Financial Management Report: Performance Analysis and Recommendations

This comprehensive financial management report delves into various aspects of corporate finance, including the importance of the finance function, its relationship with other departments, and organizational structures. It explores budgeting techniques like zero-base budgeting, ratio analysis for measuring profitability, efficiency, liquidity, and leverage, and the limitations of such analyses. The report also examines working capital management, capital budgeting methods, sources of funds, and business combinations. It further discusses the role of information and communication technology in finance, ethical considerations in financial reporting, and the finance function's impact on small and medium enterprises. The report offers recommendations for improvement in various areas, such as budgetary control, working capital management, and capital budgeting decisions, providing a holistic view of financial management practices.

Financial Management

INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
a. Importance of finance function in an organization and its relationship with other
departments..................................................................................................................................1
b. Ways in which the finance function is organized in the enterprise and recommendation on
the changes that can be made to perform efficiently...................................................................1
c. Support of information and communication technology to the finance role in the company..2
QUESTION 2..................................................................................................................................2
a. Explaining budgeting and its role in an entity as per woody's opinion...................................2
b. Budgeting approach that best suits to motivate the worker's performance and productivity.. 2
c. Advising about the planning for setting up the system of budgetary control for getting the
best results...................................................................................................................................3
QUESTION 3..................................................................................................................................3
a. Example of ratios for measuring the profitability, efficiency, liquidity and leverage of the
corporate......................................................................................................................................3
b. Utilization of ratio analysis by several stakeholders to gain the insight into the performance
of an enterprise............................................................................................................................3
c. Limitations of ratio analysis.....................................................................................................4
d. Recommendation on non-financial issues that stakeholders should throw attention for
analyzing the performance of the organization...........................................................................4
QUESTION 4..................................................................................................................................4
a. Convergence and divergence points in respect of liquidity and profitability conditions........4
b. Management of working capital- an interest to the management of an entity.........................5
c. Ways for the management of working capital to attain the goals of profitability and liquidity
with recommendations on improvement.....................................................................................5
QUESTION 5..................................................................................................................................5
a. Three methods of capital budgeting to measure the acceptability of the capital investment
project proposed...........................................................................................................................5
b. Recommending methods for making decisions in relation to the capital budget in the
company.......................................................................................................................................6

c. Role of cost of capital and time value of money in making decisions regarding capital
budgeting and evaluation of cost of capital of the enterprise......................................................6
QUESTION 6..................................................................................................................................6
a. Different types of funds and their sources with difference between the sources of funds......6
b. Process of Initial public offer and its benefits for the company to raise long term funds in
the capital market.........................................................................................................................7
c. Challenges faced by the company and ways to overcome them..............................................7
QUESTION 7..................................................................................................................................7
a. Evaluating three main forms of business combination in literature........................................7
b. Methods used for determining the company's value and of the combination enterprise.........8
c. 3 major factors for the success of business combination.........................................................8
QUESTION 8..................................................................................................................................8
a. Discussion of the roles and models of domestic transfer pricing for measuring the
performance effectively...............................................................................................................8
b. Explaining the assistance of balanced scorecard in achieving fair and balanced performance
management system.....................................................................................................................9
QUESTION 9..................................................................................................................................9
a. Several factors that drives an entity into unethical practices to report profits.........................9
b. Various methods in literature that are applied and used by the corporate to report profit at all
cost...............................................................................................................................................9
c. Role of organization's value and compensation management structure in ensuring financial
reporting and ethical behavior...................................................................................................10
QUESTION 10..............................................................................................................................10
a. Evaluating the finance role towards the growth and sustainability of small and medium
enterprises..................................................................................................................................10
b. Several sources of finance in SMEs sector in the country. Influence of the factors of finance
in SMEs.....................................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial management is the most crucial function as the managerial activity if the corporate that
deals with planning, controlling and organizing the financial resources. It is process of
allocation, utilization and generating profits from the funds to achieve the organizational goals
effectively and efficiently. The present study states the overall financial management of the
company that includes the ratio analysis, capital budgeting, working capital, business
combination, balanced scorecard and the ethical factors. Furthermore, it describes about the
factors that influence the small and medium enterprises.
QUESTION 1
a. Importance of finance function in an organization and its relationship with other departments.
Finance function plays an important role in an enterprise relating to the acquiring, allocation and
utilization of funds that are vital for meeting the day-to-day operational expenses (Angraini and
et.al., 2019). It acts as the lifeblood for any business because without finance, no organization
can function its operations smoothly. It ensures the efficient running of an entity by facilitating
money.
