FINANCE and its related aspects are considered to be the most important element for business as they are the primary objective for every firm. They are required at every level of operational activities. In the following report, a discussion will be done with respect to the strategic decision making by managers (Cox and Fardon, 2003). For this purpose, different companies will be taken to understand various aspects such as need of financial information and use of published accounts. Some practical consideration of financial figures will be taken to understand the derivation of ratios by taking data from a firm that is engaged in a large scale business. Along with the practical implication, brief knowledge regarding their impact will be presented. Apart from accounting activities, different investment appraisal techniques will be identified for gaining theoretical knowledge.
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Need for financial information
Finance is considered to be the life blood of business which is required at every level. In order to carry out every operation for the growth of firm and for meeting out the daily trading needs, finance plays a significant role (Maynard, 2013). Considering the detailed knowledge regarding importance of financial information, it is presented as below:
Future decision making – With the help of financial information, company can take future business decision regarding any operational activity such as procurement, promotions and making trade contacts with any other firm (Loayza, Levine and Beck, 2000). With the help of available funds, they make decisions to carry their business to a greater extent.
Expansion of business – When an entity plans to take their business at relatively higher level, they consider the financial information to determine whether they are economically sound enough to expand their business or not.
Assessing the growth of business – In order to assess the growth of business, financial aspects need to be considered (White, 2006). By analyzing the financial figures of current year and by comparing them with the past years, the entity determines their progress and identifies the success or failure of their business policies.
Business risk related to financial decisions
Business is a risk taking activity that is based over uncertain market conditions. There are many factors that affect the working of entity, mainly the financial working which is the major objective of every firm. In association with the relevant factor, there is certain risk that is involved with an entity (Beaver, 2005). Considering the risk identified by companies such as IKEA, there are various business risks which are affecting the financial decision making aspect that includes the list of following:
Sales risk – It is quite obvious that sales of firm like IKEA are highly dependent over the market conditions that comprises of demand of people and trend in the external environment. On the basis of sales, the profit or loss of business is identified (Funke, 2007). Sales being one of the vital operational activities carry massive degree of risk as the trend and demand of people changes frequently. Hence, it is the major business risk that is affecting financial decisions.
Cost-input risk – Cost-input refers to the amount that is priced over a particular product and it is another major operational activity that affects the financial business decision making. With high prices of any product, its demand certainly decreases. But keeping the prices too low to increase market share may lead to reduction in profits of business by IKEA. Thus, imposing appropriate prices as per the need in market is another risk that is associated with the entity (Stolowy and Lebas, 2006).
Future projections – It refers to the activity of budget making where financial projections are made to initiate any project by IKEA. The following activity is based over assumptions whether the firm will be able to generate revenue or not and on that basis, funding is done over the project. It is a type of business risk that impacts the financial decision making (Efendi and Swanson, 2007).
Financial information needed to make strategic business decisions
Business requires finance in every operational activity whether it belongs to internal or external working of firm. When an entity plans to make any future decision for the progress and growth, they consider the financial worthiness and then carry out the process. There are various types of financial information that carries individual importance in taking a particular kind of decision (Manigart, 2000). Discussing them in detailed structure with following the policies by Morrison PLC, they are as follows:
Income statements – Income statement is one of the important data that determines the trading and profits & loss account along with the assessment of balance sheet. By analyzing the final figures of balance sheet, enterprise came to know about the capital wealth that is available with them (Gibson, 2012). It is required for making future investments over other projects for the growth and expansion of business by Morrison PLC.
Financial ratios – In order to identify the growth of business carried by Morrison PLC between consecutive years, the financial ratios are considered. It is required for strategic business decision when a firm performs industry analysis to determine their own position in the market.
Cash flow statements – With the help of cash flows, Morrison PLC determines the flow of cash during a particular trading period. It is scrutinized to determine the areas where business can successfully cut the cost to increase their profitability and take strategic decisions while assigning prices to a product (Information needs of financial statements users - between harmony and conflict, 2013).Business requires finance in every operational activity whether it belongs to internal or external working of firm. When an entity plans to make any future decision for the progress and growth, they consider the financial worthiness and then carry out the process. There are various types of financial information that carries individual importance in taking a particular kind of decision (Manigart, 2000). Discussing them in detailed structure with following the policies by Morrison PLC, they are as follows:
Purpose, structure and content of published accounts
The accountability information provided by firm is made by carrying out various aspects regarding determining the purpose for which report is being made along with the structure that will be followed (Brigham and Ehrhardt, 2011). Furthermore, the content that is to be published is also taken into consideration. Considering the practices of Super-fresh PLC which is a large scale retailing chain, the individual elements and purpose for publishing accounts are described as below:
The major purpose for publishing accounts by an entity is to provide detailed information to various stakeholders. It includes the list of people that have individual importance with published accounts that are as follows:
Shareholders – They require account statements for the purpose of making investments.
Employees – Account statements help them to analyze the growth made by their efforts.
Managers – They consider account statements for future decision making process (Helfert, 2004).
The structure of published accounts comprises of various types of individual reports that are mentioned as under:
Financial statements – It comprises the statements of financial position with mentioning the growth prospectus of firm. Simultaneously, it demonstrates the income statements including trading and profit & loss account and balance sheet for showing the wealth of firm like Super-fresh PLC and cash flows for determining the regular trading activities that are dealing in cash.
