Financial Management Report: Techniques for Decision Making Analysis

This report on financial management delves into various techniques and their application in business decision-making, using Royal Dutch Shell as a case study. It covers approaches to management, emphasizing operational, managerial accounting, and statistical techniques. The report highlights the importance of stakeholders in the decision-making process and strategies for managing conflicts. It examines the role of management accounting techniques in cost control, including marginal and standard costing. Furthermore, it explores how financial data supports operational and strategic decisions, using ratio analysis to assess profitability, liquidity, and shareholder returns. The report also discusses the effectiveness of investment appraisal techniques, such as payback period, in making informed investment decisions. Finally, it addresses the importance of financial decision-making for long-term sustainability.

Financial Management
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Contents
INTRODUCTION...........................................................................................................................4
LO1..................................................................................................................................................4
Various approaches of management.......................................................................................4
LO2..................................................................................................................................................5
Importance of stakeholder in decision making process..........................................................5
LO3..................................................................................................................................................6
Role of management accounting techniques in cost control..................................................6
Uses of accounting control system.........................................................................................7
LO4..................................................................................................................................................8
1)Explanation of how financial data help in taking operational and strategic decisions.......8
Effectiveness of investment appraisal technique in decision making..................................10
Payback period.....................................................................................................................10
Net present value and internal rate of return........................................................................12
Importance of financial decision making to maintaining long term sustainability:.............13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
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INTRODUCTION
Financial management is a process of planning, organizing, communicating, directing and
controlling activities related to finance. Business organisations use financial management
techniques and tools to take essential business decisions which help in enhancing growth of
business organisation. To understand the concept of financial management in a better way Royal
Dutch Shell has been taken. In this report uses of various financial management techniques for
taking business decisions and importance of decision making to maintain sustainability for long
time period has been identified.
LO1
Various approaches of management
Ray financial adviser limited uses different financial principles and approaches to take effective
decision regarding firm and also give essential guideline to there clients. They uses
knowledgeable approach for decision making. This approach states that to run an
organization effectively there owner must have sufficient knowledge regarding the business
framework.
Ray enterprises uses different kind if techniques for decision making these are as follows:
■ Operational management technique
■ Managerial accounting technique
■ Statistical technique
■ Socio economical factor
■ Financial factor
■ Production factors
■ Operational management technique: To take effective decision regarding business,
Ray limited uses linear programming, decision tree, queueing theories and PERT and
CPM method of network programming which helps clients as well as organization to take
cost beneficial decision (Loke Birkenmaier and Hageman, 2017).
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■ Managerial accounting technique: Manager of Ray limited uses marginal cost
and standard cost techniques, BEP, ratio analysis to take decision which is more
profitable for them.
■ Statistical technique: For better decision making process business organizations
uses statistical analysis to forecasting their product and services profitability rate. In
statistical technique managers use regression, correlation, mean mode, medium tools to
analysis their future requirements and take essential decisions which provides them more
benefits.
■ Effective business decision is not only depends on the skills of management department
in taking decision it also effected with various factors these are follows.
■ Socio economical factor: Ray limited is newly established enterprises and
preferences, relationship goodwill among public of there organisation is totally effect
their business life cycle. To built trust among customers manager of this organization
need to take decisions which are in favour with public.
■ Financial factor: Taking decision for business purpose is depends on the capital
structure of an organisation. Level of liquidity and capacity of taking loan effect decision
making thus organization invest in those projects whose cost they can bear easily.
■ Production factors: These are essential factors and these effect directly on
decision making process of an running organization. For successful organization it needs
managers to combine all the production factor in effective way by which business
generated more profits. For this purpose managers needs to maintain their financial
resources and manage human resource with technical factors in a way by which they can
achieve their mission at predetermined time period Manager of Ray combines there
production factors in a certain way so that they can generate profits through their business
activities.
LO2
Importance of stakeholder in decision making process
Stakeholder includes all the relative parties whose presence is directly and indirectly effect
business organization. Customers, creditors, investors, shareholders all are consider as
stakeholders. Stakeholders play essential role in decision making process, as organization
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took decision on the basis of their stakeholders preferences. Ray financial adviser limited
formulate their policies after analysing their stakeholders requirement
There business entity is newly established and to run there business effectively they need
to attract there stakeholders. Different stakeholders have different requirements and it is
not possible to fulfil requirements and needs of all stakeholders thus it is essentially
required to the business entity to formate those polices and strategies which help in
managing there external environment factors.
