Approaches for Effective Decision Making in Financial Management

This document discusses different approaches used for supporting effective decision making in financial management. It covers the role of stakeholders in decision making, techniques for fraud detection and prevention, and the ways in which financial decision making supports sustainable performance.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
LO1 .................................................................................................................................................3
Different Approaches used for supporting the effective decision making..................................3
Role of stakeholders in decision making ....................................................................................5
LO2..................................................................................................................................................6
Setting objectives for achieving the financial goals....................................................................6
Ethical Financial management.....................................................................................................6
Maximising shareholder wealth...................................................................................................6
LO3..................................................................................................................................................6
Role of management accountants and management accounting control systems .......................6
Techniques for fraud detection and prevention...........................................................................8
LO4..................................................................................................................................................8
Evaluating the ways in which financial decision making supports sustainable performance. .. .8
Investment appraisals for making informed decisions ..............................................................11
Cash flow statements, balance sheet and break-even for financial decision making ...............12
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial management refers to strategic planning, to organise, direct and control of
financial undertakings of the organisation. Financial management include application of
management principles over financial assets of organisation. It plays and important part in fiscal
management of business (Matthew, 2017). Present report will be providing approaches used for
supporting the financial decisions. It will also provide principles for supporting the effective
financial strategies. The role of accountants and management accounting in business and the
ways in which the financial decision making helps in sustainable performance.
LO1
Different Approaches used for supporting the effective decision making.
Knowledge based approach
Knowledge based approach involves recognizing knowledge as the resource to gain
organisational competitiveness, knowledge suggests the method for managing and improving
the performance of organisation. It is essential for the business enterprise to have knowledge
based approach so that the decisions taken for the improvements are having some authentic base.
This have significant impact over the decision making approach of the executives of
organisation.
Formal and Informal approach
It provides an structured approach to the organisation in the decision making process.
This approach reduces subjective approach of making the decisions and expose details of
decision rationale. It helps in improving probability of selecting solutions meeting the multiple
expectations of the stakeholders of company (Ward and Forker, 2017). The uncertainty
associated with the tasks is reduced by having reasonable alternatives. The approach permits
more quickly re-assessment of the criteria, requirements or the stakeholders changes in
expectations. This enables the organisations to make more informed decisions considering all the
factors.
Techniques used in decision making
Decision making occurs at various levels in business. Decisions are to be taken
considering various relevant facts and figures. Proper evaluation and analysis is important for the
organisation to make effective decisions. Techniques used for making decisions are :

Decision matrix – It is used by managers in evaluating all options for decisions. In this matrix all
options are placed in first column of the table and factors affecting the decisions in first row. It
involves scoring and weighing factors based on their importance and selects the best options.
T -Chart – The chart is made for weighing plus and minus of options. This ensures that all the
negatives and positive are considered in making decisions.
Decision Tree – The tree is a model or graph which involves contemplating the options and
outcomes of each options. It is also used in statistical analysis
Pareto Analysis – Technique is used mainly when multiple decisions are required to be taken. It
helps in ranking the options depending on their importance and the ones having the greatest
impact overall on the decisions.
All these techniques are used by the organisation in their management processes. They
provide the management the relevant information about the decisions to be taken. The
information is useful for making decisions. The performance is improved by carrying out the
tests and flowing the approaches of different techniques. Using this approach it could make
effective decisions for the business.
Factors contributing in effective decision making
Factors which contribute in effective decision making are
State of Economy
Economic conditions greatly contribute in decision making process. Strong economic
conditions attract high investments for the organisations. The expectations are also high of the
investors.
Capital structure and money market.
It is easy to make decisions for raising capital in companies having strong and developed
capital market. This provides the manager with the bargaining powers.
Nature of Businesses
Decisions are highly contributed by the nature of business. Managers have to take
decisions keeping in mind the industry that is being served by them (Ward and Forker, 2017).
As the manufacturing concerns require investments mostly in capital assets.
Probabilities of steady and regular earnings

