Financial Decision Making and Payback Period Method

This assignment content discusses the Payback Period Method and Internal Rate of Return (IRR) as two techniques used by finance managers to select suitable projects that generate positive returns for their companies. The Payback Period Method provides assistance in selecting a project that recovers its initial investment in a shorter duration, making profit earlier. On the other hand, IRR enables an assessment of the return a company gets during a definite period of time. This method states that Morrison should select only those projects that give positive returns to the company. It can be concluded that finance managers need to consider all factors that affect financial decisions and evaluate them practically.

Finance for Strategic
Manager
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
1. Assessment of needs for financial information in business.....................................................1
2. Risk related to business and financial decisions......................................................................2
3. Summarizing financial information which are needs to make strategic business decisions....3
ACTIVITY 2....................................................................................................................................4
1. Purpose, structure and content of published accounts.............................................................4
2. Interpretation of financial statements.......................................................................................5
3. Analysis of financial ratios for strategic decision making.......................................................5
ACTIVITY 3....................................................................................................................................7
1. Distinguishing long term and short term financial requirements for business........................7
2. Comparison of long term and short term sources of finance...................................................7
3. Importance of cash flow management and its techniques.......................................................8
ACTIVITY 41 Analysis of corporate governance, legal and regulatory requirements...............9
2. Evaluating methods for appraising strategic capital or investment project...........................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
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INTRODUCTION
Finance is the life blood of an organization which plays a significant role in achieving
organizational goals and objectives. Financial information enables the finance manager of the
company to make effective and appropriate decisions. Financial strategists frame competent
policies and strategies which provides assistance in making proper utilization of financial
resources. It provides benefit to the company in increasing organizational productivity and
profitability (Hershey, Austin and Gutierrez, 2015). For this project report, Morrison is selected
which is the fourth largest chain of supermarket in UK. This report depicts financial information
need in business environment. Besides this, it also states assessment of business risk which
closely affects the financial decisions of the company. This project report also presents financial
statements of the company and indicates financial health and performance of the organization.
Besides this, it indicates importance of cash flow management techniques which helps the firm
in attaining success in the dynamic business environment.
ACTIVITY 1
1. Assessment of needs for financial information in business
Every business organization prepares financial statement which provides valuable
information regarding financial health and performance of the company. To build and maintain
faith of various stakeholders company is required to prepare and publish financial statement of
the company. Financial information is the essence of business decision making which enables the
finance manager to make appropriate decisions and there by helps in achieving success.
Financial information assists the finance manager to make proper usage of fund with the help of
suitable policies and strategies. Several users of financial information or statement are as
follows: Manager: Manager of Morrison requires financial statements to make strategic policies
and decisions which ensures smooth operations of business activities (Brown and et.al,
2014). Through this, company is able to assess its financial health and performance as it
helps in making effective judgments. Shareholders: Shareholders also are the owner of the company so they are highly
concerned with organizational growth and performance. They usually invest money to
earn extra income in the form of dividend. Shareholders of Morrison make use of
financial statements to assess risk and return factor before investing money.
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 Customers: They also evaluate financial statements to identify that company has the
ability or not to make arrangements in relation to regular supply of goods. Sometimes
customers are highly dependent on specific supplier for product. Suppliers: Suppliers are the main user of financial statements which helps them in
assessing credit worthiness of the company. It enables them to make suitable decision in
relation to whether he needs to supply goods to Morrison on credit basis or not. Better
financial performance ensures them that, company is able to make credit payment within
a definite period of time.
 Competitors: Competitors undertakes financial statement or information to compare its
overall performance with rivals companies (Graham, Harvey and Puri, 2015). It enables
competitors to learn competencies and strategies which aid in building competitive
advantage in the strategic business environment. Government: Tax is one of the major
income sources of the government. It makes analysis of financial statements of the firm
to assess appropriate tax amount as well as to ensure that company operates their business
activities more ethically (Users of Financial Statements. 2015).
2. Risk related to business and financial decisions
Risk is the factor which closely impacts business activities, performance and productivity
of the company. Business risk enforces huge problem in front the finance manager and Morrison
as well. There are several risk factors which affects financial and business decisions of the
company because they are closely related to the profitability aspects of the firm. Changing needs
and wants of customers imposes high business risk in front of Morrison. Customer is a wanted
animal and their needs and wants never comes to an end. Besides this, their like and dislikes are
continuously changing which impose problem in front of Morrison. Thus, in order to reduce such
business risk firm needs to undertake research and development activity to identify consumer
likes and dislikes which further affects financial decision of the company.
