Principle of Financial Management

This document discusses the principles of financial management and their importance in decision making, stakeholder management, and cost control. It explores various approaches and techniques for better decision making, as well as the factors that affect decision making. The document also highlights the value of management accounting in cost control and the benefits of financial principles for maintaining sustainability. The subject is Principle of Financial Management, and the document type is Study Material.

PRINCIPLE OF FINANCIAL
MANAGEMENT
1

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
Evaluation of techniques, approaches and factors for better decision making............................3
Stakeholder management and management of conflict objective of stakeholder groups............5
Value of management accounting in cost control........................................................................6
Reflective analysis:......................................................................................................................9
TASK 4............................................................................................................................................9
P5 Importance of financial decision making by using its way....................................................9
Recommendation.......................................................................................................................15
CONCLUSION..............................................................................................................................15
REFRENCES.................................................................................................................................17
2

INTRODUCTION
Financial management is the process of management to effectively manage all the financial
resource of the organization in order to achieve the predetermine goal of the business. In order to
understand this concept, Ray Furniture Limited had been taken for first part of this report. It is
situated in United Kingdom and medium size organization. This report is define the approaches
use in decision making process and important of shareholder analysis. How different principles
provide base ad give direction to take decision. In the second part of this report. Thomas Cook is
taken to analysis the importance of different financial mechanism in order to achieve the goal of
the organization.
Evaluation of techniques, approaches and factors for better decision making.
Approaches
Knowledge based approach: This approach is also know as information based approach.
It is related based n the assumption that personals needs great understanding capabilities to take
decision have technical knowledge regarding the field they run their business operations.
Knowledge can be defined as the mechanism of optimizing and controlling business effective. It
is require for the mangers to formulate effective strategy which i based on he summation of the
Formal and Informal approach: This is consisting approach which is used by business entities for
their decision making procedure. It provides more reason of providing detail study and effective
way to take detail study of the investment proposals. This approach is helpful in overcome the
problems of multiple expectations of the stakeholders of the organization. With the use of
effective alternative mechanisms mangers able to minimize their problems related to the
assignments. It is used to provides re-assessment condition and adjust prosperities of the
stakeholders of the organization. This approach is used for taking rational decision for the
organization (Tondi, 2019).
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Techniques use for decision making
Decision matrix-: For decision making procedure mangers use this matrix. They are able to
indentify some choices. It is the matrix in which values of the transactions are put in rows and
columns of the organization. Theses row and column helps in determine the remain and rate
performance of the organization in systematic manner. Decisions taking by this matrix are based
on some assumptions. These methods of decision making is use effective values and use these
values to take decision which is relevant for the organization.
T –Chart: This technique of decision making is used to consider all the negative and positive
outcomes when take decision. These methods of the financial management are useful in
balancing l the up and down factors of the organization.
Factors which are affect the decision making procedure:
Decision making is a conscious and human processing evolving both individuals an socials
phenomenon based upon factual and value premises which concluded with a choice of one
behavioural activity among one or more alternative with the intention of moving towards some
desired state of affairs. It is a process of deifying ad choosing alternative course of action in a
manner approach to the demand of the situation. Socio economical factor- Ray untrue limited
affected with its social factors which includes, those organizations with whom they take loan, per
public, relation with their friends.
Financial factor: The organization takes decision on thesis of the available resource. They only
considers those alternative for their future activities through which they can gain maximums
benefits and able to extend their market of minimum risk .
Personals factors: The manger of the Ray Furniture organization take decision on the basis of
their employer, age, gender, life style level of education and economical position. The also
involve their employer in decision making process so that they fell motivated towards the
organization (Häßler and Jung, 2015).
Techniques uses for prevention of fraud: In every business organization it is necessary to find out
the reason of fraud or corrupters and illegal activities running in the organization. It is the reason
company suffers from many conflicts and other issues. Business organizations are suffers from
many issue and problems. They can control the issue of fraud at the initial stage when they are
started with utilizing effect technique of fraud detection.
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Manager of Ray Furniture will used to formulate profile in which they recorded all the
possibility of fraud. This profits hell them tin supervising all the activities and focus on these
activation and department which is the chance fallibly activities so they at the mange is able to
take strict decision.
