Financial Management for SMEs

This assignment delves into the crucial aspect of financial management within Small and Medium-Sized Enterprises (SMEs) specifically focusing on how they navigate financial crises. The analysis encompasses various key concepts such as the role of intellectual capital in shaping financial strategies, understanding the complexities of risk management in an SME context, and developing effective strategic planning approaches to ensure financial stability during challenging times.

STRATEGIC FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
Section 1...........................................................................................................................................3
1. Calculating payback, NOPV, IRR, ARR, IRR and PI ...........................................................3
2. Assigning rank to plywood presses on the basis of above mentioned five calculations.........5
3. Defining the efforts made by Jack to forecast cash flow........................................................5
4...................................................................................................................................................6
5. Stating the deficiencies that are involved in the capital budgeting process of Jack’s.............6
6. Giving recommendation to Jack in relation to buying of machine.........................................6
7. Suggesting Jack in relation to making improvement in capital budgeting process................7
Section 2 ..........................................................................................................................................7
2.1 Critical review on current thinking of investment decision-making process........................7
2.2 Development in business practice which identified by the research.....................................7
2.3 Indication of future advances................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Strategic financial management is highly concerned with the development and
implementation of competent policies that aid in the growth aspect of firm. Moreover, finance is
one of the crucial elements which have high level of impact on the smooth functioning of
business organization. In this, by framing sound financial strategies company can make
contribution in the attainment of goals. The present report is based on the case situation which
entails that owner of plywood such as Jack Jones is planning to expand business operations and
functions. In this context, report will shed light on the model of machinery in which business unit
needs to invest money.
Section 1
1. Calculating payback, NOPV, IRR, ARR, IRR and PI
Y
ea
r
Sales
revenu
e
Materi
al cost
Labor
cost
Mainte
nance
Over
head
Deprec
iation
Total
cost
EB
T
Tax
atio
n
EA
T
Cash
inflow
1
259200
0
18144
00
27600
0 52000
7800
0
96428.
6
2316
829
275
171
110
069
165
103 261531
2
259200
0
18144
00
27600
0 52000
7800
0
96428.
6
2316
829
275
171
110
069
165
103 261531
3
259200
0
18144
00
27600
0 52000
7800
0
96428.
6
2316
829
275
171
110
069
165
103 261531
4
259200
0
18144
00
27600
0 52000
7800
0
96428.
6
2316
829
275
171
110
069
165
103 261531
5 259200 18144 27600 52000 7800 96428. 2316 275 110 165 261531

0 00 0 0 6 829 171 069 103
6
259200
0
18144
00
27600
0 52000
7800
0
96428.
6
2316
829
275
171
110
069
165
103 261531
7
259200
0
18144
00
27600
0 52000
7800
0
96428.
6
2316
829
275
171
110
069
165
103 261531
Computation of payback, NPV and IRR, PI and AARR of Nakata
Year
Annual
cash
inflow
Cumulative
cash inflow
PV factor
@ 10%
Discou
nted
cash
inflow
1 261531 261531 0.909 237756
2 261531 523063 0.826 216142
3 261531 784594 0.751 196492
4 261531 1046126 0.683 178629
5 261531 1307657 0.621 162390
6 261531 1569189 0.564 147628
7 261531 1830720 0.513 134207

Total discounted cash inflow
127324
5
initial investment 750000
NPV
£52324
5
IRR 29%
Payback period
2.9
Years
AARR 40.02%
Profitability Index 0.24
2. Assigning rank to plywood presses on the basis of above mentioned five calculations
Basis of rank Rank of Machine Dakata Rank of Machine Nakata
Net Present Value 1 2
Internal Rate of Return 2 1
Average Accounting Rate of
Return
2 1
Payback period 2 1
Profitability Index 2 1

3. Defining the efforts made by Jack to forecast cash flow
Cash flows such as inflow and outflow are important term to assess viability of the
project among two or more mutually exclusive projects (Hladchenko, 2015). In the present case
there are two project Nakata and Dakata which have initial cash flows £750,000 and £1300000.
In order to determine cash flows of both the projects Jack Jones made various efforts and take
helps. Jack Jones hire experts who are specialized in the capital budgeting for forecast cash flows
of the project. He hires more number of experts and give them wages for estimate that which
project will be beneficial.
4.
a.
In accordance with the financial theory and concepts forecast which is made by the
company must be in accordance with the current trend or pattern. Financial theories entail that
manager of the firm needs to make assessment of cash flow in accordance with the output
produced by the similar kind of machines. In addition to this, plywood business organization
needs to assess cash inflow and outflow by identifying the each possible alternative way of
performing activities and functions.
b.
Results of post-audit shows that predicted cash flow is lower than the actual cash flow
generated by North’s executives. Hence, such results are not surprising because when actual cash
flow is greater than predicted value then it indicates that results are biased (Kim and et.al.,
2014.). The rationale behind this, overvaluation of results sometime may result into the loss.
Moreover, due to the indication of high profit margin there is the possibility that business unit
will forgo the potential gain that is associated with other alternative options.
5. Stating the deficiencies that are involved in the capital budgeting process of Jack’s
Capital budgeting process plays a significant role in the company which helps to
management for undertake a particular project from two or more mutually exclusive project. In

