Financial Management Principles and Strategies

This document discusses various topics related to financial management principles and strategies. It covers different approaches to support effective decision making, the role of stakeholders in decision making using tacit knowledge, make or buy decision, production constraints, and key factor analysis. It also explores financial management principles used for effective management of strategy, ethical financial management, and maximizing shareholder wealth.

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
Financial Management Principles and Strategies
Name of Student
Name of the University
Author Note

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
Table of Contents
Answer to Learning Outcome 1.........................................................................................................4
Different Approaches to Support Effective Decision Making.......................................................4
The role of stakeholder in decision making using the knowledge tacit knowledge.......................5
Make or Buy Decision....................................................................................................................7
Different production constraint that prevent the sale and growth maximization...........................8
Key factor analysis.........................................................................................................................9
Answer to learning outcome 2..........................................................................................................11
Financial management principle which are used for effective of management of strategy.........11
Ethical Financial Management:....................................................................................................13
Maximizing shareholder wealth...................................................................................................13
Suggested improvements to reduce costs, enhance value and quality.........................................15
Answer to Learning outcome 3........................................................................................................17
Evaluation of the role of the management accountant and the accounting control system..........17
Important function of the management accountant......................................................................17
Role of Auditing in Business management..................................................................................18
Answer to learning outcome 4..........................................................................................................19
Financial Decision in the Sustainable performance.....................................................................19
Liquidity ratio...............................................................................................................................19
Net Working Capital................................................................................................................20
Current ratio.............................................................................................................................20
The Acid Test ratio...................................................................................................................21

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
Return on Investment – ROI........................................................................................................21
Accounting Rate of Return (ARR)...........................................................................................21
Discounted Cash Flow (DCF)..................................................................................................22
NPV - Net Present Value..........................................................................................................22
Use of statements to help in decision making..............................................................................22
Cash flow statement (CFS).......................................................................................................22
Trial Balance............................................................................................................................23
References........................................................................................................................................25

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Answer to Learning Outcome 1
Different Approaches to Support Effective Decision Making.
A knowledge-based structure is a method of artificial intelligence that targets to
apprehension the understanding of human experts to backing decision-making. Instances of
knowledge-built systems comprise expert system, which are so named because of their trust on
human proficiency (Santoro, et.al, 2018).
The knowledge base comprises a group of information in a specified arena - therapeutic
analysis, for instance. The inference device assumes understandings from the information kept in
the knowledge base. Knowledge-based structures also contain an edge through which users
question the technology and intermingle with it (Dalkir, 2013.).
Knowledge management system are of two types -Explicit knowledge and implicit knowledge.
Explicit knowledge (also called communicative knowledge) is Knowledge that can be
instantly expressed, organised, retrieved and put into words. It can be effortlessly conveyed to
others. Maximum forms of explicit knowledge can be kept in a media file. The information
included in Records, manuals, audio visuals are good models of explicit knowledge (Shintani, and
Ellis, 2013).
Tacit knowledge is the form of Knowledge that is hard to transmit to another person by
medium of inscription or articulating it. However, the capability to speak a language, play a
musical gadget, and use intricate gadget necessitates all kinds of knowledge that is not always
recognised explicitly, even by expert practitioners. The procedure of converting tacit knowledge
into explicit knowledge is identified as codification, articulation. The tacit features of knowledge
are those that cannot be codified, but can only be communicated by training or individual
experience (Rebuschat, 2013).

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Tacit knowledge can be distinguished from explicit Knowledge in three major
areas:
 Process of transferring knowledge
Explicit knowledge can be organised and effortlessly transferred, tacit knowledge is
spontaneous and unarticulated knowledge that cannot be communicated, understood without the
acquainting subject'. Unlike the transfer of explicit knowledge, the transfer of tacit knowledge
requires close interaction and the build-up of shared understanding and trust (Yang, Wang and Jin
2014).
 Acquisition and accumulation methodology
Explicit knowledge can be created through rational inference and learned by practical
understanding in the applicable framework. On the other hand, tacit information can only be learnt
through applied involvement in the applicable framework.
 Possible combination and methods of annexation
Explicit knowledge can be gathered at a particular place, kept in independent arrangements
and adopted without the involvement of the subject. Tacit knowledge on one side, is individual
circumstantial. It is distributive, and cannot simply be accumulated.
The role of stakeholder in decision making using the knowledge tacit knowledge.
Financial statistics is used by a variety of investors, this information therefore, wants to be
truthful to help, and to conform to legislation. Financial information has to follow a severe
auditing procedure. The figures of the financial data therefore, has to be correct, trustworthy, up-
to-date and comprehensible (Trianni, Cagno, and Farné ,2016.).

