Finance for Strategic Managers: Report on Business Decisions

This report delves into the crucial role of financial information in strategic decision-making for businesses. It begins by assessing the necessity of financial data and identifying associated business risks. The report then outlines the financial information required to support strategic choices, using Home Retail Group Plc as a case study, and analyzes its financial ratios for 2014 and 2013. It explains the purpose, structure, and content of published accounts, interpreting financial data and demonstrating how financial ratios support strategic decisions. Furthermore, the report distinguishes between long and short-term financial needs, compares financing sources, and examines cash flow management techniques. Finally, it explores different business ownership structures, roles, and accountability in decision-making, along with methods for appraising strategic capital or investment projects. The report provides a comprehensive overview of financial management's impact on business strategy.

Finance for Strategic Managers
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Table of Contents
TASK 1............................................................................................................................................3
1.1 Assessment of why financial information is needed in business...........................................3
1.2 Business risks related to financial decisions..........................................................................4
1.3 Summary of the financial information needed to make strategic business decisions............5
TASK 2............................................................................................................................................5
2.1 Explanation of the purpose, structure and content of published accounts ............................5
2.2 Interpretation of the financial information in these accounts................................................7
2.3 Calculation of the financial ratios and their support strategic decision making ...................8
TASK 3............................................................................................................................................9
3.1 Explanation which clearly distinguishes between long and short-term financial
requirements for businesses.........................................................................................................9
3.2 Table comparing the sources of long and short term finance for businesses.......................10
3.3 Examination of cash flow management techniques and its importance..............................11
TASK 4..........................................................................................................................................11
4.1 Different business ownership structures and Roles and accountability of owners and
managers in decision making.....................................................................................................11
4.2 Evaluation of methods for appraising strategic capital or investment projects...................12
CONCLUSION .............................................................................................................................13
REFERENCES .............................................................................................................................14
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INTRODUCTION
Strategic decision making is an integral part of business that allows managers to develop
the strategies in a line with company's mission, vision as well as long and short term objectives.
However, information from internal and external environment play lead to an optimal decision.
For the view point of organization's success, finance is the most importance resources and its
management is required to gain profitable results (Barnes, 2006). The managers surely needed
financial information to make viable decision for business. The report herewith is designed to
represent the importance of financial information in business and in strategic business decisions
making. In this regard, a leading company of UK retail market namely “Home retail group Plc”
is taken into account.
The aforesaid entity deals with home and general merchandise within UK and has capture
significant market share (Home Retail Group, 2015). The company has earned total sales of
£5.7bn in the year 2014. This study presents the calculation of financial ratios for Home retail
group Plc for the year 2014 and 2013 and shows how it supports strategic decision making.
Furthermore, the long and short term financial sources are compared on the basis of strategic
decision making. Along with this cash flow management techniques and its importance is
showcased in this report while explaining the application of investment appraising or capital
budgeting techniques.
TASK 1
1.1 Assessment of why financial information is needed in business
Financial information is a significant part of business that help business in going through
the financial position. The major aim of using financial information is to identify financial
efficiency of corporate entity as well as to make viable decisions. Financial information is
needed to develop the strategies in accord to the financial goals. This include: amount of sales
for a particular period as well as the information of purchase of raw material. These all
information is needed to design future courses of actions (Bull, 2007). Information in regard to
the purchase of assets is important to identify the cash outflows. In other words, financial
information is known as the heart of business management. To an extent, it can be said that it is
difficult to run a business without having proper information of financial resources. The major
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source of financial information are accounting reports and financial statements. The aforesaid
information pertaining to financial resources is helpful to managers in evaluating financial
condition as well as operating performance of a corporate entity. It has been witnessed that
financial information is needed by business to prepare annual reports (Murphy, 2001). These
annual reports are prepared on the basis of financial information for entire years or a specified
time period (Ryan, 2009). These statements or annual reports are used by the internal and
external stakeholders. The accurate information leads to significant improvements in the
management of business. However, the major role of financial information is in decision-
making.
