Finance for Managers: Financial Data & Strategic Decision Making

This document provides insights into the importance of financial data in strategic decision making for managers in the field of finance. It discusses the sources of financial data, the need for financial data in formulating business strategies, the risks associated with financial decision making, and methods for appraising strategic capital expenditures. The document also includes a discussion paper on the financial ratios of Samsung for the year 2019 and 2018.

FINANCE FOR MANAGERS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 – Financial Data & Strategic Decision making.................................................................1
Sources of financial data helps in information business strategy................................................1
Need for financial data and the information for formulation of the business strategies..............2
Risk Related to the financial business decisions.........................................................................3
Review of method used for appraising strategic capital expenditures........................................4
TASK 2 - Discussion Paper.............................................................................................................4
TASK 3 – Information Leaflet........................................................................................................8
TASK 4 - Capital Expenditure Appraisal........................................................................................8
Decision related to the purchase or replacement of the piece of machinery...............................8
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Finance is a broad term describing the activities associated with the business like,
leveraging, banking, credit, debt, money, capital markets and the investments. Finance is an
important factor to be considered in doing business. It requires the business enterprise to use the
most efficient source of financing its activities. Strategic financial management deals not only
with the activities that are related with the management of finance but also with achieving the
growth and objectives of the enterprise in the most efficient manner (Kumar, 2017). Present
report is based in the study conducted over Samsung plc. Pietro Yon is required to prepare a
presentation based on the research of Samsung. Report will cover all the information regarding
the strategies of the operations. It will cover the financial analysis of the company and associated
risks involves in financial decision making. It will also provide the analysis of investment project
involving funds of the business. Report will provide about viability of investments. The research
will enable the Yon to deliver the presentation based on the research of company.
TASK 1 – Financial Data & Strategic Decision making
Sources of financial data helps in information business strategy.
Financial information refers to the information related with the financial data such as
equity, assets and liabilities. All the information related to these accounts are known as financial
information. Financial information is very important for the organisation as it provide the
company to make strategic financial decisions. Company is required to analyse the different
sources of finance that is used by managers for making strategic financial decisions. There are
main three sources from which financial data is gathered that are balance sheet, statement of
income & statement of cash flow.
Balance Sheet
It provides the information related with the physical and financial resources available
with company for carrying out its business activities. Balance sheet contains the list of financial
resources but do not provide how these resources are managed by the business. The internal
working strategies could not be analysed from balance sheet. Therefore performance of company
could not be measured using balance but only financial wealth or position could be assessed.
Though it provides important information related to the assets and liabilities of the business
enterprise that is essential for preparing strategies.
Income Statement
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It is an important source of the financial information that is used by management in
taking strategic decisions. It reveals the performance of company during the given period. It do
not provide information of financial condition but about the performance of company with
existing resources. it helps in assessing the future viability of the business. Income statements
represent the revenues and expenses of the enterprise and cost of goods sold (Adomako, Danso
and Ofori Damoah, 2016). Using this company analyses the profitability and expenditures of the
company. It could be identified what costs are being incurred by the company and the sources of
revenue.
Cash Flow Statement
Cash Flow statement is much similar to the income statement. This provides the
information related with inflows and outflows of cash of the business. Difference between
income statement and cash flows is that cash flow only accounts for non cash transaction that
reveals actual cash position of the company. It could be identified where the money is flowing
and what are the potential sources of inflow. This helps the manager in promoting the sources
that are more productive and are generating higher cash. At the same time areas with high cash
outflows are controlled by applying cost efficient strategies.
Need for financial data and the information for formulation of the business strategies.
The financial health and position of the Samsung could be analyses only using the
financial data. Without using the financial data it is not possible for the managers to frame its
strategic policies. Strategies are framed after analysing all the financial data that are associated
with the business. experts are managers could identify the performance and position of the
company. Financial data is used mainly for analysing the following data for framing business
strategies.
Liquidity
Liquidity refers to the ability of firm in meeting short term obligation with current assets.
It is related with cash availability with the business. It could identify the business strategies only
after assessing the liquidity of firm. A company without adequate liquidity cannot carry out its
operations adequately (Bolland, 2017). Cash is required to carry out its daily business operations.
Before framing any business strategies it is essential to identify the cash position, whether
company will be able to carry out its operations smoothly. It could be identified that management
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of the liquid funds of the company is strong or weak. Generally companies face poor liquidity
position when the expenditures are high as compared with inflows. Inefficiency in managing the
liquidity position could cause serous issues for the company.
Profitability
Financial information is required to analyse the profitability of the business enterprise. A
company without required level of returns is considered inefficient in managing the resources
and generating returns of the company. It is essential to ensure whether management of firm is
having effective policies and control procedures for running business operations effectively
(Ogbenjuwa, Egbu and Robinson, 2018). Managers on the basis of financial data identify the
expenses that are unproductive and are consuming cost that could be applied in productive
activities. It enables the managers to frame strategies for controlling the cost of company and
increasing the productivity of company.