Finance department is interrelated with other functional units in the work environment through
its establishment role linked with operational function as it facilitate the information in respect of
equipment purchase, raw material purchase, estimating the demand of the product for optimum
production etc. It also enables the marketing department in implementing effective promotional
strategies such as advertising expenses, sales promotion etc.
b. Ways in which the finance function is organized in the enterprise and recommendation on the
changes that can be made to perform efficiently.
The design of finance function starts with the centralization decisions. The responsibility of
decision making is divided by the firm among different officers which include finance,
manufacturing, personnel, marketing and engineering (Barr and McClellan, 2018). For example-
production manager shapes the policy of investment in relation purchasing new plant, marketing
manager facilitate inputs in planning or forecasting, purchase head influence the investment level
in the inventory etc.
Setting up of shared service center, emphasizing on improved functioning of transactional
processes more efficiently. Centralizing the teams of the organization, providing the important
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service functions and the operation of complex tasks. For instance- accounting and financing as
an expertise center, looking for saving from lowering cost of production and facilitating business
associate services.
c. Support of information and communication technology to the finance role in the company.
Information and communication technology emphasize on building networks that provided for
exchanging the information. Due to all the financial transactions include the information
exchange, the online finance popularity increases with advancement in technology. It helps the
finance department to function across the globe. Through internet, finance function can be
performed effectively as it provide information regarding the credit scores and ratings which are
necessary for reacting to worldwide developments. Valuable information relating to the
customers are also attained by the information and communication technology. By this way ICT
supports the finance function in the enterprise.
QUESTION 2
a. Explaining budgeting and its role in an entity as per woody's opinion.
Budgetary slack approach is adopted by woody which act as unjustified approach because in this
situation woody is becoming selfish and thinking about himself rather than the organization
where, over-estimation of expenses of the budget allows the woody a better way of making with
their numbers. It is specifically essential for him for getting bonuses and performance appraisals
by achieving the set target of budgeted numbers.
b. Budgeting approach that best suits to motivate the worker's performance and productivity.
Zero base budgeting is the efficient budgetary tool in which all expenses are re-examined and re-
evaluated for each of the new period. It starts from the zero bases and each function within the
enterprise is examined for its cost needs. This enables the manager in allocating the resources
efficiently and in cost effective manner to improve the activities of the business. It detects the
budget that are inflated.
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c. Advising about the planning for setting up the system of budgetary control for getting the best
results.
For establishment of the budgetary control system in getting the better result company should
ensure about the proper planning of financial goals that helps in maintaining the budget
discipline in the enterprise. Effective budgeting requires identification of all the expenses so that
accurate picture of spending by the firm can be evaluated. Assessing the guaranteed income for
the purpose of budgeting assist the firm in avoiding the speculative income in the future and
helps in reaching the financial goals faster.
QUESTION 3
a. Example of ratios for measuring the profitability, efficiency, liquidity and leverage of the
corporate.
Net profit ratio- It depicts the relationship between the net sales and the net profits. It is
calculated as net profit divided by net sales (Bawole and Adjei-Bamfo, 2019). It is expressed in
the percentage form. It measures the profitability of the entity after deducting all the expenses,
taxes and costs.
Inventory turnover ratio- It acts as an efficiency ratio that indicates the effective management of
the inventory for a particular period. It measures the number of times the average stock is sold
during specific period.
Current ratio- This ratio also known as liquidity ratio states the liquidity position of the
enterprise by assessing the firm’s ability to meet its short term obligations. It is computed as
current assets divided by current liabilities.
Interest coverage ratio- A leverage ratio, reflects the firm’s capability to meet its interest related
expenses. This ratio is computed as dividing the EBIT by the interest expenses of the company.
b. Utilization of ratio analysis by several stakeholders to gain the insight into the performance of
an enterprise.
Management- Ratio analysis enables the management in determining the operational
performance and measuring the turnover of the enterprise (Bekaert, and Hodrick, 2017). By this
the managers can compare the present performance with the previous performance so that
reasons for growth and downfall can be gained and this in turn leads to efficient performance in
the future.
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Shareholders- they analyze the profitability ratio of an entity which assist them in evaluating the
risk and return associated with the investments made by them. This helps them in gaining the
maximum out of the investment held by them in the enterprise.
Creditors and suppliers- they are concerned with the liquidity and cash-flow position of the
firm. Liquidity ratio and cash ratio enables them in knowing the firm's capability to meet its short
term obligation so that they could be able to assess the safety and security of their money with
the enterprise.
c. Limitations of ratio analysis.
