Financial Management: Approaches, Techniques, and Stakeholder Management

This document discusses the range of approaches, techniques, and factors contributing to effective decision making in financial management. It also explores stakeholder management and the value of management accounting techniques. The document includes scenarios and examples to illustrate key concepts.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
SCENARIO A..................................................................................................................................1
1. Evaluating the range of approaches, techniques and the factors which contributes to
effective decision making............................................................................................................1
2. Evaluating the management of conflicting objectives and stakeholder management of
different stakeholder groups........................................................................................................3
3 Examining the value of management accounting techniques. .................................................3
4 Examining techniques detection and prevention of fraud and key approaches to ethical
decision making. .........................................................................................................................4
5. Reflection ................................................................................................................................5
SCENARIO B..................................................................................................................................6
1 & 2 Identifying how data obtained could help in informing operational and strategic
decisions of company. .................................................................................................................6
3. Comparing and contrasting investment appraisal techniques and evaluating their
effectiveness to maximise the return on investments. ..............................................................11
4. Value of techniques helping in financial decision making ...................................................15
5. Financial decision-making in supporting the long term sustainability .................................16
6. Recommendations for management accountant to help in improving financial stability .....16
CONCLUSION .............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Financial management could be described as function or area in organization that is
concerned with the profitability, cash, expenses and credit so the organization is having means
for carrying out the objective as effectively as possible. It is also referred as dealing with money
investments of firm to help them in better decision-making (Erin and et.al., 2018). It involves
raising finance from various sources that is best suited for the organization and will bring
maximum benefits. Financial management ensures that there is adequate supply of the funds to
concern and ensuring adequate returns Report will provide about the range of techniques,
approaches and the factors that contribute to effective decision making. It will also discuss about
the different stakeholder groups and conflicts between shareholders and management. Further the
study will provide about the value of management accounting techniques and the different
techniques used for fraud detection.
SCENARIO A
1. Evaluating the range of approaches, techniques and the factors which contributes to effective
decision making
There are various types of approaches and techniques which assists the management of
the organization in taking relevant business related decisions. Some of these approaches and
techniques are stated below.
Knowledge based approach: In this, the management takes into account the pre-
determined criteria for the purpose of measuring and ensuring that the optimal outcome has been
achieved. It involves taking the advice from the expertise in the relevant for the purpose of
taking meaningful business decisions as it primarily focuses on the quantitative aspects and other
factual information for undertaking meaningful business decisions. For instance, the organization
can make use of its income statement to know its profitability and draw opinion on the same.
Formal and informal approaches: The formal decision-making processes takes much
longer time as compared to the informal approaches. In the formal approach, it is clear that who
will participate in the decision-making process and is also documented properly and it develops
trust and equality (Kyheröinen, 2020). In the informal approach, it is unclear who will be
participating in the discussion and it lacks transparency but in the situation requiring instant
decision then this approach is very useful for undertaking prompt decisions. There is a complete
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set of structure to be followed in the formal approach which is not so in case of the informal
approach.
Make or buy decisions: This is an important factor having an influence over the
organizations decision-making process. Under this, the business requires to make a decision in
respect to whether to make or produce the product in-house or outsource it from outside. It takes
into account both quantitative and qualitative aspects in determining or evaluating and making of
the final decisions (Lee, Townsend and Wilkinson, 2020). For carrying it out properly and
effectively it will require undertaking all the relevant cost related factors into consideration
before making any change in the same.
It can be explained with the help of an example.
Cost of producing 6000 units of a component
Per unit Total
Direct Material 10 60000
Direct Labor 8 48000
Variable Factory Overhead 9 54000
Fixed Factory Overhead 12 72000
$1.5 per direct labor dollar
39 234000
The similar component can be purchased from outside at the market price of 29 per unit. It will
also result into reduction in the fixed factory overhead, that is, 25% will be saved.
