Financial Management Approaches, Techniques, and Factors
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This report discusses the approaches, techniques, and factors involved in financial management, including stakeholder management, management accounting techniques, fraud detection and prevention, and investment appraisal techniques. It also explores the impact of financial decision-making on organizational sustainability.
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INTRODUCTION Financial management is defined as planning and controlling financial functions of the organization. Planning of Financial Management involve controlling and directing the financial activities such as procurement decisions and other associated utilisation of financial functions for conducting various organisations functions. This report is based on the case study of Marks and Spencer (M&S). M&Sis a multinational retail company deals in clothing, food products and home products. Company initiated its business operations in the year 1884. Micheal Marks and Thomas Spencer are the founders of the organization. Company has a worldwide retail outlets comprises with more than 1400 locations across the globe. Henceforth, this report will emphasis over approaches, techniques and factors involve in financial management. Stakeholder management will also be summarized in this report. This report will also evaluate about the value management accounting techniques in respect to cost control and maximization of value of shareholder. Fraud detection and prevention technique will also emphasis in this report. Investment appraisal techniques will also be analysed in this report . Impact of financial decision-making over organization sustainability will also elaborate. TASK 1. Financial management approaches, techniques and factors Covered in PPT Stakeholder Management Covered in PPT Management accounting techniques in cost control and maximizing shareholder value Covered in PPT Fraud detection and prevention. Covered in PPT TASK 2. Operational and strategic decision-making from financial data Financial management is a process that involve strategical planing utilising financial resources of the company. Company management take all the decisions related to investing and financing after analysing all the financial data to assess the company's capabilities of investing. Financial data like ratio guides the company management about the liquidity position of the
company (Alkaraan, 2017). Financial analysis like pay back period, net present value and internal rate of return emphasis over profitability aspect of the investment decision-making that guides company management about suitability of different investment decisions in respect to company's profitability. Company management also utilise techniques of financial management like pay back period to assess about the potential outcomes from taking infrastructure decisions like investing in new machineries or in new technology. Investment appraisal techniques Investment appraisal specifies as analysing the investment decision-making in respect to profitability. This is an important practice use under financial management that emphasis over identifyingweathertheinvestmentdecisioninvolveininstallingnewtechnologiesor machineries are profitable enough for the company by assessing the quantitative aspect of such investment. This also emphasis over potential time required to cover up the total investment involved in investment. Management of M&S utilise certain techniques to assess the financial efficiency of the investment decision-making. Pay Back Period Pay back period is among the crucial analytical tool used to analyse the financial efficiency of the investment decision-making. This analysis emphasis over the potential time require to recover the total amount involve in making the investment. Payback period is an important analysis that guides the company management about the number of years will be needed in order to recover the total investment involved in the investment decision (Campbell and et.al., 2019). To calculate the payback period company divide the total cash outflows or total investment amount with the potential inflow of cash every year. After identifying the payback period of investment company management analyse the period with total expected life of investment. Based on the analytical review about different options available for investment company management take the most suitable or profitable investment decision. With the analytical review about different investment proposals on the basis of payback period technique company take the most effective decision that can maximize the return of investment. Advantage: ï‚·Effective technique that indicate about the profitability of the investment decision. ï‚·Easy to calculate the number of year require to recover the total investment of money. ï‚·Liquidity aspect of financial management are also assessed in this method.