The company can make changes or manipulation in the financial statements to show the
improved financial position and better ratio analysis (Finkler, Smith and Calabrese, 2018). This
leads to unrealistic evaluation, which means window dressing. Ratio analysis ignores the changes
in the price level because of inflation as most of the ratios are computed on the basis of
historical cost. This reflects the vague financial situation. The qualitative aspects are also ignored
in the ratio analysis of the entity as they take into account only the monetary values. They do not
state the actual solution to the financial problem, hence are not a tool for responding to the
financial problems.
d. Recommendation on non-financial issues that stakeholders should throw attention for
analyzing the performance of the organization.
Non-financial issues relating to the system of performance measurement, plays a vital role in
developing strategies, compensating managers and evaluation of the goal achievement of the
organization. For analyzing the performance of the company in a better way stakeholders must
focus on aspects such as customer loyalty, employee satisfaction and retention, quality and
innovation. These measures helps in gaining the long term benefits and stable growth of the
enterprise in the future. It acts as the better indicator for evaluating the future profits of the
corporate. For example by conducting research or programs for customer satisfaction etc.
QUESTION 4
a. Convergence and divergence points in respect of liquidity and profitability conditions.
Higher liquidity states that firm has high investment in the working capital, but if the working
capital is not used and managed efficiently then the enterprise will be counted as less profitable
(Karadag, 2015). On the other hand lower liquidity reflects low investment in working capital,
but if the company uses its working capital optimally, it is said to be more profitable. A
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corporate which is profitable might not have adequate liquidity as most funds are invested into
the projects and a company which has higher liquidity might not be considered as profitable due
to opportunity lack for investing the idle cash. Profitable organization can go insolvent in short
term if has no liquidity and vice versa. Thus, the enterprise need to maintain the balance between
both liquidity and profitability.
b. Management of working capital- an interest to the management of an entity.
Proper working capital management is crucial to corporation's fundamental in context of
operational success and financial health of the business (Massingham, Massingham and Dumay,
2019). It indicates about the adequacy of the cash-flow position of the enterprise. Working
capital is a necessity for the management of the entity to manage the routine activities of the
business like daily payments, unexpected costs and purchase of raw material for producing the
finished product. It facilitates smooth functioning of the operations and a metric for gaining the
efficiency, sound financial health and liquidity of the company.
c. Ways for the management of working capital to attain the goals of profitability and liquidity
with recommendations on improvement.
Managing the inventory in prudent way leads to attaining the goal of profitability and liquidity as
excess stock results heavy burden on cash resources of the business. On the other side,
inadequate stock results in loss of sale which in turn leads to affect the customer relations. So,
optimum level of inventory must be maintained. Timely payment to the vendors create better
relations with the suppliers and better deals could be negotiated which leads to better working
capital (Matthew, 2017). Improving the process of receivable and managing the debtors
effectively helps in generating good system of collection so that cash availability can be
maintained and profitability could be attained.
QUESTION 5
a. Three methods of capital budgeting to measure the acceptability of the capital investment
project proposed.
There are several methods to evaluate the capital budgeting decisions such as net present value,
internal rate of return and payback period etc.
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Net present value- It is the difference between the present value of cash inflows and the initial
cash outlay. It is used to determine the profitability in the project and investment (Rodrigues and
Rodrigues, 2018). It considers the time value of money and considers the risk present in future
cash flows so that better forecast can be achieved.
Internal rate of return- It is the rate at which the sum of discounted cash inflow equates with the
sum of discounted cash outflow. In other words it is the rate which discounts the cash flow to
zero. The proposed project is accepted when the internal rate of return is higher than the
threshold rate and rejected when the IRR is less than the threshold rate.
Pay back period- It refers to the number of years required to recover the initial cash investment
of a capital budgeting project. If the payback period is less than or equals to the firm's maximum
desired period of the firm then the project is considered as desirable and vice versa.
b. Recommending methods for making decisions in relation to the capital budget in the company.
Net present value is the suitable approach of capital budgeting in making the decisions in the
enterprise because it takes into account the concept of time value of money (Rossi, M., 2015).
Positive net present value depicts that the project is profitable while negative net present value
indicates that the project will result in loss. It clearly tells about the acceptance and rejection of
the proposed project.
c. Role of cost of capital and time value of money in making decisions regarding capital
budgeting and evaluation of cost of capital of the enterprise.
Time value of money plays an important role in making decision as it states that a cash in hand
today is more of more worth rather than the cash to be received in future because the cash held
today can be invested for generating returns in the future. Cost of capital is the rate of gaining
return that could be earned by investing the same money in different investment with the same
risk (Setiawan and Amboningtyas, 2018). An organization's weighted average cost of capital is
computed as the average rate of interest paid by the company towards its assets.
QUESTION 6
a. Different types of funds and their sources with difference between the sources of funds.
