Financial Management Report: Decision Making Approaches and Principles

This report delves into the core concepts of financial management, offering a comprehensive analysis of decision-making approaches within organizations. It begins by defining and contrasting formal and informal approaches, evaluating their respective advantages, disadvantages, and practical applications. The report then explores key financial principles essential for achieving long-term sustainability in business finance, emphasizing planning, forecasting, and capital structure analysis. Furthermore, it examines the pivotal role of management accountants within integrated business systems, along with the value and application of accounting control systems in improving financial decision-making processes. The report provides a detailed examination of the role of management accountants and accounting control systems in financial decision making. The report concludes by summarizing the key findings and providing a cohesive understanding of financial management principles and their practical implications.

Financial Management

Table of Contents
INTRODUCTION ...............................................................................................................................3
MAIN BODY ......................................................................................................................................3
LO 1 .....................................................................................................................................................3
P1. Defining formal and informal approaches for effective decision making.................................3
M1. & D1. Analysing advantages and disadvantages along with uses of formal and informal
approaches in effective decision making process............................................................................4
LO 2......................................................................................................................................................6
P2. Analysing key financial principles for achieving long term sustainability in the business
finance..............................................................................................................................................6
M2. & D2. Critically evaluating importance of financial management principles..........................7
LO 3......................................................................................................................................................7
P3. Role of management accountant in integrated business system................................................7
P4. Evaluating the use of accounting control system along with their value in the integrated
business system................................................................................................................................8
M3. & D3. Justifying the role of management accountants and accounting control system in
improving the process of financial decision making.....................................................................10
CONCLUSION..................................................................................................................................10
REFERENCES...................................................................................................................................11

INTRODUCTION
The term financial management is concerned with the process of planning, controlling, managing
and directing of all the financial activities as well as resources of the business in an effective
manner. Every business organisation requires funds or financial resources for conducting business
operations, productions functions, for acquiring raw material, manpower etc. By managing the
financial resources of the business, it helps in maximization of firm value and helps in minimizing
the cost of capital. Also, by formulating accurate and relevant business strategies, plans and policies
in line with the goals and business objectives can help in developing high market value and
customer base as well. It is very important to keep monitoring or tracking the performance for
determining whether the business operations are working towards the attainment of goals or as per
the strategies framed or not. The present report will define different approaches including both
formal as well as informal assisting in the decision making process for organisation. Further,
explanation related to the key financial principles important in attaining long term financial
sustainability will be provided. At last the report will streamline about the role of management
accountant in the process of financial management. Different use of accounting control system
along with its value will be describe in relation with the integrated business system.
MAIN BODY
LO 1
P1. Defining formal and informal approaches for effective decision making.
Rational and effective decisions are very crucial for the success of every business
organization because any kind of inappropriate planning and strategies can hamper the process of
decision-making which can further completely ruin the business operations and thus the company as
a whole. Thus, it is for this reason that managers are so precise and diligent in their planning
process that quality decisions could be taken which could improve the profitability as well as the
performance level of the business organization. There are different types of formal and informal
approaches which the management can applies for supporting the effective decision making process
such as :
Formal approach :
Under this approach, the decision-making takes place through the formal channels within the
organization. In this approach of decision-making, everything is clear regarding who will participate
in the decision-making process, what steps will be followed during the process, proper
documentation of each and every activity and who will be in charge of which activity. The formal
approach includes :

 Processes : It is related with the adoption of best and better improved business processes
and procedures which helps in increasing the overall business productivity as well as the
profit margin. Processes are well defined business procedure in accordance to which
activities in decision-making can takes place.
 Proper organizational structure : One of the most important aspect for business to
perform in an effective way is based on the organisational structure which the company is
having. By having better and accurate organisational structure, it assists in the process of
decision-making which is taking place through organized channels (Formal decision
making, 2016).
 Systems : Are defined as those business practices, concepts and management system on the
basis of which, every business organisation undertakes its business operations and activities.
Systems are basically framework within which the decisions are to be taken viz. included in
the formal approach. These decision-making undertaken by company aids the managers in
taking more rational decisions under controlled settings, standards and norms which further
assist in improving the level of performance of the company and employees as a whole.
Informal approach :
When the decision-making process takes place in the uncontrolled and unstructured settings
then such approach to decision-making is known as informal approach. There are various ways
through which such decisions could be made such as :
 Interpersonal relationships between the employees/member of company : Having sound
and good working culture, environment in the workplace can help in motivating the level of
employees and workers as well. Smooth flow of communication enhance the productivity
and also increases the operational efficiency of business. Decision making process of the
company are made by the friendly relationships existing within the organization.
 Groups / networks : Team and group are considered as one of the most important human
resource for every business organisation without which no operational activities can be
undertaken. Informal groups exists in the company and an informal network is created
through which decisions are taken within an organization (Brunsson and Olsen, 2018).
M1. & D1. Analysing advantages and disadvantages along with uses of formal and informal
approaches in effective decision making process.
Formal approach
Advantages :

