AAF044-6 Accounting and Finance
AAF044-6 Accounting and Finance
1. Introduction
The following report is prepared to illustrate the concept of finance and investment appraisal for Centrica to have a deep understanding of its business operations in the current market sphere. Centrica stands as a pioneering energy enterprise having a rich legacy of more than two centuries. From its integral role in fueling the industrial revolution with gas as well as coal to its current-day status, it has become a market-leading energy services & solutions provider in the UK & Ireland. The journey of Centrica epitomises evolution & innovation within the energy sector.
Key features of Centrica:
Historical Legacy: Centrica is at the forefront of the UK energy sector, shaping & adapting to changing energy landscapes having a history of 200 years.
Diversified Operations: In contrast to many other energy firms, Centrica operates around the entire energy value chain (Centricabusinesssolutions.com, 2023). The diverse businesses complement each other aiming to render sustainable, affordable and simple energy solutions to customers. The different brands of this firm include Centrica Energy Trading, Centrica Business Solutions, Bord Gáis Energy, and British Gas.
Commitment to Sustainability: Sustainability is the key element of Centrica’s business ethos. The firm is dedicated to reducing its carbon footprint which is evident from its significant mitigation of about 70% greenhouse gas emissions as well as its initiatives to promote sustainable living. Further, the installation of more than 2300 heat pumps reflects the commitment of this firm to sustainable energy (Sustainability, 2023).
Community Engagement: Centrica’s delivery of 2,098 volunteering days focussing its commitment to community engagement & support that align with corporate objectives thereby making a positive impact beyond its core business operations.
Corporate Objectives
- One of the core objectives of this firm is to focus on customers beyond providing energy solutions. The firm aims to empower customers by offering sustainable & affordable products & services at the sametime as supporting them in transitioning to lower carbon alternatives effectively (Centrica.com, 2022).
- The other objective is related to Net-Zero Commitment. It means this firm aims to lead that change in transitioning to cleaner energy sources by working towards achieving net zero carbon and ensuring a sustainable future for generations to come.
- Diversity and inclusivity is another objective where it emphasises promoting diversity via initiatives like recruiting a notable percentage of women in its apprenticeship programs thereby surpassing sector averages.
Key Resources in Centrica:
Human Capital: The workforce of Centrica constitutes about 20,000 employees worldwide where 7000 engineers are considered to be its fundamental resource. These skilled people are the source of driving innovation, rendering technical expertise and further delivering exceptional service around the energy value chain (Centrica.com, 2023).
Technological expertise: The firm’s decade-long experience & expertise in the energy sector are well equipped to tackle challenges as well as spearhead advancement in technologies like heat pumps & hydrogen production essential for the sustainable energy future.
Partnerships for Net Zero Homes: The other key resource is the collaborative efforts with external stakeholders potentially involving homebuilders such as StModwen Homes in constructing carbon-neutral homes. This indicates Centrica’s partnerships towards sustainable living solutions because such alliance reflects a commitment to innovation & environmental stewardship by developing homes which align with the zero carbon goals.
Management issues and the challenges
- The primary management issues revolve around managing increased costs & addressing concerns about affordability for consumers. The war in Ukraine limited global energy supplies thereby causing an escalation in energy costs. The situation added strain to the already existing challenge of the increased cost of living making it difficult for to consumers afford their energy bills (Centrica.com, 2023).
- Managing supply chain disruption particularly to electronic chip shortages is a critical challenge for Centrica. The disruption directly impacts the availability of an essential component for smart meters and boilers affecting firms’ capability in meeting demand & installation targets.
- The other management issue is the Smart Meter Roll-out Challenges. Meaning the roll-out & adoption of smart meters faced challenges because of the onboarding of approximately 700,000 SoLR customers (Centrica.com, 2023). The surge disproportionately increased installation targets making it difficult to meet its objective in the market. It is essential for the firm to meet regulatory requirements with authorities such as Ofgem and the government.
