Approaches and Techniques for Effective Decision Making in Financial Management

This document discusses the various approaches and techniques used in financial decision making, including formal and informal approaches, management accounting techniques for cost control and maximizing shareholder value, and techniques for fraud detection and ethical decision making. It also explores the importance of stakeholder management and the conflicting objectives of different stakeholders. The document provides insights into the role of financial data in making strategic and operational decisions, as well as a comparison of investment appraisal techniques and their effectiveness in maximizing ROI. The content is relevant to the subject of financial management and is suitable for students studying related courses in college or university.

PRINCIPLE OF FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
Approaches and techniques contributing to effective decision making. .....................................1
Stakeholders management and of conflicting objectives of different stakeholders ....................3
Management accounting techniques in cost control and maximising shareholder value............3
Techniques for fraud detection and ethical decision making. .....................................................4
Reflection.....................................................................................................................................5
TASK 2 ..........................................................................................................................................6
Financial data helping in making strategic and operational decisions. .......................................6
Comparing and contrasting investment appraisals techniques and its effectiveness in
maximising ROI. .........................................................................................................................6
Value of techniques used in financial decision-making..............................................................7
Financial decision making in long term sustainability of business. ............................................8
Recommendations in relation to the way in which management accounting could be used for
improving the financial sustainability .......................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial management deals with management of financial resources in the best possible
manner. It refers to allocating the financial resources of company to the most productive
operations. Present study is about the financial decision-making and its importance for the
business enterprise. The research is based on Persimmon plc that is a real estate company. The
report will cover the decision making approaches, techniques and factors influencing. This will
also cover the stakeholder management and cost accounting for minimising the costs. Study
provides and understanding about information essential for strategic and operational decisions.
This covers the investment appraisal techniques in in decision-making and the financial decision
for long term sustainability of business enterprise.
TASK 1
Approaches and techniques contributing to effective decision making.
Formal Approach
It is the approach comprising of structures, systems and processes which helps
management in decision-making. In this approach step by step format is followed by
organisation for the purpose of making acceptable and viable decisions. The structure defines the
information that defines the alternatives. It is used by organisations for formalizing the
relationship among the staff and processes of company. The formal approach helps organisation
in establishing coordinated environment through effective decisions. Organisations can solve
different types of business problems using subjective approach of decision-making. The
approach is very useful for organisations to make decisions in organisation with big amount of
data and information and also they have to make repetitive decisions in the stable environment
(Hemmer and Labro,2019). It also helps company in accurate and efficient transmissions of
decisions in the business environment. It is highly used approach for planning , allocating the
resources and for setting targets. The advantage of the approach is that it helps in effective
collaboration and organising the structure of business activities.
Informal Approach
This could be defined as approach consisting of unwritten rules, networks and the
relationship building for decision making purposes. There should be a strong relationship
between the senior and lower level management for getting correct and reliable data and
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informations from all the departments on which the decisions of management will be based. This
approach requires company to consider the rules and regulation, values, beliefs and the history of
organisation in its decisions. The informal approach of decision making is not based on a set
criteria but on considering the results that would be most beneficial for company (Moreno and
et.al., 2019).
Techniques used in Decision-making.
Decisions are taken at various level of the organisation. These decisions define the future
performance of company. The accuracy of the decisions is dependent on the techniques use by
organisation for responding them.
T-Chart : This chart is used for assessing the positive and negative points of a decision. This
enables company in taking decisions with maximum positive points.
Pareto Analysis : The technique is useful in case of multiple options are available with the
company for making the decisions. In this technique options are ranked and the one with highest
rank is chosen.
Decision matrix : This is used for evaluating options to make decisions (Devi and Devaki,
2019). It places option in 1st column and factors affecting in 1st row. Options are than scored and
weighed on the basis of importance.
Factor contributing in decision-making.
Nature of business
It is the major factor to be considered by the organisation in making decisions. The nature
of business defined the viability of choices available to company. For instance manufacturing
concerns decision are taken considering their production capacity.
Capital Structure
This refers to sources of funds available to company. The business is available with
enough funds or not for making any decisions is important.
Economic State
The economic conditions have great influence over decisions to be taken. The managers
of company take decision analysing the economic conditions of market. The market and
consumer behaviours play an important role in any organisation (Güler, Mukul and
Büyüközkan, 2019).