 Transparency - In formal approach, the process of decision making is very transparent.
Business management takes into consideration every aspect of business for making decision
considering its effects on the performance of business.
 Quality norms – For making good customer base and high retention, it is very important for
an organisation to provide good quality business products and services at the affordable
pricing policy. Also, each part of financial information should be taken into account for
making quality decision.
 Simple process – In this approach, no confusion and dilemma is created. Under this
approach everything is very clear and simple to be understand related to participation aspect
and how things will be documented.
Disadvantages :
 Comprehensive structure – One of the biggest disadvantage for an organisation under
formal approach is that it is having a very comprehensive as well as formal structure which
requires proper and in deep understanding for making use of it effectively. The decision
making process is sometime delay due to comprehensive formal structure leading to fall in
the performance level of business.
 Inflexible – Another drawback of using the formal approach is its lack of flexibility aspects.
It thus results in reduction the quality of decisions and hampers the performance level of
business as a whole.
Informal approach
Advantages :
 Basis of decision - Decisions under informal business approach are taken in the real time
taking into account all the aspects of business which can have negative impact on the
working of the business operations and performance as well.
 Usefulness – This type of business approach is highly useful in the situation of ad hoc as
there are no protocols that are to be followed. It is based on plans and strategies which are
formulated for achieving the desired business goals in timely manner.
 Application - Since large number of people are involved in this type of decision-making,
more valid and precise decisions can be concluded by taking into consideration all the ideas
and thoughts of participants (Farmer, 2017).
Disadvantages :
 Confusing process - Informal approach sometime creates unnecessary confusions within

the organization which hampers the decision-making process of the company.
 Unclear process – In this type of business approach, no clarity or clear picture is provided
regarding who will participate in the process of decision-making.
 Lack of transparency – Informal approach of management accounting is not transparent
and provides great confusion in relation with the participants details in the decision making
process.
Use of formal and informal approach in effective decision making -
Application of formal approach is more beneficial to effective decision-making because the
process takes place under controlled framework within the organizational structure. This reduces the
chance of the information, facts etc., of getting distort which could potentially affect the decision-
making in a significant way. Moreover, this approach is highly transparent unlike informal approach
to decision-making which creates confusions, sometimes create conflicts & disagreements in the
process. Also, informal approach is less transparent as compared to formal approach.
LO 2
P2. Analysing key financial principles for achieving long term sustainability in the business
finance.
Financial management is related with planning, directing and controlling of resources in the
company. It is associated with the use of financial as well as other business resources in undertaking
the operations and activities. With the help of financial management, company get assistance in
form of financial guidance and advice. Following are the key financial principles by use of which it
helps in achieving future sustainability and long term growth:
1. Planning and Forecasting – Financial management is considered as one of the most
important business aspect as it deals with the function of planning, organising, forecasting
and controlling. With the help of effective financial management, it assists business in
making accurate forecasting or estimation about future business operations, revenues and
expenses to be occurred for a definite time period. By making proper plans, strategies and
course of action, every business organisation can achieve high productivity as well as can
increase its performance level (Finkler, Smith and Calabrese, 2018.).
This further results in increasing the overall profit margins of the company thereby reducing cost
expenses as associated with the most unproductive and unnecessary business areas. By making
prediction related to cost expense, profit level which are going to receive from future business
operations. It compares the actual with estimated one and determines variance if any. Further

corrective measures were taken for removing these variances and reaching the set defined business
goals.
2. Financial reporting – It is considered as one of the most important part which assist in the
decision making process of the company. Financial reporting is basically a report which has
been prepared by the company containing all the information of financial as well as
statistical nature of a particular time period.
3. Analysis of capital structure – Capital structure refers to the proportion in which the
company has its capital design. Financial management assist company in making decision
related to acquiring of business capital either in form of equity, debt or making a
combination of both. Having optimal capital structure can result in maximization of value of
firm and minimisation of business cost of capital (Barr and McClellan, 2018).
M2. & D2. Critically evaluating importance of financial management principles.
Financial management assist company in making proper and accurate allocation of business
resources especially financial one. By making effective utilisation of available business and
financial resources, it helps in improving the operational efficiency of many business organisation.
By managing the limited fund resource's properly, a company can minimize its cost of capital and
enhance the level of value of business firm.
This management function assist company in making sound business as well as investment
related decision by enabling proper and better understanding of financial information of the
company (Zietlow and et.al., 2018). With the help of financial management principles, every
company can prepare its financial report depicting deep insight about the current financial position
of the business operation and employees as a whole.
LO 3
P3. Role of management accountant in integrated business system.
Management accountant is defined as a person which basically performs the function of
interpretation and analysis of the available financial as well as statistical information for assisting
the management of company in decision making process. It provides financial data along with
interpretation and analysis for the better understanding of the financial as well as liquidity position
of the company. The main aim of management accountant is to give advice to company, investors
related to the better understanding and making use of such financial data and information in the
business development and growth process. The role of management accountant is as follows:
1. Decision making - Management accountant perform their business role by adding value to