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Different stakeholders have different needs from the organisation’s financial accounts
Company Managers – require the information to empower them to handle and run the business
proficiently.
Shareholders – will require the information to evaluate how successfully management are
carrying out the business, how much they can extract in dividends and how lucrative the business
is to invest in for long term (Sayce, et.al).
Trade contracts – trader or the supplier of the raw material on credit to the business, wants the
information to know organization credibility in making payment.
Finance Providers – such as banks who will need to identify that the company can have enough
money for the repayments of loans provided.
The Government – how much tax the company is owing to pay and also any taxation which the
establishment gathers on behalf of the administration (Adam Cobb, 2016).

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Make or Buy Decision
When creating this decision a variety of investigation require to be considered comprising both
quantitative and qualitative foundations (Jami, and Walsh, 2014).
Martin (2015) has charted a variety of features to consider within this decision making procedure
(cost/benefit examination):
 Cost Budget factor
 Enhanced quality control
 competent suppliers
 production supply
 project strategy secrecy is essential to defend proprietary technology
 Minimum Expenses on transportation and warehousing
 Governmental, environmental, or societal reasons
 Productive use of surplus plant capability to support appropriation fixed overhead
Factors supporting purchase from outside
 Third party expertise in productivity, know-how and quality are more than that of the buyer
 Deficiency of expertise in –house production
 Lesser-volume requirements
 Budget aspects (costs fewer to buy the item)
 No need to plan a separate strategy for the item.
Costs for the make analysis
 Direct labour overhead
 Progressive inventory-carrying cost

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 Additional capital cost
 high purchasing cost
 Increased factory running cost
 Increased managerial cost
 Increased purchased material cost
Cost factors for the buy analysis
 Carriage expenditures
 Increased buying expenditures
 Inspection expenses involved in examining the third product quality
 Associated expenses with product quality
Different production constraint that prevent the sale and growth maximization.
Capacity constraints
This happens when the business’s operations uncover an absence of ability to fulfill
demand for its products and services in the market. If this restraint is existent, the urgency is to
abolish it so that more capacity will be can be used (Renz, 2016).
Market constraint.
There is a market constriction if the company has more than adequate production
capability, but there is not sufficient demand in the economy to convert into sales and, ultimately,
profit (Carroll, and Buchholtz, 2014).
Cash constraint.
Complications in cash flow are also measured as constriction, when they could mean an
incompetence on the part of company to pay for its working capital needs (Boatright, 2013).

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Key factor analysis
Key factor analysis is a financial instrument for forecasting the variations in population
size centred in recognising the comparative involvement done to it by the important issues of the
birth, deaths, migration (Rohr, 2017).
When there is one restrictive issue then key factor analysis is done.
The steps involved in the determining of the key factor analysis are mentioned below.
 Recognise the rare resources
 Compute the contribution per unit for every manufactured goods.
 Compute the contribution per unit of the rare supply every manufactured goods.
 Rank the products the basis of contribution per unit of the rare resource.
 Apportion resources using this ranking and answer the question.
If there is more than one limiting factor then linear programming has to be used (DRURY, 2013).
The process for the linear programming with 2 variables are given below.
 Describe the variable
 Outline and communicate the objective
 Articulate the restraints
 Make a graph classifying the feasible region
 Explain the ideal manufacture plan

