AAF044-6 Accounting and Finance
AAF044-6 Accounting and Finance
1. Introduction
Background of organization
The energy sector plays a critical role in an economy, and the strategies are mainly meant to improve the management system of an industry. The implementation of energy efficiency measures helps to reduce consumption and waste to reduce the dependency on energy sources and security. Accounting and finance play a significant role in ensuring the effective management of resources and strategic decision-making. The study investigates the significant role of finance in the energy sector as Centrica plc. Hence, it often deals with larger capital investment within exploration, production and infrastructure projects. Accounting and finance help to evaluate the investment through capital budgeting techniques based on assessing the financial viability and potential returns.
Centrica Plc is a British multinational energy service company, with headquarters situated in Windsor. Centrica plc is a publicly listed company and is properly constituted under the London Stock Exchange. Centrica Plc is one of the largest integrated energy companies with operations in various countries across the world. Additionally, the firm is also involved in the development of renewable energy biofuels, and electric fuels.
The Royal Dutch Centrica Plc has reported its total revenue of £7.70 billion in the current fiscal year 2022. Centrica Plc is one of the largest oil and gas manufacturers and is publicly traded worldwide. The energy manufacturing companies reportedly have the greatest profits while the benchmark and energy prices are average. The firm has identified various initiatives that shift the clean energy sources and investment within renewable energy projects. In the current business environment, the firm mainly focuses on low-carbon and renewable energy solutions consisting of solar, and biofuels (lse.co.uk, 2024). The energy company mainly engaged in various aspects of the industry consisting of exploration and production, marketing and refining and distribution of oil and gas products.
Key resources
Centrica Plc is a major energy company that relies on a variety of key resources to support its operations and strategic initiatives. Considering the human resources, Centrica Plc employs a diverse and skilled workforce with expertise in various areas such as engineering, finance and technology. However, effective leadership and technology teams are significant resources for driving strategic decision-making based on operational excellence (Chen and Ma, 2021). Similarly, the financial resource plays a significant role in exploring fund productions, refining and marketing activities. The energy efficiency companies are engaged in various transportation projects consisting of oil and natural gas explorations as a key resource for maintaining or licensing the environmental risk.
Management issues and challenges faced in meeting its objectives
Centrica Plc faces huge criticism based on management issues that can severely impact the ability to meet its strategic business objectives. The global shift towards renewable energy to reduce carbon emissions identifies huge challenges for traditional oil and gas companies such as Centrica Plc. However, expertise and capabilities risk has been a huge issue for retail energy supply and services businesses (Centrica.com, 2024). Additionally, energy price volatility has been also incurred due to fluctuation of commodity prices, especially in the energy sector can severely impact the profitability and revenue of the firm. In the current business environment, Centrica plc faces intense market competition from other energy companies, both traditional and emerging players. Apart from this, companies in the energy sector digitize their business operations, and cybersecurity has become a crucial concern. Therefore, protecting sensitive data and ensuring the reliability of digital infrastructure are the main ongoing challenges faced by companies (Mattera et al., 2021). It has been identified that Centrica’s challenges can be able to create huge obstacles in meeting the firm objectives and goals to achieve the net zero energy transitions and low carbon emission target.
2. Discuss the potential challenges Centrica Plc would face in implementing
Continuous budgeting refers to a dynamic budgeting approach that mainly consists of regularly updating and revising budgets throughout the fiscal years. The significance of continuous budgeting mainly relies on its ability to adapt to changing business conditions, enhance decision-making as well and improve overall financial management. By regularly updating budgets, decision-makers have identified its huge access to the current financial information (Dong et al., 2022). The system enables the business to make informed and timely decisions to foster business agility. The continuous budgets help in optimizing the resource allocation through aligning the financial resources with strategic priorities. The continuous budgeting system supports proactive cost management by identifying variances. Hence, it makes the organizations foster and correct actions promptly to control costs that prevent potential financial issues. Hence, continuous budgeting facilitates the identification of risks and uncertainties that may impact financial performance. It allows organizations to develop risk mitigation strategies and business contingency plans. According to Wu et al., (2020), the study investigates the potential challenges faced by energy services firms as Centric plc is involved with several departments. This engagement fosters a sense of ownership and accountability between the employees to achieve the financial targets. The energy service firm employs several issues that may resist away from traditional annual budgeting practices. This is because of a lack of resistance that creates uncertainties in communication and a culture shift towards embracing continuous improvement.
Based on implementing the continuous budgeting system, ongoing time and effort from finance and operation teams have been required. Thus, limited resources and competing priorities make it more challenging to sustain the level of requirement and commitment (Chaudhry et al., 2020). Similarly, implementing a continuous budgeting system often involves huge upgrades or adopting a new budgeting plan. Thus, integrating technology or adopting new budgeting and forecasting tools often be more complex to integrate seamlessly with the existing system. As per the statement of Agudelo et al., (2020), a continuous budgeting system mainly relies on real-time data. Thus, ensuring the accuracy and quality of data depicts its huge challenge, especially in case of data disparate and inconsistency. Considering the performance measurement, traditional budgeting is often dependent on fixed annual performance metrics. In such a scenario, shifting to continuous budgeting mainly requires a reassessment and realignment of performance measurement. However, the firm faces cultural shift challenges, as it has been a major issue for the firm to integrate the new budgeting system. This is because an employee may resist change from the traditional budgeting system to a continuous budgeting system due to changes in the budgeting process. Moreover, integrating a significant change in the budgeting system depicts a huge challenge in training and skills required for the employees (Bergmann et al., 2020). Conversely, Centrica plc mainly needs to encourage their employees to develop proper training sessions to acquire a new budgeting system beneficial for the firm.