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Stakeholders management and of conflicting objectives of different stakeholders
Stakeholders refers to the parties having interest in the company and it operations. They
are the individuals or group having interests in business portfolios, projects and projects as they
are also affected with their decisions. Every business enterprise is having stakeholders whose
interest are required to be considered by organisation. They play an important role for the
business in decision-making. The business organisation is concerned with making decisions
related to planning, analysing, interpreting and implementing the actions related to stakeholder
management (Cheraghi, Choobchian and Abbasi, 2019). It is concerned with engaging people by
considering their interests for maximising the stakeholders value.
Managing conflicting stakeholder objectives
There is a great importance of managing the interests of different stakeholder. These
stakeholders are concerned with maximising their values. The suppliers of the company are
concerned with the payments schedules for their supplies, customers are concerned with
receiving high quality goods at low costs. The shareholders of company are concerned with
receiving high returns over their investments maximising their wealth. Decisions are taken by
management considering concerns of all the stakeholders. Conflicts arise when one is given
priority by the business over the other. The policies and procedures adopted by the management
should be for the benefit of all stakeholders. This could be better managed by identifying the
different stakeholders and their interests.
Management accounting techniques in cost control and maximising shareholder value.
Management accounting is concerned with the management of business resources and
cost control strategies. It is of great importance for company in achieving its defined goals and
objectives. Management accountants perform their roles by ensuring that the resources are used
in best possible way and processes are being run the most cost effective manner (Garcia‐Castro
and Francoeur, 2016).
Management accounting cost control techniques
Cost accounting
This is concerned with analysing the cost associated with the manufacturing of each
product. It provides important information about the variable and fixed costs incurred by
organisation. The cost accounting uses various concepts and tools for minimising the costs of
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production. Cost accounting involves break-even analysis that helps company in identifying the
required level of outputs for covering its production costs.
Financial planning
The objective of company is to achieve maximum returns reducing the costs and its
operations. Financial planning helps business in having a defined business plans for the future
activities. This provides company a structured path to follow. Majority of the costs control issue
arises due to inefficient planning of management.
Budgetary Control
It is an effective tool used by organisation in decision making. It involves making
forecast about the future income and expenditures of company. This requires company to make
in depth analysis of the market conditions, inflations and all the other factors for making budgets.
Company make comparison between the actual and budgeted outputs (Epstein and et.al., 2017.).
On the basis of this company identifies the reasons behind variations and take corrective
measures for having the cost under control.
Margin analysis
This refers to measuring the the break-even points so that company can have an optimum
sales mix with minimal costs. It is an essential technique of management accounting for keeping
the costs under control. Company adopt effective strategies and policies for reducing the costs of
production.
Techniques for fraud detection and ethical decision making.
Companies are nowadays having serious considerations for detecting the frauds carried
out within their organisation. Businesses are using different fraud detection techniques such as
Auditing
This refers to inspection and checking of all the business transactions carried within
organisation. Majority of the frauds are incurred in the financial transactions. Auditing is
conducted by professionals of all the financials. This enables them to identify any frauds being
conducted so that they can be identified at their initial stage. Any errors or misstatements in the
financial statements, fake invoices and irregular transactions are inspected by the auditors for
preventing any defaults or frauds.
Corporate Governance
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The corporate governance refers to establishing proper control and monitoring procedures
of all the business transactions. This involves keeping adequate checks in the enterprise for
preventing the frauds. Company should have checking of all the inventory moving in and out of
the organisations. The material purchase orders, consumption of materials in the given process,
wastages and like other activities carried within business (Marota and et.al., 2017). All the
invoices and other transactions should be carried out by employees with proper authority and
inspection by the managers and seniors executives of business.
Ethical Decision-making
It refers to practising ethics in decisions taken. It deals with the establishment of ethical
values in the business. Decisions should not be taken considering the interest of single party.
They should not be taken to deceive and person or party. Operations of the business should be
carried out using ethical standards.
Reflection
The above study was an interesting part as it deals with financial sector. This study has
helped in getting the understanding and knowledge about the approaches of the business
decision-making. Decisions decide the future operations of business. I have learned that the
major business decision are taken considering the decisions techniques like t-chart, pareto
analysis, decision matrix so that they are much accurate and reliable. Also there are other factors
to be considered that are influencing the business decisions like economic factor, nature of
business and like other. The business not runs all alone it is associated with different parties
known as its stakeholders. They are concerned with every business decisions that have effect
over them. Organisations are required to ensure that the business decisions are not depriving the
interest of any one stakeholder as it will be giving rise to conflicts between the stakeholders.
