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Importance of Financial Management

University: KENSINGTON COLLEGE OF BUSINESS

  • Unit No: 15
  • Level: High school
  • Pages: 10 / Words 2563
  • Paper Type: Assignment
  • Course Code: N/A
  • Downloads: 286
Question :

This sample will let you know about:

  • What is financial management?
  • Discuss the importance of financial management.
Answer :
Organization Selected : N/A

Financial management pertains to strategical or managerial planning, coordination, direction and effective controlling of all the major fiscal functions in corporation or business entity. This involves systematic application of managerial principles and concepts in management of fiscal resources and assets of corporation and perform a crucial part in organisational and fiscal management. The main importance of FM is to give a proper guidelines to the different department of company which support in proper use of financial resources and make appropriate investments. In this project, Brightsun Travel is selected which deliver services related travel and tourism in different cities of UK.

In this report, various formal and informal approaches methods which support to make decision, principle of financial management, role of management accountant, use of accounting control system and their value are discussed in the context of integrated business system. In addition the ways in which FDM is crucial in attaining the long term financial sustainability is discussed in this project.

Evaluating ways in which financial decision making is significant for long term

This has been shown that managers make operational decisions in their daily business activities. Managers would then have all information on the current industry discount rate (Martin, 2016). This isn't as simple as no of operations which can be more economical or efficient. Gathering information is also a significant task that over a period can have significant influences during the operational task within enterprise. There are lot of functional information which is gathered periodically by managers. 

The aspect and stance of the corporation depend on all essential decision making. It provides executives and many others who help their daily decision-making needs with knowledge and demonstrations. To evaluate their current situation, it is important to using financial statements of corporation Brightsun Travel. Following is ratio analysis of corporation using data obtained from corporation's financial statements that can assist to inform about strategical and operational decision-making for Brightsun Travel as follows: 

Ratios analysis

Ratios analysis/evaluation are typically utilized as an efficient means of evaluating financial statements. In order to determine the abilities and shortcomings of a company, its financial situation and fiscal performance, the numbers develop numerical or qualitative relation among two statistics of financial statement. This helps multiple stakeholders assess certain aspects of performance of a company (Bodnar and et, al., 2013). In this regard following are several key ratios of corporation Brightsun Travel and their analysis to support corporation's operational and strategical key decisions, as follows:

Gross Profit Margin

(GBP in Million)

Year 2017

Year 2018

Gross Profit

768.00

643.00

Revenues

9007.00

9584.00

Gross Profit Margin (%)

8.53%

6.71%

Table containing gross profit margin of corporation for year 2017 and 2018, shows that in year 2017, GP margin was 8.53% which has been declined to 6.71% in year 2018. This declining scenario, reflects that entity's capabilities to generate sum of profit from core-fundamental operations has been declined. 

(GBP in Million)

Year 2017

Year 2018

Net Profits

13

-163

Revenues

9007

9584

Net Profit Margin (%)

0.14%

-1.70%

Above table is exhibiting net profitability margin of enterprise has been reached to negative level. In year 2018, net-profit ratio is -1.70% which was .14% in year 2017. This decline and negative figure in net-profit margin indicates that organisation's net profit generation abilities have been reduced.

(GBP in Million)

Year 2017

Year 2018

Current Assets

2241

2113

Current Liabilities

4325

4222

Current Ratio

0.52

0.5

Table containing current ratio of  Brightsun Travel shows that in year 2018 current ratio of corporation is .50 which which was .52 in year 2017 reflecting a decreasing trend in corporation's current ratio. Such a decline in current ratio shows that enterprise's short-term liquidity position has been declined. It also an indication that company's working capital position is not so much appreciable.

(GBP in Million)

Year 2017

Year 2018

Shareholder's Equity

281

291

Net Profits

13

-163

Return on Equity (%)

4.63%

-56.01%

Above presented data of return on equity shows that in year 2018 ROE is negative -56.105 which was around 4.63% in year 2017. This major declining trend shows that enterprise's capacity to provide return on equities employed has been reduced by a large gap.  Such decrease can affect trust of shareholders in company.

(GBP in Million)

Year 2017

Year 2018

Debt

6334

6278

Equity

281

291

Debt Equity Ratio

4.44%

4.64%

Above table shows data and figures of debt-equity ratio and analysis of this table shows that in year 2018, Debt-equity ratio is 4.64% while in year 2017 this was 4.44% this increase in ratio point out that corporation's reliability on debt financing has been increased over the period. Company should control this ratio as the excessive debts in corporation's financial statements is indication of weaker capital structure or poor solvency position. Struggling with your assignments, Order assignment help from our experts! 

