Principle of Financial Management

Principle of financial
management

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
Scenario A..................................................................................................................................3
Evaluating approaches, methods and the factors that helps an organization in making
effective decisions .................................................................................................................3
Stakeholder management and managing conflicting purpose of different kind of the
stakeholder groups .................................................................................................................4
Value of management accounting techniques........................................................................5
Techniques for fraud detection and prevention and approach to ethical decision making....6
Reflection...............................................................................................................................6
Scenario B..................................................................................................................................7
Financial ratios analysis of Morrison Supermarkets PLC for the year 2020, 2019 & 2018. .7
Application of data obtained in decision making.................................................................14
Outcomes of investment appraisal techniques utilized in taking actions to maximise ROI 14
Value of the techniques that is used in informed decision making......................................15
Long term sustainability through financial decision making...............................................15
Recommendations to improve financial sustainability........................................................15
CONCLUSION........................................................................................................................16
REFERENCES.........................................................................................................................17
APPENDIX..............................................................................................................................19

INTRODUCTION
Financial management is the process which focusses on all the management function
from the financial perspectives such as procurement and optimum utilization of the funds. It
mainly refers to the application of the principles of management to the financial resources.
This report presents about the importance of management accounting and its techniques in
making informed decisions which helps in sustainable growth along with the ratio analysis of
the Morrisons plc.
Scenario A
Evaluating approaches, methods and the factors that helps an organization in making
effective decisions
Knowledge based approach- The knowledge-based decision-making approach uses
a pre-determined criterion to measure and ensure that the outcome for the desired topic is
optimal. The main objective of this type of decision-making process is to ensure that strategic
decisions are made by using an effective approach and thought process. It also involves a
collective understanding of the background about the concerned topic (Valaskova, Bartosova
and Kubala, 2019). The key elements of knowledge-based approach include open
communication between leaders and members, equal information access and mutual trust
within the organization. By adequate implementation of these elements, an organization is
bound to make strategic business decisions that will help in its achievement of goals and
objectives.
Formal approach- Formal approach of decision making is said to be the most
balanced approach because it involves clarity in allocation of tasks and responsibilities which
means that all the employees are aware of their duties which further helps in the making of
strong and effective decisions (Shaofan and et.al., 2019). The formal approach is time
consuming but also has the highest success ratio as compared to other approaches. Also, it
helps in building equality and long-term trust within the members of the company that further
helps them in the accomplishment of assigned goals.
Informal approach- Informal approach includes making decisions on the basis of
subjective, holistic and past experience. Informal decisions are faster to implement and
require less efforts & coordination but at the same time these decisions are riskier (Reid and
Sanders, 2019). It is generally suitable for small scale organization as it gives the reward of
high risk, high rewards. However, every company should take informal decisions after heavy
research and planning. For instance- A member of staff or teh temporary employee hwho is
feeling that he is being treated in a wrong way.
Role of the stakeholders with respect to decision making- Stakeholders are the
group of people that are interested in the performance of the company, it includes
shareholders, investors, creditors, government and customers. Thus, it is important for an
organization to consider its stakeholders before taking the final decisions, the firm must
refrain itself from taking complex decisions as it can affect its stakeholders in a negative
manner and further reduce the revenue of the business. Furthermore, the company must
consider the issues raised by the people and should make appropriate decisions b keeping
those points in mind.
Making or buying decisions- The make or buy decision can be defined as an
approach of making strategic decision between manufacturing or producing an item internally

or purchasing it from the external party like suppliers which is also referred to as outsourcing
(Ghazinoory and et.al., 2019). It is imperative for the business to analyze and interpret
whether it can achieve financial benefit through or making or purchasing and then take the
appropriate decision accordingly.
Limiting factor assessment- The limiting factor assessment involves the restriction
of an organization’s ability to increase its sales due to demand constraints or the availability
of production resources. Thus, an organization needs to take decisions on which factor should
it limit like raw materials, labor, money that would not affect its operations.
Key factor analysis- Key factor analysis is the method of decision making that
involves making strategic decision of using limited factors. It is concerned with the use of
limiting factors effectively and efficiently.
Stakeholder management and managing conflicting purpose of different kind of the
stakeholder groups
Effective management of stakeholder can be done by the company in complying or
considering various principles that are as follows-
Setting objective in order to achieve financial objectives- Setting of goals and
objectives is imperative for every organization to succeed as it helps the company in
developing a budget plan that it can follow to achieve financial success. The company must
make sure that it has set up SMART (specific, measurable, attainable, realistic, time bound)
goals and it can help in increasing their profitability.
Ethical FM- Ethical financial management means balancing, protecting and
preserving stakeholders’ interests. It is important to do so because ethics define what is right
and what is wrong which means that it I the duty of company to take care of its employees,
customers, government, investors and creditors, and to protect their interest within the
company. Moreover, the business should also follow its corporate social responsibility and
should not indulge in any unethical or illegal activities that cause harm to the society and its
stakeholders (Kostopoulos, 2019). It must not involve in forgery, manipulation and insiders
trading and should perform its financial/ business activities with complete honesty and
loyalty and should ensure complete transparency with its stakeholders by providing them
with accurate accounting information, financial reports and statements. This will be
beneficial for the business in long run as it will lead to building strong trust between both the
parties and help the firm in achieving long term success.
Maximizing wealth of the shareholders- It reflects that shareholders must provided
with maximum return and it is counted as the major objective of all the corporations. In
context of financial management, it means increasing the price or value of an entity’s
common stock. In order to achieve this objective, managers’ takes into account risk and the
timing attached with the expected earnings per share for maximizing price of company’s
shares. When this has been properly implemented, management would also leads to
maximizing dividends and the capital gains which accrue to its respective stakeholders. More