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Disadvantage: ï‚·Ignore time value of money. ï‚·Negligence of cash inflow after calculating about the total payback period. ï‚·Restricted technique in respect to usage as it serves the limited advantages. Net Present Value Technique(NPV) Net Present Value (NPV) is also a crucial technique use in analysis about the profitability of financial decision making of the company. NPV is calculated by addressing the difference between the present value of cash inflow and the present value of cash outflows (Easton and Sommers, 2018). Present value of cash inflow is calculated by multiplying potential cash inflow each year with the time value of money. This is a crucial technique that also consider time for analysingabouttheprofitabilityofinvestmentdecision-makingincontexttocorporate organisation. Time value of money are also influenced with factors like inflation that reduces the value of money and purchasing power every year. All such factors involve in NPV provide the clear brief about investment decision and its profitability in respect to the company. Management of M&S focuses on this technique to analyse potential advantage of investment decision-making. Advantage: ï‚·Consider time value of money for analysing about the profitability of the investment decision. ï‚·Productive techniques to assess about the investment decision. ï‚·It accepts conventional cash flows. ï‚·This technique also address the risk factor involve in investment decision. Disadvantage: ï‚·This method do not consider sunk cost. ï‚·This technique showcase optimistic results. ï‚·Do not consider size of project. Internal Rate of Return (IRR) Internal rate of return is also an effective technique use for analysing investment decision of the company. IRR involvetime value of money till the inflow of cash reduces to zero (Harris, 2017). IRR denote compound annual rate of return every company will generate from the investment decision. Time value of money is a crucial aspect involve in investment decision-
making. These techniques effectively consider the present value of time and based on such present and future value of time actual cash inflows are calculated under this technique. Merit: ï‚·Time value of money is considered. ï‚·Simple technique to use ï‚·No need to calculate hurdle rate. ï‚·Required rate of return is also conveniently utilized in this technique. Demerit: ï‚·External factors like government policies get ignore in this technique. ï‚·Many times assumptions use in this method to evaluate actual value of time in future looks irrelevant. ï‚·Mutually exclusive projects gets ignore in this technique. ï‚·Contingency not get considered in this technique. Management of M&S can utilize the NPV method of investment appraisal technique to analyse about the investment decision. NPV is a dynamic method that also consider time value of money in analysing investment decision-making and its profitability in respect to corporate organization. Techniques involve in financial management decision-making Financialmanagementdecision-makingemphasisoveranalysingvariousfinancial aspects like liquidity, cash flows, time value of money and other associated financial aspect before taking decisions like investment decision, business expansion decision and various infrastructure related decision-making (Herranz and et.al., 2017). Corporate organizations utilize techniques like cash flow statements, break even analysis and other relevant techniques to address the financial decision-making. Cash Flow Statement:Cash flow statement is a summarized statement that involve all the cash inflows and kinds of cash outflows irrespective to its nature. To assess the liquidity position of the company management use this accounting and finance tool (Hughes and Jones, 2018). All the inflows and outflows include in cash flow statement are not necessarily related to the current financial year it can be based to coming financial years. This statement enables the investor's of the company to address all sources of cash inflows of the company and to also to address different sources related to the company that seek outflows of M&S financial resources.
Break Even Analysis:Break even analysis is also a crucial practice involve in finance management. Analysis of this tool guides the company management about the stage in product life cycle when all associated cost incurred to produce and sale the product will be recovered (Karunasena and Gamage, 2017). Break Even point is indicated as a not profit not loss situation for the company. After the launch of all the products company management analysed the expected profitability from the product after calculating about the break even point of the product. To calculate the break even point company divide fixed cost by contribution per unit. Management of M&S also use this technique in order to take product line expansion decision. Financial decision-making support long term sustainability Company management address analysis of different financial ratios like stock turnover ratio, fixed asset turnover ratio, debtor turnover ratio and other associated financial ratios in order to analyse about the organization financial performance. Profitability also indicate about the company's sustainability in respect to market competition. Profitability Ratio Analysis Profitability ratio analysis 20182019 Gross Profit40.4738.3 Net profit29.137.3 Sales revenue106.98103.77 Earnings before interest and tax or operating profit162.2166.6 Capital employed-508.1-738 Net income29.137.3 Average total assets7921.357375.2 GP ratioGross profit / sales * 10038%37% NP ratioNet profit / sales * 10027%36% Return on capital employedEBIT / capital employed-0.3192284983-0.2257452575 Return on assetsNet income / avearge total assets0.00367361620.00505749