2. Challenges in Implementing Continuous Budgeting
Continuous budgeting is the method of constantly including one additional month at the end of a multi-duration finance budget as each month goes by. Since the continuous budgeting idea is often applied to a 12-month budget, a full-year budget is always close at hand. A company may generate a high-quality budget that is significantly more favorable if it chooses to adopt continuous budgeting for a shorter period of time, like three months. Since sales projections are typically more accurate over time periods of only a few months, the price range can be adjusted solely on the basis of highly likely estimations of corporate interest. A continuous price range is comparable to a short-term projection throughout this short time frame, and forecasts typically include additional total income and expense figures. (Lois, et. al., 2020).
One advantage of this approach is that it assigns a person to continuously monitor the budget model and update the price range assumptions for the final incremental duration of the finances. When continuous budgeting principles are used to capital budgeting, significant fixed asset projects can receive funding at any point rather than during the more usual once-a-year capital budgeting process, which is common under more traditional budgeting methods.
The adoption of continuous budgeting in Centrica’s structure indicates a strategic shift towards a greater dynamic and adaptable economic making plans method. While the advantages of continuous budgeting are obvious, the journey from conventional budgeting practices to a perpetual and evolving budget is rife with challenges (Bhat, 2022). The demanding situations in enforcing continuous budgeting for the first time in Centrica’s structure are as follows:
- Cultural Resistance:
The first and perhaps the most formidable venture is cultural resistance within Centrica. Traditional budgeting strategies instill a hard and fast mindset, and employees may be worried approximately the common modifications inherent in continuous budgeting. The transition needs a cultural shift in the direction of embracing alternatives and fostering a greater flexible method of monetary-making plans. Leadership at Centrica will perform a crucial role in riding this transformation, emphasizing the blessings of adaptability and encouraging a mindset shift amongst employees.
- Data Quality and Integration:
Continuous budgeting is predicated closely on real-time and accurate statistics. Unfortunately, many corporations grapple with problems associated with data high-quality and integration in the course of this transition (Soares, Magalhães, and Mendes, 2020). Disparate facts resources, inconsistent formats, and the absence of a centralized records repository pose tremendous hurdles. Resolving these challenges often includes investments in strong statistics control systems, standardized reporting structures, and complete education packages to enhance personnel information literacy at Centrica.
- Technology Adoption:
Successful implementation of continuous budgeting requires the adoption of superior financial planning and evaluation (FP&A) tools. Centrica’s entrenched in traditional techniques can also lack the important technological infrastructure. The introduction of recent software and ensuring employees are adept at the usage of those tools are challenges that demand cautious plans, committed sources, and powerful education packages. Collaborating with IT groups and finance professionals is crucial to align technology with Centrica’s particular needs.
- Change Management:
Introducing continuous budgeting necessitates an essential trade inside the way financial strategies are managed. Resistance to alternate is a common human trait, and overcoming this resistance calls for a nicely-dependent change management method. Effective communication, schooling packages, and strong management guide are important components of successful exchange control (Kashkimbayev, and Zhakupov, 2021). Ensuring that personnel at all ranges recognize the benefits and are actively worried about the transition method can mitigate resistance and make contributions to a smoother adoption for Centrica.
- Short-Term Focus vs. Long-Term Strategy:
Continuous budgeting regularly locations emphasis on short-term forecasting and adjustments. Balancing this quick-time period consciousness with long-term strategic making plans can be a delicate mission. Centrica should ensure that the dynamic nature of continuous budgeting does not cause neglect of critical lengthy-term investments and strategic tasks. Striking the right stability between agility and retaining a strategic outlook is an important issue of successful continuous budgeting, requiring careful consideration of organizational desires and priorities.
- Performance Measurement Challenges:
Traditional budgeting offers a clear benchmark for overall performance assessment. However, continuous budgeting, with its ongoing adjustments, introduces complexity to the performance dimension. Centrica needs to redefine key overall performance signs (KPIs) and broaden new metrics that align with the dynamic nature of continuous budgeting (Sayhoud, and Mamouri). This requires a thoughtful method, collaboration among finance and operational teams, and duration of trials and blunders to become aware of the most relevant overall performance signs within the context of evolving budgets.
- Resource Allocation:
Allocating resources successfully in a constantly converting environment is a tremendous project. Traditional budgeting allows for resource allocation based on a predefined plan, however, continuous budgeting needs regular reassessment of useful resource desires. Centrica might also need to optimize resource allocation without a clear annual budgeting cycle, leading to ability inefficiencies and conflicts. Implementing sophisticated resource allocation models, fostering go-useful collaboration, and leveraging advanced analytics can assist in addressing this project.
