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Investment decisions are the most crucial for business because it has direct impact on profitability. Commercial entities are required to evaluate available proposals in suitable manner to select viable option for investment. For this purpose, management of organizations is required to consider external and internal factors (Arnold, 2005). Collected information from these factors should be analyzed through financial tools and techniques. Present project report is based on strategic investment decisions of Toyota. Management of company is planning to invest in new technology in order to enhance their productivity and profitability. Report will include description of organization decision on the financial investments. Further, role and limitations of budgets will be discussed. Described tasks in the report will be supported by appropriate financial theories in order to draw valid conclusion.
Investment decisions has crucial impact on the financial statement of any company. Toyota is planning to invest in new and innovative technologies to make improvement in their production process. With this investment, management of the company will be able to make significant reduction in cost and can deliver better products to the customers. This investment will have huge impact on financial statement of the company because it will affect cost and profitability (Leung, 2011). For this investment, company will be required to incur capital expenditure by making arrangement of sources of finance. Further, management of Toyota has to provide training to their employees so they will be able to operate by making use of these techniques. These expenses will make increase in their cost due to which production and administration cost will be increased. With the implementation of this technology Toyota will be able to improve efficiency of their cars and will make reduction in overall cost. As a consequence, demand for car in the market will be increased which have positive impact on sales.
In accordance with the above description it can be noticed that investment of Toyota in new technology will affect various financial values in different manner. By considering this aspect, impact of the investment decisions on the financial statement of organization along with its relevance is enumerated below-
Income statement is prepared for the computation of net profit or loss incurred by business through their operational activities in an accounting year. Income statement is prepared on the basis of accrual concept. With the investment in new technology Toyota has to incur training cost and administration costs. These expenses are revenue in nature thus it will be recorded in income statement (Morgan and Rego, 2006). Further, sales of the company will be increased due to increase in demand in market. Increased sales will be recorded on the credit side of the income statement while cost will be recorded on debit side. For the capital investment company had raised funds from financial sources for which they will be required to pay financial cost. This cost will be recorded on debit side of the income statement in section non operating items. On the basis of this description it can be noticed that both income and expenses will be fluctuated with the investment decision (Love, 2002). However, it has been estimated by Toyota that increase in income will be higher in comparison to increase in expenditure.
This statement is also known as balance sheet. It represents balance of assets, liabilities and capital on a particular accounting date. With the capital investment in new technology there will be fluctuation in these balances (Bayne and Woolcock, 2011). Initial, impact will be of funds generated for capital investment. If funds are increased from debt finance, then there will be increase in non-current obligations and simultaneously balance of cash equivalents will also be increased. In the situation of equity finance, there will be increase in capital balance or funds of shareholder. For implementation of new technology company is required to purchase new plant and machinery and dispose non-beneficial assets. As a consequence, balance of these assets will also be changed.
Each activity of cash flow statement will be affected by the transaction of investment in new technology by management of Toyota. Funds consumed in capital investment will be deducted from investing activities and generated funds from financial sources will be added in financing activities. Other transactions will be recorded in operating activities such as increase in sales and production costs.
Toyota is required to prepared budgets prior to making capital investment. Budgets are prepared for future forecasting of operational activities. With these statements, company will able to reduce future uncertainties in order to minimize risk in investment. Budgets will Toyota in achieving their goals and objectives in an effective manner. By preparation of budget company will be able to coordinate activities across various departments. In addition to this, they can translate strategic plans into actions by allocating financial resources on the basis of requirements of different activities (Gigerenzer and Gaissmaier, 2011). In this manner, company will be able to make optimum utilization of their resources to make enhancement in their profitability. By making comparison of actual and budgeted figure Toyota can make improvement in their strategies to enhance the level of standard performance and to reduce variances. Budgets are prepared by considering operational activities on the basis of priority. Thus, allocation of resources is done on the basis of necessity of expenses (Significance of budgeting and recommendations to enhance the budgeting process, 2010). By this approach company is able to reduce unwanted or additional expenses which are not beneficial for Toyota. In this manner, management will be able to optimize cost structure for appropriate managing and controlling.
Despite of above described benefits there are certain limitations of budgeting. Main issue in budgeting is lack of accuracy in financial value. Budgets are prepared on the basis of future predictions and past experience. Due to this aspect, there is high possibility of variance between actual and budgeted values. In addition to this, one wrong prediction can have significant adverse impact on profitability because entire strategies are formed by considering budget as road map (Gorchels, 2006). Budget reduces flexibility in operational activities because it is applied mechanically and rigidly. After implementation of budgets in operational activities, changes are complex to be done to make improvement. It may demotivate employees as targets to too difficult to achieve by them. In addition to this, budgets are arbitrarily imposed from top to bottom level due to which employees are not able to understand these statements and they are not committed to it. This approach will make reduction in initiative and innovations at lower level.
In accordance with the above description it can be noticed that there are various advantages and disadvantages of budgets (Curzon and Wingler, 2013). However, implementation of investment project will not be feasible without budgets. In order to prepare appropriate budgets financial manager of Toyota is required to consider following aspects-
Industry Standard- Toyota is required to consider changes in industry and economy while preparation of budgets. In this manner, they will be able to avail information about possible changes in revenue and allocated costs in operational activities (Hussey and Ong, 2005). On the basis of this information, they can make appropriate future predictions for preparation of budgets.