Leverage
Financial data is also essential for taking decisions related to the leverage. it refers to
identifying capital structure of entity. The proportion of equity & debt capital. Leverage refers to
the requirement of company to borrow funds for carrying out its operations. Decisions related
with the capital structure are taken analysing the financial data such as the sources through which
funds could be borrowed.
Risk Related to the financial business decisions
Risk management refers to the policies adopted by the Samsung for minimising its
various risks associated with the business. Different risks related to business are market risk that
is related with volatility in market prices and sensitivity analysis on basis of price volatility
factors. Credit risks are associated with failure of counterparty in meeting their obligations, it
involves the management to assess credit rating & credit line management. Another risk
associated with business is the liquidity risk which is posed by maturity and liquidity. Company
carries out the stress testing and assess liquidity ratio management.
Risks related with business are important for assessing the financial condition. These
risks could affect the Samsung and its operations even after efficiently managing the business
operations. Market risks are not within the control of company. Decisions related to the risks
management are taken by company for ensuring that the risks are reduced to the least.
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Review of method used for appraising strategic capital expenditures.
Capital expenditures involves huge funds that makes it essential for the firm to analyse
feasibility of the project before making investments. They are required to assess whether the
project will be profitable or not (Nouri and Soltani, 2017). Samsung uses capital budgeting
techniques for appraising the strategic capital expenditures. It involves techniques such as
accounting rate of return, the payback period &. net present value
Accounting Rate of Return
The methods enable the company to identify the increase in accounting profits with the
investments. Investment with lower rate of return is not considered profitable by entity.
NPV
It identifies the profitability by assessing the present values of the future cash flows that
project will be generating. The investments with the positive NPV is considered profitable.
Technique considers the time factor in assessing feasibility of investment.
Payback Period
It also analyses the period within which the capital expenditures will be recovered by the
cash flows generated by it. It analyses the break-even point of the project after which it will start
generating profits therefore the project with shorter payback period is adopted.
The investment appraisal techniques help the manager to take right decisions regarding the
capital expenditures after assessing the feasibility of different project for the company. It enables
the company to make comparisons between different investment options and the one with the
maximum benefits is adopted by the company (Jones And et.al., 2018). These appraisals help the
business in taking various strategic decisions related to the capital expenditures.
TASK 2 - Discussion Paper
Financial Ratios of Samsung for the year 2019 & 2018.
SAMSUNG
2019 2018
Liquidity ratio
Current assets
(CA) 155634050 149895684
Current liability 54727544 59274029
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(CL)
Inventory 22966437 24869754
Quick Assets (QA) 132667613 125025930
Current ratio
Current assets / current
liabilities 2.84 2.53
QR (CA - Inventory) / CL 2.42 2.11
Profitability ratio
Employed Capital 247783479 231904771
Net operating
profit 23826222 50526547
Return on capital
employed
Net operating
profit/Employed Capital 9.62% 21.79%
Net Income 18652605 38049231
Shareholder's
Equity 225559368 212579734
ROE NI / Shareholder's Equity 8.27% 17.90%
Cost of Sales 126335995 113598417
Sales 197690938 197690938
Gross Margin
Total Sales – COGS/Total
Sales 36.09% 42.54%
Operating profit 23826222 50526547
Sales 197690938 209163262
Net profit ratio
Operating Income/ Net
Sales 12.05% 24.16%
Efficiency Ratios
Inventory 22966437 24869754
Trade Receivables 30143757 29059541
Net Assets 225559368 212579734
Cost of Sales 126335995 113598417
Sales 197690938 197690938
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Asset turnover
ratio Sales / Net assets 0.88 0.93
Inventory
turnover ratio Sales / Inventory 5.50 4.57
Account
receivable
turnover ratio
Sales / Accounts
Receivable 6.56 6.80
Debt
Debt 76951655 78599066
Equity 225559368 212579734
Debt equity ratio Debt/ Equity 34.12% 36.97%
Interpretation:
Liquidity ratios: It is the financial metrics it is useful in determining the capability of the
corporation to make payment of its current obligations with its CA without any need to procure
further funds.
Current ratio (CR)
The CR evaluates the capability of the corporation in respect to making payment of its
short-term debts which are due within the one year. CR is determined by taking CA and dividing
it by current liabilities (Raj, 2018). The current ratio of Samsung PLC has increased from 2.53
time to 2.84 times which demonstrate that the business is more liquid and has the capacity to
make payment of short term obligations from it and does not require any additional finance. But
the company needs to make sure that its current ratio does not increase more than that otherwise
it will mean that company is having excess of cash which is left ideal and adding no value.