The transition from conventional budgeting to continuous budgeting gives formidable demanding situations, but the ability advantages in terms of accelerated agility, responsiveness, and greater choice-making competencies make it a worthwhile undertaking for many corporations like Centrica. Overcoming cultural resistance, investing in technology and statistics infrastructure, enforcing robust change management techniques, and putting the right stability between short-term period flexibility and long-term period strategy are important steps to make sure for a successful shift. Continuous studying, edition, and a dedication to embracing the dynamic nature of Centrica are key elements for Centrica’s navigating the demanding situations of continuous budgeting implementation.
3. Why Manager Prefer IRR over NPV
Net present value (NPV) is a value which the investors calculate to decide the profitability of a proposed project. NPV can be very useful for reading an investment in a business or a brand new venture within a company. NPV considers all projected cash inflows and outflows and employs a concept referred to as the time value of money to decide whether particular funding is possible to generate profits or losses (Wang, 2021).
Formula of NPV:
The internal return (IRR) is a metric utilized in economic analysis to estimate the profitability of ability investments. IRR is a reduction price that makes the net present value (NPV) of all cash flows equal to 0 in a reduced cash flow evaluation. IRR calculations rely on the same method as NPV does. Keep in mind that IRR isn’t always the real money value of the venture. It is the rate of return of an investment that makes the NPV equal to 0 (Dai, Wang, and Zhao, 2022).
Formula:
The Internal Rate of Return (IRR) and Net Present Value (NPV) are each often used financial evaluation metrics for analysing and inspecting the profitability of investment projects. While each has its merits, the IRR, especially, gives sure benefits that make it a favoured metric in a few eventualities.
One primary purpose why IRR is frequently considered higher than NPV is the ease of evaluation with the discounting factor. The IRR is basically the discount rate that makes the net present value of an undertaking equal to zero. In less difficult phrases, it represents the rate at which the prevailing value of expected cash flows equals the preliminary funding. This intrinsic connection between IRR and the discounting factor affords an honest and intuitive degree for assessing an assignment’s profitability.
When comparing IRR with a predetermined discount rate, commonly the cost of capital, it gives a clear indication of whether the venture is possible. If the IRR is more than the discount rate, the venture is considered financially sound (Liu, 2022). This clean evaluation simplifies selection-making for traders and financial analysts.
Moreover, IRR is expressed as a percentage, making it immediately comparable to different capability investments or the employer’s required rate of return. This per cent-based illustration enables a brief assessment of assignment attractiveness, enabling stakeholders to gauge the task’s relative profitability against opportunity possibilities.
The IRR’s advantage in percentage representation becomes obvious while contrasting it with NPV. NPV offers absolutely the value of the venture’s profitability, indicating the net value in forex phrases. While NPV signifies profitability, the absence of a percentage discernment could make it tough to compare initiatives of varying scales or assess their relative attractiveness (Pan, Wei, and Zeng, 2022).
In essence, IRR’s return percentage assessment simplifies the decision-making manner, in particular when choosing among a couple of investment opportunities. Investors can effectively identify projects with better IRR, signalling a better return on investment. This trustworthy assessment aligns nicely with the sensible considerations of buyers who frequently are trying to find readability and simplicity in evaluating the economic viability of tasks.
In short, the IRR’s ease of assessment with the discounting rate, represented as a rate of return percentage, makes it a favoured metric for assessing a challenge’s profitability. This simplicity is essential in selection-making methods, permitting buyers and financial analysts to effectively compare and prioritize investment possibilities primarily based on their expected returns (Zhang, 2022).
4. The main functions of the audit committees
Main Functions of the audit committee
Financial Reporting and Internal Controls: This main function revolves around Reviewing the adequacy & effectiveness of financial processing, internal controls, reporting and risk management. Further, it relates to advising the board on the balance, fairness, and understandability of the accounts and annual report (Centrica.com, 2023).
Internal Audit Oversight: This relates to monitoring as well as reviewing the operation & effectiveness of the Group’s Internal Audit function where it ensures independence and strategic focus. Further, it engages in Supervising the appointment of Audit Officers and Group Chief Risk.