Along with the micro economical factors economic conditions such as recession or
deflation are also the subject of high business risk. Macroeconomic or market conditions such
as recession also affects business decision of Morrison. During recession, purchasing power of
the customers decreased so to attract more customers Morrison offered high discount to their
customers (Valentin and Mihaela–Andreea, 2015). In addition to this, it also made investment in
promotional activities to attract both existing and potential customer base due to presence of high
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competition. It impacts the revenue, market share and image of the company. Finance manager
of Morrison should consider all the risk factors which negatively affect the productivity and
profitability of the enterprise.
3. Summarizing financial information which are needs to make strategic business decisions
Finance manager or department of Morrison acquires variety of information through
financial statement of the company. It provides proper information to the firm regarding financial
activities and usage of fund. Success of the whole organization highly depends upon proper
utilization of finance. Through this, finance manager of Morrison is able to make effectual
decision which helps the organization in building and sustaining competitive advantage (Minnis
and Sutherland, 2014). Income statement, cash flow statement and balance sheet of the Morrison
provides deeper insight to it about business performance. Morrison undertakes following
statements to get information for making strategic business decisions: Income statement: Income statement of Morrison contains information about income and
of the firm. Expenditure includes salary and wages, office expenses, commission paid,
advertising expenses etc. On the other hand, such as income includes interest received,
commission received etc. It provides help to company in taking strategic decisions by
highlighting areas where the organization needs to control expenses. It provides more
benefit to Morrison by increasing profit of the company. Cash flow statement: It renders information about inflow and outflow of cash activities.
Cash flow statement assists Morrison in making investing as well as financing decisions
which proves to be more profitable for the company (Kwak and et.al, 2015). It indicates
cash position of the firm which helps the company in framing competent strategies for
organizational growth and development.
 Balance sheet: Balance sheet of Morrison states financial health and performance of the
company. It indicates the obligation which company needs to bear within financial year.
Besides this, it also gives idea about liquidity and soundness of the organizational
performance. This information enables the finance manager to make better decision so
that, company can achieve success and build distinct image in the mind of stakeholders.
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ACTIVITY 2
1. Purpose, structure and content of published accounts
Purpose of published accounts: One of the main purposes of Morrison to publish its
financial statement is to provide information regarding financial health and performance of the
company. Through this, it can obtain faith and trust of various stakeholders such as customers,
shareholders, suppliers, government etc. in the company's operations. By publishing financial
statement, Morrison can easily attract existing as well as potential customer base (Dehnavi and
et.al, 2015). Besides this, it also enables the company to increase its goodwill by fairly and
accurately publishing financial or business information.
Content of published accounts: Morrison includes following contents when they publish their
accounts in public at large:
 Income statement analysis
 Cash flow statement
 Balance sheet
 Non-recurring profit and loss a/c
 Segmental reporting New and discontinued operations of the company
Structure of published accounts: Structure of the published accounts can be divided into
following parts such as follows:
 Annual report of the company begins with overview of chairman of Morrison who states
strategies and policies adopted by the company. In addition to this, it also highlights the
performance, goals and objectives which the organization has achieved during the
accounting year.
 Company requires to present fact and figures through illustrations and pie charts so they
become more understandable.
 Along with it, published accounts of the firm represents summary of balance sheet items
which provides insight to investors regarding performance of business operations
(McNeil, Frey and Embrechts, 2015).
 In addition to this, annual report of the firm presents income statement analysis as well as
analysis of cash flow statement. It depicts liquidity position of the company because
earning of the investors is closely related to liquidity position of company.
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2. Interpretation of financial statements
Published accounts or annual report of Morrison provides several types’ valuable
information to company as well as other stakeholders. It enables the firm to frame competent
strategies and policies which contributes in achieving organizational goals and objectives.
Besides, it also he also helps the company in building competitive position over others. It has
been interpreted that, income statement entails information regarding income and expenditure of
the company. . Whereas cash flow statement of the company indicates cash or liquidity position
of the firm. It assist company in making important business decisions such as investment,
dividend etc. which further contributes in increasing goodwill and productivity of the company.
If financial or liquidity position of the company is sound then, Morrison is able to attract
potential and existing stakeholders (Kroes and Manikas, 2014). It also helps Morrison to retain
and sustain investors for longer duration.
Apart from it, Balance sheet of the Morrison shows financial soundness of the company.
Balance sheet has two parts such as assets and liabilities. Both the sides give clear idea to
shareholders, suppliers, government etc. about financial operations of the firm. It helps
stakeholders in making investment decision through which they can increase their earnings. It
has been analyzed that, financial and liquidity position of Morrison is sound. It is the positive
sign for the company which aid in increasing further productivity and profitability of the
company.