The decisions are highly influenced by the earning of the enterprise. Decisions are taken
by the managers considering the availability of funds and earnings. Managers are not confident
on decisions when the earnings are fluctuating.
Liquidity position of company
It defines the strength of company to make buying and selling decisions. Decisions
related to deployment of funds are taken on the basis of liquidity position of company. It
contributes significantly in the decision making process.
Role of stakeholders in decision making
Stakeholders are important for the business and play critical role in decision making
process of company. All the stakeholders have different interests in the business and managers
are required to manage their conflicting objectives.
It is concerned with systematically identifying, analysing, planning and the
implementation of the actions concerned with engagement with the stakeholders. Stakeholder
management refers to the process concerned with engaging the people & maintaining effective
relationships with the members. Stakeholders are the individuals or their groups with interest in
project, portfolio and and programme because they are concerned with work or are affected by
outcomes. There are variety of stakeholders in the projects, portfolios or programmes. These
people have significant influence on the success or failure of the work. Management of
stakeholders is concerned with harnessing positive influences & to minimise effect of negative
influences (Kwakkel, Walker and Haasnoot, 2016). It is mainly concerned with identifying
stakeholders, assessing the interests and influence, developing communication management plan
and engaging & influencing the stakeholders. Organisation must have an effective stakeholder
management strategy for managing the stakeholders of company. It identify and document the
approaches for increasing the support and decreasing the negative impact of stakeholders over
life of project.
Managing conflicting objectives of different stakeholder groups
Manager is required to understand necessity of balancing interests of various
stakeholders. Shareholder and sales teams are concerned with the revenue and profit generations
for having adequate returns over their investments. Operations team expects to complete task in
less time increasing their efficiency. Every departments and stakeholders have their own interests

and it is essential for the manager to identify their interests. Managers are required to identify the
priority of the interests and place them accordingly. Conflicts in objectives generally tends to
arise when needs of stakeholder groups are compromised with the expectations of other groups.
Organisations have to make choices between the policies and procedures for managing the
interests and objectives of stakeholder groups.
LO2
Setting objectives for achieving the financial goals
Companies are require to make short term as well as long term goals for the business. A
business is required to set gaols for overreaching the goals and objectives of business. Short
term goals are made by organisation for achieving and getting near to the future goals. Success
of the business is achieved by short term goals helping to achieve the long term vision of
company (Mohagheghi, Mousavi and Vahdani, 2017). The long term goals provide the
company a defined path for achieving the vision and mission of company. The objectives of the
goals should be to properly organize business financial funds, having sustainability in business
and maximising the wealth of shareholders (Business Goals, 2019).
Ethical Financial management
Ethical financial management is focused towards achieving the financial goals and
objectives using ethical means. The finance should not be raised through unethical means. It
should not include misstatements or mould its financial figures for representing profitability in
the financial statements. There are many companies who misrepresent their financials for raising
funds from outside authorities. Example : The financials statement of the company should be
prepared reflecting true and fair view of the actual position of the company and not to deceive its
stakeholders
Maximising shareholder wealth
Company should have objective of maximising the wealth of shareholder by performing
well in the business. Shareholders make investments in company with the motive of earning
adequate returns. It is essential for the business enterprise to take strategic decisions that creates
recognition of company in market (Caffi and Rossi, 2018). Company should adopt for policies
and procedures to enhance its performance. This will provide company with higher returns and
this will increase the share prices maximising the wealth of its shareholders. For example : The

company should adopt for effective strategies for increasing the profits. Increase in profits raises
the share prices of company that directly adds to the wealth of shareholders.
LO3
Role of management accountants and management accounting control systems
Management accounting is an accounting branch concerned with identifying, measuring,
analysing and interpreting the accounting informations, so that it could be used by the managers
in making the decisions for efficiently managing company operations.
Role of Management accountant
Management accountant performs series of tasks for ensuring the financial security
handling all the financial matters of company. It helps the business in driving its management
and strategies. A management accountant ensures that all the processes and operations are
carried on properly by the business keeping all the costs under control (Zhang, 2016).
Financial Management Systems
Financial planning
Objective of every business is to earn maximum possible profits. The objective is
achieved when management have sound and proper financial planning. It is management
accounting techniques that helps the organisation to plan before investing funds. This prevents
unnecessary wastage of the resources and costs. It ensures that the resources of company are
allocated appropriately. Sound financial plans will result in achieving the objectives maximising
the wealth of shareholders.
Cost accounting
It is concerned with presenting the cost of each product and process in a structured form.
This provides management with the information related to the cost associated with each project.
Cost accounting involves comparisons of actual cost with the budgeted costs. The differences are
to be identified by the business so that the corrective measures are taken for eliminating or
reducing the gap. This ensures that activities that are not performing or having high variances
have to be given attention (Weetman, 2019). Cost accounting ensures that activities that are
having unnecessary costs should be eliminated this saves cost of company.
Margin Analysis
It is concerned primarily with incremental benefits related with the increased productions.
It is a fundamental and a essential technique used in the management accounting. It involves