Short-term funds Medium-term funds Long-term funds
These are the funds that are
needed for meeting the current
The funds needed for more
than a period of one year but
Funds needed for more than a
period of five years are known
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obligation that is a period less
than or equals to one year.
Various short term sources are
trade credit, treasury bills and
commercial papers etc.
for less than 5 years are called
as medium term funds.
Sources of these funds
includes public deposits, loans,
lease financing etc.
as long term funds. The
sources of acquisition of these
funds includes purchase of
fixed asset like machinery,
plant and equipment.
b. Process of Initial public offer and its benefits for the company to raise long term funds in the
capital market.
Firstly company selects the lead merchant banker then the securities issued and the price band
for bidding must be disclosed to the shareholders (Shara, Muda and Rujiman, 2019). After
disclosure syndicate members are appointed and the process of bidding remains for a period of 5
days. Bids have to be entered with the particular price band. On the closure of the process, the
book runners will be evaluating the price levels. At last, the issuer and the book runners decides
the final price of the security. Allocation of the security is made to the bidders and the rest are
refunded.
Initial public listing helps the current shareholders in diversifying their holding and risk. It
facilitates an easy way to raise the capital in the future. Through going public company can
enhance its value in the market.
c. Challenges faced by the company and ways to overcome them.
Through initial public offer the share price of the company is exposed to fluctuations in the stock
market. The expectation and the interests of all the public investors has to be taken into
consideration. Wide range of requirement of disclosure has to be met with proper financial
reporting (Soemantri, Sueb and Sagara, 2019). A huge investment is involved in the process of
IPO which acts challenges faced by the enterprise.
QUESTION 7
a. Evaluating three main forms of business combination in literature.
Joint venture- When two or more firms combines with each other for a specific objective and
agrees to share the profits, control and losses with each other, such business combinations are
known as joint venture.
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Mergers- It is the combination of two or more business organization which results in new
business expansion and growth.
Takeover- It implies taking over the control of an entity which is already registered through an
exchange of shares.
b. Methods used for determining the company's value and of the combination enterprise.
Asset approach- in this method the business of both the enterprise is viewed through its assets
and liabilities. The business is valued on the basis of the value of its assets to determine the fair
value of the asset in the market.
Income approach- It is the method used for evaluating the value of the company's business on
the basis of its capability to generate economic benefits (Su and et.al., 2018). It is useful for
determining the economic value of the entity.
c. 3 major factors for the success of business combination.
Strategy- Setting the right strategy and implementing it tactically results in successful business
combination. Articulating the rationale of acquisition and managing it with the execution of
tactics and operational activities for achieving the objectives and strategies set.
Value- wealth maximization is the key factor that helps in determining the real success of the
merger and acquisition or any other business combination. This can be done through preserving
the existing assets value of the companies and realizing the deal value and then they should move
in steady state of any one of the enterprise for creating higher value.
Leadership- for determining the success and failure of the business combination, leadership is a
major factor as it is concerned with the commitment or alignment by the top executive team of
the organizations towards the goals and strategies of deal.
QUESTION 8
a. Discussion of the roles and models of domestic transfer pricing for measuring the performance
effectively.
Transfer pricing plays a crucial role for measuring the performance and for purpose of tax
reporting (Zietlow and et.al., 2018). It determines the income distribution across several
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divisions of the enterprise. It is an instrument used for coordinating the decisions in relation to
the operating of different segments of business. The tax liability of the firm can be minimized
through transfer pricing.
b. Explaining the assistance of balanced scorecard in achieving fair and balanced performance
management system.
Balanced scorecard is the tool for performance measurement that the manager uses to track the
implementation of the activities by the employees at the workplace and to monitor the
circumstances arising from the actions by the staff. It views the company from financial as well
as non financial perspectives that includes financial, customer, internal process and growth
outcomes of the business so that fair and balanced system can be achieved in the organization.
QUESTION 9
a. Several factors that drives an entity into unethical practices to report profits.
Financial fraud- illegal agreement or fixing the price of the product at inflated level between the
competitors of the industry leads to an unethical practises by the firm in reporting profits
(Angraini. and et.al., 2019). Other misconduct like tax evasion and tax fraud for sowing the
higher profits of the company also consider as an unethical practice.
Misrepresentation- covering up of any illegal place of work or transactions and the false data in
the report of the shareholders and lying about the corporate profits to the union results in
unethical practice.
b. Various methods in literature that are applied and used by the corporate to report profit at all
cost.
Cost benefit analysis- It is a tool that is used to make comparison between the total cost and
projected benefits by using a standard metric. This assists in calculating the net cost or benefit
attached with programme.
Profit report- By preparing the income statement profits are reported by the enterprise so that
users can utilize the information in making decision regarding their investment and it reflects the
financial performance of the entity.
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