Per unit Total
Make Buy Make Buy
Purchase price 29 174000
Direct Material 10 60000
Direct Labor 8 48000
Variable Factory Overhead 9 54000
Fixed Factory Overhead 9 54000
Total 36 29 216000 174000
Difference in favor of buying 7 42000
From the above example, it can be clearly seen that it is favourable for the company for
outsourcing the component. Therefore, make or buy decision-making helps the business
organization in taking right decision in respect to whether it will be beneficial for the company to
produce the product in-house or outsource it to the third party.
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2. Evaluating the management of conflicting objectives and stakeholder management of different
stakeholder groups.
Stakeholders
Stakeholder management is a significant process which is useful in maintaining good set of
relationship with the key people of the organization. A stakeholder is considered to be as a party
who has wide degree of interest in the affairs of company and is also influenced by the working
of business. Creditors: They supply raw material, financial capital and other services to the company.
They are interested in the company because they want to be paid in full within the
stipulated time period. They seek to the financial statements of the company as it
provides comprehensive look upon the financial health of company. Managers and Employees: They want to company to thrive to earn high wages and
remain invested in the company for long period of time (Kaplan and Atkinson, 2015).
They seek to the financial statements of the company to know the financial health of
company. Shareholders: They are interested in the business operations and count on business to
remain profitable to gain valuable set of return on investment. They seek information
from cash flow statement and ratios to examine the earning growth of company.
 Government: They need business to grow in order to gain taxes which supports various
government services.
Conflict between Management and Shareholders
The conflict between the shareholders and the managers of the company is mainly
referred to as the agency cost and has been borne by the shareholders. The agency theory tends to
state that, decision right of corporation has been given to mangers to effectively act in the
interest of the shareholders. The interest of the varied stakeholders group may conflict. For
example, the key goal of the owner or management of the company is to seek higher profits,
reduce business cost and pay optimum wages to the staff. On the other hand, the goal of the
shareholder is to gain higher returns from the investment they have made. This resulted in major
conflict of interest between the two parties.
3 Examining the value of management accounting techniques.
Management accounting
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Management accounting is considered to be as the branch of the accounting. It is
considered to be very useful for the financial managers of the Diageo Company because it helps
in taking long term as well as the short term decision to improve the financial health and
operational efficiency of the company. It is useful for the financial managers in carrying out
financial planning and effectively analyses the financial statements of the company. The
budgetary control technique is considered to be prominent because it helps the financial manger
to set specific budget and control cost to carry out business operations. The management
accounting techniques like break even analysis, marginal costing, standard costing, break even
analysis, capital budgeting, inventory valuation, trend analysis, etc. are of utmost value to the
financial manager because it helps in increasing the profit margins by effectively attaining
economies of scale and lowering operational expenses. It helps the financial manager in
evaluating the financial health of company and take necessary decision.
Role of management accountants
Management accountants in turn are referred to as the planners, risk managers,
strategists, budgeters and also the decision makers. They assess the key financial reports and
managerial reports of the company and engage in better decision making (Maas, Schaltegger and
Crutzen, 2016). They also focus on maintaining the effective financial health of the company for
greater sustainable success. Another key significant role of the management accountant is to
maintain optimum level of the capital structure. They analyses the accounts and also prepares
report for effective decision making. This way it is considered to be useful in contributing to the
greater success of the company.
Maximization of shareholder’s wealth
The shareholder’s wealth can be effectively maximized by considering those business
concern which helps in maximizing the market value of the shareholders. However, when the
company maximizes the wealth of the company then the individual shareholder can use the
wealth to maximize the individual utility. The market value of the share have been an effective
indicator associated with the key efficiency and effectiveness of the company.
4 Examining techniques detection and prevention of fraud and key approaches to ethical decision
making.