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Answer to learning outcome 2
Financial management principle which are used for effective of management of
strategy
Generally, the financial management planning process concludes in the formulation of
corporate strategy. The strength of the entire process of strategic planning is tested by the efficacy
of the strategy finally forged by the firm. Corporate strategy is the game plan that actually steers
the firm towards success. The degree of aptness of this game plan decides the extent of the firm's
success. That is why formulation of corporate strategy forms the crux of the strategic planning
process (Hilton, and Platt, 2013).
Setting objectives to achieve financial goals
Objectives are the expected end result of sequencers of activity, and therefore have a main
part in strategy preparation. Objectives should always be specified as concise as possible, so that it
can quantity whether objectives have been realised (Otley, 2016).
Objectives have many purposes.
 They empower the total objectives of the organisation to be fragmented into clear
announcements of what require to be done at every level.
 They deliver clear declarations of what action require to be taken.
 They deliver an emphasis for every activity.
 They offer goals for both personal and group accomplishment.
 They simplify the control of authentic performance.
 They deliver a ground for assessing how effectively the plans are being executed.
Setting Corporate Objectives
Corporate objectives should communicate those factors that decide an organisation's success.
These include.

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 Survival
 Growth in payments to shareholders
 Profitability
 Customer satisfaction
 Market share
 Growth
 Cash flow
 Quality of products/services

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Ethical Financial Management:
Ethics are moralities created on doing the true thing. They are the ethical values by which a
business functions. A finance executive must offer proficient, correct and judicious information
that impartially represents any probable disclosure issues, such as legal complications. The
manager is similarly morally accountable for defending the privacy of the employer and residing
within the boundaries of law (Fullerton, Kennedy and Widener, 2014).
Ensuring ethical management prospects in the regions in which the organisation is located.
 Using investigation and expansion to follow improvement, thus confirming continuity of
employment prospects
 Inaugurating a strategy of price control to enhance productivity, rather than capitalize on,
profits
 Utilize profit in the business to empower survival, constancy, and development policies to
be followed
 Supporting for Government social transformation actions through improved company and
governmental co-operation.
 Helping workers through entity medical care programmes.
 Inaugurating health centres within the community to improve worker and society health
 Enhancing shareholder wealth.
Maximizing shareholder wealth
The ratios that are significant for the existing and probable trade investors are as follows:
 Earnings per Share ratio
 Return on investment
 Dividend Yield ratio

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
Earnings per Share Ratio
The Earnings per Share ratio displays the incomes made by the business during the year relative
to the number of shares issued, and is computed as follows:
Earnings per Share = Profit after Tax
Issued Shares
All of the Earnings per Share are not to be distributed to the Shareholders. A part will be
reserved within the organization – as retained profit - to support the future development
requirement to achieve business objectives (Edwards, 2013).
Return on an Investment
ROI (Return on Investment) assess the profit or loss produced on
an investment comparative to the amount of money invested. ROI is typically conveyed as a
percentage and is normally used for individual monetary choices, to equate a entity profitability or
to relate the efficiency of several investments.
Anticipating future financial earnings is usually referred to as ‘Investment Appraisal’, and
is built upon the prerequisite to influence the financial pronouncement that by spending in a
project, an organization will discover itself in a improved position than it is currently.
Any financial choice about the future must be entirely companionable with the strategic
purposes of the organization, particularly in relation to whether the entity is an ‘income extractor or
an ‘income optimiser’. Calculations must display that the forecast revenues meet a fixed and
essential rate of return (Christensen, Nikolaev, and Wittenberg‐Moerman, 2016).
Managers’ reluctance to assign resources to investment opportunities can be brief as follows:

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
 Absence of profit occasion
 Financial ambiguity
 Refusal to upsurge levels of borrowing
 Deficiency of accessible capital
 Absence of skilled managers to inculcate investment prospects.
Choosing the correct investment evaluation practice is vital to safeguard that decisions are made
quantitatively (Omar et. al). The base of project planning and investment evaluation should contain
the following points:
 A strong description of the strategic purposes of the organisation
 Examination and identification of those projects that will lead to satisfying organisational
objectives.
 Contemplation of the costs and benefits associated with each potential project
Anticipating Returns on Investment (ROI) can be calculated using the model.
 The Payback Period
 IRR – Internal Rate of Return.
 NVP – Net Present Value
 ROCE – Return on Capital Employed
 Discounted Cash Flow.
Suggested improvements to reduce costs, enhance value and quality
Quality Circles
These are a set of workers that meet frequently to resolve difficulties distressing their work.
Quality circles usually endorse resolutions for quality and productivity complications which
management may use (Ongore, and Kusa, 2013). Quality circles have established popular in the
previous years. Training packages can be acquired to train workforce about the procedure to do
quality circles. Management can also control the numbers of people convoluted and the price of

