Accounting and Finance AAF044-6

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Table of Contents
Introduction......................................................................................................................................3

Key feature...................................................................................................................................3

Corporate objectives....................................................................................................................3

Key resources...............................................................................................................................3

Strengths......................................................................................................................................4

Management issues and challenges.............................................................................................4

Challenges in implementing continuous budgeting.........................................................................4

Critically discussing IRR vs NPV...................................................................................................7

Determining the primary duties of the audit committees through the announcement of Centrica's
annual report's nominations.............................................................................................................9

Conclusion.....................................................................................................................................12

References......................................................................................................................................13
Introduction
The global energy sector is going through an extensive transition as businesses attempt to attain
sustainability and satisfy the increasing need for more environmentally friendly energy solutions.
An international provider of energy and services is Centrica plc. The headquarters of the British
global company Centrica plc are located in Windsor, Berkshire. Gas and electricity supply to
customers in the UK and Ireland is its main business. In addition, the business offers plumbing
and other home maintenance services. Following British Gas plc's demerger and consequent
renaming as BG plc, Centrica plc was established on February 17, 1997.
Key feature
As a renewable energy trading organisation Centrica Energy Trading operates globally. Gas and
electricity distribution to UK businesses and customers is the main business activity of Centrica.
Retail activities under the British Gas Business brand, the company provides gas, electricity, and
other services to enterprises and consumers (Anaya & Pollitt, 2019). Though Centrica has
continued to utilise the British Gas retail brand, it is limited to use this name within the UK. The
organisation also collaborates with major corporations to provide energy supplies and services,
including electric vehicle charging and renewable energy generating. LNG, power, and gas from
both Centrica's own production and external sources are traded via Centrica Energy Trading.
Corporate objectives
Centrica is a domestic corporation of electricity and energy firms with an objective of providing
more and cleaner energy solutions to the entire world through operations that are socially,
ecologically, and economically sustainable. Being among the most inclusive and diverse
businesses in the world is Centrica’s goal. To meet the needs of their customer, they provide
innovative energy and service solutions. It wants to provide a strong sense of belonging and
value for all of our stakeholders, including partners, suppliers, as well as workers. Centrica aims
to power development by offering more cleaner and more environmentally friendly energy
solutions.
Key resources
The items that a firm needs in order to run its operations are referred to as resources. Centrica
needs a number of essential resources in order to run its business and provide value to its
consumers. These resources are divided into three distinct groups including physical, human,
intellectual, and financial resources (Bolden & O’Regan, 2016). Physical resources involve the
broad refining network and manufacturing of the business, along with to its fleet of distribution
and transportation vehicles. It also includes storage facilities and retail locations. To accelerate
operations and innovation, Centrica mostly depends on its knowledgeable and experienced
employees. This involves specialists who support the business succeed, such as managers,
scientists, engineers, and salesperson.
Strengths
With several outlets in around every state, Centrica Plc has been supported by an efficient
distribution system which ensures that a huge number of consumers can quickly and easily
access its products. Because of its low costs of production and sales, Centrica Plc has the
capability to offer its products under a price which is affordable for consumers.
Management issues and challenges
Managing its workers has been the company's biggest issue. The organisation has a high turnover
rate and problems with managing diversity. Additionally, the company is having trouble utilising
precise performance management systems to involve workers in duties that would keep them
engaged, motivated, and employed (D’Ettorre et al., 2022). Capital limitations are a major
problem for the organisation's management. Additionally, because these initiatives require a
significant capital involvement, choosing the right solutions presents a difficulty for the business.
Centrica encountered a few issues with regard to finances, staff, and various other resources.
Due to intense industry competition and the oligopolistic character of the business, Centrica is
subjected to decreased demand. The impact of environmental change on current production
systems. Political problems that drive the current operations and infrastructures into trouble.
Energy is a highly regulated sector, so any changes to the laws may have a big effect on
Centrica’s business and enhance compliance expenses. Centrica engages in a very competitive
market with rivalry from other large electricity and gas corporations and other alternative energy
providers.