Fraud and detection of frauds
Any illegal activities and dishonest activities which has been carried out by the company or
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the individual person to gain advantageous financial benefits. Detection of frauds is one of the
key significant measure which helps in improving the operations of the business. Segregating all
the accounting duties and maintaining the internal control is considered to be highly significant
measure for the prevention of fraud within the organization. Audit the books regularly and also
using encrypted software is considered to be as one of the key prominent measure which is
useful in prevention of the fraudulent set of activities within the company. Tampering of the data: the employee of the company alters the amount, payee or other
specific details to create unauthorized check. This fraud can be detected by conducting
random audits and implement check and balances. Inventory theft: Stealing of the products or diverting it to some other place. This can be
detected by implementing anonymous ethics and also encouraging employees to report
any wrongdoing within the organization.
 Embezzlement: Such fraud is carried out on the part of the person who controls the funds
of the company. Implementation of the tight accounting functions and internal control
helps in the prevention of such fraud.
Ethics
Ethics is considered to be as carried out appropriate set of business practice and policies
within the whole organization. Ethical decision making is referred to as a process of choosing
and effectively evaluating the key alternatives in a significant and prominent manner. It is useful
in eliminating unethical practice and select the best ethical alternative. Utilitarian approach is
considered to be an effective ethical decision making approach which is useful in determining
the right and wrong doing by effectively focusing on the key relevant outcomes,
5. Reflection
The report belongs to my interest area finance. I have performed all the tasks and
questions taking deep interest and understanding the requirement in financial management. I
have found that financial management is the foundation of any business as cash flows are the
blood of organisation. Different approaches of decision-making are knowledge based, formal and
informal and make or buy decisions. These approaches help in effective decision making to run
the business efficiently. In critical situations where judgement could not be made effectively
different decision making techniques are used like decision tree, make or buy decisions. I have
found that even after using different approaches and techniques there are various factors that
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affect the decision-making process. Prior to this I was not aware about the fact that even
effective decisions could be influenced. Factors influencing the decisions are economic
scenarios, inflation rates, management effectiveness or other non financial issues. These factors
could significantly improve the financial condition of the business. Apart from this, I have also
noted that stakeholder management is essential for the management as it is not having single
standing and have various parties that are interested in business such as shareholders, employees,
suppliers and consumers. Management has to consider that the interest of one group is not
deprived due to other. It has to ensure that the decisions are taken which benefits all the
stakeholders and organisation as whole. I have learned that management accountant plays an
effective role in recording all the transactions and events of business. They have the role of
preparing budgets and variance analysis and taking measures for reducing variations. Along with
these company should also establish strong internal controls for preventing and detecting the
errors and frauds. The financial information provided by the company should present true and
fair of company and should not be misappropriated for presenting manipulated performance and
position.
SCENARIO B
1 & 2 Identifying how data obtained could help in informing operational and strategic decisions
of company.
Operational and Strategic decisions
The data provided by the financial statements enables the company to make decisions
that are essential for operating the business successfully. Operational decisions are taken for
optimum utilisation of the resources of the business to earn higher returns. Strategic decisions
based on financial information are taken to enhance the processes and procedures of business.
It is explained by financial analysis and interpretation of Diageo Company.
Profitability Ratios
Ratio Formulae 2020 2019
Profitability ratios
ROCE
Operating Profit
*100/ (Total Equity
+Total Non-current
liabilities)
7.97% 16.64%
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Gross Profit Margin Gross Profit*100
/Revenue (sales) 60.40% 62.18%
Operating Profit Margin
Operating
Profit*100 /Revenue
(sales)
18.18% 31.41%
Return on capital employed
It is the ratio used by the company to evaluate the efficiency of management in
generating returns over capital employed. It shows the ability of company in using the resources
in the best effective manner for the organisational growth and higher returns. ROCE of company
in year 2019 represents 16.64% that has moved downward to 7.97%. It shows significant decline
in the ratio causing serious concern for the management to look into the cause (Erin and et.al.,
2018). It is also seen due to the decreased profits or increase in capital employed. It could be
seen that management is losing efficiency in managing the resources.