Quick ratio
This ratio is more conservative than current ratio as it takes into consideration the more
liquid assets. It measures the relationship of liquid assets with the current liabilities. Liquid asset
is calculated by subtracting inventory and prepaid expenses from current assets. The quick ratio
of Samsung PLC is has increased from 2.11 in 2018 to 2.42 in 2019 which indicates that the
liquidity position of the organization is very strong and high the ratio is more favourable it is
considered for the organization.
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Profitability ratios: This ratio is used to assess the company’s ability to generate earnings with
respect to revenue and cost over a specific period.
Return on capital employed
This ratio quantifies the productivity of the organization in generating profits from the
measure of capital employed by it. It measures the long-term profitability (Dicu, Bondoc and
Popescu, 2019). Higher the ratio is more favourable for the company. The return on capital
employed of Samsung has reduced from 21.79% in 2018 to 9.62% in 2019. Company needs to
identify the causes for such huge drop in the percentage.
Return on Equity
This ratio measures how company is using the money of shareholders for generating
profits and in growing the business. It is seen from the investors point of view and requires it to
be higher. The return on Equity of Samsung PLC has reduced from 17.90% to 8.27% in 2019.
The decline in percentage implies that the organization isn't viable enough in managing its
shareholders funds.
Gross margin
This ratio clarifies the connection between net benefit and sales. It is utilized in
measuring the operative performance of the organization (Walters and Helman, 2020). Higher
ratio more beneficial to the organization. There is a decrease in the GP margin of the
organization from 42.54% to 36.09% in 2019. This demonstrates the organization has not
worked well in managing its operating expenses so effective measures are required to be
implemented to improve it.
Net profit ratio
The NP ratio sets up the connection between net profit and the revenue. There has been a
reduced in the net profit ratio from 24.16% to 12.05% in 2019, this indicates that the even though
revenue of the business is increasing but the cost associated with it is also increasing at the fast
rate.
Efficiency ratio: This ratio investigates the proficiency of the organization in utilizing its assets
and liabilities.
Asset turnover ratio
This ratio is utilized for measuring the proficiency of the organization in effectively
utilizing the business assets to produce sales. The asset turnover ratio of Samsung PLC has been
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reduced to 0.88 in 2019 from 0.93 in 2018. The decrease in ratio indicates that the organization
was not effective in fully utilizing its assets in 2019 which might be because of some production
or management problems.
Inventory turnover ratio
The ITR determines number of times company has sold and replaced its inventory in a
specific period (Tissen and Sneidere, 2019). Samsung PLC’s inventory turnover ratio has
increased from 4.57 to 5.50 in 2019, which mean stat company is able to moving or sell out its
inventory at the faster pace and indicates effective inventory management.
Accounts receivable turnover ratio
This turnover ratio indicates how efficiently company is able to recover the amount from
its debtors. This ratio has decreased from 6.80 to 6.56 in 2019 this ratio depicts that the
organization is not effective in collecting due amount from their customers. Thus, company
should work on its collection process.
Leverage ratio: This ratio investigations the capital structure of the organization utilizing
obligation and equity extent.
Debt-equity ratio
This proportion shows the extent of obligation and value in the capital structure of the
organization (Rahmadi and Nurdiana, 2020). The obligation value proportion of the organization
is reduced from 36.97% to 34.12% which indicates that company is using lower debt sources of
funding which reduces the potential risk.
TASK 3 – Information Leaflet
Covered in leaflet.
TASK 4 - Capital Expenditure Appraisal
Decision related to the purchase or replacement of the piece of machinery.
Calculation of the cash inflows from both the old machine and new machine.
Computation of Cash flows of Old Machine
Per
unit
price Year 1 Year 2 Year 3
Units 90000 50000 30000
Revenues 5 450000 250000 150000
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Direct Materials 1.8 162000 1.89 94500 1.98 59535
Direct Labour 0.75 67500 0.79 39375 0.83 24806.25
Variable
Overheads 0.45 40500 0.45 22500 0.45 13500
Depreciation 0.35 31500 0.35 17500 0.35 10500
Repair &
Maintenance 7000 7000 7000
Depreciation 86667 86667 86667
(260,000/3)
Profit 54833.33 -17541.66 -52007.91
Add: Depreciation 86667 86667 86667
Cash Inflows 141500 69125 34659
Computation of Cash flows of New Machine
Year 1 Year 2 Year 3
Units
Per unit
price 90000 50000 30000
Revenues 5 450000 250000 150000
Direct Materials 1.8 162000 1.89 94500 1.98 59535
Direct Labour 0.6 54000 0.63 31500 0.66 19845
Variable Overheads 0.3 27000 0.3 15000 0.3 9000
Depreciation 0.55 49500 0.55 27500 0.55 16500
Repair & Maintenance 10000 10000 10000
Depreciation 48333 48333 48333
(220000-75000)/3
Profit 99166.66 23166.66 -13213.33
Add: Depreciation 48333 48333 48333
Cash Inflows 147500 71500 35120
Cash flows generated using the old and new machine.