calculation of break-even points for determining optimal sales mix for products of company. The
technique helps in controlling the cost of manufacturing. The appropriate sales mix needs to
identify the level after which company will be earning profits after covering the cost. The
increase in profit levels helps in increasing the returns to shareholders
Cost Control and effective financial planning.
Organisation control costs by effectively managing its resources this is done by effective
financial planning. Budgetary control helps organisations in financial planning.
Budgetary Control
It is used by management for analysing the future financial needs of company. They have
to be arranged and estimated on orderly basis. This technique is used for managing and
controlling the financial performance of business. This provides the business direction to follow.
Managers use this for appropriate resource allocation between different processes and activities.
This enables the company to allocate funds appropriately (Bromwich and Scapens, 2016).
Effective budgeting helps in achieving the growth and success this increases the value of
company and its shareholders.
Techniques for fraud detection and prevention
It is important to detect fraud as it may put the whole business in danger. Businesses
suffers million of loss because of frauds. It is important for the organisation to detect the frauds
at early stage and to implement the fraud prevention techniques so that if any fraud is undergoing
it can be prevented at early stage.
Building profile of the potential frauds, taking top down approach for the risk assessment,
listing areas where the frauds can occur in the business. It involves identifying the type of frauds
possible in the areas.
Organisation have to focus over the risks having greatest possibility of reducing the
shareholders wealth. They should test data and transactions not randomly but fully. Company
should adopt to implement continuous auditing and the monitoring approaches (Ax and Greve,
2017). Timely auditing should be conducted and also effective monitoring should be laid over all
the processes to prevent frauds. Management should be informed with effective communication
channels about the frauds doings at their initial stages.
Ethical decision making approach

Company should adopt Utilitarian approach for effective decision making as it assess the
action on terms of their outcomes or consequence. It considers its costs and benefits before
taking decisions. The approach strives for achieving the greatest benefit for greatest number at
the same time creating least harm or preventing greatest sufferings (Wen and Zhu, 2019). The
approach is beneficial for the organisations as every decision is taken considering its end results.
LO4
Evaluating the ways in which financial decision making supports sustainable performance.
Financial ratios in making informed business decisions.
Persimmon plc
2018 2017
Liquidity ratio
Current assets 4215.7 4228.8
Current liability 1123.9 1198.6
Current ratio 3.75 3.53
Current assets / current liabilities
Current assets 4215.7 4228.8
Inventory 3059.5 2825.9
Current liability 1123.9 1198.6
Liquid ratio 1.03 1.17
Current assets - (stock + prepaid
expenses)
Activity ratio
Trade Receivables 91.8 86.1
Sales 3737.6 3597.8
Account receivable turnover ratio 2.46% 2.39%
Sales 3737.6 3597.8
Net Assets 3194.5 3201.6
Asset turnover ratio 117.00% 112.38%
Sales / Net assets
Profitability ratio
Employed Capital 3527.8 3558.2
Net operating profit 1090.8 966.1

Return on capital employed 30.92% 27.15%
Net operating profit/Employed Capital
Net Income 1090.8 966.1
Shareholder's Equity 3194.5 3201.6
Return on Equity 39.30% 41.10%
Net Income / Shareholder's Equity
Cost of Sales 2557.7 2526.1
Sales 3737.6 3597.8
Gross Margin 31.57% 29.79%
Total Sales – COGS/Total Sales
Operating profit 1090.8 966.1
Sales 3737.6 3597.8
Operating profit ratio 29.18% 26.85%
Operating Income/ Net Sales
Debt
Debt 333.3 356.6
Equity 3194.4 3201.6
Debt equity ratio 10.43% 11.14%
Debt/ Equity
The above ratio analysis is of Persimmon plc which is a real estate company of United
Kingdom. Company is performing well in the sector from years. For assessing the financial
health and position ratio analysis is used by the organisations and various experts. It is an
effective tool used by the management and investors in decision making. It tells the true position
of company and its internal management (Rao, 2016). There are different financial ratios used
by the organisation to assess the financial performance of company. Most commonly used ratios
are profitability, liquidity and efficiency ratios.
Liquidity of company is measured of company using current and quick ratio.
Current ratio of company is 3.75 in 2018 that represents strong liquidity position of
company. Company is having enough current assets to meet its short term obligations. The short
term obligations can affect the business success. Therefore it should have enough of assets to
meet the short term liabilities.
Quick ratio is 1.03 that has declined from previous years as the inventory stock was
higher in current year. Excluding the inventory company should have strong liquidity as