External Audit Management: This function relates to managing the relationship with external auditors which involves appointment, remuneration, independence and effectiveness. It also conducts periodic tendering for external audit contracts (Centrica.com, 2023).
Risk Oversight: It relates to Overseeing and informing Group audits in terms of disclosure of financial statements and then monitoring & reviewing business risk areas involving cyber risks and regulatory and legal matters.
Whistleblowing and Compliance Oversight: This is another function which is about managing the effectiveness of whistleblowing & reviewing the firm’s arrangements for compliance with statutory & regulatory requirements.
Membership of the Audit
Chair: Kevin O’Byrne who is the Independent Non-Executive Director
Members: Stephen Hester (retired during the year), Pam Kaur, P Duggal (appointed during the year), Nathan Bostock, Carol Arrowsmith (Centrica.com, 2023).
Key Focus Areas Right Through the Reporting Year
Financial Reporting and Judgments: The key areas for focusing were related to Reviewing significant accounting judgments as well as financial reporting matters. Further, it was to assess the viability & Going concerns of the Group.
External and Internal Audit Effectiveness: This was with Assessing the effectiveness of external audit processes as well as Internal Audit functions. Further, it relates to overseeing the credit risk exposure, finance systems and control environment (Centrica.com, 2023).
Risk Management and Compliance: This was another key area where the audit committee were engaged in Monitoring risks in various business units like legal/regulatory compliance, pension schemes, and information security. It then reviews the firm’s readiness for legal & regulatory changes.
Corporate Reporting Review: The audit committee was engaged in addressing queries & enhancement associated with TCFD disclosures as well as climate reporting by the Financial Reporting Council (Centrica.com, 2023).
Non-Audit Fees and Committee Effectiveness: It was another chief area where the audit committee was monitoring non-audit fees that opted to be awarded to external auditors in ensuring objectivity. Further, they were reviewing & increasing the Committee’s terms of reference as well as effectiveness.
Suggestions for possible improvement:
Greater Emphasis on Sustainability Reporting: One suggestion that can be followed by the audit committee or the firm is to enhance the focus of the committee on sustainability reporting (Al‐Shaer, 2020). This can be done by aligning with global reporting standards such as SASB or GRI. Secondly, to consider more comprehensive disclosure on ESG metrics & their integration into financial reporting.
Increased Transparency in Risk Oversight: The next suggestion is related to providing more detailed insights into specific risk assessments as well as mitigation strategies associated with emerging risks like climate range, geopolitical developments and cyber security.
Strengthening Non-Audit Fees Policy: It is also important to reassess the policy on non-audit service fees, which ensures a clear delineation between statutory audit as well as non-audit work (Drogalas et al. 2021). Implementing a more transparent process for the approval as well as monitoring of non-audit services, particularly those approaching the £1 million cap would be effective for the firm towards responsible business operations.
Enhancing External Audit Oversight: It is important to provide more detailed information about the outcomes of the assessment which is carried out to ascertain the effectiveness, objectivity and independence of the external auditors.
Regular Performance Evaluation of Committee: The quality of the audit committe will be increased if it conducts a more detailed assessment of the committee’s performance involving its structure, contribution and effectiveness to the firm’s strategic objectives (Al-taee and Flayyih, 2022). Further, foster continuous improvement by soliciting feedback from shareholders and commitment members themselves as well
5. Conclusion
In conclusion, the adoption of continuous budgeting in Centrica signifies a strategic circulation closer to better adaptability and dynamic monetary planning. Despite the challenges, overcoming cultural resistance, addressing statistics satisfactory issues, managing trade effectively, and balancing short-term consciousness with long-time period approach are critical steps for Centrica to successfully transition and attain the blessings of continuous budgeting. In other words, the thorough examination of the annual report enriched my understanding of the financial health & operational aspects of the firm significantly. Reviewing the disclosure of the audit committee particularly its function, membership and others shed light on the governance structure as well as strategies employed. These insights assist in comprehending the firm’s commitment to ensuring effective risk management as well as adherence to regulatory standards. It is by understanding these intricacies contributes to a more comprehensive view of the firm’s financial position and its impact on many stakeholders. Consequently, it helped me in my current role by rendering a deeper comprehension of the firm’s governance mechanism as well as strategies for sustainable growth.
6. References
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