Finance for Strategic Managers | Strategic Decision Making
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Running head: FINANCE FOR STRATEGIC MANAGERS
Finance for Strategic Managers
Name of the Student
Name of the University
Author’s Note
Finance for Strategic Managers
Name of the Student
Name of the University
Author’s Note
FINANCE FOR STRATEGIC MANAGERS1
Table of Contents
Introduction................................................................................................................................2
1. Financial Information.............................................................................................................3
1. a. Company Introduction and Sources of Financial Information.......................................3
1. b. Need for Financial Data and Information and Creative Accounting.............................4
1. c. Identification and Analysis of Risks and Processes to Manage Them...........................6
2. Published Accounts................................................................................................................8
2. a. Advise on Investing in the Business than to Place Money in Deposit Account............8
2. b. Ratio Analysis..............................................................................................................10
Comparative Analysis and Interpretation of Ratios.........................................................10
Recommendations............................................................................................................13
Limitations of Financial ratio Analysis............................................................................14
Other Method to Analyze Financial Data and Performing Strategic Decision Making. .15
3. Capital Expenditure Projects................................................................................................16
3. a. Review of the Methods to Appraise Strategic Capital Expenditure Projects...............16
3. b. Evaluation of Business Proposal..................................................................................18
Conclusion................................................................................................................................20
References................................................................................................................................22
Introduction
Table of Contents
Introduction................................................................................................................................2
1. Financial Information.............................................................................................................3
1. a. Company Introduction and Sources of Financial Information.......................................3
1. b. Need for Financial Data and Information and Creative Accounting.............................4
1. c. Identification and Analysis of Risks and Processes to Manage Them...........................6
2. Published Accounts................................................................................................................8
2. a. Advise on Investing in the Business than to Place Money in Deposit Account............8
2. b. Ratio Analysis..............................................................................................................10
Comparative Analysis and Interpretation of Ratios.........................................................10
Recommendations............................................................................................................13
Limitations of Financial ratio Analysis............................................................................14
Other Method to Analyze Financial Data and Performing Strategic Decision Making. .15
3. Capital Expenditure Projects................................................................................................16
3. a. Review of the Methods to Appraise Strategic Capital Expenditure Projects...............16
3. b. Evaluation of Business Proposal..................................................................................18
Conclusion................................................................................................................................20
References................................................................................................................................22
Introduction
FINANCE FOR STRATEGIC MANAGERS2
Strategic decision making is a crucial aspect for the strategic managers of the business
organizations and it refers to the mechanism to chart a course on the basis of the longer term
vision and long-term goals of the companies. Strategic decision making enables aligning the
shorter-term organizational plans with the broader mission through clarifying big picture of
the business so that both clarity and consistency can be provided to the companies. The main
intention of strategic decision making is to provide the companies with competitive
advantage by challenging the overall direction as well as scope of the business (Shepherd and
Rudd 2014). In the process of strategic decision making process, strategic managers are
required to take into consideration different aspects as well as different types of information
of the business and financial information is considered as one of those types of information.
There is a large association between strategic decision making and financial information of
the companies as the strategic managers largely rely on the financial information to make
different types of strategic decisions (Tseng and Hung 2014). There are different sources
from where required financial information can be acquired. Strategic managers are also
required to identify the organizational risks in strategic decision making process with the aim
to develop strategies to mitigate them. Ratio analysis is a crucial tool for analysing and
interpreting financial information of the companies so that investors can know the actual
financial health of the companies. Strategic managers are also required to take into
consideration different methods to appraise strategic capital expenditure projects along with
the effective management of cash flow (Tseng and Hung 2014).
This report is based on Wesfarmers Limited (Wesfarmers) listed in Australian
Securities Exchange (ASX) which is a recognized stock exchange. There are three parts in
the report. The first part discusses about the importance of financial information in strategic
decision making process. The second part discusses about the importance of published
Strategic decision making is a crucial aspect for the strategic managers of the business
organizations and it refers to the mechanism to chart a course on the basis of the longer term
vision and long-term goals of the companies. Strategic decision making enables aligning the
shorter-term organizational plans with the broader mission through clarifying big picture of
the business so that both clarity and consistency can be provided to the companies. The main
intention of strategic decision making is to provide the companies with competitive
advantage by challenging the overall direction as well as scope of the business (Shepherd and
Rudd 2014). In the process of strategic decision making process, strategic managers are
required to take into consideration different aspects as well as different types of information
of the business and financial information is considered as one of those types of information.
There is a large association between strategic decision making and financial information of
the companies as the strategic managers largely rely on the financial information to make
different types of strategic decisions (Tseng and Hung 2014). There are different sources
from where required financial information can be acquired. Strategic managers are also
required to identify the organizational risks in strategic decision making process with the aim
to develop strategies to mitigate them. Ratio analysis is a crucial tool for analysing and
interpreting financial information of the companies so that investors can know the actual
financial health of the companies. Strategic managers are also required to take into
consideration different methods to appraise strategic capital expenditure projects along with
the effective management of cash flow (Tseng and Hung 2014).