inventory is not considered as current asset. Company should have strong liquidity as various
stakeholders are concerned with the liquidity of company (Almumani, 2018).
Return on capital employed of company is 30.92 % that is increased from last year.
There is constant growth in return. Company is using its resources productively for generating
adequate return for the business.
Return over equity of company is very as compared with the industry average. It is
giving return of 39.30% against its stockholders equity. High returns attract more investors and
shows that the performance of company is strong. Management is effectively using the strategies
to generate high returns.
Gross margin of company is 31.57%. It has shown increase from the previous year.
Gross margin of company should be high as it is the amount left for carrying out all the other
indirect costs of business. Being a real estate company its direct costs are much higher. It is
having profits adequate as per industry average.
Operating profit margin shows that company is having 29.18%. It is having high profits
that shows company will achieve the growth and objectives of business (Dicu, Bondoc and
Popescu, 2019). Operating profits are the return generated by carrying on the business. Business
have very strong policies and procedures that is helping it generate such high returns.
Activity ratio shows the efficiency with which company is utilising its resources.
Efficiency is measured by the asset turnover and accounts receivable turnover. Turnover are
showing increasing trend which shows that assets of company are utilised efficiently for
generating revenues.
Debt equity ratio measures the financial risks in business. Debt equity ratio is 10.43% in
2018 that has declined from 2017. Higher the debt high is the financial risks but at the same time
company should have an appropriate mix of both for having a balanced capital structure.
Investment appraisals for making informed decisions
For making accurate and informed decisions companies use various investment appraisal
techniques. Technique used in investment appraisals are net present value, payback period,
accounting rate of return
Net Present Value

Net present value considers the concepts of time value of money. It measures with
company will be recovering the cost of investments from the future cash flows or not. This helps
the business in more accurate decision making (Bunker, Cagle and Harris, 2019). Drawback of
NPV is that it do not accounts for the hidden cost associated with the project and it is difficult to
determine discounting factor. Formula for NPV is Present value of future cash inflow – initial
investments.
Payback period
It is used for calculating the time length within which its costs of project will be
recovered. The time lengths shows whether to accept the project or not. It is simple and easy to
calculate and understand. This helps in identifying the reliability of projects. Limitation of
payback period is that it completely ignores time value of money.
Payback period = Original cost of investment / Cash inflows
Accounting Rate of Return
It is a financial ratio used for calculating the viability of investments. The method shows
the return from the investments in percentage. The method consider accounting profitability in its
cash flows which is not considered by any other method. This method also do not consider the
time factor in its cash flows.
Accounting rate of return = Average net profit / Average Investment
Cash flow statements, balance sheet and break-even for financial decision making
Financial statements provide an important base to the management for making the decisions.
Cash Flow Statements
Cash flow statements provide the management with the cash inflows and outflows from
business. Managers can track the areas where funds are excessively flowing and activities that
are generating higher returns. This helps company to focus over more productive areas and take
corrective steps for areas to be improved.
Balance Sheet
Balance sheet is a financial statements used by management to analyse the position of
company in market. The performance of the firm can be measured by the values of assets and
liabilities stated in the balance sheet (Rodrigues and Rodrigues, 2018). Management can
compare their position with that of its competitors. This enables company to take effective
strategies and policies for improvement.

Break-even analysis
Break-even analysis is the point at which company will be meeting its cost and start
generating profits. This helps the business in identifying the level of sales at which company will
meet its costs. This is essential for the organisation to plan their marketing strategies for
achieving the desired level of outputs.
CONCLUSION
Based on the above study conclusions can be drawn that financial management play an
important role in the business. A business cannot run successfully without making sound
financial decisions. Decisions for the business are taken on various facts and informations.
Companies follow different approaches for making effective business decisions. The financial
performance and position can be analysed using ratio analysis. This provides important
information for making the decisions related to business.

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Business Goals. 2019. [Online]. Available through :
<https://www.groupon.com/merchant/blog/short-term-long-term-business-goals>.