3. Analysis of financial ratios for strategic decision making
Ratio analysis can be defined as a tool which simplifies and facilitates better
understanding regarding financial results of the corporation. It acts as a key indicator which
helps stakeholders in making suitable investment decision. In addition to this, finance manager
of Morrison uses ratio analysis to identify strong and weak areas of organizational performance.
It helps in making suitable strategies to convert weaknesses into strengths.
Financial Ratios 2014 2015
Efficiency ratios:
Fixed asset turnover ratio 2.05 2.12
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Inventory turnover ratio
Receivable turnover ratio
20.34
101.61
21.26
177.01
Liquidity ratios:
Current ratio
Quick ratio:
Debt-equity ratio
.50
.16
.53
.50
.18
.70
Current ratio of the company indicates firm's ability to pay its current liabilities over
current assets. 2:1 is the ideal current ratio which shows financial soundness of the company.
From the above mentioned analysis it has been interpreted that, liquidity position of the Morrison
is not strong because it is below ideal current ratio. On the other hand, quick ratio of the
company depicts that, organization possess sufficient amount of marketable securities which can
easily be convertible into cash (Barton and Wiseman, 2014). Quick ratio of the company is
below ideal ratio which is 0.5:1. It can be assessed that, company has improved its financial
performance as compare previous years but still liquidity position of the firm is not well.
Morrison is required to take strategic move to improve its financial health and position. Debt-
equity ratio of Morrison presents that, firm raises its fund mostly through equity share capital.
Efficiency ratio of the company states that, Morrison's has the ability to make proper and
effective utilization of assets and stock as well. Fixed asset turnover ratio depicts that, company
have made proper utilization of fixed assets. On the other hand, inventory turnover ratio of the
Morrison decreases which is not good sign for the company. In addition to this, receivable
turnover ratio of the company is high as compared to previous year. It is not good for Morrison
because it receives late payment which reduces working capital of the company. Morrison is
required to make effective measures at appropriate time so that, organizational goals are timely
achieved.
Ratio analysis provides deeper insight to an organization about their financial health and
performance. Through this, Morrison is able to frame effective strategies and policies which
make contribution in the achievement of organizational goals and objectives. Further, ratio
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analysis also provides information to the organization about the effectiveness of their strategies
and policies. For instance: On the basis of above mentioned ratio analysis debt equity ratio of
Morrison exceeds ideal ratio. By taking into consideration Morrison can control the issuance of
equity shares. In addition this, liquidity performance of Morrison is not sound. By identifying
such aspect company can frame effective strategies and policies in relation the investing as well
as financial decisions. In addition to this, efficiency ratios shows that company have made
optimum use of assets to generate revenue in 2015 as compared to 2014. Ratio analysis also shed
light on the growth and development aspect of the company. Thus, by undertaking each and
every aspect organization becomes able to attain success in the competitive business arena.
ACTIVITY 3
1. Distinguishing long term and short term financial requirements for business
Company requires short or long tern finance which highly depends upon the business
needs and activities. There are several differences between long term and short financial
requirements. One of the main differences is that, when Morrison requires fund for more than
three years to meet its financial need then, it is known as long term source. For example:
Morrison requires long term finance to expand its business operations in several parts of the
country. It is taken as a current liability of the company which closely affects its cash and
profitability. As usually company needs to repay this amount in the form of installments from
current assets of the firm.
On contrary to this, when company requires fund for a limited period of time such as less
than 1 or 2 years to meet its financial requirements it is called as short term finance. For
example: To attract existing and potential customers Morrison needs to undertake sales
promotional activities to increase productivity and profitability of firm (Götze, Northcott and
Schuster, 2015). To meet these expenses as well as to make payment to supplier on time,
company requires short-term finance to ensure smooth functioning of the business organization.
2. Comparison of long term and short term sources of finance
There are various differences between long term and short term sources of finance which
are enumerated below:
Basis of difference Long term sources of finance Short term sources of finance
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Meaning Long term sources of finance
provide financial assistance to
Morrison for a long period of
time.
Short term sources of funding
provide financial assistance for
the very short span of time
approximately 6 to 12 months.
Examples Long term sources for
Morrison includes bank loan,
debenture, shares, retained
earnings and public deposits
etc. It facilitates in fulfilling
long term goals and objectives
of company (Meyer and
Kiymaz, 2015).
Short term sources of finance
depict bank overdraft, trade
credit facilities, installment
credit, short tern bank loan etc.
Objective Long term sources of finance
render benefit to Morrison
when it plans to huge
investment in specific project.