Gross Profit Margin
It is the ratio reflecting different the performance of internal management by effectively
running the operations of business. It is the amount left with entity after covering all the direct
costs and expenditures associated with the business. Gross profit moves downward when firm is
not able to maintain control over costs of production (Husain and Sunardi, 2020). Gross profit
ratio was 62.18% that shows change of 1.78% downwards. Company is required to take steps for
controlling the costs due and to increase the revenues.
Net Profit Margin
Net profit margin of Diageo is 18.18% that has decreased with 13.32% from 31.41%. It
could be seen there has been significant decline in the profits of company. Net profit is an
important ration for both internal and external users of financial statements (Pivac, Barać and
Tadić, 2017). Such decline could have significant effect over the business and share prices.
Company is required to take steps to control the costs and expenditures and to promote sales of
business.
Liquidity ratios
Ratio Formulae 2020 2019
Working Capital
Ratio
Total Current Asset/
total current
Liabilities
1.77: 1 1.34 : 1
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Acid Test (quick)
Ratio
(Total Current Asset -
INV)/ total current
Liabilities
0.88: 1 0.56 : 1
Current Ratio
It refers to ratio used for assessing the liquidity position of the entity. Current ratio enable
the users to assess whether company is having current assets for meeting the short term
obligations. Diageo is having current ratio of 1.77 that has improved from 1.34 with change of
0.43. There has been improvement in current ratio reflecting that liquidity position of the entity
has strengthened from previous year (Madushanka and Jathurika, 2018). However this is not
adequate as standard of 2:1. A company must have strong liquidity position for running the
operations of business smoothly and effectively.
Acid test ratio
The ratio is used by the management or investors to assess whether liquidity position is
strong even after excluding the inventory. There are many users who find inventory is not current
asset as it could not be sold on quick basis. Acid ratio of Diageo was 0.56 in 2019 that has
increased to 0.88 in 2020. However the ratio shows that liquidity position of company is very
low. Current assets are not enough for meeting the short term obligations excluding inventory.
Management is required to take immediate and strong measures for improving the liquidity
position of the firm (Monnet and Vari, 2019). The liquidity position could be improved by
reducing the short term loans and requiring the company to take long term loans for meeting
working capital requirements. It is also required to improve the cash flow management of the
business adjusting the debtor days and creditor days.
Stability Ratios
Ratio Formulae 2020 2019
Gearing ratios Total non-current
Liabilites/TNCL+ TE 68.52% 58.19%
Debt/equity ratio Non current liabilities/
Total Equity 2.18 1.39
Gearing Ratio
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Gearing Ratio could be defined as the metric used for assessing the liabilities of company
against the total capital employed. The gearing ratio of company is 68.52% that has increased
from 58.19% in 2019. This shows that the liabilities of company has increased from previous
year. It shows that company is increasing its debts and liabilities for running the business
operations. Higher gearing ratio represents company as more risky and makes the firm less
attractive for the investors (Lim, 2017). Company is required to make measures for improving
gearing ratio and to control the increasing debts.
Debt Equity Ratio
Debt Equity Ratio reflects the capital structure of the enterprise and financial risk. It
could be assessed from the ratio that debt to equity has raised from last year. In previous year
company had borrowings of 1.33 for every £1 when in current year it has increased to £2.18
against £1 of equity. The capital structure of the company is inadequate. Though the cost of
capital would be low from the high debt but there is high financial risk in the business. A
company with high debt equity ratio is at higher financial risk with high returns (Prayagsing,
2020). Company is required to take steps for making optimum capital structure with low cost of
capital.
