Finance is a fuel in the business. Finance is an elixir and proves to be of great help for the purpose of value creation in businesses. All the activities that are conducted in any organisation are connected either directly or indirectly through finance(Kolk and Pinkse,2010 ). Financial decisions are most crucial decisions for the business. In the present report the discussion will be regarding the financial information that is going to be required while making the financial decisions for an organisation. Also, efforts have been made to highlight the major risks associated with the businesses. The detailed analysis are performed for Clariton Hotel operating in UK which is a growing company. The organisation is engaged in providing hospitality services.
1.1 Importance Of Financial Information
The main objective regarding preparation of financial information is to assess the financial position of the business. Apart from this the financial information also enables the users to make comparison for different periods. Therefore an effective assessment can be made regarding the financial performance of the company and the economic decisions can be made taken on that basis. Financial information has distinctive significance for the different users which is discussed in detail as follows-
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Business Managers- Financial information is required by them to manage the liquidity and finances of the company effectively. This will ensure an adequate assessment of the business which can be useful for financial decision making.
Shareholders & Prospective Investors- They use financial information to make an assessment of the risks & returns of the company and take investment decisions. Prospective investors require financial information for the purpose of taking decisions regarding the viability of the investments(Irwin and Scott,2010 ). Financial information is useful for making predictions about the future earnings, dividend policies of the company. Also an effective assessment regarding the risks and returns from the particular assessment can be made by a prospective investor.
Financial Institutions- These institutions require the financial information for the purpose of decision making regarding whether a particular business has repaying capability or sufficient earnings for the timely repayment of the loans. The financial health of the company is being assessed by the financial institutions. This is being done with the help of the financial information provided by the business.
Suppliers- The financial statements and other financial information of the company is being assessed by the suppliers to assess the credit worthiness of the company for the purpose of providing credit on the goods or raw material supplied. The other terms of credit is based on the basis of the financial health of an the Clariton hotel.
Customers- They require the financial information for the purpose of ensuring a steady supply of the goods in future.
Employees- The financial information of Clariton Plc is of vital use for employees as well as it helps them to assess the future remunerations and about job security.
Government- Governmental authorities require financial statements for the purpose of making assessments of tax liabilities and other duties that are required to be paid by an organisation. Also comparison can be made regarding the data provided in the return by Clariton with that of the actual financial information.
1.2 Identification of business financial risks
Financial risks of the business can broadly be broadly divided to the three segments namely- Capital structure risks, liquidity risks, and long term stability risks. A brief description of the of these risks along with some important risk management techniques are discussed as follows-
Capital structure risks- These risks are high when the capital structure of an organsation is unbalanced. That could be due to en excess of debt or equity( Simons,2013.). This will affect the returns of the company and thus there are going to financial disturbances. Hence it is extremely important to manage the capital structure that is to employ adequate equity and debt portions in order to maintain an appropriate returns for the investors.
Liquidity risks- These risks occur when there is inadequate cash or other liquid assets with the business to repay its current liabilities. Liquidity position of the hotel is a vital factor as it poses threats of bankruptcy. These can be managed by making an detailed assessment about the company's short term liabilities along with the contingent liabilities and maintaining adequate working capital for its repayment.
Long term stability risks- Long term stability of Clariton hotel is connected with the various sources of finance that are being used to buy long term or fixed assets. The inefficient management of these assets will enhance the risks of insolvency for the hotel. Hence it is very important to manege these risks in order to develop the business of Clariton.
The other risks to which Clariton is exposed are strategic risks that are due to the irrelevant or inefficient strategic policies of the company. Another risks could be operational risks that could be due to the hurdles faced by the hotel in carrying out its routine operations. All these business risks can be managed by following an effective risk management. The different steps involved in the process of risks management and which will help Clariton to manage its risks are-
- Identification of risks
- Analysis Of risks
- Evaluation of risks
- Treating the risks
- Monitoring & reviewing risks
These steps are required to be followed for each of the financial and other risks identified for the purpose of managing risks effectively for Clariton.