They also use risk management technique in this approach manger identify the area son of fraud
and formulate optimize to avoiding the risk of fraud and any illegal activities helping with the
organization.
Manager of Ray Financial Limited to prevent the fraudulent activities need to done audit on
timely bass it will help them to reduce the chance of any accounting error and find out if there
will be any misshaping activities done during recording of transactions.
Approach of ethical decision making: Business organizing should be needed to utilize the uttirial
approach for their effect decision making With the use of these technique manger can evaluate
the pros and cons of their decision towards the business organization. It issued to avoided the
loss further organization and provides maximum profit to the organization.
Stakeholder management and management of conflict objective of stakeholder groups
Stakeholder management is an essential element for any organisation despite of their size
and scope. Stakeholder is an individual, association or community who get influence or affected
by organisation decision. It is essential for an entity to make sure that they engage stakeholders
in every essential and necessary aspects of company decision making process and provide them
information and data accordingly in order to strengthen the stakeholder management. This
process is known as cycle to involve stakeholders in order to further ensure positive form of
partnership with them. Stakeholder is key essential individual for an organisation thus, it is
necessary for an entity to involve them in business plan, portfolio, decision making and other
essential aspects (Agasandyan, 2017). Further it has been evaluated that stakeholders have
significant impact upon organisational failure and success. With the proper stakeholder
management entity can make reduction in adverse impact and can formulate strong relationship
with them through which they can gain more opportunity of growth and development. In
addition to this it has been evaluated that stakeholder engagement allow entry to have proper
control on stake holding ratio of entity in marketplace and also allows them to have positive
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brand image in respective industrial sector. This has been evaluated that stakeholders of an
enterprise include owner consumers, suppliers, employees, lenders etc.
Managing conflicting objectives of different stakeholder groups
Stakeholders are most essential element of an entity and play a significant role in
company decision making process with having great impact upon their decision making process.
They are key important aspect thus in this it is essential for manager of an entity to make sure
that there is proper alignment with stakeholders of organisation and further ensure that they are
engaged in all the essential decision making process of organisation and are further being
provided with necessary information, this will allow manager to manage conflicting objectives of
different stakeholders group in effective manner. In addition to this it is essential for organisation
to fulfil the needs of different stakeholder groups as to assure continuous growth and return.
Along with this it has been determined that, that every organisation as stakeholders have their
own set of proprieties thus, it become essential for manager to have proper plan for his or her
priorities (de la Huerga, Molin Silvera, . and Turoff,2019).
Value of management accounting in cost control.
It has been evaluated that in order to ensure efficient business it is essential for an entity
to emphasise upon controlling the cost of labour, inventory and different other overhead cost. In
this cost control is defined as a practice to evaluate and further make reduction in business
expenses as to make increase in profitability. It has been evaluated that management accounting
is identified as practice to analyse and communicate financial data to manager who further
undertake the use of information in business decision making process. In addition to this
management accounting ensure calculation per unit cost with the utilisation of different costing
techniques. It has been evaluated that with the assistance of management accounting in cost
control, manager can effectively undertake wide range of strategies and process through which
they can reduce expenses by identifying unnecessary issues. Main aim of this is to strengthen
entry financial position and increase company overall profitability. With the help of management
accounting entity can further assure control of cost through which the can increase efficiency of
their process. In this it has been evaluated that the important technique to have proper control
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cost is cost accounting take make entity to manage their expenses in effective manner (Da,
2015).
Principle is those facts which are used to provide general guideline and directions to business
entities. Through which managers get idea to run their business activities in right direction and in
systematic way. Financial Principe are used for taking effective decision regarding financial
business activities through which organization able to maintain their position in market for long
time period. Following are the principle of finance used by manager of Ray Furniture Limited in
order to take decision and run financial approaches to organization activities:
Principle of risk return: This principle is based on the assumption that this more
organization able to take risk their require rate is higher. It is the trading financial principle
which is connected with high risk of investment ad high reward. The risk return factors
depend on the factors of investments and organization. It is the skills of the manger which
invest in the best portfolio securities through which organization able to higher rate of
return. The manger use techniques of financial management to compare investment ‘s risk
and return rate and then choose those proposal for their investment in which they are able
to gain more profit as compare to other investment (Chunfei, 2019).