1.2 Business risks related to financial decisions
The organization makes strategic decision on the basis of varied information pertaining to
internal and external environment however, there is a specific risk associated with the financial
decisions. The foremost business risk is associated with the company at the time when not single
debt is taken. Further, there are major kinds of risk such as strategic, compliance, financial, and
operational are involved with the business. An effective management of risk is involved to
improve the efficiency of company. The points below represent the various kinds of risk
involved in business: Market risk: The market in which company operates its business generally carries risk
that affects the operations of company. The uncertain demand from marketplace is the
foremost risk involved with financial decisions (Srinivasan, 2012). The new and updated
trends which take place in the market also contains risk for business. In addition to that,
market risk includes inflation, fluctuation in market trend and recession. Compliance risk: The compliance risk is significantly associated with laws and
regulations of government in the operating region. Compliance risk occurs just because
of changes held in legal policies that are associated with customer relationship
management, health and safety, taxation, trade policies and so on (Barnes, 2006).
Whenever the policies change, it puts both negative and positive impacts of business.
 Operational risk: Operational risk is associated with financial decision making, however,
this is associated with the internal system of enterprise. The operational risk has
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significant capability to influence growth and development of business. Sometimes,
improper management of financial resources leads to operational risk.
1.3 Summary of the financial information needed to make strategic business decisions
To make strategical business decisions company requires accurate financial information
so that strategies can be designed in link with the financial objectives. The points below presents
the financial information that is required to support strategical decision making. Cash inflow and outflows : To support the strategical decision making organization
requires information of cash inflow and outflow for a particular time span so that proper
management of finical resource can be ensured (Smit and Trigeorgis, 2012). This is
required to manage surplus and reduce the chances of deficit. Profits and losses : The long term investment decision, product planning, market
research, innovation and all depends to the availability of cash and profitability of
business. However, to support the decision making organization requires financial
information of net and gross profit of the enterprise that will assist in decision making. Cash projections: The information of cash projection in business are required to support
decision making however, it is associated with budgeting activities. In addition, the cost
associated with financial sources are discovered and actual results are compared with
expected ones (Kaplan and Atkinson, 2015).
 Financial requirements : The information pertaining to financial requirement of
company is needed facilitates strategical decision making for which, financial statements
are reviewed.
TASK 2
2.1 Explanation of the purpose, structure and content of published accounts
Purpose and content of financial statements
The major purpose of financial statements is to provide information pertaining to the
financial health of company to internal and external users. The major financial statements are
Balance sheet, income statement and cash flows statements all such information included in such
kinds of statement provides clear picture of business to the financial users.
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The content included in financial statement supports the decision making of business.
From the balance sheet, managements can assess the amount of liabilities owned by company
this is supportive is assessing financial obligations. It has been witnessed that financial users
required the information pertaining to liquidity and profitability position of a company. The
amount of profitability can be accessed from income statement that facilitates investment
decisions (Borad, 2009). The content included in cash flow statement include information
pertaining to financing, operating and investing activities and amount involved in such statement.
The content included in financial statement is helpful in deciding future cash projections. The
information included in such statements provides information to the stakeholders whether the
organization is capable to pay credit or if it is profitable to invest in the company. However, the
management can that the expected growth of the organization is strengthened through a strong
relationship between management of cash and financial resources.
Structure of financial statements
Table 1: Structure of Profit and Loss account
Particular Debit Credit
Revenue xx xx
Cost of sales xx xx
Gross profit xx xx
Selling and distribution
expenses xx xx
Operating expenses xx xx
Operating profit/earnings
before interest and taxes
(EBIT) xx xx
Interest income xx xx
Interest expense xx xx
Net interest expense xx xx
Earnings before taxes xx xx
Income taxes xx xx
Net income xx xx
Table 2: Structure of Balance sheet
Particular Amount
Liabilities xx
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Capital and reserves xx
Capital xx
Reserves xx
P&L Account xx
Current liabilities xx
Non current liabilities xx
Total xx
Assets xx
Fixed assets xx
Current assets xx
Total xx
Table 3: Structure of Cash flow statement
Cash flow from Operations xx
Net earnings xx
Additions to cash xx
Depreciation xx
Decrease in Accounts receivables xx
Decrease in account payable xx
Subtract from cash xx
Cash flow From Investing xx
Equipment xx
Cash flow From Financing xx
Cash flow for FY ended 31 December xx
2.2 Interpretation of the financial information in these accounts
The major financial statement are Balance sheet, Income statement and Cash flow
Statement. The information included in all such statements assist in identifying the overall
performance of business and the status of financial health. The major role of such information is
in assessing the financial ratios from which the status of business in financial terms can be
identified in a simpler and easier way (Annamalai and Jain, 2013). The income statement
contains the information of profits and balance sheet presents the information in respect with the
liquidity of firm. On the basis of information included in financial statements the liquidity,
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profitability, solvency performance of company can be assessed (Guzman, 2015). Along with
this, the information contains with financial reports is helpful in conducting competitive analysis.