defensible form of the shareholder wealth maximization looks for longer term instead of
shorter term increment.
Delivering sustainable growth in long run- It relates to protecting an entity’s capital
base which is counted as the well-accepted principle of business. Achieving sustainable
development helps in integrating measurement and the planning systems of the business
organization (Goodman and et.al., 2020). It means as adopting the suitable activities and the
business strategies that helps in meeting need of an enterprise and its respective stakeholders
at present along with protecting, enhancing & sustaining natural and the human resources
which would be required in future.
Value of management accounting techniques
There are mainly two types of standards which can be used for cost control, that is,
internal and external standards. The external standards are used for mainly used for
comparing the performance of the company with respect to the other firms within the industry
using the financial ratios. In contrast to it, internal standards are used for evaluating the infra
firm cost elements such as material, labour etc. Some of the internal control management
accounting techniques are stated below.
Budgetary control
It is derived from the budget as it uses budget for implementing the budgetary control
as a means of planning and controlling the various types of organizational activities. It
establishes the predetermined objectives which is further used as a basis for the purpose of
measuring the performance (Chand, 2019). Under budgetary control, actual outcome is
compared with the budgeted targets and in case any deviation is there, causes for the same is
identified and also remedial actions can be taken to rectify the mistakes. The budgetary
control helps in maximizing the utilization of limited resources in an effective way and
establishes proper coordination among the members. This helps in effective profit planning
and if implemented successfully will result into increase in profits which will lead to increase
in the shareholders’ value.
Standard costing
It is the most widely used system for exercising the cost control. Under this technique,
the aim is to establish the standards of performance along the target costs which the company
is required to achieve within the set working conditions. It is mainly the pre-determined cost
that determines the what each product would cost under the given set of conditions.It initiates
with the future estimate of the product with respect to its cost in a future period then standard
costs are set by gathering al the relevant information from different sources. This technique
establishes the yardstick based on which the performance of the company is measured that
helps in exercising the control which is means for cost reduction and this consequently leads
to increase in profits leading to increase in the shareholders value which is beneficial for both
the company and the shareholders.

Techniques for fraud detection and prevention and approach to ethical decision making
Fraud can be caused because of scams or fudging the financial reports or theft the
own employer. The businesses and government agencies all across the world have
sufferedthe loss of hundreds of billions in lost or the misused funds because of unethical
practices causing an irreversible damage to the company’s reputation and affecting the
customer trust (Kulikova and Satdarova, 2016). When the matter gets worse, it forces
organizations to force cut down it staff and stop the spending. The focus has been shifting to
internal audit departments who are now required to implement the fraud prevention and
detection measures. Some of the key techniques that can be used by the organizations for
preventing and detecting fraudare stated below.
Listing the potential areas of fraud
The most important thing that the organization should do is to list down the areas
where there are higher chances of detecting fraud along with the type (Halbouni, Obeid and
Garbou, 2016). Then quantify the risk associated with it with impact of it on the organization.
Also, company should focus that type of risk that has a direct connection with the shareholder
value.
Implementing continuous auditing and monitoring
By introducing continuous auditing and monitoring of the transaction will help in
checking the validity the same and also it will set up the scripts which will run against the
large volume of data with the purpose of identifying the any anomalies. This method will
improve the efficiency, consistency and the quality of the fraud detection.
Communicating the monitoring activity to all the members of the organization
For preventing fraud, the major step that can be taken is the communicating about
fraud detection system which may cause the alert in the organization which will reduce the
chances of breaching the controls system. this is the great preventive measure as people
already knows that if they will try, they will get caught.
For it to be successful it is essential to have encourage the approach of ethical
decision making in the top-down approach which will set an example for the organization.
Reflection
After evaluating all these 4 questions, I can say that management accounting is very
important from the business perspective. The wide range of techniques and tools it has will
assist the business organization in effective decision-making process. These approaches are
designed in such a way that it will meet the various business requirements. Taking into
consideration various aspects before taking decisions such as financial and non-financial
aspects. The role of stakeholders in an organization is also crucial and therefore, proper
management of the stakeholders is very essential for the organization. There are two types of
stakeholders internal and external each having their own aims and objective and on the other
side is organization which is having its own mission and vision. Thus, there are chances of
conflict of interest which is management is required to mitigate in order to run the
organization smoothly. I have learned that decisions should be taken by considering that the
interest of any particular group is not promoted or being decreased. Also, decisions are taken
by understanding the impact of it on the company’s stakeholders otherwise it will affect the
shareholders value. The various techniques that can be used for the purpose of managing the
cost and maximising the shareholders’ value which is beneficial for the company. Fraud
which is the major problem that every organization is facing can be reduced or mitigated by