Time value principle: This principle based on the assumption that the value of the money
is changing with the changes of time. Thus organizations need to tale decision on the basis
of applying this principle. Value of the financial resources decline within the changes of
time or the value of present money is worth more than this future thus it is required for the
manger to properly and uses their money in effective way so that they are able to earn
more money in future time period. They need to analyses the inflation rate of the scent and
future time and then invest their finance in that security which rate of money is high future.
Leverage: It is something means to use borrowed money to buy or pay something that
may generate income in the future. It is an investment technique in which organizations
able to use small amount of money to make investment of much larger values. In that way
leverage gives business entities significant financial power. There will be 2 types of
leverage which an organization is used, financial and operating leverage where shows the
relation of and degree of profits with other factors of the income statement. Rey Furniture
uses this principle to analysis the relation and takes decision on the basis of tax factors
affection on organization operations.
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Liquidly: It is the most essential principle of financial management for the organization.
Manager takes decision on the basis of their liquidity and profitability outcomes. This
principle based on the assumption that how easily the organization able to converts their
securities into cash .They want to invest in those projects which them maximum rate of
profitability. Worth lower risk return .It is useful to manage the working capital of the
organization specially for Thomas Cook organization.
Diversity: This principle based on the rule that mangers needs to use those effective mechanism
through which they are able to minimize the risk of portfolios.
Hedging: This principle is focus on the assumption that mangers needs to take decision
regarding their loan is required appropriate sources of funds which means that mangers
should select for long term purpose loan long term resource of loan and for taking short
term loan they need to use short term medium of long. This principle will help in managing
the resources in effective way an also help organization to maintain position of liquidity in
the entity.
Dividend valuation: This principle is related with the most important principle of
financial management. This principle is related with the distribution of divided which is
essential for every business organization. Especially for Thomas Cook. Management
department of the Thomas Cook organization formulates policies for divide according to
which they need to distribute dividend to their shareholders. The calculation of divided in
base on the model of the divided. Divided s the sign of business organization’s growth, the
higher the rate of divided the more the chance of organizations to maintain their position in
the market (Haßler and Jung, 2015).
Benefits of financial principles for maintaining sustainability:
Setting business objective to attain financial goal: Thomas Cook use financial principle to
set their business objective. Whether use of theses principle they are able to choose their
long term, short run and operating objective of the organization. Requirement of resource:
These principles use to analyses the requirement of resources to attain the object of the
organization. With the use of liquidity a risk return principle through which they are able to
determine the quantity of resource they required.
Maximize shareholders worth: Management department use the financial management
methods and technique to take decision regarding divdend with the use of their technique
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they distributor dividends on order to provide maximum benefits to their potential
shareholders:
Ethical financial management: With the use of effect principles Thomas Cook will be
able to work in ethical way in order to not break any legislation and rules of the law. It will
useful to increase the understating and ethical reaction between personals.
Essence of managerial decision: Financial management tools help in taking decision and
direction to take decision. It is useful in taking decision of planning and controlling of the
organization (Krasnov and Kozmenkova, 2017).
Reflective analysis:
Principle of financial management this when I get the project I am very excited to done
research on this topic as financial is my favour part of management studied. When I started this
project I am facing many issue, It is really hard to find project related to this topic and research
and understanding the values, concept and technique of the financial management. Due to lack of
communication problem I am unable to ask help and take suffering from my teacher regarding
the research on stakeholder mangement and principles of financial management. However with
the use of You Tube videos and my team members I am able to complete my project. At the end
of this project my skills and concept regarding financial been increasing effective way and
confidence to sole financial problems and given presentation on this topic has been increased in
positive way.