1.3 Financial information
The financial data that is required for strategic decision-making for Clariton are its cash flows statements which which reflects the movement of cash flows and thereby helps ion making analysis regarding the various activities and about the major cash inflows and outflows. Balance Sheet of the company is required for decision making regarding the employment of the adequate assets and managing liabilities of the business(Shiller,2013 ). Profit and Loss statement discloses the revenues and the expenses and thereby help in controlling excess expenditures and framing policies for increasing the revenues. Then another important financial information is the ratio analysis which help in making comparisons regarding the profitability and other aspects of the business.
2.1 Purpose and contents
The general purpose for the preparation of the financial statements is to provide a structured information about the operations performed by Clariton. Financial statements as the whole are prepared by companies to analyse data which is being presented and take various strategic decisions. These decisions could be either related to the credit positions, or investments decisions, or may be related to the taxation and strategic planning.
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- Balance Sheet- This statement includes an elaborate information about the assets and the liabilities which are both short term and long term. The description regarding these is provided in the notes to accounts which are to be prepared after the financial statements.
- Profit and Loss Statement- This statements is prepared to present in detail the revenues arising from distinct sources and the expenses incurred for earning those incomes.
- Cash flows statement- This statement reflects the movements of cash flows for a particular period.
The interpretation is being given in the notes to accounts(Ahmed and Duellman,2011. ). It includes the details of the figures in the financial statements. The financial statements can be interpreted by the help of the notes to accounts.
2.3 Financial Ratios
The various financial ratios that can be used for the purpose of assessing the liquidity of the company are current liability ratio, quick assets ratios. Also ratio analysis can be used for making comparison from the financial statements of the previous years and that of its competitors.
3.1 Diffference between long and short term financial requirements of business
Business finance needs can be classified in to two categories namely long and short term finance needs. Long term finance needs refers to the amount of finance that company require for more than a year. On other hand, short term finance needs indicate the fund that firm needed to meet its financial requirements within a year. Working capital is used to meet day to day finance needs of the business. Managers on single time period have to take decision in respect to short term and long term finance needs of the firm. This is because for carrying out large size projects it is important to arrange long term finance so as to ensure that sufficient amount of money will be available to meet finance needs of the project (Bamber, Jiang and Wang, 2010). On other hand, short term finance is required perform day to day business activities of the firm. Hence, it can be said that there is a difference between long and short term finance requirements because long and short term funds are used for different purpose by the managers. Thus, Clariton hotel must clearly determine its short term and long term finance needs so that it can be ensured that when funds will be required they will be available in sufficient amount on time to the business firm. Short term finance requirements are determined by considering number of factors like the present number of the current ratio and expenditure that is made by the firm on quarterly basis in its business. Whereas, in order to determine long term finance requirement existing capital structure and cost of finance is mainly taken in to account (Brealey and et.al., 2012). Apart from this, plan that firm prepare in respect to investment that it will made on its project in upcoming year in also considered while determining long term finance needs of the business. Thus, it can be said that short and long term finance requirements of the business are determined on the basis of varied factors.
It is concluded that financial information must be used by managers for making business decisions. It is also concluded that ratio analysis must be done time to time in order to evaluate business performance. Long and short term source of finance must be used by the firm with due care. This is because if same will not be done then business problem will come in existence. Investment appraisal method must be used to select most viable project for the business firm.
- Ahmed, A.S. and Duellman, S., 2011. Evidence on the role of accounting conservatism in monitoring managers’ investment decisions. Accounting & Finance. 51(3). pp.609-633.
- Baker, M. and Wurgler, J., 2011. Behavioral corporate finance: An updated. National Bureau of Economic Research.
- Bamber, L.S., Jiang, J. and Wang, I.Y., 2010. What's my style? The influence of top managers on voluntary corporate financial disclosure. The accounting review. 85(4). pp.1131-1162.
- Bamber, M. and Parry, S., 2014. Accounting and Finance for Managers: A Decision-making Approach. Kogan Page Publishers.
- Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.