Considering the implementation of a new budgeting system, the firm requires huge resources and investment in technology, as well as conducting learning and training sessions to improve the market changes. Regardless, it is predicted as more challenging for the firm due to the shortage of workers and skilled employees in the UK due to the issue incurred through Brexit. The significant challenges might generate a negative impact on a firm to create daily operations or implement a new budgeting system (Mauro et al., 2020). The above challenges associated with the implementing new budgeting system faced by Centrica plc continuously change the market dynamic, especially due to the evasion between the countries’ wars such as Russia and Ukraine. Hence, it makes it more difficult for the business to integrate changes that affect the long-term business operations and goals. In addition, this can impact the potential performance of the business and competitive advantages. Furthermore, it can be observed that the challenges of new technology adoption can also impact the business’s environmental concerns (Schwering et al., 2020). Thus, the continuous budgeting system mainly requires huge alignment with the organizational strategic goals. However, the ongoing financial plans aligned with shifting strategic priorities depict huge challenges. Energy efficiency firms mainly need robust management practices that identify the risks in a rapidly changing business environment.
The traditional budgeting system often consists of incentive structures to meet annual targets. Shifting towards continuous budgeting may require a huge alignment of incentives based on encouraging market performance. In the context of the company, Centrica plc needs to adhere to the updated regulatory standards and requirements to incorporate the continuous budgeting environment and its additional efforts. Therefore, implementing a new budgeting system at an energy service firm involves strategic planning, coordination, effective communication and building consensus among the stakeholders (Xi et al., 2020). This would mainly help to build a compelling case by articulating the benefits of the new budgeting system in financial teams. The compelling alignment depicts the way that the company aligns with Centrica’s strategic goals, and improves the decision-making to enhance the overall financial management. Similarly, the company needs to develop a training program based on enhancing the training skills of employees involved in the budgeting process. It highlighted the new system and its configurations based on improving their ability to analyse the data and helping the firm implement a new budgeting system.
3. Discuss the reason the manager prefers IRR to NPV to carry out discounted cash flows
The internal rate of return is an important technique used by managers to identify the investment rate of return within any particular business project. IRR plays a crucial role in evaluating the effectiveness of potential investment and decision-making towards assessing the projects. This is because of identifying the comparison with the cost of capital or redetermined hurdle rate. The business manager determines the project’s ranking through the use of IRR for various investment opportunities (Wang, 2021). The investors have been able to identify the decision of the project making through assessing the rate of return is higher than the cost of capital, the investment is generally considered acceptable. The internal rate of return helps the manager assess the variability of a project by indicating the rate of return that the investment has been expected to generate. The internal rate of return has been computed through “(Future value ÷ Present value) ^ (1 – periods) – 1”. The IRR is determined as a percentage that makes it easy for the stakeholders and managers to understand and communicate the potential return on investment (Abdeljawad et al., 2020). Similarly, the net present value is also a major tool used to compute capital budgeting and investment analysis. However, the NPV provides a clear and objective criterion for decision-making. The main goal and aim of identifying the NPV is to align the goal of maximizing shareholder wealth. The NPV has been computed through “Cashflow / (1+i) ^ t – initial spending”. The benefit of using the NPV is that it aligns with the financial objectives by incorporating a discount rate to improve the risks and opportunities associated with the investment. The net present value allows the decision-makers to compare the project variability to the rate of return. The NPV encourages a long-term perspective by considering the entire life cycle of the projects and assessing the sustainability and value of the investment (Arjunan, 2022). Based on comparison NPV can be used in conjunction with other financial metrics IRR that focus on the project’s return. NPV illustrates the amount that has been compared directly to the initial investment. The net present value depicts its fundamental elements in financial analysis based on providing comprehensive objectives and assessments to make profitability within the investment projects. According to Bratten et al., (2022), both the internal rate of return and NPV are mainly used in documented cash flow analysis. In the context of Centrica plc manager prefers IRR over NPV for certain reasons. The IRR is expressed as a percentage representing the rate of return on investment. This percentage has been more intuitively understood by the managers and investors as well as stakeholders, as it makes it easier to explain the potential profitability as compared to the dollar amount. Managers may evaluate the IRR to use the decision-making tools because it provides simplicity in decision-making tools because it provides a clear threshold for project acceptance or rejection. Moreover, the IRR has been primarily focused on the rate of return generated through an investment (Raimo et al., 2021). This has been particularly relevant in situations where the attractiveness of various projects mainly needs to be assessed regarding the return percentage benefits rather than the actual values. While IRR has various benefits for the business manager it also has some limitations. Hence, the IRR is determined as an unconventional pattern of cash flow with various changes. It has been identified that multiple discount rates make the NPV value equal to zero (Magni and Marchioni, 2020). Similarly, the IRR predicts an unclear reinvestment rate. The reinvestment rate may be challenging in different aspects mainly in different ways based on reinvestment. This is because IRR fails to consider the actual size of the investment.