Investment Appraisal Techniques

Investment appraisal techniques defines as compilation of tools that are employed to to accurately identify any particular investment or project's relative attractiveness. Investment appraisal is intended to determine the feasibility and value produced for projects, programs and investments decisions (Winand, Zintz and Scheerder, 2012). The main goal in business case of investment assessment/appraisal tools is to valuation of benefits related to investment to justify incurred costs. This assist in systematic evaluation of effectiveness to help in maximising return on any investment/project. In this context following is discussion on several key techniques of investment appraisals in context of Brightsun Travel as follows:

NPV: This is key technique which shows net present benefits to be occurred from a specific investment or project. Here it assesses the present value of all the future benefits that corporation will earn form making investment. For instance, Brightsun Travel wants to make investment of 275000 pounds in a project which has effective life of 5 years and will receive cash flows: £ 49500, £ 110000, £ 275000, £ 82500 and £ 132000 respective during five year. Discounting rate of return is 5%. Then for evaluation of this project viability, NPV is effective and simple tool. In this regard following computation of NPV of respective project, as follows:

Year

Cash Inflow

PV Factor 5%

Present Value Of Cash Inflows

Initial investment

-275000

1

-275000.00

1

49500

0.9523809524

47142.86

2

110000

0.9070294785

99773.24

3

275000

0.8638375985

237555.34

4

82500

0.8227024748

67872.95

5

132000

0.7835261665

103425.45

 

 

NPV

280769.85

As computation shows NPV is difference between PV of all cash in flows and outflows. Project's NPV is 280769.85 or 280770, this positive figure of NPV of concerned project shows that project is able to generate effective and favourable return on sum of investment made in project. Need Assignment Examples?Talk to our Experts!

Payback Period

This is another critical tool, which shows that specific time span within which sum of initial investment in project is forecasted to be retrieved and recovered due to aggregate cash inflows obtained from investment (Sharan, 2012). In this regard following is assessment of payback period of respective project, as follows:

Year

Cash Inflow

Present Value Of Cash Inflows

Cumulative Cash Flows

Initial investment

-275000

-275000.00

-227857.14

1

49500

47142.86

-180714.29

2

110000

99773.24

-80941.04

3

275000

237555.34

156614.3

4

82500

67872.95

224487.25

5

132000

103425.45

327912.7

 

 

 

 

Payback Period:

2 + (80941.04/237555.34)

2.34

A payback period above the project's life shows that project is not able to provide sufficient return based on investment made and project's life cycle. As per above computation of payback period of respective project, it has been evaluated that payback-period is 2.34 years. As project's payback period is below the aggregate project life of 5 years, thus project is viable and able to generate adequate return according to investment made.   

Average Rate of Return

This is also a crucial technique that reflects the actual probability of a project. This shows proportion of average cash flows to be generated from  a project and aggregate investment made in any project (Hull, 2012). This is simplified technique which help to evaluate effective returns to be generated from any project or investment. Under it all the cash flows are sued up and divided by project's life to assess the average return will be generated form project. Then this average amount is divided by total sum of initial and further investment in project. Outcomes are denoted by percentage return to be achieved out of a project.     

 

Year

Cash Inflows

Present Value Of Cash Inflows

1

49500

47142.86

2

110000

99773.24

3

275000

237555.34

4

82500

67872.95

5

132000

103425.45

 

 

555769.85

Average Cash Flows

 

111153.97

Initial investment

 

275000.00

 

 

40.42%

In this context above computation shows that this project will generate around 40.42 percent. This ARR percentage shows that this project would be viable. This is also an indication that corporation will achieve assured profits from this project.

Accountant role and system to support decision making.

The accounting officer of the respective company has a distinct role in helping internal managers and stakeholders in a financial reporting year to understand financial positions and performance. Distinct accounting control structures, like conformance and accounting reforms are in place, corporate assets are secured and corporation financial statements are maintained and prepared. This role and control structure are essential for internal managers to decide because it provides detailed information on their business activity with the company. In financial statements of corporation, control system establishes certain compliances and accountability policies for monitoring inflows/outflows inside company.

Financial decision making support long term financial sustainability

Financial decision and related task assist a corporation to perform operations and multiple tasks of corporation smoothly. As in Brightsun Travel managing staff make effective and relevant financial decisions that contributes in organisation's long run financial viability and sustainability (Dong, Michel and Pandes, 2011). This also allows to meet the corporation's lengthy-term goals in recent years. The idea of financial decision-making relates primarily to the efficient usage of fiscal resources which contribute to long-term sustainability of Organization. by utilizing the funds effectively, an organization can succeed more effectively with the assistance of sound financial decision-making. Get Finance Dissertation Topics from our experts!

Conclusion

In conclusion, it is stated that financial management lets business entities strengthen their financial decisions in operating capital. It also helps them establish funding methods, strengthens their net profit allocation payout plans and provides successful retained earnings policies. This also provide assistance to investor and other stakeholder to make informed and meaningful decision so that higher return can be gained in future. Ratio analysis is beneficial in describing the actual and real image of financial strength of company and ease the process of decision making.

Also Read- Unlocking Business Strategy: Unilever's Competitive Edge

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