Challenges in implementing continuous budgeting

Capital is the sum of the investments made by the company's shareholders and also the capital
that the business uses to finance debt and loans from investors & financial organisations. Capital
structure of Centrica consists of equity and long-term debt that is owned by the organisation's
stockholders. Equity refers to the ownership portion that shareholders possess in the business. By
issuing and selling investors' shares of stock, it can be increased. According to Centrica annual
report 31 December its total shareholders’ equity is 1,017 million. Debt is the amount of
borrowed money that a business obtains from different sources, including bonds, bank loans, as
well as other debt securities. Centrica's bonds are almost 64% of its overall debt. Bank loan of
Centrica almost 26% of its total debt.
Budgeting is a core strategy which has been considered by different business entities in order to
optimum use of financial resources through reduced wastage and appropriate allocation.
Basically, budgeting is a procedure for allocating resources in accordance with needs and crucial
to the operations of the company (Magni & Marchioni, 2020). Budget plays an important role in
terms of identifying resource allocation and justify financing needs. In terms of capital structure,
debt to equity ratio impacts the company's cost of capital. More dependency on the debt may
drives to higher financing expense which influence resources allocation budget.
The dividend that a business pays to its shareholders is defined as dividend policy. The
prediction of dividend often based on cash flow of budget. Organisation mainly make budget by
forecasting cash outflow and inflow. The prediction also includes dividend projection like pay
out ratio of each year. If budget changes, it requires change in the dividends policy. The
organisation needs to reduce dividend and growth of dividend to adjust with the changing
budget.
Continuous budgeting defines a form of financial budgeting where future income and
expenditures are continuously forecasted (Noble & Bstieler, 2023). This technique for budgeting
is predicated on the concept of forecasting future trends using historical data. Businesses and
organisations that require greater flexibility and frequent budget changes frequently utilise this
kind of budgeting. Continuous budgeting help businesses plan forward financially and
strategically by helping them decide where they can allocate their resources most effectively.
Having a more precise understanding of future cash flow demands and being able to adapt to
transformations in market situation are some benefits of employing a continuous budget. Since
departments and firms are responsible for the next month's budget, it helps them maintain
better standards. One disadvantage of this budget, it may take a lot of time, which will raise
employee and resource expenses. It might need the incorporation of additional software tools in
order operate as efficiently as possible. Centrica faces several problems in implementing
continuous budgeting as well.
Inaccurate data
The data's quality is one problem. If the data is inaccurate, it could negatively impact the
reliability of the prediction. If Centrica’s depend on historical data to forecast the performance of
Centrica’s in the future, this could be a problem. The timeliness and accuracy of the data should
always be given high priority in order to effectively utilise the possibilities of the continuous
budgeting technique (Ioannou et al., 2017). Reliable and update financial data are important for
the effective continuous budgeting. Centrica may encounter difficulties to integrate current data
from several department. The continuous budgeting might less effective because of data delays
and inconsistencies. Prioritising quality of the data may ensure accurate picture for accurate
decision-making through defining clear ownership as well as information validation methods.
Complexity
By taking into account various information and data for a specific cost for the upcoming time,
the process of starting with different forms of charges and expenses is complex. Centrica might
face costs associated with various administrative & operational procedures. Centrica must take
into account the operational efficacy and product performance levels currently in use, compare
them to market performance and project future performance, & forecast costs associated with
various business procedures and operations (Kasymova, 2016). In order to manage customers
and deliver goods and services in accordance with requirements, cost management is necessary
to gather information from various departments and customer relationship management. Thus,
for every company, estimating future costs for various operations and procedures is a challenging
task. However, the business might use big data technologies to determine the cost and anticipated
costs of any upcoming business operations.
Time consuming
Since the budgeting process involves several statistical and data analysis procedures, it takes a
lot of time. To accurately estimate costs and expenses for different operation of business,
managers and financial professionals of Centrica need to collect information from a variety of
business activities and departments and assess different phases and approaches (Bhimani et al.,
2018). Additionally, it's necessary minimise expenses and establish the prices required for a
precise and effective budget that guarantees the firm that assures the business will perform better
financially, the company analyses its present budgeting costs and expenses with previous
expenditures.
Planning continuously
To keep up with the planning of various activities and phases, Centrica must recognise many
kinds of issues and circumstances. Due to the business's global transportation operations, it is
important that it prepare for a variety of potential future obstacles to be able to maintain
improved performance and financial stability. Centrica could face difficulties maintaining to a
precise and accurate budget among other things because of the rate of inflation and fluctuations
in the price of various materials and resources, like diesel and other sources of energy, which are
necessary for the maintenance of a large number of vehicles on an international basis (Bonazzi &
Iotti, 2016).
Resources conflicts
A resource conflict is one issue that can come up while making a continuous budgeting. Centrica
face resource conflicts when various teams inside the organisation compete for control. For
example, the manufacturing team desires to manage production levels, while the marketing team
desires to expand sales. This could result in disputes and decrease the reliability of the
prediction. For allocation of resources, continuous budgeting requires more dynamic and
continuous system. Centrica may face difficulties for establishing a structure which make sure
that all of the resources are distributed effectively and regarding the strategic objective of it
(Henttu-Aho, 2018). Though the organisation identifies priority of the project changes
dynamically, approach of prioritising is become frequent issues.
Optimising
By using an efficient budgeting procedure, Centrica has been able to keep higher productivity
regardless of challenges or dangers. Each organisation prioritises continuous budgeting in order
to keep both increased business process efficiency and an ideal degree of return. Centrica may
face difficulties in the future in allocating resources to various technological procedures and
development.
Developed flexible budget
Financial managers must be able to make adjustments to any fluctuations in prices and expenses,
and each organisation must create a flexible budget with various expenses as needed (Huang et
al., 2022). Any organisation that allocates its whole financial resources to various procedures and
activities faces a fundamental challenge. To create a flexible budget for the business, the
company has demanded too much.