4. Audit and remuneration committee of Centrica Plc
The primary function of the audit committee is a necessary component of corporate governance to ensure the integrity and transparency of financial reporting within an organization. The audit committee is mainly responsible for reviewing and overseeing the financial statements and reports to ensure accuracy and compliance with accounting standards and regulatory requirements (Alzeban, 2020). The committee mainly assesses the effectiveness of the organizational initial controls and risk management system. This mainly includes reviewing the process in place to safeguard the business assets to ensure the regulatory complaints (Liu, 2022). The core responsibilities of the audit committees are to monitor or review the effectiveness and provide advice to board members to discharge their duties. In countries like the UK, committees identify the annual report on behalf of the board to identify the decision and fair balance necessary for the shareholders. Additionally, the audit committee incorporates the entire process and control involved in the production process. The main function of the audit committee is to review the operations consisting of its dependencies and strategic focus accountable for the committee. The external auditors of the business manage the relationships with group auditors (Zhang, 2022). It brings huge scope for the business in adult plans, performance objectivity and interdependencies of the external auditors.
In the context of Centrica plc, the risk and audit committee assess the board in fulfilling the responsibilities by identifying and monitoring the integrity of financial information provided to their shareholders (Dzomira, 2020). However, the committee members oversee the financial reporting related to the risk and business controls. This is because the group identified a small number of queries based on supplementing existing disclosure. According to the committee report the overall non-audit fees incurred in 2022 have been recorded as £ 0.9 million as compared to the previous year’s £ 1.7 million. Thus, the interim results were £ 0.3 million for the audit consolidated statement (Centrica.com, 2024). The audit and risk committee of Centric plc is “Kevin O’Byrne” to determine the various effectiveness of the external audit to assess the effectiveness of the external audit process and interdependencies in areas of the robustness of the audit process, quality of people and service, delivery quality, and independencies. In addition, the executive and non-executive directors increase the overall workforce to benchmark the data of similar roles and sizes within Centrica plc.
The remuneration committee determined the salary for the chief executive officer mainly increased by 2.6% to £815000, and the salary of non-executives has increased by 4.8% across the wider UK workforce. Hence, the objective of the remuneration policy attracts and retain high-calibre executives in challenging as well as competitive global business environments. The remuneration policy mainly places a strong emphasis on both the short and long-term performance (Liu, 2022). The remuneration committees seek to avoid creating huge risks in the achievements of performances.
Suggestion or improvement
The committees need to enhance transparency through clearly communicating the remuneration policies and practices to their shareholders, employees and other stakeholders. This is because it provides detailed information regarding executive pay and their underperformance metrics (Zhang, 2022). Similarly, the remuneration committee needs to be closely linked with or aligned with the long-term strategic objectives of the energy service firms. The auditors and internal business need to review and adjust the performance metrics to ensure a balanced view of financial operations as well as sustainability goals. In such a scenario, it needs to incorporate the key performance indicators with the industry’s evolving challenges. The committee member encouraged the team to use long-term fiscal incentives to promote sustainable value creation (Tumwebaze et al., 2022). Furthermore, the stakeholder needs to actively engage with another shareholder to understand the industrial standards and peer companies. It helps the firm to determine the appropriateness and incentive payouts. By incorporating the strategies, remuneration committees can be able to become more equitable and transparent and align with the business executives along with executive pay for the long-term success of Centrica Plc. Considering corporate governance, the energy service firm needs to integrate the ESG factors to evaluate performance and compensation. The committee members also need to tailor training programs for the employees for further developing opportunities. It helps to ensure the members are well equipped to evolve the various needs of organizations.
Conclusion
The overall results and outcomes illustrate based on the energy sector of Centrica Plc. The overall results have been provided by me to analyse the business objectives and further goals accompanied by the firm and its key resources. In my opinion, the chosen company provided me with a clear and concise view of further progress and accepted the challenges of evaluating the financial statements of the companies. So far, it has helped me to understand the financial and legal challenges as well as also helped to provide an opinion to improve the financial positions. Conversely, I also found that Centrica plc follows a group report to determine the external auditor of the company. It helped me to identify the issues faced by companies with risk and audit management. Thus, I also found that IRR and NPV are both fundamental metrics. Despite this, managers consider the IRR in evaluating the discounted cash flows. In the UK, in corporate governance, the committee maintains the flexibility to apply discretion to achieve a fair outcome as a no-remunerations policy and framework. However, it helped me to carefully consider the design and implementation of the committee report. In my opinion, the committee needs to be able to exercise appropriate discretion based on identifying a fair outcome.
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