TASK 4
P5 Importance of financial decision making by using its way
Financial management accounting is a process of collecting evaluating and recording all
the transactions which is relate with the finance. Administrative department of the organizations
have the responsibility related to the collection and recording of all the transaction on the basis of
these records the financial manger take decision regarding their operational activities. In
financial decision making process financial accountant play essential parts as they have
responsibilities regarding every detail business activities. They are the reason of taking decision
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of the business entities. Management accountant with the use of effective management
accounting technique , prepared budgeting report which help in providing guideline regarding
financial budget within ht organization. They take the information of tax and apply policies
through which Thou m Cook organization able to take maximum benefits of the tax schemes
started by government. They manger the long term as well as short term assets of the
organization an formulated effective polices to maintain ration of working capital. Management
accountant is plan for strategic business planning and also formulate strategies for effective
controlling procedures. they analyses those activities which are the reason of high cost of the
operating activities and cut of all the high incurred activity in order to reduce cost and maximize
profit of the organizaton. Best decision takes by analysis the financial repost of the organization.
Ratio analysis: This technique of financial management is adopted by organizations in order to
asset their business assets in effective way. Ratio analyses is used for determine the assets of the
business organization in effective way. Ration analyses show the relationship between 2 variable
of the financial statement and this will help in comparison and take decision for manger o that
they are able to recognized which alternative is best for them or in which year they gain more
income. This is used for creating quantitative ratio among 2 variables of the financial reports. It
will also useful for shareholders of the organization to analysis the performance of the company
and it position in the market place. Following are the investing, operating and financing ratio are
used by organization to identify their success rate (Churet and Eccles 2014).
Gross margin ratio
Particular Formula Amount 2018 Amount 2019 2018 2019
Gross Profit Margin Gross
profit /
Sales*100
11105/44404*100 10585/44478*100 25.01 23.80
Gross profit ratio is used to determine the ration of gross profit and revenue earn by the business
organization. In this case . the gross profit ratio of the Thomas Cook in 2018 was 25.01 % and in
2019 it was decrease from 23.05 %.This depicts that the company’s profit decrease . May be it is
decreases due to the result of its conflicts and chances of the government policies of UK.
Net profit margin:
Particular Formula Amount 2018 Amount 2019 2018 2019
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Net profit margin: Net profit
/ Sales
*100
2897/44404*100 2897/44404*100 6.52 -2.75
This ratio is used to define the relation between net profit and sales offer current year. From this
analyses it has been identified that profit of the Thomas Cook has been decrease as their gross
profit already decrease in 2019 and it will direct affect the net profit ratio.
Current ratio: This ratio determines the quantitative connection with current assets to its
liabilities. It is useful for working capital management. From this calculation it analysis that the
ratio is decrease from 2018 to 2019. It means that organization’s rat declining due to lack of
availability of current assets (Altman, , Iwanicz‐Drozdowska, M Laitinen,and Suvas,2017 ).
Particular Formula Amount 2018 Amount 2019 2018 2019
Current ratio Current
Assets /
Current
Liabilities
16787/15714 17844/16871 1.07 1.06
Quick ratio
This ratio interprets the quick liquidity value available in the Thomas Cook organization. The
value of liquidity assets as compare it its current liabilities this ratio depicts how much quantity
did the company have in liquidity form to pay their current debt. There will be nothing has to be
changed in the value of quick ratio.
Particular Formula Amount 2018 Amount 2019 2018 2019
Quick ratio Quick
Assets/
Current
Liabilities
12074/15714 12947/16871 0.77 .77
Return on equity ratio
This ratio is evaluate the value of the equity return . The company earn more as compare to 2018
from 2-19.
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Particular Formula Amount 2018 Amount 2019 2018 2019
Return on Equity Net income /
Shareholders
equity
2897/17850*100 -1225 /
15395/*100
16.23 -7.96
Debt to equity ratio
This ratio is used for calculation of the relationship between debt and equity. It defines the value
of equity as compare to their debts. The organization in 2018 value of this ratio is much better
then 2019, which means that organizations better [positioning 2028 as compare to the
consecutive year.
Particular Formula Amount 2018 Amount 2019 2018 2019
Debt to equity ratio Debt /
Equity 17850/22595*100 15395/27173*100 79.00 56.66
1. Usefulness of investment evaluation system in decision making
Investment Appraisal Techniques
Investment appraisal technique involves those methods which are initial means to appraise
performance of the new project of the organizations. Theses include payback period, net present
value, and internal rate of return. All these are part of capital budgeting methods. Manager of
Thomas Cook used this technique in order to recognize which tool or investment proposal is best
for the business organization in order to achieve their goals. Following technique are used under
this mechanism of financial management in order to achieve the target of effective efficiency of
the operation activities of the organization (Momen, and Rahmatollahi, 2016).