Further it has also provided an understanding about the different management accounting
techniques used for controlling the costs and reducing them to minimum. Companies are using
different steps like auditing and strong governance for fraud detection and following ethical
approach for decision making.
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TASK 2
Financial data helping in making strategic and operational decisions.
Annual reports give both financial and non financial information relevant for the business
to make decisions. The information helps in assessing the health and position in the market.
Financial information consists of quantitative figures stated in financial statement like income
statement, balance sheet and cash flow statements. They provide important information related to
efficiency of business in carrying out its operations using the existing resources. This provide the
management with information about whether the required returns have been earned by the
company or not. The information is used by organisation for making informed strategic
decisions for improving the productivity and efficiency.
Non financial information includes the business structures, policies and procedures,
corporate governance, political and economic influence. These factors are often ignore by the
viewers of financial statements but many of times affect the business operations. There are
organisations who are performing well but are not able to generate adequate returns (D'Onza,
Greco and Allegrini, 2016). The reports provide the information about the corporate governance,
leadership of business. The CSR practices being followed by organisations. This provides
information for making decision for improving the strategies and operational performance.
Comparing and contrasting investment appraisals techniques and its effectiveness in maximising
ROI.
A business decision-making process involves considering all the negative and positive
aspects before taking decisions. Business takes various financial decisions that includes
investments of huge business funds. These decisions are taken considering various investment
appraisal techniques like NPV, ARR and payback period. They are also known as capital
budgeting techniques for making capital decisions.,
Net Present Value
This is an investment appraisal techniques used in assessing the feasibility of projects that
company is considering to adopt. This method involves measuring the present value of cash
flows generated by the project. Projects with positive NPV are considered as profitable by the
business. This enables company to identify whether the future cash flows generated by project
will be enough for earning profits after recovering its investments costs. The method is an easy
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and simple to understand and is used by experts for making choices between the projects. This
investment technique involves time value of money.
Accounting Rate of Return
It refers to the rate of return that will be generated by the business from the investments
or projects it is proposing to make. Accounting rate of return considers the accounting returns
that are not considered by any other investment technique. Investments should be generating
adequate rate of returns so that the cost of investments could be recovered by the project. This
enables company in identifying whether the project will be generating enough returns or not
(Hirshleifer, Jian and Zhang, 2018). The method is a capital budgeting technique used by
experts for making comparisons between the projects. This identifies return in percentage terms
from the proposed investments.
Payback Period
It is also an investment appraisal technique used by organisation to identify the time
taken by the investments to recover its costs. The companies should make investments if it is
able to recover its cost. This enables company in identifying the time after which company will
start making profits. This approach says, shorter the payback period more profitable is the
project. Between the two projects on with shorter payback should be selected. The disadvantage
of using this technique is that it do not consider time value of money in its calculations.
Value of techniques used in financial decision-making.
There are various techniques used by management of enterprise for making decisions. It
ensures that the business organisations are having effective control procedures and effective
strategies for the long term success of the business organisation. These techniques include cash
flow statements, balance sheet, income statements and break even analysis.
Income Statement
These are the statements prepared by the organisation for assessing the profitability of
business. This statement reflects all the incomes and expenditures incurred by the organisation
during the year such as revenues, cost of sales, operational costs, finance costa and other income
earned by the company. This is used for assessing whether the the required returns are generated
by the company or not. This also provides the efficiency in carrying out the business
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transactions so that the strategies and policies of company can be modified (Lu, Won and Cheng,
2016).
Balance sheet
It provides the details about the assets and liabilities of company. This shows the capital
structure being followed by the organisations for keeping its costs minimum. It provides the
business about the short and long term obligations and its investments. The statements is used for
assessing the over all health of the business enterprise.
Cash flow statements
The cash flow statements are the statement represents the inflow and outflow of cash in
business. The cash flow statements covers operating activities, financing activities and the
investing activities. Using this statements company can identify the flow of cash in different
activities. It could identify the areas that are unproductive so that the flow of cash towards them
could be stopped and focus could be given over productive areas (Stewart, and et.al., 2018).
Break-even Analysis
This is a technique used by the management in identifying the level of sales required for
covering its production costs. This enables company in identify the point where its cost and
revenues are equal. It helps company in deciding its marketing strategies and production outputs.