Critically discussing IRR vs NPV

Investment is crucial for any new company. It will be challenging to manage the company and
turn a profit in an organisational environment without the right investment tools. Managers use
investment appraisal tools to make efficient investment decisions. One of the investment tools
payback periods, determines how long it will take an investment to earn back its initial
investment. It determines how rapidly cash circulates from an investment to pay for the initial
cost of capital.
Financial analysts use the internal rate of return to evaluate the potential profitability of projects.
The estimated annually growth rate for an investment is called the internal rate of return. The
internal rate of return's primary goal is to identify the rate of discount that will enable the present
value of all annual nominal cash inflows to equal the original net cash outflow, instead of the
investment (Wang, 2021). The internal rate of return is the most effective method for comparing
and assessing potential rates of annual return across time when analysing capital budgeting
projects. Moreover, investors can use IRR for calculating the investment return of different
assets, firms using it to decide which capital projects they want to invest in. In general, while
comparing investment alternatives with other similar characteristics, the investment with the
greatest return on investment would be considered the best. The main disadvantage of the
internal rate of return technique is that, in contrast to projects, it does not account for project size.
The simple comparison is between the cash flows and the capital expenditure that generated
these cash flows. This might be challenging when two investments have significantly different
capital requirements though the smaller project has a higher internal rate of return. The internal
rate of return approach ignores any possible future expenditures that could have an impact on
profit and just considers the anticipated cash flows from a capital input. Since the internal rate of
return ignore capital costs, it shouldn't be employed to compare projects with varying durations.
NPV is a technique for projecting an organization's revenue growth across a given period of time
to estimate its future value (Abdullah et al., 2018). The net present value refers to the total
amount of each cash flow of present value both inflow and outflow generally distributed across
time in a certain full investment and project. NPV is a method for evaluation that helps with
financial decision-making. It shows the distinction between the cash inflows and outflows over a
given period of time, expressed in present value. Among the other important advantages is the
NPV approach, which clearly demonstrates profitability. An investment has a positive net
present value (NPV) if the present value of its income overcomes the present value of its
expenses. By applying various discount rates, the NPV approach also supports in the analysis of
investment risk.
It makes it possible to compare several investments in relation to one another. Decision-makers
may determine which option is the most feasible by evaluating the net present value (NPV) of
various projects. Among the possible disadvantages are the NPV approach depends on selecting
the right discount rate. It is necessary to estimate future cash inflows, which is not always
correct, in order to calculate a project's net present value. The NPV approach can be time-
consuming due to the process of forecasting cash inflows, outflows, and the correct rate of
discount for all future years. Manager prefer IRR rather than NPV one of the main factors is
percentage representation of IRR. Stakeholder can easily understand the project profitability
through this percentage (Quick et al., 2022). IRR provide a clear decision based on one
parameter. IRR focus on the BEP (breakeven point) through presenting the rate of discount
where NPV is zero.
IRR follows traditional budgeting method. Manager can prefer this tool because it is easy and
consistent that fits into present financial analysis framework. Many organisations also use this
method for decision making. While NPV explicitly considers the size of the investment, IRR
integrates this information into a single percentage, offering a holistic view that some managers
find more convenient. Analysing variation of a performance across a time, NPV give less visible
sign another reason of manger preference to IRR.