Payback period defines how long it does take the project time to recover its investment
cost of the project. It is the simplest and most useful technique small business enterprises.
Investment: 100000
Year Cash flow Cumulative cash flow
1 30000 30000
2 40000 70000
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3 90000 160000
4 120000 280000
5 150000 430000
Payback period= Year before cost recovered + amount to be recover / next year cash flow
= 2 + 30000/90000
= 2.33 years
This refers that the organization will be able o recover its cost with 3 year as the pay back period
Net present value this method is help in define the valuable project by using present value in
their calculation it is the modern method of investment appraisal most useful method a bit
consider the tie value consideration. It provides reliable information to the management
department (Xiong and Gao, 2014).
This calculation i definer that manger should be acetate project as its net present value amount in
much high then its initial investment cost.
Cost of capital- 10%
Investment- 100000
Year Cash
flow
PV
factor
Discounted
cash flow
1 30000 0.909 27270
2 40000 0.826 33040
3 90000 0.751 67590
4 120000 0.683 81960
5 150000 0.621 93150
303010
NPV= Discounted cash flow-investment
= 303010-100000
= 203010
The net present value of project is positive that is of 203010 pounds and company should accept
this project.
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Accounting rate of return: This also known as average rate of return. It also treated as the
financial ratio which defines the relationship between net income of the organization to its
investment. How much business entities will be able to earn from their investment defines in the
form of rate. Higher accounting return show higher profits for the organization.
Formula: Average net income / Initial investment * 100
Calculation of net income:
Formula: Net cash inflow – depreciation
Depreciation = Initial investment / life of project
Calculation of depreciation:
= 100000/5
= 20000
Net cash flow:
Year Cash flow (A) Depreciation (B) Net cash flow (A-B)
1 30000 20000 10000
2 40000 20000 20000
3 90000 20000 70000
4 120000 20000 100000
5 150000 20000 130000
330000
Average net income:
Year Net cash flow (A-B)
1 10000
2 20000
3 70000
4 100000
5 130000
Total 330000
= 330000/5
= 66000
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So,
ARR= 66000/100000*100
= 66%
The value of ARR is of 66% that shows that project is viable for company. This means that
organization will be able to gerante more profits if the accepts the project proposal.
Cash flow statement: This method of financial management use by the organization in order to
determine their values of cash inflow and cash outflow for relevant financial year. It will also
dine the reliable information regarding financial transaction and business activities of the
organization. Manager of the Thomas Cook cash flow statements in order to recognise financial,
operating and investing business activities. This will also show performance of the business
organization it will help in take decision related to future business activities(Qu, and Zhang, J
2017).
Recommendation
Business organization is dived into small, medium and large size of the entities .Every business
organizations needs apply the management accounting and financial management principle in
their own way. Although small size organizations face many problems and issues the technique
and financial management model within the organization as it is required skilled
personals .Financial management provides helps in taking decision and effectively run the
organization and the role of management accountant regard with the organization is very
essential. Althofh to prevent the fraudulent activities mage also supervise the work of
management accountant as he has the responsibilities of taking care of all the accounts. Thus it is
require and essential to adopt these methods of financial and management accounting in Ray
Furniture limited in order to achieve its organization goal in effective way by using proper
allocation of resource and reducing the risk of loss by taking decision regarding effective
portfolio .
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CONCLUSION
From the above analyse it has been concluded that financial management is essential part of
every business organization as it the principles and models of financial manner help in taking
effective operating, investing and financial decision. Theses provide also useful in distribution of
divined which help in maximize the growth of th shareholders of the organization. They use
shareholder analyses process though which they able to recognized the perceptions and desire of
the shareholders with the company. Part 2 of this report help in identifying the importance of the
techniques use in financial decision making process. Mangers use ratio analysis, net present
value, payback period technique though which they able to recognize the correct decision and
financial position of the organization in order to attain the goal of the business organization.
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