However, the efficiency of company can also be assess with the information which is included in
financial reports. The possible capital and revenue expenditure of company can be known
through the information that is having with financial reports. The cash flow statement includes
the information of cash inflows and outflows of business for a specific time provide however it
also provides the information of cash available with business so that investment decisions can be
supported.
2.3 Calculation of the financial ratios and their support strategic decision making
Financial rations of Home Retail Group Plc.
Ratios Formula 2014 (Million) 2013 (Million)
Profitability ratios
Gross profit 1764 1732
Operating profit 70 137
Net profit 94 54
Net Sales 5663 5475
Gross Profit Ratio
(Gross Profit/ Net Sales)
*100 31.15% 31.63%
Operating Profit Ratio
(Operating Profit/ Net Sales)
*100 1.24% 2.50%
Net Profit Ratio (Net Profit/ Net Sales) *100 1.66% 0.99%
Liquidity ratios
Current Assets 1957 2020
Current Liabilities 1204 1169
Closing Stock 902 942
Current Ratio
Current Assets / current
Liabilities 1.63 1.73
Quick Ratio
(Cu. Assets - Cl.
Stock)/Cu. Liabilities 0.88 0.92
Efficiency Ratios
Net Sales 5663 5475
Total Assets 4245 4009
Total Assets Turnover
Ratio Net Sales/ Total Assets 1.33 1.37
Cost of goods sold 3899 3743
Inventory 902 942
Inventory Turnover
ratio COGS/Inventory 4.32 3.97
Gearing ratios
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Debt 1531 1513
Equity 2674 2733
Debt Equity Ratio Debt/ Equity 0.57 0.55
Financial ratios are calculated on the basis of financial information that is included with
financial reports. The different ratios are calculated to asses the financial health of company so
that the future investment decision can be supported. Profitability ratios include net profit, gross
profits and operating profit ratios that are helpful in assigning profitability of company on which
basis management takes decision such as expansion, product development, innovation and
research etc. It has been witnessed that net profitability of company has been increased as
compared to previous years, however, net profit and gross profits have also increased. It presents
a fruitful sign for future investment and other decisions.
In the aspect of liquidity ratios, current ratios and quick ratios of business have been
improved than compared to previous years therefore, the organization can make decision in
respect with sound liquidity position of business (Annamalai and Jain, 2013). The company is
seen efficient in terms of meeting the short term financial obligations. The company can make
decisions for taking loans and paying off in shorter time without any defaulter.
The efficiency is judged through the efficiency ratios of business. It has been witnessed
that total asset turnover ratio of company has been decreased on the other hand total inventory
ratio has been improved. It has been witnessed that debt to equity ratio is improved as compared
to last year indicated that company has made equitable balance between debt and equity. This all
information is used to assess the financial position of company and making effective decision for
future investments (Guzman, 2015).
TASK 3
3.1 Explanation which clearly distinguishes between long and short-term financial requirements
for businesses
Financial funds are needed by the company to purchase assets as well as investing in
various projects. There are major two kinds of source such as internal and external. Internal
sources are those are raised within the business. On the other hand, external sources are raised
from outside the business. Further, these are divided into long term and short term sources of
finance. In long term sources, of finance company takes loan generally for 5 years and also
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raised funds for a long run source such and retained earning. The loan taken is also considered as
the external but long term sources of finance (Buckle and Thompson, 2004). On the other hand,
reduction in working capital and selling of assets are short term source of finance. To make
research and development expenses, the company goes for acquiring long term financial sources.