Past performance- Along with industry standards, company is also required to consider financial data of previous years to determine trend. Generally, data of previous five to seven year is considered to assess trend of business. By considering this information, management can forecast future figures (Significance of budgeting and recommendations to enhance the budgeting process, 2010). In this manner, they will not repeat mistakes of previous financial years in preparation of budgets.
Additional margin- Management of Toyota is required to allocate their financial resources by considering additional margin for emergency situations. By this approach, they will be able prevent situation of deficiency (Zimmerman and Yahya-Zadeh, 2011). For example, if there is situation of inflation and cost of motor components is at it peak point then in this situation company can use additional funds reserved for uncertainties. In this manner, company will be proactive to future risks and uncertainties.
Cost cutting- Management of Toyota should plan to make reduction in their costing structure in order to enhance profitability of business. For this purpose, they are required to conduct cost benefit analyze in order to identify expenditures which are not economical for business (Hacklin, 2012). In this manner, they will be able to eliminate additional expenses which are irrelevant to operational activities. Further, they can search for new options for purchase of raw materials.
By considering above described aspects, management of Toyota will be able to manage their financial resources in an effective manner. They can monitor their performance to accomplish goals and objectives of implementation of new technology. Improved budgets will assist them in taking better decisions for business by which they can maximize their return on capital investment (Beynon-Davies, 2009). In addition to this, management of company will be able to identify threat and opportunities prior to their rivalry firms to attain competitive advantage.
Activity based approach is modern tool of accounting used for allocation of overhead in a logical manner. In this method initially cost is assigned by considering operating activities to determine cost of each department (Woiceshyn, 2011). In traditional approach of costing only machine or labor hours are used for the allocation of overhead in different departments. This method was not suitable because it does not define accurate cost of particular department. As a consequence, management has to face difficulty in determination of pricing policy and making other decisions. With the activity based approach allocation of overhead expenses is done in accordance with the real cause instead of considering common base. Main objective of Activity based approach is to develop a system in which commercial entity can effectively capture, allocate and distribute costs by considering area of responsibility.
In Toyota, activity based costing will recognize activities such as special engineering, testing and machine set up in which financial sources of company is consumed. On the activities cost consumption of each department will be calculated. By considering this information, company will take decision regarding portfolio of products that should be produced for higher profitability (Kimmel, Weygandt and Kieso, 2010). In addition to this, they make comparative assessment of department cost and profit to make suitable decision for business. Complexity of actual manufacturing environment of Toyota demands a rational approach for costing by which company can deal with inherent issues in costing. In the situation of turnaround, reduction in cost is key aspect for success. With the activity based approach management of Toyota can make reductions in direct cost in order to generate high profits. Activity based costing will assist Toyota in identifying hidden waste cost consumption on the name of overhead.
Strategic management accounting is focused on both internal and external factors of company in order to make viable decision. For the purpose of capital investment in new technology, Toyota is required to consider these aspects for effective allocation of cost in preparation of budgets and conducting break even analysis. By considering information from external factors company can do effective financial planning in order to achieve their aims and objectives (Kaner, 2014). This form of accounting assist management in making and implementation strategies to make increase in profitability of business. Further, it analyzes cost of production such as raw material and overhead to optimize cost structure. For the future forecasting of demand in market, strategic management accounting will assist Toyota in evaluating trend and economic factors. On the basis of this information they can form better plans and strategies. In addition to this, they will be able to explore available opportunities in market for high growth and increase in market share (Jocumsen, 2004). This strategy will provide them competitive advantage due to which they can provide better performance in comparison to rivalry firms.
Resource allocation is crucial task for business in order to maximize their return. For the investment in new technology following resources will be required by management-
Financial resources- The most vital for resource for any project or investment is financial resources or funding. For the investment in new technology, Toyota is required to generate funds from appropriate sources of finance. For this purpose, they are required to compare financial cost and its implication on business activities. With the generated funds, company will purchase tangible and intangible equipment (Gigerenze and Gaissmaier, 2011). Management and allocation of financial resources is significant and complex task. For proper management of financial resources company is required to prepare budgets by prioritizing their expenditures.
Human resources- Success of investment decision is relied on capability and talent of employees. Toyota is required to recruit an efficient individual who can provide training to existing staff and assist them in implementation of technology in production process. Company is required to make sure that recruited individual has good track record and work experience. In this manner, Toyota can achieve goals of their investment project. For the recruitment of efficient individual variety of methods can be used by management of Company (Bayne and Woolcock, 2011). In present investment project, management can take help of staffing agencies to select suitable candidate for the job.
Physical resources- Toyota is a car manufacturing company thus they require variety of physical resources in order to accomplish their production process. For the implementation of new technology company is required to make changes in their set up process and their production equipment. By the generated funding, management is required to purchase this equipment so they can effectively implement new techniques in production process (Woiceshyn, 2011). For this purpose, they will quotations from suppliers. Further, they will make comparative assessment of quotations along with the capacity of machinery provided. On the basis of this evaluation they will purchase suitable machinery in order to enhance their production capacity.