Cash inflows Old New
Year 1 141500 147500
Year 2 69125 71500
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Year 3 34659 35120
Cost of machine 260000 220000
Less: Exchange
allowance 120000
Cost 260000 100000
Investment appraisal techniques for identifying the viability of the two investments options.
Following technique has been used by Yon for making informed decision about whether
to use existing machine or replacing it with the new machines. The decision will be framed on
the basis of results of techniques.
Net Present Value
Computation of NPV
Old Machine New Machine
Year
PV factor
@ 10%
Cash
inflows
Discounted
cash
inflows
Cash
inflows
Discounted
cash
inflows
1 0.870 141500 123105 147500 128325
2 0.756 69125 52258.5 71500 54054
3 0.658 34659 22805.6 35120 23109
Total discounted cash
inflow 198169 205488
Initial investment 260000 100000
NPV (Total
discounted cash
inflows - initial
investment) -61831 105488
Internal Rate of Return
Computation of IRR
Old
Machine
New
Machine
Year
Cash
inflows
Cash
inflows
0 -3E+05 -100000
1 141500 147500
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2 69125 71500
3 34659 35120
Internal rate of return
(IRR) -4% 94%
Accounting Rate of Return
Computation of Average rate of return
Old Machine New Machine
Year Cash inflows Cash inflows
1 141500 147500
2 69125 71500
3 34659 35120
Average profit or
cash inflow 81761 84706.6667
Average initial
investment 260000 100000
average initial
investment [(initial
investment + scrap
value) / 2]
ARR 31% 85%
Payback Period
Computation of Payback period
Old Machine New Machine
Year
Cash
inflows
Cumulative cash
inflows
Cash
inflows
Cumulativ
e cash
inflows
1 141500 141500 147500 147500
2 69125 210625 71500 219000
3 34659 245284 35120 254120
Initial
investment 260000 100000
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Payback
period 3 1
0.4 -0.3
Payback
period
3 year and 4
months 7 months
Recommendation
Company should choose the option of replacing the machine. Existing machine is having
zero value at of 3 rd year end and entity will not be covering the cost of machine with its cash
inflows. On the other hand purchasing new machine will allow company exchange allowance of
120000 that will reduce the cost of new machine to 100,000. This will be increasing inflows &
reducing costs. Company will recover the cost of initial investment in just 7 months of its
production. All the investment results have given positive results for replacing the machines and
keeping existing machine will be a loss for the company. Therefore the company should replace
the old machine with new machine.
CONCLUSION
The above research helps in drawing conclusion that the SAMSUNG is a well established
brand that is having strong financial position and is performing well in the market. The financial
data provides wide range of information that helps the managers of company on framing
strategies for the business. Financial health and performance is analysed using ratio analysis and
the investment appraisal techniques helps the business in taking adequate strategic decisions
related with capital expenditures.
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REFERENCES
Books and Journals
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Management.
Dicu, C., Bondoc, M. D. and Popescu, M. B., 2019. A Quantitative Approach To Profitability
Ratios. Scientific Bulletin-Economic Sciences. 18(1). pp.57-65.
Jones, C. And et.al., 2018. Financial Management for Nurse Managers and Executives-E-Book.
Elsevier Health Sciences.
Klačmer Čalopa, M., 2017. Business owner and manager’s attitudes towards financial decision-
making and strategic planning: Evidence from Croatian SMEs. Management: journal of
contemporary management issues.22(1). pp.103-116.
Kumar, R., 2017. Strategic Financial Management Casebook. Academic Press.
Nouri, B.A. and Soltani, M., 2017. Analyzing the use of strategic management tools and
techniques between Iranian firms. Academy of Strategic Management Journal.
Ogbenjuwa, L., Egbu, C. and Robinson, H., 2018. A skilled manager, strategic to real estate
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Tissen, M. and Sneidere, R., 2019. TURNOVER RATIOS AND PROFITABILITY RATIOS
CALCULATION METHODS: THE BOOK OR AVERAGE VALUE. Scientific
Programme Committee. p.851.
Walters, D. and Helman, D., 2020. Profitability: Interpretations and Considerations. In Strategic
Capability Response Analysis (pp. 99-139). Springer, Cham.
Raj, S. S., 2018. Financial liquidity of general co-operative marketing societies. International
Journal of Research in Social Sciences. 8(7). pp.296-310.
Rahmadi, Z. T. and Nurdiana, D., 2020. Return On Assets, Debt To Equity Ratio, And Cash
Effective Tax Rate Banking TBK Listed In The Stock Exchange Jakarta Indonesia. Talent
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