their business firm thereby helping the management of the company in the process of
decision making and planning. The participation made by management accountant is
considered very important part in the team of management related to the decision making
and other business processes.
2. Strategic planning – The foremost role of management accountant is related to setting of
business goals and objectives for the business organisation. Making strategic plans,
strategies and actions in line with the set defined business goals for assisting the employees
as well as workers in working towards the attainment of business goals. It determines the
way in which a company can achieve its aims by implementing sound and effective business
policies and plans (Osadchy and Akhmetshin, 2015).
3. Directing – It is considered as a process of monitoring the day to day business activities and
operations for assessing the overall performance level of the business as well as of its
employees. The management accountant assist company in evaluating the successful
implementation of plans, actions as framed in order to achieve the desired business
objectives. For achieving the goals of business firm, proper and effective planning has to be
made by the organization with directing actions of the management accountants so as to
direct the accuracy of these plans which requires information about the operation activities.
The role of management accountants is to provide company with the crucial information.
4. Controlling – One of the most important function which the management accountant has to
perform is controlling. It evaluates the actual results of the business operations against all
the plans, strategies and policy framed. It helps in measuring the performance level of the
business operations and assess what changes or modification is required in the plans and
strategies formed for attainment of goals and objectives successfully in a cost effective
manner. It also ensures proper allocation of business as well as financial resources as per the
requirement of different business department for conducting of smooth business operations.
P4. Evaluating the use of accounting control system along with their value in the integrated
business system.
Accounting control system is defined as a process, method or procedures which are
implemented by every business firm for undertaking accounting and business transaction. It ensures
the validity as well as accuracy of the financial statements of the business for an accounting period.
With the help of accounting control system, company gets assistance in making compliance of all
the applicable business laws and regulations. Following are the uses of accounting control system in
the business:

1. Cash control – With the help of accounting control system, every business organisation can
easily control its cash flow related activities. For making more profit, control of cash is
considered as one of the most important aspect of internal accounting control system. By
ensuring proper allocation of available business as well as financial resources in the
effective manner can help the management of the company in working smoothly towards the
attainment of business goals and objectives. Keeping track or records of cash related
business transaction can help the company in assessing the overall business performance
level. Also, it will enhance the profitability aspect of the business thereby reducing the cost
expenses associated with unproductive business areas.
2. Information security – Financial as well as accounting information are considered as
crucial part of every business organisation. It is the duty of company to protect the price
sensitive information about the business operations of the company and not make profit out
of it. Proper implementation of security measures related to the protection of physical and
electronic means is necessary from the point of view of safety of the information of financial
nature. Information of crucial as well as sensitive nature should be password protected or
kept in locked filling cabinets otherwise can result in creation of illegal profits to others or
incurring of business loss (Siminica, Motoi and Dumitru, 2017).
3. Documentation – Proper documentation has to be done of all the important and statutory
papers related to the financial information having sensitive data. Business firms should
stores copies of all the receipts, invoices, vouchers, cash registers, check cancelled for future
business references. All the transaction related to the cash nature has to be recorded and
maintained for assessing the performance level of business profit and loss situation for a
definite time period. It helps in acting as a proof for particular transaction in case of any
confusion.
4. Audits – It is the duty of every business organisation to make compliance of all the
applicable rules, laws, regulation and provisions for not getting being penalised. It is very
important to make comply from time to time for remaining competitive in the marketplace
and gaining advantages out of it. Any financial mismanagement or non compliance made by
the company can result in the process of costly litigation or it can also result in financial
turnoil in the future time period which will hamper the goodwill or brand image of the
company.

M3. & D3. Justifying the role of management accountants and accounting control system in
improving the process of financial decision making.
Management accountant ensures proper formulation as well as implementation of business
strategies, plans and policies for the betterment of business operations and employees as a whole. It
is the responsibility of the management accountants to help the management and company in
framing strategic planning, intent in relation with the business goals and objectives (Ortas, Gallego
‐ Alvarez and Álvarez Etxeberria, 2015).
Accounting control system helps company in limiting access by keeping control over
people. It is related with the setting of permission levels for accessing the data and information of
financial nature. With the help of accounting control system, recording of cash related business
transaction can be done which in future helps in identifying defaulters in case of error or any
fraudulent activities is taking place.
CONCLUSION
From the above report it can be concluded that financial management is concerned with the
process of managing and controlling the financial resources of the business enterprise for making
effective allocation as per the requirements of business department. The report has defined that by
making use of different management practices such as best business procedures and system,
budgeting practices etc. can help the company in making all the crucial business as well as
investment related decision. Also, with the adoption of best and better improved business processes
and procedures which helps in increasing the overall business productivity as well as the profit
margin. Both the formal and informal approaches helps the management of the company in making
effective and sound business related decision having features such as transparency, better
understanding, clear pictures, etc. Furthermore, the report has summarized role of management
accountant in preparation of strategic plans, intents and policy for achieving the set defined business
objectives. It has also focuses on the concept of accounting control system which plays important
role in providing security measures related to the information of both the statistical as well as
financial nature from making wrong use of it.

REFERENCES
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