Finance for Strategic Managers - Assignment
Added on 2020-10-05
22 Pages5674 Words247 Views
Business DevelopmentFinanceMechanical Engineering
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FINANCE FOR STRATEGICMANAGERS
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Activity 1.........................................................................................................................................11. Assessing why financial information is needed in business...................................................12. Identifying business risks related to financial decisions.........................................................23. Summary of financial information required to make strategic business decisions.................3ACTIVITY 2....................................................................................................................................41.purpose, structure and content of published financial statement.............................................42. Interpretation of the financial statement ................................................................................83. Calculation of financial ratio from the statement ...................................................................9Activity 3.......................................................................................................................................101. Difference between short and long financial requirements of business................................102. Long term and short term sources of finance .......................................................................123. Technique of cash flow management ..................................................................................13ACTIVITY 4..................................................................................................................................151. Kind of ownership structure, their legal requirement and role of manager and owner inthese structure ...........................................................................................................................152. Methods of appraising strategic capital or investment project .............................................16CONCLUSION..............................................................................................................................17REFERENCES..............................................................................................................................18
INTRODUCTIONFinancial decision also known as capital structuring is process of identifying the fundingand financial sources option for business. Financial decision comprise question regarding moneyarrangement like how, when and amount of money required for business. These decision aretaken after taking acquiring cost, risk, flexibility and interest rate of available finance sources.This report will articulate about importance of financial decision and risk associates with thesedecisions. Study will help in knowing the role of financial information in taking strategicdecision. Furthermore, interpretation of key financial information and ratios is also given. Reportwill render decent understanding of short term and long term financing option along with cashmanagement techniques. It will also discuss about kind of ownership, their legal requirement andobligation and role of manager in each legal structure. Lastly, methods to apprising the capitaland investment project also cover in report. Activity 11. Assessing why financial information is needed in businessThe final accounts are quite important part of the business as it helps to ascertainfinancial position with ease. The financial information is needed for analysing business income,operating expenses incurred in the best manner possible. It is helpful for company so thatbusiness may be able to ascertain whether income exceeds expenses or not (Srivastava, 2014). Ifexpenses are more than that of income earned, then company is required to take remedial actionsso that operating expenses may be alleviated up to certain extent and profits may be attainedquite effectually. The objective of financial information is clear as it helps to analyse whetherbusiness is financially sound or not.Financial information is needed in business which is then used to prepare financialstatements such as income statement, balance sheet, cash flow statement and statement ofchanges in equity etc. With the help of these statements, stakeholders of company such asmanagers, shareholders, investors, customers, suppliers, employees, government and taxationauthorities are able to go through financial statements and then take decisions accordingly.Financial position, performance and changes occurred in for a particular period can be assessedwith the help of financial statements being prepared from supplying financial information quitecomfortably (Feijóo, Gómez-Barroso and Voigt, 2014). This means that business may be able toattain clarity regarding overall position and its strengths and weaknesses may be identified.1
In accordance to financial position, company may be able to take decisions which willenhance its position in the future. This will help to make well-structured decisions and as aresult, it may be able to accomplish desired profits by initiating healthy strategies. Thus, it can besaid that financial information is quite useful for business in analysing information in the bestway possible and take righteous decisions by incorporating strategies and achieve goals withease. Moreover, control may be initiated on expenses so as to reduce the same which obstacles ingarnering profits and thus, business would be able to attain stated goals by having transparentfinancial information through financial statements.2. Identifying business risks related to financial decisionsThe business risks is termed as potential for organisation's actual returns varying fromexpected returns. The type of business risks depends upon the operational activities beingconducted by company. Moreover, business risks which relates to financial decisions are listedbelow-Financial RisksThe financial risk arises due to events that weaken earnings of organisation