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Profitability ratio indicate that company ahs witnessed decrease trend in its sales revenue as compare to last financial year.M&S has witnessed the GPR of 37%. This figure shows that the company management has witnessed the decrease in its gross profit by 1% (Maroun, 2017). This downfall company witnessed is due to decrease in its sales revenue as compare to last year. Management of M&S should focus more on its marketing campaign. Company management can also focus over launching new retail products and brands in order to expand company's sales. As per the NPR analysis of the company it can be stated thatM&S has witnessed the increasing trend in its net profit which indicate that company has improved its profitability irrespective to its decreased sales figures. NPR is a crucial aspect that play a huge role in organisation sustainability.Outcomesofthisratioalsoindicatethatcompanyhasalsocontrolledits expenditure in order to improve its profitability. M&S should continue its cost control strategy and should focus over achieving higher sales in order to improve its profitability in the coming year. Liquidity Ratio Analysis Liquidity ratio analysis 20182019 Current assets1317.91490 Current liabilities18262228.4 Inventory781700.4 Prepaid expenses00 Quick assets536.9789.6 Current ratioCurrent assets / current liabilities0.72174151150.6686411775 Quick ratioCurrent assets - (stock + prepaid expenses)0.29403066810.3543349488 Analysis of liquidity ratio indicates that policies of the M&S for managing its current assets and current liabilities is not effective enough. Current ratio of the M&S do not indicate the
satisfactory results as the company addressed the current ratio of around .6 as compare to idle current ratio which is 2 (Oskarbski, Birr and Żarski, 2019). As per the financial statements the company has witnesses downfall in its current ratio as compare to last financial year which implies that organization policy of managing its current assets and current liabilities is not efficient enough to deal with company's requirements in context to matching the standard figure of current ratio. Company is also not able to cope up with the idle situation of quick ratio. M&S has also witnessed its quick ratio that is around .35 as compare to idle quick ratio which is 1. Both the figures indicates that company management needs to adopt the better policies for managing all its current assets and current liabilities. Solvency Ratio Analysis Solvency ratio analysis Long-term debt1670.63623.2 Shareholder's equity2956.72681 Debt-equity ratioLong-term debt / shareholders equity0.56502181491.3514360313 Solvency ratios of the M&S indicates that company has framed better strategical policies in respect to managing its liquidity situation as compare to last financial year. Company management witnessed improvement in all its solvency ratios such as long term debt, share holder equity and debt equity ratio (Tarofder, Azam and Jalal, 2017). Company management can continue the same strategies in the coming year to have a strong liquidity position. Efficiency Ratio Analysis Efficiency ratio analysis 20182019 Cost of goods sold66.565.47
Average Inventory783.25740.7 Turnover or sales revenue106.98103.77 Average total assets7921.357375.2 Average fixed assets6400.755971.05 Receivables or debtors308.4322.5 Creditors or payables872.9911.2 Cost of good sold66.565.47 Stock turnover ratio (In times)0.08490264920.0883893614 Total assets turnover ratio0.01350527370.0140701269 Fixed assets turnover ratio0.01671366640.017378853 Receivables or debtors turnover ratio (in days)(Debtors * 365) / Credit sales1052.21536735841134.3596415149 Creditors turnover ratio (in days)(Creditors * 365) / COGS4791.10526315795080.0061096686 All the current position of efficiency ratios indicates that company management can utilize more effective operational strategies in order to channelize all its business operations. Company management has witnessed increase trend in its stock turnover ratio as compare to last financial year which indicates that company is keeping more stocks as compare to last financial year (Wambua and Koori, 2018). Total asset turnover ratio indicates that company management follower more effective strategies in term of maintaining its fixed assets that has improved the total asset turnover ratio. Efficiency ratio also assessed that company's policies to deal with its debtors is not sufficient as the debtors are taking more time to pay all the dues as compare to last year. Financial ratio like creditor turnover ratio indicate that company carry the good strategy in respect to dealing with its creditors as company sustain more time to pay back its dues to creditors as compare to last year.
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CONCLUSION This report concludes about approaches involve in financial management like traditional and modern approach that guides the company management to take decision-making in respect to management of financial resources. Techniques like ratio analysis and risk management has also concluded that guides the management to take profitable investment decisions by analysing about different factors involve in investment like risk, payback period and others. Different factors has also summarized like economic factor and government policies that also involve in decision-making process related to financial resources of the company. How different conflicts associated with stakeholders like shareholder's, investors are also concluded and strategies like brandmanagement,goodwillanalysisaresummarizedthatuseineffectivedealingwith stakeholder conflicts. This report also concludes about different ratios like gross profit ratio that indicate about company's performance in the market. Reflection In this report approaches are summarized of financial management. Analysis of both the approaches traditional and modern is conducted in respect to financial management. I also assessed the techniques like ratio analysis and risk management that has a crucial involvement in taking financial decisions. All the crucial factors are also evaluated like government policy and economic factors in order to assess the financial management decision-making. Stakeholder analysis is also a part of this report in respect to managing different conflicts attached with stakeholders of the company. PPT Slide 1.
PPT Slide 2.
Slide 3. Slide 4.
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