Efficiency Ratios
Ratio Formulae 2020 2019
Inventory rate of turn Cost of sales/inventory 0.81 0.89
Inventory days (Inventory/cost of
sales)*365 453 days 410 days
Receivables days (Receivables/
sales)*365 66 days 76 days
Payable days (Payables/sales)*365 289 days 315 days
Inventory turnover ratio
It is used for identifying the frequency of inventory movement from company. Inventory
turnover of company is 0.81 that is low. Company is required to have high inventory turnover
ratio that reflects efficiency of management in moving the inventory fast and increasing the sales
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(Zimpel and et.al., 2017). Inventory turnover could be increased by taking effective sales
promotion steps to increased the sales.
Inventory days
It reflects the time within which inventory is converted into cash. Inventory days are 453
which were 410 in 2019. The inventory days are significantly high which reflects that the
management is facing issues in moving the inventory and converting them in cash.
Receivables days
It provides the days in which dues are collected from the customers. Above table shows
that receivables days are 66 which have reduced from 76 days last year (Njenga and Jagongo,
2019). Attempt have been made by management to reduce the collection period for improving
the cash flows.
Payable days
Payable days reflects the payment period of creditors. Diageo is having payable days of
289 days and have reduced from 315 days. Payable days are also reduced with receivable days
for effectively managing the cash cycle.
Management is taking active steps for improving the efficiency of entity which is currently very
weak.
Investment Ratios
Ratio Formulae 2020 2019
EPS (dilluted)
Profit after interest,
tax & preference
dividend / Number of
ordinary share
60.1 pence per
share
130.7 pence
per share
DPS 59.9 pence per
share
130.7 pence
per share
EPS & DPS
The ratio reflects the earnings per share available from the business carried out during the
year. Earnings of the company have declined significantly as compared with last year which
there has been drastic in returns on investments. The investors are attracted towards the
companies having EPS and are providing adequate returns to the business(Musah, Gakpetor and
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Pomaa, 2018). It has to take major steps to improve the financial structure as the declining profit
levels could affect the business and its future plans.
3. Comparing and contrasting investment appraisal techniques and evaluating their effectiveness
to maximise the return on investments.
Investment Appraisal
Investment appraisal refers to way that helps business in assessing attractiveness of the
possible investment or the projects based over findings of the several capital budgeting as well as
financial techniques. It is also referred as fundamental analysis that helps in identifying the long
term trends and perceived profitability of the firm. There are different techniques used in the
investment appraisal as stated below
Payback Period
It is the method used by the experts and analysts to evaluate the time that proposed
investment will take to recover the cost of investments. The method does not uses time value of
money which is drawback of the technique (Akinbogun, Binuyo and Akinbogun, 2017).
Advantage of the method is that it enable the management to analyse whether it will be able to
generate cash to cover costs within useful life of asset. Investors aims at having shorter payback
period so that they could earn adequate profits.
Example:
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Accounting Rate of return
The method is one of the techniques of investment appraisal that reflects the return on
projects in term of percentage as against the investment costs. It is essential and important
calculations made by the investors and analysts for analysing risk involved investments or
projects. It also analysed whether earnings will be enough for accepting risks level. The method
does not accounts time factor in calculating returns. The method is highly used due to its
simplicity and is based completely over accounting profits.
Example:
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Difference between cash flow and non-cash flow
Cash flow refers to inflow and outflow of cash from different activities carried out by the
business. It refers to actual flow of cash. On the other non cash flow refers to items that affect the
profitability but do not have cash effect. These items do not affect the liquidity or cash balance of
company such as depreciation, unrealised profits etc.
Net Present Value
It could be defined as the method used for determining current values of future cash
flows that will be generated from projects including initial capital investments. The method is
used widely in the capital budgeting for establishing projects that will provide greatest profit.
The method helps analysts and investors to assess the profitability of proposed investments
(Kerubo, 2017). It uses time factor for drawing the outcomes and assessing the proposed
investments' viability.
Discounted cash flow techniques
Discounted cash flow refers to valuation method which is used for estimating value of the
investments based over future cash flows. The DCF analysis attempts at figuring out values of
the investments today based over projections on the cash flows it will be generating in future. It
is essential for the business. It is useful for financial investments for both business owners and
investors looking for the change making in business like investing in new projects.