Financial decision making in long term sustainability of business.
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)
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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
Management used ratio analysis for supporting the financial decisions taken by the
enterprise. The liquidity ratios include current and quick ratio that represents company is having
strong liquidity position with ratio of 3.73. This states that company is able to meet its short term
obligations from the available assets but the quick ratio eliminating inventory from current
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assets require company to take steps for the concerns related with liquidity. The Liquidity
position of company should be strong for long term sustainability.
Return on capital employed and return over equity are the investor profitability ratios
used for assessing the returns generated during the year. Company is having ROC of 30.92%
and ROE of 39.30%. The returns are high this presents that company is making efficient use of
its resources that is essential for attracting new investors and long term sustainability of business.
Gross profit and operating profit refers to the returns generated from the business. It
involves taking adequate decisions related with the business for increasing its revenues and
having effective control over the expenditures of business (D'Onza, Greco and Allegrini, 2016).
Cost control measures are essential for the long term success of organisation.
Solvency ratio or debt equity ratio is used for assessing the capital structure and financial
risks of company. They should take decisions regarding the capital analysing the current debt
structure of company. Current debt of company is 10%. Company should not raise more debts as
it will be increasing its finance costs.
Recommendations in relation to the way in which management accounting could be used for
improving the financial sustainability
There are various management accounting systems or tools that helps an organization in
attaining and improving the financial sustainability within the business that are as follows-
 Organisation should make use of activity based costing tool that helps in ascertaining an
amount of the total funds and the resources allocated and dedicated to specific project or
the proposal. This in turn improves financial sustainability in the company.
 An enterprise should adopt balanced scorecard technique as the model for evaluating
performance of the business which balances a measures of the financial performance,
internal operations, innovations and learning (Schaltegger, 2017). It helps the company
in viewing four major perspectives of the business that involves financial, customers,
growth and internal processes. These perspectives plays a crucial role in context of
increasing sustainability and the performance of the company.
 Benchmarking is the other main MA technique that should be adopted by the firm for the
purpose of attaining suitable standards or the practice and thus establishing an attainable
standards through examining both external and an internal information. It might facilitate
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standard of an excellence that in turn assist an organization in achieving better
performance.
 Key performance indicator is also tend to be the most essential MA system through
which a company can achieve financial sustainability as it helps the firm in attaining the
goals effectively and efficiently (Maas, Schaltegger and Crutzen, 2016). KPI can be
used by an enterprise at various level in evaluating the success and in reaching the targets
with application of most suitable strategies within the process.
 Variance analysis is stated as another MA system or tool that should be used by the
company for determining deviation present between standard and the actual figures. It
helps in making the task performed as per the standards set and the strategies made that
results in ensuring effective controlling at the workplace.
 By adopting financial governance, which is also a MA tool company could gather,
monitors, manages and controls the financial information (Manes-Rossi, Orelli and
Padovani, 2017). Through company can track its financial transactions, manages the
performance, controls data, disclosures, compliance and the operations.
 Through using MA systems an entity could be able to utilise and manage all the available
resources whether tangible or intangible in order to create financial sustainability.
 MA tools or systems enables the corporation in identifying all the internal and the
external factors that has a great influence on the operations of the company with respect
to dynamic and competitive environment.
 Company should adopt management accounting systems in making quicker and the better
strategic decisions on the basis of an integrated thinking cutting through silos for
connecting relevant information and people within the work environment.
CONCLUSION
The above study has provided an in depth understanding about the financial management
in an enterprise. Business cannot run successfully without having appropriate strategies and
techniques. Report has provided about the different approaches used in decision-making like he
formal and informal approaches. They enable the management to take decisions considering all
the factors related with the business. Management also uses different techniques for supporting
the big decisions with techniques such as decision tree, decision matrix and other. Along with
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this it has also provided about the factors influencing the decision-making in company. The
report has provides about the techniques used by company for fraud detection and using ethical
considerations in decisions taken by management. Second part of study provides the use of
financial and non financial informations in strategic and operational decisions for the enterprise.
For making accurate and reliable decisions for the investments it uses investments appraisal
techniques like ARR, payback period and net present value method. Tools like ratio analysis
helps in assessing the health and position so that decisions can be taken for achieving the long
term sustainability of business. Management accounting provides with various methods using
which organisations improve the financial sustainability of the enterprise.
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