Importance of Cash Flow Management for Strategic Decisions

This report delves into the critical role of cash flow management in evaluating capital expenditure proposals, emphasizing its importance in providing a detailed breakdown of an organization's financial activities. The report uses Samsung as a case study to illustrate how analyzing cash flow statements can help management assess the viability of proposals through techniques like Net Present Value (NPV) and payback periods. It recommends the use of ratio analysis and cash flow management for informed decision-making, highlighting the efficiency these tools offer. The report also addresses the impact of creative accounting techniques, such as 'window dressing,' on strategic decisions, and the limitations of ratio analysis, especially concerning inflationary forces and the lack of causal factors. It concludes by underscoring the need for a comprehensive approach to financial analysis beyond ratio analysis alone.

FINANCE FOR STRATEGIC MANAGERS
Importance of Cash Flow Management when evaluating proposals for capital expenditure
Essentially, Cash Flow Management relates to the act of tracing money by analysing its sources
and application in a comprehensive manner. For the purpose of evaluating proposals for Capital
Expenditure, analysis of this area is critical as it provides a detailed break-up of operating,
investing as well as financial activities undertaken by an organisation. In the context of Samsung,
in 2018, the company had the highest Capital Expenditure (CAPEX) worth $3.9 million in the first
quarter for facility investment. However, this amount was chipped down by 60% in 2019 for Q1
mainly so as to moderate supplies during its bust phase. Such a proposal would include analysis of
financial statements of current as well as previous year along with additional information related to
the future plans and its various divisions. By analysing its Cash Flow Statements, Samsung's
management would be able to evaluate the viability as well as feasibility of various proposals
through application of techniques such as Net Present Value (NPV) and Payback Period among
others.
Recommendations and Justifications
In the context of Samsung PLC, it is recommended that various methods such as Ratio Analysis as
well as Cash Flow Management enable the company's management to make informed decisions in
a prompt manner. The rationale behind using such tools is that there ability to provide an overview
of all the activities in a concise and unambiguous way. Through their employment, Samsung's
business manager will be able to achieve more in a lesser period of time as they would not have to
look at each and every variable to derive information regarding a particular area that is required to
Impact of 'Creative Accounting' Techniques when making strategic decisions
Creative Accountancy mainly relates to those management practices which sought to exploit
loopholes in financial regulations so as to gain favouritism in the eyes of their stakeholders in a
misleading manner. One of the prominent technique under this discipline is known as 'Window
Dressing'. This technique relates to the presentation as well as communication of financial
information in a manner that boasts an attractive image of the company. While taking a strategic
decision related to capital budgeting with a purpose to purchase new asset or replace the existing
one, Samsung's management may look at the current and historical financial statements which gives
a quick review of performance in an effective manner. If such reports contain inflated or
manipulated figures, it may result in misappropriation of future cash flows that may cause Samsung
to incur potentially heavy losses from a long-term organisational perspective as well as result in
establishment of unrealistic objectives for upcoming financial periods to achieve their predefined
goals.
Limitations of Ratio Analysis as a tool for strategic decision-making
Evaluating different ratios related to liquidity, profitability and leverage ratios among
others helps in deriving valuable insights regarding various functional units by a business manager.
However, this analysis is not free from limitations. In the context of Samsung PLC, these
limitations may arise in the following manner:
Inflationary forces may distort Samsung's Financial Statements, which may result in
drawing inaccurate conclusions that may be crucial for making important strategic decisions.
Ratios only provide numerical figures and do not facilitate in provisioning of causation
factors. Thus, making managers of a business including Samsung to carry out additional
investigation to ascertain such reasons for the purpose of undertaking strategic decision-making
practices.
In the end, Ratio Analysis is only one methodology to analyse company's financial statements for
drawing inferences. Completely relying on such values may result in provide a fraction of
information for the purpose of decision-making by Samsung's business managers.