Time value of money
It refers to concept that aims at evaluating the worth of money. The concept provides
money owned now is more worth than identical sum of future values because of the potential
earning capacities. Core principle of concept holds that money could earn interests, amount of
the money more worth as soon it is received. It is also known as present discounted value.
Difference between future and present value of cash flows
Present value is current value of the cash flow that will be generated in future. It is also
the current value of money. Present value will be lower if time period is long for the amount to
be received in future. The value in future will be increasing due to various factors such as
inflation, interest rates etc.
On the other future value refers to value at which investments will be growing after the
compounding periods. It could also be described as worth of assets or cash at particular future
time and amount will be equivalent in value to particular sum at present. It forms an important
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basis for the valuation techniques for valuing company. The future values are measured by
compounding the present values at particular rate of interest.
Net Present Value
It could be defined as the method used for determining current values of future cash
flows that will be generated from projects including initial capital investments. The method is
used widely in the capital budgeting for establishing projects that will provide greatest profit
(Wambua. and Koori, 2018). The method helps analysts and investors to assess the profitability
of proposed investments. It uses time factor for drawing the outcomes and assessing the
proposed investments' viability.
Example:
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4. Value of techniques helping in financial decision making
Financial decision making refers to process of weighing pros and cons of the decisions
as they related to use of the money. The liquidity position and the investment accounts are good
indication of whether management have been able to make good financial decisions. It plays
critical role in the success of the organisation. There are different techniques which are used in
financial decision-making.
Cash Flow statements
They are the statements which are used by the management and other external users to
analyse the cash flows of the business. It is very useful statement that reflects the areas from
which cash are generated and the areas to which cash investments are made. Analysing the cash
flows important decisions are taken by management for monitoring and controlling the activities
and operations due to which cash flows are affected. Any decision for purchases or investments
are taken after assessing the liquidity position of the entity.
Break even analysis
Example:
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It is useful tool to determine the point at which product, service of company will be
profitable. In straight words it is used to measure the point at which products or services will be
covering the cost or the number of products required to be sold for covering the cost. It is an
important technique used by the management for decision-making related to sales.
Income statement
It provides summarised details of all the company incomes and expenses. It is highly
useful in analysing the returns generated from carrying out the business, its major costs and
expenditures. It is used for making various strategic decisions for improving the profitability,
reducing costs and increasing the sales.
5. Financial decision-making in supporting the long term sustainability
From the financial perspective sustainability is defined as ability of starting, growing and
maintaining the business with long term and short term financial stability. Financial decision
making involves taking various informed decisions about the growth and expansions. It assess
about the viability of different projects using different investment techniques identifying the
profitability and payback (Husain and Sunardi, 2020). It also involves procurement of funds
from different sources which is most beneficial for the company at low costs. In such manner
financial making plays an important role in sustainability of the organisation.
6. Recommendations for management accountant to help in improving financial stability
Management accountants are the professional who are undertake management accounting
work. They have considerable role in improving financial stability of organisation. Management
accountant could performs different functions like:
Cost Accounting
It involves accountants to record all the costs and expenses incurred in production of
products or services. It will provide all the details about the costs which are productive and non -
productive so that steps for eliminating costs that are not productive could be taken.
Budgeting
This is an effective tool that could be used by the accountants for controlling costs and
expenditures of business. Accountants could compare the actuals and budgeted figures to
measure the variances so that actions for identifying the causes and reducing he differences are
taken.
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CONCLUSION
It could be concluded from the report that financial management is a very broad area and
have significant influence over the business. It involves different functions to be performed by
the management and accountants for the overall growth of the organisation. Various techniques
and concepts are used for making informed decisions to enhance the efficiency and productivity
of firm. Investment decisions are taken by the management after analysing the profitability and
payback period and one which is most viable is chosen for business.
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