Director's report – It shows the judgment made by director whether the company is gaining progress or not. It shows the future plans of firm which are made by directors and that are to be presented to various stakeholders of entity (Drake and Fabozzi, 2012).
Interpretation of financial information
The financial information provided by companies is very effective as it helps in taking various types of decisions by different stakeholders of the firm. With the help of financial information through published accounts, following benefits are ascertained:
Comparison between consecutive accounting years – By analyzing the financial figures of company by Super-fresh PLC between two or three consecutive accounting years, the firm came to know about their growth prospects (Cortes, 2009).
Comparison between companies – By making comparison between accounting statements of two companies under same industry, the relevant firm gets to know their own market position where they are standing. Simultaneously, it helps them to make more effective policies to earn greater market share.
Industrial comparison – With the help of identifying published account, the particular entity can perform industrial comparison. It helps them to determine the success of industry and trend where they are performing business (McMenamin, 2002).
Setting benchmark – After analyzing the published accounts and through getting the knowledge of financial figures, company such as Super-fresh PLC can set benchmark standards which will help them to build future targets. It allows the business to perform operational activity with greater efficiency level as they have to comply with the standards that they have created (Funke, 2007).
Ratio analysis may be defined as a tool which provides information to Superfresh Plc about their financial health and performance. It enables organization to frame sound strategies and policies by taking into consideration the profitability and liquidity aspects. For instance: current ratio of an organization is very far from ideal ratio. Current ratio of Superfresh Plc is .64 which represents that company have less amount of current assets to meet their current obligation. In this situation, manager requires to make control over their expenses and frame competent strategies which facilitate optimum utilization of the financial resources to the large extent. In addition to this, profitability aspects of the corporation shows increasing trend in their performance. This aspect compels organization to follow their existing strategies and policies which proves to be more profitable for them in the upcoming years. On the basis of this aspect, it can be stated that ratio analysis provides assistance to the enterprise in making strategic plan and policies.
Distinguishing long and short term financial requirements
There are basically two types of financial activities which are available to the business which comprise of short term and long term finances. Determining each type in detail, the long term financial requirements are those that are required for more than the period of one or two years that are depending over the nature and type of business (Cox and Fardon, 2003). On the other hand, short term financial requirements are those that have to be met out within period of one year. The long term finance is generally required when the firm plans to perform some large scale activities such as launching of a new product or mainly at the time of expansion of business. In contrary to this, the short term finance is required for meeting out daily business needs. It includes activities such as payment to debtors, procurement of material and other short term miscellaneous expenses (Stolowy and Lebas, 2006).
Cash flow management techniques and their importance
There are different types of cash flow techniques that can be assessed for determining the flow of fund for regular transactions by business. They carry a vital importance to analyze the flow of liquidity over various activities. The different cash flow techniques along with their importance are presented below:
Cash flow forecast – It is a technique where the firm makes prediction of cash flows that will be occurring during accounting period. It includes the activities of determining trade payable and trade receivable.
Managing inventory – Management of inventory is another cash flow management technique in which the firm determines the cost over managing stocks that are available with them. It includes procurement cost, maintenance and warehousing of material.
Budgetary controlling – It is another cash flow management technique with the help of which future budgets can be made. It is generally adopted at the time when an entity is taking initiative of business expansion.
Evaluating methods for investment appraisal
There are various methods for the investment appraisal that are considered while making investments. Individually describing them, they are as follows:
Net Present Value (NPV) – It is the technique that is helpful in determining the present value of an investment on the basis of expected income that it will generate in future by reducing the cost that it will include.
Internal Rate of Return (IRR) – It is that rate of return at which the NPV derived from the above investments become zero. It is helpful in making comparison between different investments (Fridson and Alvarez, 2002).
Payback period – It is the technique that helps investor to determine the time period at which investment will cover the cost and begin to produce positive returns. By comparing two projects, the plan that covers cost in the least time period is expected to be favorable as compared to the other.
Cost benefit analysis – This analysis refers to the method by which company can determine the best option and approach for adopting benefits by reducing the cost that is incurred over labor and time (Adler, 2000).There are various methods for the investment appraisal that are considered while making investments. Individually describing them, they are as follows:
From this Finance Assignment sample report, it is concluded that finance related aspects plays a very important role for managers while making decisions. By the help of this approach, managers can identify the scope of their business along with determining the efficiency of their corporate policies that they are applying in running their operational activities. The financial information that is required is determined along with the business risks which are associated with them. The concept of published accounts has been elaborated with respect to various examples for practical learning. The sources of funds have been analyzed and finally, different ownership structures are described with identifying the roles by owners along with some investment appraisal techniques.
- Efendi, J. and Swanson, E. P., 2007. Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of Financial Economics.
- Fridson, M. and Alvarez, F., 2002. Financial statement analysis. John Wiley & Sons.Neave, E., 2002. Financial systems. London: Routledge.
- Funke, C., 2007. Ownership structure as determinant of capital structure. GRIN Verlag.
- Gibson, C., 2012. Financial Reporting and Analysis. Cengage Learning.
- Helfert, A. E., 2004. Techniques of Financial Analysis. Tata McGraw-Hill Education