Determining the primary duties of the audit committees through the

announcement of Centrica's annual report's nominations
The purpose of a remuneration committee is to determine the compensation of executives,
directors, and senior-level staff (Quick et al., 2022). Centrica remuneration committee's objective
is to make sure that the business pays its executives a fair and competitive salary that is
consistent with the goals of the company. Remuneration committee of Centrica disclose its
annual reports that play an important role in advising and identifying the organisation structure
and remuneration policy of executive and directors. Minimum three members require for
remuneration committee, who must all be independent non-executive directors. If the Board
Chair was considered independent at the time of recommendation, they might also participate in
the Committee as an extra member. On the Nominations Committee's suggestion and after
discussing with the Committee Chair, the Board will choose the committee members.
Every three years at the most recent, a report on the business's remuneration policy will be
prepared by the committee and recommended for approval by the board of directors. and an
annual remuneration report that will include information on each director's compensation (Yekini
et al., 2019). All the information needed to comply with applicable laws and regulations as well
as the UK Corporate Governance Code. For this team, the evaluation of annual performance is
based on individual and strategic goals for 25% of the total, and business performance for the
remaining 75%. The Committee continually administers of and evaluates the remuneration
policies efficacy, as well as its influence and usefulness with other compensation plans for the
broader workforce. The committee's internal structure has the support of the committee.
The audit committees make decisions about the business's internal and external ethics. The
company's audit committee also assesses the financial accounts, corporate rules, and ethical
issues to identify if they still make sense in the modern world. Hence, it is crucial that the audit
committee identify Centrica governance structure. The committee's membership consists of a
significant group of people who assist in recruiting and resource direction. The management's
decisions about major issues and difficulties in the financial reports are assessed by the audit
committee. The influence of accounting and regulatory actions on the financial reports is also
examined by the committee. The committee works with other committees for comprehension of
the responsibilities, effects, and risks on financial statements.
The audit committee meets with management and the external auditor to talk about the business's
quarterly and audited yearly financial statements (Bananuka et al., 2018). Along with the
financial data and advice provided to external rating agencies and experts, they also examine the
earnings press releases. The committee maintains a continuous evaluation of the systems for
internal control, risk management, and internal financial controls currently in place at the
company. Kevin O’Byrne is the chair of the audit committee. The committee focus on the quality
of the audit and integrity of the financial reports. The audit committee assessed Centrica's
internal controls as well as risk management system effectiveness, emphasising in certain area
for example operational risk, financial reporting and cybersecurity.
It also focuses on the business financial forecast and evaluates its viability to going entity. This
committee administer and supervise the head of internal audit's work. The committee also
contribute to the accounts and financial statements. There needs to improvement in the
organisation committee membership by increasing diversity in the committee. In term of
providing stakeholder assurance and transparency, it needs to give more specific information the
possible risk determined by the committee and take steps to prevent it.
The corporate governance of Centrica responsible for procedures, guidelines, directives, or legal
frameworks that allows companies to manage, regulate, or conduct their business activities.
Developing the long-term sustainable value for stakeholders is its primary responsibility, with an
emphasis on strategic and policy-related issues. It is in charge of making sure that the risk
assessment and control procedures are efficient, formulating the group's plan, managing resource
distribution, and maintaining the group's performance. The confidence and trust of stakeholders
are increased by strong corporate governance of Centrica. Centrica's corporate governance
ensures that shareholders are treated fairly and safeguarded from power abuse. It encourages
decision-making that is well-informed and efficient within Centrica. It assists in identifying and
evaluating risks, putting in place suitable controls and security measures, and assessing risk
exposure. In recommendation, with appropriate analysis, the company can enhance both its
financial performance and capital structure. The business needs to implement strict policies and
procedures in order to achieve optimal performance.
Conclusion
In summary, Centrica operates its business in the energy sector to supply gas, electricity, and
other services to enterprises and consumers. This report identifies the business's intangible as
well as tangible resources. A number of issues with the company's administration, talent
management, and recruiting are making it difficult for it to achieve its goals. Potential threats
were additionally determined, along with the possibility of inflation in the United Kingdom
affecting the company's profitability. In the continuous budget implementation process, this
organisation has encountered a few challenges. Examining Centrica's continuous budgeting
implementation in this report has been valuable experience.
My comprehension of the analyze financial statements and evaluate management decisions of the
organisation has improved greatly as a result of the extensive study that was done, and this has
improved my performance in my present position. I've been able to determine importance of
remuneration committee and audit committee. My understanding of the organization's financial
decision based on IRR rather than NPV. With this understanding, I am more qualified to make a
significant contribution to discussions about corporate finance and investment appraisal. The
understanding I gained from this report might be applicable directly in my current position.
There has been discussion over the roles and duties of the audit committee and its members, as
well as some recommendations.
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