This report is based on Wesfarmers Limited (Wesfarmers) listed in Australian
Securities Exchange (ASX) which is a recognized stock exchange. There are three parts in
the report. The first part discusses about the importance of financial information in strategic
decision making process. The second part discusses about the importance of published
FINANCE FOR STRATEGIC MANAGERS3
accounts for gaining information on the companies. The last part discusses about the methods
of appraising strategic capital expenditure projects.
1. Financial Information
1. a. Company Introduction and Sources of Financial Information
Wesfarmers is one of the largest multinational corporations operating in the consumer
discretionary industry of Australia. It was established in the year of 1914 and it is
headquartered in Western Australia. Wesfarmers is known for its diverse business operations
that include outdoor living and home improvements; and general merchandise and apparel;
office supplies; it also has an industrial division that includes chemical related business,
fertiliser and energy, safety products and industrial products (wesfarmers.com.au 2020). Over
the years, Wesfarmers has become one of the largest employers in the presence of a
shareholder base of 484,000. Providing satisfactory return to the shareholders is the primary
aim of the company. In order to achieve this primary aim, Wesfarmers has certain specific
objective; they are anticipation of the customer needs in order to deliver competitive services
and goods, taking care of the staffs as well as employees through providing them with safe
and fulfilling work environment, fairly engaging with the suppliers along with ensuring
ethical sourcing, providing reasonable support to the communities in which it operates, taking
good care of the environment and operating in the presence of honesty and integrity in all the
business dealings (wesfarmers.com.au 2020). Wesfarmers has certain factors that work a
growth enablers of the company such as outstanding people, commercial excellence, social
responsibility, innovation, empowering culture and robust financial capability
(wesfarmers.com.au 2020).
Earlier discussion shows the importance of financial of financial information in
strategic decision making process. There are different sources of financial information that
accounts for gaining information on the companies. The last part discusses about the methods
of appraising strategic capital expenditure projects.
1. Financial Information
1. a. Company Introduction and Sources of Financial Information
Wesfarmers is one of the largest multinational corporations operating in the consumer
discretionary industry of Australia. It was established in the year of 1914 and it is
headquartered in Western Australia. Wesfarmers is known for its diverse business operations
that include outdoor living and home improvements; and general merchandise and apparel;
office supplies; it also has an industrial division that includes chemical related business,
fertiliser and energy, safety products and industrial products (wesfarmers.com.au 2020). Over
the years, Wesfarmers has become one of the largest employers in the presence of a
shareholder base of 484,000. Providing satisfactory return to the shareholders is the primary
aim of the company. In order to achieve this primary aim, Wesfarmers has certain specific
objective; they are anticipation of the customer needs in order to deliver competitive services
and goods, taking care of the staffs as well as employees through providing them with safe
and fulfilling work environment, fairly engaging with the suppliers along with ensuring
ethical sourcing, providing reasonable support to the communities in which it operates, taking
good care of the environment and operating in the presence of honesty and integrity in all the
business dealings (wesfarmers.com.au 2020). Wesfarmers has certain factors that work a
growth enablers of the company such as outstanding people, commercial excellence, social
responsibility, innovation, empowering culture and robust financial capability
(wesfarmers.com.au 2020).
Earlier discussion shows the importance of financial of financial information in
strategic decision making process. There are different sources of financial information that
FINANCE FOR STRATEGIC MANAGERS4
can be used in strategic decision making of Wesfarmers. Wesfarmers has three types of
financial statements that can be considered as the main source from where the management of
the company can acquire the required financial information in order to make strategic
decisions; they are income statement, balance sheet and cash flows (Mimura et al. 2015). The
income statement that is also known as the profit or loss statement of the companies shows
revenues and expenses of the company during a particular financial period. The main purpose
of the income statement can be seen in demonstrating the performance of the company for a
particular period through showing the revenues and expenses along with the resulting profit
or loss. After that, the balance sheet is another major crucial source of information of the
company that assists by providing a summary of the accounting balances that are assets,
liabilities and equity for a particular financial period. Information obtained from this source
of information assists in the depiction of the strengths of the company along with the working
capital which helps in determining how easily changes in revenue can be managed by the
company while operating correctly (Nalini et al. 2016). The cash flow statement is another
source of information for the company that helps in summarizing the total amount of cash
inflows and outflows of the company for a particular period of time. These are the three main
sources of financial information in Wesfarmers. In addition to these sources, financial
information can also be obtained from notes to the financial statements of the company.