and as aresult, affect shareholder's wealth up to a major extent. Shareholder's wealth will be dilutedbecause they may value organisation by discounting firm's projected cash flows. These types ofrisks including changes in equity prices, credit spreads, interest rates, commodity and creditwhich are risks to capital of company as it becomes unable to meet its present financialobligations and not incurring significant losses (Macedo, Pinho and Silva, 2016). Thus, it isrequired to ascertain risks in order to ascertain inaccuracy and make timely remedial actions.Operational RisksIt is another risks which arises due to making financial decisions. The operational risk isparticularly related to organisation's internal activities and includes process risk. It pertains tolack of desired resources which are essential for making up operational tasks in the best mannerpossible. It includes employees, processes, materials and necessary equipments and machineries(Nordmeyer. 2018). These are the inputs which are used for producing outputs in effectivemanner. It can be said that business requires these inputs and in the absence of any of theseresources, outputs cannot be produced and thus, risk arises. 2
Strategic RisksThe strategic risk is related to business environment where organization operates. Thebusiness activities and company's communication with investors. On the other hand, businessenvironmental risk means to issue with the markets in which company buys and sells goods andservices and government regulations and relate compliance issues. This means that businessneeds to make well-structured strategies and as a result, strategic risk can be minimized. It alsoincludes unfavorable downturn in supply or demand for organization's commodities and rivalswith whom business competes for revenue and supplies up to a maximum possible extent.3. Summary of financial information required to make strategic business decisionsThe financial information is required and it can be ascertained by preparing three basicfinancial reports such as balance sheet, income statement and cash flow statement which shouldbe in accordance to the guidelines being issued by GAAP (Generally Accepted AccountingPrinciples). This is because it will be difficult for making strategic decisions on the basis ofinaccurate financial information. These are listed below-Balance sheetIt is summary of business position at a certain point of time highlighting assets, liabiitiesand shareholder's equity. It provides picture of strength of business and days of working capitalimplying how effectively company could handle changes in sales. Balance sheet is also helpfulin identifying such as debtors cycle works and how net profits are being utilised and how oftenmachinery is replaced (Evans, Hodder and Hopkins, 2014). Thus, financial position helps to takestrategic decisions. Income statementIt is another useful statement which helps to ascertain revenue and expenses during theparticular point of time, usually it is prepared at the end of financial year. The major purpose ofpreparation of income statement is to show how firm has performed over the past year whichlists down sales and expenditures and profit or loss accomplished serving need for strategicdecision-making in the best manner possible.Cash flow statementThe cash flow statement outlines inflows and outflows of cash for the particular period.The cash movements are outlined for time and also it highlights various activities in which cashinflows and outflows are arrived. The cash flow statement has three activities such as operating3
activities, investing activities and financing activities (Nimtrakoon, 2015). It is required that cashreceipts must exceed cash payments for favourable cash balance and position of business quiteeffectively. Hence, management may be able to take strategic decisions by relying on thesefinancial statements.ACTIVITY 21.purpose, structure and content of published financial statementThe main purpose of the financial statement is to provide the stakeholders with theaccurate information relating to the organisation operations and the performance of the firm inthe market. The company by using the financial statement is able to provide information aboutresults of operation, financial position, cash flow of the organisation (McMillan and Overall,2016). Financial statement help managers in making decision for improving the performance ofthe organisation by analysing the financial information. Shareholder use this information todetermine the risk and return of this investment through use of the financial statement. Financial statement are used by management for making effective decision for increasingthe profitability of the firm. It provides the information relating to the organisation activities forformulating various policies and procedures for future growth (Falkheimer and et.al., 2017). Thepurpose of financial statement is to provide the information top the stakeholders about thecurrent position of the firm it assists in identifying the liquidity of the business. The financialstatement are prepared by every company as it assist in providing the information to the readersregarding the financial status of the firm. The structure of financial statement includes profit andloss statement , balance sheet and cash flow statement. The profit and loss statement contains the information relating to incomes and expensesof the business by conducting the operational activities. This statement shows the profit earnedby the business by recording the information of the incomes and expenses. Balance sheets of thebusiness contains the information relating to assets and liabilities which provide the informationrelating to the financial position of the business (Gliedt and Hoicka, 2015). Cash flow statementrecord the information regarding the cash inflow and outflow for the period which assist indetermining the cash actual present with the business which will assist in conducting the futureactivities of the business. The following shows the financial statement of the marks and Spencerwhich consist of profit and loss statement, balance sheet and cash flow statement.4
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