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
executing quality circles. They can be focused towards particular areas and motivated to work with
work force straight involved within the process under examination. They can also be engaged to
work in an exact area where problems have been.
Six Sigma
It is a data driven method, which pursues to reach excellence (Zainudin, and Hashim 2016).
Work is critically examined and the number of disparities which a procedure has is aimed to be
minimise through development reform using six sigma methodologies – DMAIC and DMADV.
The Six Sigma DMAIC methodology (define, measure, analyze, improve, control) is an
improvement structure for existing procedures falling under specification and searching for
rampant improvement.
The Six Sigma DMAV process (define, measure, analyse, design, verify) is an
improvement structure apply to create new procedures or products at Six Sigma quality levels. It
can also be used if an existing process needs more than just incremental improvement. The values
of six sigma are not entirely detached from those of continuous improvement but the data
investigation of deviations frequently means that it is less appropriate for smaller organisations and
where improvements which will have fewer influence on price since it is an expensive exercise in
itself (Weber,2014).

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
Answer to Learning outcome 3
Evaluation of the role of the management accountant and the accounting control
system.
Management accountant
Management accounting is a professional work that encompasses associating in
management decision making, formulating planning and performance management
structures, and providing know-how in financial reporting and control to help
management in the preparation and execution of an organization's strategy (Hasan,
2013).
Important function of the management accountant
Business accounting
Financial management comprises of design and management of the recording structures for
cash and bank amount, receipts, expenditures and several assets and liabilities.
Cost and management accounting
It includes satisfying the information requirements of organization. It help in organization
decision making, planning the entity financial performance, monitoring costs and increasing
profitability (Castilla, and Fernandez, 2017).
Auditing
It investigate the compliance with governance rules and regulation in line with company
processes and external audits to confirm the existence, ownership and basis of estimate of fixed
assets and investments.

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
Management accounting is consider as a crucial feature of the strategic development of the
entity, as such it is an instrument to be apply in the several business processes of the entity.
Financial Accounting
Financial accounting is related with the precise recording and calculating of the several
financial businesses transaction of an entity over a period of time (Magni, 2015).
The work of auditing is becoming more problematic as the auditors are called upon to grow a
wide and significant ability comprising
 Financial accounting methodology
 Communication procedures
 Auditing processes and procedures
 Information technology and computing
 Statistical interpretation skills
Role of Auditing in Business management
Auditing plays an important role, this is because corporate organisations evolve due to
 The growing size or organisations, especially in the business sector
 The dive toward globalisation in business
 The technologically driven upsurge in organisational complexity
 The high demanding socioeconomic and legislative structures executed by the European
Union
 The rising political compressions for companies to be conscious of their social
accountability in the delivery of correct and truthful financial information
 The social and political pressure on business to improve their intelligence towards ethical
obligation

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
The proprietors, managements and administrators of every business must be completely
cognizant of their accountability to their stakeholders (Bae, and Patterson, 2014). It is the
responsibility of auditors to help directors in this movement through the making of the accounts of
the business in a accountable manner. Stakeholders will include the following:
 Shareholders
 Local authorities
 Employees
 Customers/clients
 Government
 Financial institution
Answer to learning outcome 4
Financial Decision in the Sustainable performance
Evaluation of the ways in which the financial decision making support the sustainable
performance
Ratio analysis is a significant financial instrument to make informed business decision. Ratio
analysis pursues to scrutinize the final account of the entity by seeing important key ratio (Lane and
Rosewall, 2015). The broad classification for the ratio analysis are
 Liquidity ratio
 Activity ratio
 Profitability ratio
 Debt ratio
Liquidity ratio
In order to meet the short-term debts, an entity must have assets that can be sold to generate
cash. In a usual balance sheet, the following assets would be called as current assets

