Management Accounting and Decision Making (Essay Sample)

Use of Finance and accounting Report
Brivitic PLC
Student ID
August 2017
Derby University
Introduction
Management accounting plays a critical role in shaping business growth and return generation. Defined by Drury (2013) as a process of evaluating business operations and costs to aid decision making process in achieving organisation objectives, management accounting not only increase efficiency of organisation management but also improves employee’s efficacy. Zimmerman (2011) notes that organisations that practice good management accounting are able to offer better product at lower prices, improve business efficiency, have better management control and maximise returns from operations. But to perform their duties, the management require information for decision making to provide both reasons and assumptions for their judgement and action taking. This report evaluates how Britvic employs management accounting and finance to inform decision making and provide value for stakeholders in light of its day to day operations, acquisition of Bela Isicha and product costing.
Britvic PLC (100)
Britvic plc is UK based multinational company involved production, sale and distribution of soft drinks. It is a leading distributor of branded soft drink and the second supplier of carbonated still soft drink in UK. A constituent of the FTSE 250 Index, Britvic operates six divisions; GB stills, GB carbs, Ireland, France, Brazil and International (Brivitic, 2017). Some of its main brands include Robinsons, J2O and Fruit Shoot in GB, Club and Ballygowan in Ireland and, Fruite and Pressade in France (Reuters, 2017). The company strategy is designed to achieve its mission in becoming the most, creative, dynamic, and admired soft drinks company across the globe (Britvic, 2017).
Use of management accounting in Britvic Operational management
Britvic largely employs finance and accounting in planning, control, performance evaluation and decision making to create value for its stakeholders. Planning involves generating organisation objectives and establishing strategies to achieve them. To ensure growth and profitability to create value for shareholders and meet customer expectation, Britvic plc has deployed SAP advanced planning and Optimization software that makes use financial and accounting metrics that facilitate company planning through forecast estimation and supply chain optimization as recommended by Gowthorpe (2005). According to Sap (2016) this tool has already helped the company to cut inventories by 30% and improved sales by 25% over same network.
Accounting information is also used by Britvic in monitoring operations and activities to evaluate whether they proceed according to the plans and achieve value for its stakeholders (Kaplan et al, 1998). For instance, Britvic has in place governance audit committee that uses financial accounting to oversee and addresses, through internal audit function, internal control processes and detect any weaknesses that arise, and generate corrective measures to strengthen weak areas (Britvic, 2016).
Finance and accounting has been and still is a leading approach in evaluating business performance in with an aim of meeting various stakeholders’ objectives. With this realisation, Britvic keeps financial records and prepares annual financial report that include income statement, balance sheet and statement of cash flow, and use them to evaluate their performance on different aspects of its business operations (Britvic, 2016). In order to improve its operations, the company also evaluates the relationship between various items in terms of ratios, compares with previous period performance and to evaluate their trends as recommended by Marshall (2016). In this way, the shareholders are informed on how the usage of their investment is performing and become aware of the expected returns.
Finance and accounting forms the larger part of decision making for business organisation and the stakeholders involved therein (Gitman, 2015). As such Britvic heavily relies on figures from its accounting systems to make market decision on its products and operations. For instance, in 2016 the company noticed a shift in consumer preferences towards healthier products; products with less sugar and calories. With this regard the company reduced 19bn calories from its portfolio to align itself with customer preferences and generate more sales, providing value for both consumers and shareholders (Britvic, 2016). The need to create value for their customers and shareholders also inform the recent company expansion through acquisition of other businesses and Bela Ischia (Britvic, 2017) and expanding its bottling plants at Swinnow Lane, Bramley, Leeds (Construction news, 2015).
Britvic acquisition of Bela Ischia
In March 2017 Britvic completed acquisition of Bela Ischia Alimentos Company which is a well-known familiar brand in key regions of Brazil including Rio de Janeiro and Minas Gerais (StockMarketWire, 2017). The acquisition involved making a strategic decision that made use of financial and accounting information both from the company acquired and Britvic financial and data records. According to Johnson (2014), financial evaluation is essential to a corporate acquirer’s assessment of a target company as part of due diligence process to ensure that the acquirer meets both its long terms objectives and those of its shareholders.
In this acquisition, a major step involved determination of price and value of Bela Isicha. As noted by Johnson (2014), the principle determinants of the target company value are underlying assets value, value of redundant assets to be acquired, the sum total of interest-bearing debt that is the acquirer anticipate to assume, the expected cash flow from the target company and those after acquisition. In evaluating the value of these determinants, the analysis of current and historical financial statements is done majorly the cash flow, income statement and balance sheet.
Business entities are usually valued by their capacity to produce discretionary cash flows; cash flow from operations (Johnson, 2014). Such cash flow defined by Neely (2002) as EBITDA less income taxes, working capital requirements and capital expenditure. As such discretionally cash flow representing the amount that can be withdrawn without necessarily impairing company operations can only be evaluated from the company financial statements communicating the need for well-kept financial records. A positive value of discretionally cash flow will ensure that shareholders will be assured of positive returns, government bodies will be assures that the business will not collapse dwindling the economy and taxes will be timely paid (Riani et al, 2016).
But valuation also involves analysis of historical operational financial results to ensure that the target company meets the acquirer’s objective on profitability, efficiency, leverage and operational capacity (Rani et al, 2015). As such the use of ratio analysis tool in evaluating the performance of Bera Isicha was very critical in the acquisition process. According to Healy and Palepu (2012) although these do not guarantee future performance ratios inform the current company capacity and can be used to predict future performance. Accounting data is also necessary in evaluation of company efficiency to evaluate current management efficiency and assess increm4ental working capital requirements for increasing the revenue. Evaluation of company financial strength through liquidity and leverage ratios in also necessary in acquisition process to ensure that the target firm has capacity to continue operating without necessarily siphoning funds from the acquirer (Johnson, 2014). Such analysis will require the use of current and financial data while still taking into account the prevailing circumstances and economic conditions at the time of such performance. However, Marshall (2016) notes that ratio analysis present a qualitative analysis but do not elaborate the reasons or factors behind such performance and are also affected by inflation. Further, a company may perform window dressing on items in its financial statement to make resulting ratios look better which may lead to wrong conclusions. As such evaluators should corroborate conclusions from ratio analysis with other information affecting them in order to reach at better conclusions.
In acquisition decision making, forecasts are usually used as a bargaining point for acquisition makes use present and historical financial statements, and operation metrics like employee numbers, qualification their expected salaries and the expected economic environment (Syukur and Fitri, 2016). As such various items in financial accounting reports are predicted from historical accounting information to evaluate the business value and see whether the business meets the expected return for shareholders and growth objective of the business (Riani etal, 2015). After such evaluation and bargaining process Bela Isicha acquisition price was reached to R$218m (£56.8m) (Stockmarketwire, 2017)
Lastly, with favourable information on hand, Britvic had to decide the source of funds to purchase Bela Isicha. This involved analysis of various sources and cost of funds and the ability of the business to meet such costs (Damodaran, 1996). Such analysis required the use of income statements, balance sheet and cash flow statement evaluate the company’s ability to meet additional cost of capital. With this regard Bela Isicha £56.8m acquisition was funded through existing debt facilities (Brivtic, 2017).
Britvic Product costing
Britvic product costing is another area that communicate the importance of finance and accounting to create shareholders value. Britvic Plc employs marginal costing technique as opposed to absorption costing method when allocating product ...