In this manner, company will be able to manage their resources to enhance their return on investment. Allocation of resources will be done on the basis of budgets to prevent situation of deficiency of resources. Resources will be adjusted in departments by considering their changing needs. Allocation of these resources will not be rigid it will change as per business circumstances of Toyota.
In several situation available resources are not in accordance with the requirements of business. Main reason of gap between need and availability of resources is poor financial planning and inaccurate forecasting in budgeting process. Toyota is required to reduce these gaps else they have to face adverse consequences occurred due to under and over absorption of resources (Kimmel, Weygandt and Kieso, 2010). It is because, both the situations have adverse impact on profitability of business. If there is situation of deficiency of resources, then company will not be able to achieve their aims and objectives. On the other hand, in situation of excessive resources company has to pay high financial costs which will reduce their profitability.
By considering the above described decisions there will be reduction in gap of required and available resources. It is because, management of Toyota will determine the required resources for investment project and then they will arrange resources for the same (Toyota, 2015). With this approach they will be able to prevent situation of over and under absorption of resource (Kaner, 2014). Thus, management will make sure that available resources are in accordance with the demand of the company by which they can achieve their desired returns. Along with this, they will be able to make optimum utilization of their capabilities to enhance return of business.
Main objective of treasury department is to manage liquidity of business. For this purpose they manage inflow and outflow of cash to make sure that proper cash and cash equivalents are available in business. Along with this, they invest their funds in appropriate options to maximize return from investment option (Jocumsen, 2004). For accomplishment of above described objectives, treasurer of Toyota should consider prudence principal to assure that assets of company are safeguarded through the activities of investment and hedging. Role of treasury management in decision of investment in new technology is as follows-
Forecasting of cash and cash equivalents- By appropriate treasury management, company can gather information for required cash in investment project. In this forecasting process they will consider both capital and revenue expenditure. On the basis of these expenses budgets will be prepared by management. In this manner, company will be able to generate appropriate funds for the investment decision to achieve their goals in an effective manner.
Monitoring of working capital- For proper maintenance of liquidity in business monitoring of working capital is essential. Through treasury management Toyota can review their corporate policies related to the working capital (Gigerenzer and Gaissmaier, 2011). They will model their impact on inflow and outflow of cash. In this manner, they can valuable changes in operational policies.
Generation of funds- Another important role of treasury management is to generate funds for investment projects. By considering cash forecasting they will raise funds from suitable financial sources such as debt finance, equity finance, venture capital, angel finance and other internal sources. From these source one or two option is selected in which company has to pay minimum financial cost. In this manner they generate funds as per the requirements of business (Bayne and Woolcock, 2011). If required funds will not be generated by treasurer of Toyota, then management will not be able to implement new technology in operational process to achieve their objectives.
Reduction of risk in investment decision- It is essential for Toyota to minimize risk in capital investment because failure of project can cause huge loss to business. For this purpose they use various netting and hedging strategies. By the use of these strategies they are able to cope up with threats of change in asset values, current holdings and rate of interest. Management of Toyota can form proactive strategies so they should be affected by such fluctuations. Along with this, they will be able to maintain stability in their profits.
Effective storage and retrieval of information- Through treasury management, information is collected about cash holdings, market condition, trends in industry and economic changes. With this information company will be able to assess internal and external factors of business environment to make suitable decision for strategic investment (Love, 2002). In the present decision of investment in new technology treasury management is required to conduct comparative assessment of cost and return of project. In this manner, they will be able to assess viability of project to ensure that by implementation of new technology there will be value addition in assets and productivity of business.
Bank and credit rating agency relations- By appropriate treasury management, company can improve their relations with financial and banking institutions. By this approach they will be able to create positive image of financial condition of the company. In addition to this, they can discuss their desired changes in non-current obligations in future period (Morgan and Rego, 2006). Management of Toyota can also take benefit of additional services provided by bank such as wire transfers, ACH payments, lock boxes and so forth.
In accordance with the above description it can be said that there is important role of treasury management in investment decision. By appropriate treasury management company can monitor inflow and outflow of cash in an effective manner. All roles and responsibilities of treasury revolves around monitoring and utilization of cash in order to enhance profitability of business (Bayne and Woolcock, 2011).
From the present study it can be concluded that investment decisions are important for the success of business organizations. Management is required to consider internal and external factors for appropriate evaluation prior to the decision making. By making investment in new technology Toyota will be able increase their productivity and profitability. For this purpose they are required to prepare budgets. With budgetary statements they will be able to analyze future threat and opportunities and can act accordingly. Company is required to allocate their resources in an appropriate manner to maximize their return. For this task, they are required to make estimation of required resources by business. Gap between required and available financial resources can be reduced by proper financial planning. Strategic management accounting will assist Toyota in forecasting of future demand in market, evaluating trend and economic factors. On the basis of this information they can form better plans and strategies. Treasury management provide significant support to investment decision so risk can be minimized and possibility of return can be maximized.
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