Company takes help of short
term sources of finance to
meet its day to day or regular
expenses. So, flow of business
operation never breaks down
due to financial issue (Revsine
and et.al, 2005).
Both the sources of finance such as long term and short term provides help to the
company by meeting its financial needs and thereby results in achieving success.
3. Importance of cash flow management and its techniques
Cash flow management plays a vital in making strategic business and financial decisions
of the company. It provides assistance to Morrison regarding inflow and outflow of cash which
enables in assessing financial performance of the company. It acts as an indicator which helps
the finance manger to make effectual strategies for the organizational growth and development.
If inflow of the cash is greater than outflow then, it is positive mark for the company. It
depicts that, Morrison has adequate fund to expand its business activities. It enables it to conduct
research and development activity to assess customer needs, wants and desire. Through this,
Morrison is able to increase sales as well as profit of the company. By providing satisfactory
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services to the customer, company can easily build customer loyalty which provides benefit to
the organization in near future. In addition to this, to manage cash flow effectively and
efficiently company needs to undertake several techniques (Sminia, 2014). For this, Morrison is
required to manage its working capital and business risks. Besides this, the firm need to make
efforts to collect its receivable within a time frame so that, they invest money in other productive
purposes. Cash flow management also helps the enterprise in attracting stakeholders in making
investment in Morrison's business operations.
ACTIVITY 41 Analysis of corporate governance, legal and regulatory requirements
There is different corporate governance well as legal and regulatory requirements for
public and private limited company. To start a new venture, private limited company requires £1
as a share capital. On the other hand, public limited company needs to maintain £50000 in the
form of share capital to start a new business. Along with it, the public limited company shares of
the firm have to denominated in home currency of UK(£). On other hand, there is no such type
of restriction upon private companies (Anderson and et.al, 2015). Besides this, to start a new
firm in UK it is necessary for both public and private limited company to present its
memorandum and article of association in an appropriate format to registrar. To open up new
business venture, enterprise has to follow all the procedures which are prescribed by the UK
government.
Role and accountability of managers significantly differs as changes made in the structure
of an organization. In the sole proprietorship firm, owner plays all the roles and responsibilities
itself. They manage business activities and functions without any intervention of others. On other
hand in the partnership firm, different partners plays different role for the well being of an
organization. Partners of an organization need to make discussion with each other before making
any decision. In addition to this, company which is limited by shares limits the liability of
shareholders to the value of their shares. Management and board of directors having the
responsibility to make decision in relation to the business activities. Shareholders does not have
right to make interference in the decision making of organizational aspects. Thus, role and
responsibilities of owner and managers significantly differs as changes take place in the nature of
the organization.
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2. Evaluating methods for appraising strategic capital or investment project
Investment appraisal techniques can be defined as a tool which helps Morrison in
selecting project which proves to more profitable for the firm in near future. Besides this, it also
assists in assessing impact of investment upon cash flow of organization (Investment Appraisal
Techniques. 2015). There are various tools available to company which helps in assessing
viability of the project (Peirson and et.al, 2014). Payback period method provides assistance to
enterprise in selecting suitable project which recovers initial investment in shorter duration and
makes profit earlier.
Along with it, internal rate of return is another method which enables Morrison to assess
return which company gets during a definite period of time. Through this technique, the firm can
estimate cash flow which it may generate within this duration. This method states that, Morrison
should select only that project which gives positive return to the company otherwise reject the
proposal (Pettigrew, 2014). However, it can be evaluated that, internal rate of return is more
practical then payback period method. It indicates that, company would generate positive return
from the project or not in near future. On the other hand, pay back method only entails duration
of project.
For instance: Morrison make initial investment of 100000£ in the new project.
Calculation of Net present value to assess the viability of project is as follows:
Years Cash inflow Discounting factor@10%
Discounted cash
flow (£)
1 30000 0.909 27270
2 35000 0.826 28910
3 42000 0.751 31542
4 45000 0.683 30735
Total 118457
Initial investment 100000
Net present value 18457
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On the basis of the above mentioned analysis it has been assessed that new project gives
positive return to Morrison such as 18457£. Thus, Morrison needs to select the project which
proves to be more profitable for them.
CONCLUSION
From this project report it has been concluded that, finance manager of the company
needs to consider all factors which affects financial decision of the firm. It closely impacts
productivity and profitability of the enterprise. It can be seen in the report that, various financial
statements enable Morrison to make effectual decision, policies and strategies. By analyzing
ratios it also has been concluded that, financial performance of Morrison is not sound. It can be
concluded that, after analyzing the period of financial need company is required to select
appropriate source of finance. Effectual management of cash flow provides help to the company
in achieving success in the competitive business environment.
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