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
 Account receivable (debtors)
 Bank balances
 Stock (inventory)
 cash
 Pre-payment made
The current liabilities of the entity would comprise such items as
 Accounts payable (creditors)
 Notes payable
 Bank credit
The three important of liquidity ratio are:
 Net Working Capital
 The Current Ratio
 The Acid Test or Quick Ratio.
Net Working Capital
Net Working Capital (NWC) is computed by deducting current liabilities with current
assets. As a common rule of thumb, NWC should always be positive, this means the business has
more current assets as compare to current liabilities. Circumstances might rise where the positive
variance can be excessively high, and this means that the business is not utilizing its current assets
competently (Bae, and Patterson, 2014). For example, the company may be retaining too much
cash in the business, permitting trade debtors too much time to reimburse their unpaid bills
Net Working Capital = Current Assets - Current Liabilities

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Current ratio
The current ratio is the liquidity ratio that evaluate a business capacity to pay short term due
within one year time frame. It represent the investor how a business can maximize the current
assets on its balance sheet. The formulae comprise the following
Current ratio = current assets / current liability
The Acid Test ratio
It is usually measured that the least liquid of a business current assets is its stock holding or
inventory. Most financial management analysts recommend that a better barometer of an business
liquidity is the Acid Test Ratio, which eliminates the least liquid of the entity assets from the
liquidity ratio measurement.
Formulae: cash + marketable securities +Account receivables / Current Liability
Return on Investment – ROI
This is a financial tool which pronounce the performance dimension used to assess the
efficacy of an investment or project. The ROI will be unrelated for every stakeholders. It may not
be effortlessly articulated in financial terms. This is because, the difficulty starts from the degree of
danger instigated by a number of variables. For minor projects the ROI may be merely worked out
in terms of ticket sales or incoming registration payments. The normal formula for ROI is:
ROI = Net profit / Total Investment * 100.
Accounting Rate of Return (ARR)
The accounting rate of return is the outcome of the profit divided by the initial investment
of a particular project. Benefits of this method is that is effortlessly computed and consider into
account the profitability feature. However, it doesn’t take into account the time value of the money
either and it can be computed through several approach by permitting for discrepancy and

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
unreliable figures when examining and associating projects and it includes accounting income and
not cash flow.
ARR= Average Accounting Profit / Initial Investment.
Discounted Cash Flow (DCF)
The Discounted Cash Flow is centred on future cash predictions and discounts them to
calculate the present value, in other words DCF principles says it consider into account that money
tomorrow is value less than now due to inflation. If the final result computed is higher than the
initial investment, then the project proposal might be feasible and can be accepted for doing
business. There are two methods and both of them take into consideration the time value of
money principle.
NPV - Net Present Value
NPV is one of the best standard methods used to evaluate the viability of a proposed project
and it can be applicable for any type of project. It is computed by considering the current value of
the cash inflows and outflows of a scheme less the investment on the project.
NPV evaluates for the net present value of money, which is based on discounted cash
inflows. It is legitimately simple to assess; however, it depend on the estimates of future cash
incursions of the project, which could be dissimilar from realism. A difficulty is that it undertakes
the cash flows occur at year-end and specified that interest rates and inflation change, it could be
difficult to choose at what rate to mark-down the cash flow.
Use of statements to help in decision making
Management use of financial statements such as cash flow, trial balance and break even to
effectively run the organization, to decide future business strategy, to take day to day and longer

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FINANCIAL MANAGEMENT PRINCIPLES AND STRATEGIES
term decisions. Outside stakeholders also use the financial data to make decisions regarding their
investment.
Cash flow statement (CFS)
The aim of the cash flow is to show the business profits and cash; it also provide
information on where the money originates from and where the cash is invested. The duration
cover by the cash flow statement should be decided by the company but is often made on monthly
basis. This is to be noted the cash flow statement is frequently measured in advance so that the
entity can ensure that funding is available for money borrowed and is from time to time CFS joint
with the budget to develop a budget cash flow forecast.
Trial Balance
A trial balance is a conclusion of the transactions documented in the ‘books’ recognised as
ledger accounts and is used to test the correctness of double entry accounting records at the same
time it also assist in easier creation of the final accounts and the financial statement. Each ledger
account is summed and this data is incorporated for the statement of financial position or the
balance sheet.

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HND HNC – Unit 15 – Financial Management
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HND HNC – Unit 15 – Financial Management
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HND HNC – Unit 15 – Financial Management
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HND HNC – Unit 15 – Financial Management