The long term source of finance are required to make investment decisions, on the other hand,
short term financial resources are needed to make tactical business decisions. However, to make
long term financial decisions or strategical decision, it is required to make use long term
financial resources (Barnes, 2006). In addition to that, short term financial resources are required
to carry out day to day operations as well as long term financial sources are used for project
investments.
3.2 Table comparing the sources of long and short term finance for businesses
Long term sources of finance Short term sources of finance
Long term sources of finance are those source
that are used for long run especially for 5 years
and more.
To the other hand short term sources of finance
are the sources that are used for a shorter time
span i.e. less than 1 year.
These sources are used to fulfill the long term
requirements of finance for business (Kiondo,
2004).
To meet day to day operations and short term
sources of finance company generally needs
short-term financial sources.
Long term sources of finance are needed for
making huge investment projects (Ryan, 2009).
On the other hand, short term financial source
are used to make minimum investment.
The sources of, long term finance are equity
and preference shares, debenture, long term
bank loan as well as retained profits etc.
The short term financial sources include bank
overdraft trade credit, account receivable as
well and short term bank loan (Srinivasan,
2012).
It has been witnessed that long term debt
sources are generally has higher interest rate.
To the other hand, short term debt financial
sources are available at minimal interest rates.
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3.3 Examination of cash flow management techniques and its importance
Management of cash is an important aspect that contributes in the success of business.
The foremost financial aim of business is to manage the cash inflow and outflow in business.
The proper cash management helps in attaining desired profitability and a crucial indicator of
financial health and business performance. The management of cash provides an information in
regard to the company's sufficient funds to make future financial decisions. In order to make
effective management of cash company has to consider various techniques so that the working
capital can be managed (Krzysko and Marciniak, 2001). The most famous ways to control cash
is that the company can collect payment as quickly as possible. However, it facilitates cash
investment in proactive activities. To the other hand, budgeting is another cash management
technique that is used in the business to estimate the future cost so that cash can be managed in a
fruitful manner. To the other hand, contingency plan development is an effective way to manage
cash within business. Overall, cash management is an effective technique that helps in
controlling business expenses and increasing incomes.
Techniques of managing cash flow:
 Management of working capital: Working capital includes the management of inflow and
outflow of cash in business. It is very essential to manage working capital on short term
and long term basis and it also helps to manage the operational activities of organization.
Short term finance can be efficiently manage through inventory management,
management of cash receivable and payables within specified time period. On the other
side long term finance in cash flow can be manage through payment on installment basis
which decreases the problem of large payment and helps to manage surplus in cash
budget (Smit and Trigeorgis, 2012).
 Monitoring of cost: All the expenses and cost of the operational activities are to be
managed on monthly basis and also to get best possible credit period deals from
suppliers.
 Management of inventory: For the better management of cash flow in business, it is
essential for the company to manage its inventory turnover period (Weaver and Weston,
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2007). It assists to avoid overdue payment and management of inventory in business as
per the requirement.
TASK 4
4.1 Different business ownership structures and Roles and accountability of owners and
managers in decision making
There are three kinds of business structure such as sole proprietor, partnership and limited
company. All there are having different governance, legal and regulatory requirements. However
sole proprietor do not follow any legal formulaties and other entities have to follow the rules and
regulation as compared to other structural bodies. For limited companies, it is required to prepare
financial statements as per the guidelines of IFRS. On the other hand, the partnership firm
requires to prepare individual partner's account (Murphy, 2001). By partnership firm, it is
required to have a deed that will include the terms and condition of business. In such kind of
firms, active partners have the responsibility to manager the work on the other hand nominal
partners do not have any responsibility. However, the limited companies are owned by
government as well as public. In addition to that, financial statements of such companies are to
be prepared as per the accounting standards i.e. GAAP and IFRS. Further, in the limited
companies shareholders have all the rights regarding business affairs and decision making.