the present case the owner and CEO of north woods limited Jack Jones use majorly two
budgeting techniques such as payback period and average rate of return (Yang, Narayanan and
De Carolis, 2014). Deficiencies of both the methods are there in the business of Jack's by which
he is unable to take appropriate decisions for expansion of business. Main lack of the payback
period is that, it considers only time factor and not involve discounting factor and depreciation as
well. Due to considering only duration of project it not provides accurate informations to the
company. Another method is average rate of return which consider discounting factor and initial
investment but not consider time factor. It gives average return of the overall project by which
manager is unable to make effective business decisions. Another drawback is that it hires more
number of experts who give different opinions by which decisions maker get confused for
making decision.
6. Giving recommendation to Jack in relation to buying of machine
By taking into consideration all the above mentioned aspects it can be said that owner of
plywood needs to place emphasis on making selection of Dakata machine. Moreover, NPV of
Nakata is higher than Dakata to the large extent. NPV of Dakata is £523245 which shows that
business unit will enjoy high level of return after the specified time frame. On the other hand,
according to the selection criteria ARR, IRR, payback period and profitability index of Nataka is
high. Thus, model of Nataka machine will prove be more beneficial for the firm.
7. Suggesting Jack in relation to making improvement in capital budgeting process
The owner use two methods payback and average rate as well as he hires more experts by
which he is unable to get effective and appropriate decisions in order to select a project. It can be
recommended to the Jack for improving its capital budgeting process is that, it should hire only
one or two experts by which he will not confuse (Wolfe and Castroviovanni, 2014). Apart from
this it should use net present value method which involves time value and discounting factor as
well. NPV shows future value of initial investment after completion of the project, so he will be
able to undertake a project from Nakata and Dakata (Yu, Ramanathan and Nath, 2014).
Moreover, he requires using internal rate of return which indicate that after completion of the
project how much return will be generate. Hence, it can be suggested to Jack that he should use
NPV and IRR techniques for improving its capital budgeting process.

Section 2
2.1 Critical review on current thinking of investment decision-making process
As per the view of Virlics A. (2013) each organisation needs to take business decisions
and investment decisions as well to earn more profit. While making decisions with help of
different types of capital budgeting techniques there are management get confused sometimes.
When there are two or more mutually exclusive projects then the methods are give different
values. For example: when management use IRR and NPV then from one method project A is
better and from second method project B is beneficial, at that point company is unable to make
appropriate decisions. Hence, it can be said that there are various issues with the methods in
order to take decision for investment.
2.2 Development in business practice which identified by the research
From the research it can be interpreted that investment decisions process creates some
issues for make investment. In order to this there are various development needs which helps to
make appropriate investment decisions. In the business practices the management should develop
the investment structure where it should consider another methods also rather than only capital
budgeting techniques (Bates, 2014). The businesses require developing its investment strategies
and use the portfolio as well which helps to make investment in different areas. When investor
use various investment avenues that it able to generate more profit instead of investing in a
particular area.
2.3 Indication of future advances
In the future or upcoming financial year when the company use the investment appraisal
techniques then able to assess viability of a project. In the future it requires using the advanced
and updated technologies where excel sheet is to be improve. When management use updated
technology then outcomes from the calculation will be get proper and help to the firm for make
investment decisions effectively (Dudin and et.al., 2014). Appropriate investment decision leads
to become more profitable and enhance financial performance of the business in the industry.

CONCLUSION
From the above report, it has been concluded that Jack Jones need to select Dataka which
in turn helps company in enhancing the profitability aspect. Besides this, it can be inferred from
the report that business unit needs to make selection of proposal by taking into consideration the
time value of money concept. In addition to this, case situation entails that business entity has
considered payback period for making selection of proposal. Thus, business unit needs to place
emphasis of NPV while selecting the proposal.

REFERENCES
Books and Journals
Bates, J., 2014. The strategic importance of information policy for the contemporary neoliberal
state: The case of Open Government Data in the United Kingdom. Government
Information Quarterly. 31(3). pp. 388-395.
Cohen, S., Naoum, V. C. and Vlismas, O., 2014. Intellectual capital, strategy and financial crisis
from a SMEs perspective. Journal of Intellectual Capital. 15(2). pp. 294-315.
Dudin, M. N. and et.al., 2014. The organization approaches peculiarities of an industrial
enterprises financial management. Life Science Journal. 11(9). pp. 333-336.
Greenbaum, S. I., Thakor, A. V. and Boot, A. eds., 2015. Contemporary financial
intermediation. Academic Press.
Hill, C. W., Jones, G. R. and Schilling, M. A., 2014. Strategic management: theory: an
integrated approach. Cengage Learning.
Hladchenko, M., 2015. Balanced Scorecard–a strategic management system of the higher
education institution. International Journal of Educational Management. 29(2). pp. 167-
176.
Karepova, S. G. and et.al., 2015. New approaches to the development of methodology of
strategic community planning. Mediterranean Journal of Social Sciences. 6(3S6). pp. 357.
Kim, Y. and et.al., 2014. A strategic model for technical talent management: A model based on a
qualitative case study. Performance Improvement Quarterly. 26(4). pp.93-121.
McKinney, J. B., 2015. Effective financial management in public and nonprofit agencies. ABC-
CLIO.
Ungson, G. R. and Wong, Y. Y., 2014. Global strategic management. Routledge.
Wolfe, J. and Castroviovanni, G., 2014. Business games as strategic management laboratories.
Developments in Business Simulation and Experiential Learning. 33.
Yang, Y., Narayanan, V. K. and De Carolis, D. M., 2014. The relationship between portfolio