thinking on strategic financial management;

understand and utilise appropriate tools for strategic financial management

evaluate strategic financial management options in light of the needs of management and the policy of the enterprise;

characterise and describe the enterprise's financial strategy and use that characterisation to develop optimal financial strategy for all stages of the life-cycle;

dentify an organisation's objectives in financial terms and evaluate their attainment;

discuss the interrelationships between decisions concerning investment, financing and dividends;

identify and analyse the impact of internal and external constraints on financial strategy (e.g. funding, regulatory bodies, investor relations, strategy, and economic factors);

evaluate current performance, taking account of potential variations in economic and business factors;

Recommend alternative financial strategies for an organisation.

Solution to Case study

Alternative 1

Item

year 0

m £

year 1

m £

year 2

m £

year 3

m £

Revenue

0

1.8

9.9

12.55

Less cost

Factory conversation

- 1.130

Equipment

- 4.14

-4.08

Redundancy cost

-1.20

Operating cost

-2.04

4.47

5.265

Net present value of cash flow for first three years of operations = £ 6.39 millions. As with alternative 1, one approach to the calculation of the terminal value would be no assume that cash flow would only maintain for 6 years, that is until the first date of equipment is likely to need to be replaced, the figures would be:

Note:

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