In case of sole proprietorship business no such legal laws and regulations are present
where business can easily carry out operations and it is not required to comply with the legal
guidelines. Further, public limited company has to comply with accounting standard which are
IFRS and GAAP. It is required for companies to comply with the overall guidelines developed
by the government. Apart from this in case of partnership business not only commercial
transactions are recorded but those associated with partners are also undertaken. Further, in case
of business such as sole proprietorship and partnership owners of the business can take decision
for their personal benefit and interest of others are not considered (Weaver and Weston, 2007).
On the other hand, in case of Limited Liability Company it is required for directors to take each
and every decision in favour of shareholders and other individuals associated with the company.
Therefore, in this way the three different business ownership structures differ from each other in
the form of legal regulations. Business like sole proprietorship is free from legal laws and no
regulations are required to be followed (Annamalai and Jain, 2013). On the other hand corporate
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governance of limited company is totally different which takes into consideration different areas
such as carte of all stakeholders, ethical functioning, respect for workers, respect for human
rights, respect for environment, activities of social and inclusive development etc. Further, in
case of sole proprietorship and Partnership Company no such corporate governance policies are
present.
4.2 Evaluation of methods for appraising strategic capital or investment projects
The investment appraisal technique are used to asses the viability of investment projects.
These are also called as investment appraisal techniques. Internal rate of return, Net present
value, Payback period and Profitability index are the major techniques to assess the investment
projects (Weaver and Weston, 2007) The famous techniques of investment appraisal is Net
present value as it considers time, value and money of a project. The points below presents the
calculation of NPV and the decision based on it.
Table 4: Net present value for Project ABC
Years
Net cash
flows(£)
Discounting rate of
10% Present value(£)
1 46000 0.909 41814
2 51000 0.826 42126
3 48000 0.751 36048
4 65000 0.683 44395
Total present value 164383
Less Initial investment 100000
Net Present value 64383
Table 5: Net Present value for Project XYZ
Years
Net cash
flows(£)
Discounting rate of
10% Present value(£)
1 47000 0.909 42723
2 49000 0.826 40474
3 55000 0.751 41305
4 62000 0.683 42346
Total present value 166848
Less Initial investment 100000
Net Present value 66848
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Project XYZ has higher NPV than Project ABC, hence, it is to be selected for investment
purpose.
On evaluating the feasibility of the project on the basis of NPV method, it is examined
that Project XYZ has higher net present value that is £66848 in compare to Project £64383.
Selection of project in NPV method is based on the project which has positive and higher NPV.
Project XYZ will give better return to the company in future and investment in this project will
give better return to the business.
Pros:
 It considers the present value of cash flow and on the basis of which net present value is
determined and also assess the risk associated with the flow of future cash flow from the
investment (Buckle, Buckle and Thompson, 2004).
 NPV method also considered the cost of investment and also the advantage of investment
in project on the basis of its time duration.
Cons:
 NPV method does not consider the exact time period in which the amount of investment
will be recovered.
 It is based on assumption that is the cost of capital or discounted factor is selected on
assumed basis (Krzysko and Marciniak, 2001).
Payback period method: This investment appraisal technique determines the time period in
which the investment of company in project will be recovered. Also determines that after how
many years, business will receive positive cash flow after achieving its breakeven point.
Pros:
 Payback period consider the exact time period of recovery of investment and also the
breakeven point.
 It helps in easier decision making while selection of project on the basis of recovery of
investment in long run basis.
Cons:
 This method does not calculate the rate of return, only assess the time period in which
cost of investment will be recovery (Ryan, 2009).
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 Payback period also not consider the value of future cash flow as due to change in rates
of inflation the value of cash flow in business also changed.
CONCLUSION
The report above described the importance financial information in decision making
process. It has been witnessed that internal and external users uses financial information to
promote their decision making. The report concluded that ratio analysis is used to interpreter the
financial information that is helpful in making strategic decisions that are directly linked to the
growth of enterprise. Moreover, the financial statements are used to asses the financial health of
company and are known to assess the financial performance of business in the market place
through competitive analysis.
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Economics, (30), pp. 244-275.
Ryan, S. J., 2009. Managing Your Personal Finances. 6th ed. Cengage Learning.
Smit, H. T. and Trigeorgis, L., 2012. Strategic investment: Real options and games. Princeton
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