1. b. Need for Financial Data and Information and Creative Accounting
It can be seen from the above discussion that income statement and balance sheet are
two of the major sources of financial information of Wesfarmers. The following discussion
shows the summarization and analysis of these two financial statements of Wesfarmers:
Income Statement – Income statement in the 2017 annual report of Wesfarmers shows that
the revenue has increased as compared to the past year while the total expenses of the
company has decreased in 2017. This has led to the large increase in EBIT of Wesfarmers in
can be used in strategic decision making of Wesfarmers. Wesfarmers has three types of
financial statements that can be considered as the main source from where the management of
the company can acquire the required financial information in order to make strategic
decisions; they are income statement, balance sheet and cash flows (Mimura et al. 2015). The
income statement that is also known as the profit or loss statement of the companies shows
revenues and expenses of the company during a particular financial period. The main purpose
of the income statement can be seen in demonstrating the performance of the company for a
particular period through showing the revenues and expenses along with the resulting profit
or loss. After that, the balance sheet is another major crucial source of information of the
company that assists by providing a summary of the accounting balances that are assets,
liabilities and equity for a particular financial period. Information obtained from this source
of information assists in the depiction of the strengths of the company along with the working
capital which helps in determining how easily changes in revenue can be managed by the
company while operating correctly (Nalini et al. 2016). The cash flow statement is another
source of information for the company that helps in summarizing the total amount of cash
inflows and outflows of the company for a particular period of time. These are the three main
sources of financial information in Wesfarmers. In addition to these sources, financial
information can also be obtained from notes to the financial statements of the company.
1. b. Need for Financial Data and Information and Creative Accounting
It can be seen from the above discussion that income statement and balance sheet are
two of the major sources of financial information of Wesfarmers. The following discussion
shows the summarization and analysis of these two financial statements of Wesfarmers:
Income Statement – Income statement in the 2017 annual report of Wesfarmers shows that
the revenue has increased as compared to the past year while the total expenses of the
company has decreased in 2017. This has led to the large increase in EBIT of Wesfarmers in
FINANCE FOR STRATEGIC MANAGERS5
2017. There is a decrease in the finance cost of the company in 2017 whereas income tax
expenses have become double in this year. All these aspects led to the huge increase in the
net profit of Wesfarmers in 2017 along with the increase in basic and diluted EPS of the firm
in 2017 (wesfarmers.com.au 2020).
Balance Sheet – Balance sheet in the 2017 annual report of Wesfarmers shows decrease in
the total current assets and non-current assets of the company in 2017 which has contributed
towards the fall in the total assets of Wesfarmers in 2017. In case of liabilities, both current
liabilities and non-current liabilities of Wesfarmers have decreased in 2017 as compared to
2016 and this has led to the decrease in total liabilities of the company in 2017. Total equity
has increased in 2017 due to the increase in issued capital (wesfarmers.com.au 2020).
The above information on the income statement and balance sheet of Wesfarmers
helps the management of the company in comparing the actual performance and position of
the firm with the budgeted financial performance and position (Bryce 2017). In case there is
major variance, the strategic managers develop appropriate strategies to revive the financial
performance and position of the company. In addition, strategic managers of Wesfarmers can
compare this information from past information or the information of the competitors so that
the areas requiring improvements can be recognized and appropriate strategies can be made.
Moreover, in the presence of all this information, it become possible for the strategic
managers of Wesfarmers to male strategic plans based on strategic decisions (Morden 2016).
Impact of Creative Accounting – Creative accounting can be considered as the activities to
manipulate a company’s financial information. This is also referred as earnings management
which are the accounting practices that follow the accounting rules but depart from the spirit
of those accounting rules (Yadav 2014). There is a difference between fraudulent accounting
practices and creative accounting practices; these are not illegal but it is considered as
2017. There is a decrease in the finance cost of the company in 2017 whereas income tax
expenses have become double in this year. All these aspects led to the huge increase in the
net profit of Wesfarmers in 2017 along with the increase in basic and diluted EPS of the firm
in 2017 (wesfarmers.com.au 2020).
Balance Sheet – Balance sheet in the 2017 annual report of Wesfarmers shows decrease in
the total current assets and non-current assets of the company in 2017 which has contributed
towards the fall in the total assets of Wesfarmers in 2017. In case of liabilities, both current
liabilities and non-current liabilities of Wesfarmers have decreased in 2017 as compared to
2016 and this has led to the decrease in total liabilities of the company in 2017. Total equity
has increased in 2017 due to the increase in issued capital (wesfarmers.com.au 2020).
The above information on the income statement and balance sheet of Wesfarmers
helps the management of the company in comparing the actual performance and position of
the firm with the budgeted financial performance and position (Bryce 2017). In case there is
major variance, the strategic managers develop appropriate strategies to revive the financial
performance and position of the company. In addition, strategic managers of Wesfarmers can
compare this information from past information or the information of the competitors so that
the areas requiring improvements can be recognized and appropriate strategies can be made.
Moreover, in the presence of all this information, it become possible for the strategic
managers of Wesfarmers to male strategic plans based on strategic decisions (Morden 2016).
Impact of Creative Accounting – Creative accounting can be considered as the activities to
manipulate a company’s financial information. This is also referred as earnings management
which are the accounting practices that follow the accounting rules but depart from the spirit
of those accounting rules (Yadav 2014). There is a difference between fraudulent accounting
practices and creative accounting practices; these are not illegal but it is considered as
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