Manager of Ray limited set short term goals for their small creditors and customers and
long term goals for their potential stakeholders like government, bank institutions,investors etc.
These goals help in controlling stakeholders conflicts and help organisation to earn profit by
providing satisfaction to their stakeholders.
Strategies for managing stakeholder conflicts:
Business organizations needs to implement polices after identifying requirements of all
categories stakeholders. For this purpose they need to implements short term and long term
goals of there different categories of stakeholders
LO3
Role of management accounting techniques in cost control
Management accounting is a method of accounting process which used by managers to record,
analysis and collect data in a way which help in taking essential decision. Managers uses
various managerial accounting techniques to efficiently run their managerial process.
Management accounting techniques included marginal costing, standard costing, financial
statements, trend and ratio analysis etc.
Ray financial adviser limited adopt this accounting tool to fulfil these objectives:
■ Controlling cost
■ Maximizing worth of shareholders
■ Controlling cost: Manager of Ray uses marginal and standard costing techniques to
identify cost of running operating activates. These tools help in analysing those activities
which help in generating profit. After identification of highly cost generated activities
managers formulate strategies which help in reducing cost. Business organisation will
also be reduce there cost through increasing there sell price marginal costing and ratio
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analysis help in identifying rate of selling products and services which gearing high
profit. Ray is small enterprises and these tools helps in identifying effective ways of
controlling services charges or cost on providing services and guidelines to their
potentials customers.
■ Maximizing worth of shareholders: Managerial accounting tools help in taking
essential decision which improve value of shareholders in running organization. These
tools used by managers to identify their requirements , preferences of customers. With
the uses of profit statements managers easily identify products and services utilized by
customers and strategies of their competitors. With the uses of ratio managers distributed
dividend and bonus to their shareholders. It will help influencing shareholders to stay
with organization for long time period. Manager of Ray limited uses managerial
accounting techniques to take decision which helps in formulating those polices which
increase worth of there shareholders (Xie, So, and Wang, 2017).
Uses of accounting control system
Business organization uses accounting control system for prevention of fraud and unethical
issues generated within the organisation. Accounting control system is help in formulating
polices and procedure in a ethical ways. This will also included financial management
system which help in controlling financial transaction related activity and take essential
decision regarding investing, financial proposals.
Accounting control system is essential part of an organization as this will help in controlling
unethical activities generated within the organization. Manager of Ray financial advisory
limited uses different tools and techniques to prevent fraud in their organization. In today's
technological world fear of cybercrimes, frauds, corruption are the biggest fear of newly
established organization .
To reduces the chances of these types of issues manager of this organization implement
rigid polices related to their securities. They properly maintain their accounting records
and check and verify their recorded monthly, even they cross check vouchers and proof
statements of business activities. Accounting control tools help in optimality utilization of
resource use in business activities, these will help in managing each documents in
systematic way which help in managing time.
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These tools are used by management for performance evaluation process as accounting
control system uses those4 tools and methods which help in identifying work done by an
employers and workers in particular time period. On the other side it will help in
identifying potential employers of business organisation . Managers after analysing
accounting records formulated policies of provides promotions and incentive, bonus to
their potential employers.
LO4
1)Explanation of how financial data help in taking operational and strategic decisions
Success of an organisation depends on how effectively their management department take
decision and implement strategic policies in their organisation. Managers of a business entity
take decision regarding their daily routine business activities. For enhancing operational
activities managers need to use financial accounting techniques to improve their results.
Financial data help an organisation to identify earnings expenses incurred during a financial year.
These data use by managers to make policies regarding their potential customers. Manager of
Royal Dutch Shell use financial data to make strategies related to take essential decision
regarding finance, investment, and dividend. The organisation prepares financial statements to
take strategic decision regarding their operational activities. For this purpose, they use ratio
analysis technique ( Lee 2016).
Ratio analysis technique: It is a tool of management accounting. Organisations uses this
technique to identify profitability level of an organisation and for comparative analysis with their
rivalry companies. Managers of Shell uses ratio analysis to identify their divided amounts,
earning, and growth rate of their business entities.
 Gross Profit Margin:
(GBP in Million) Year 2017 Year 2018
Gross Profit 47,179.00
60,430.00
Revenues 305,179.00
388,379.00
Gross Profit Margin (%)Gross profit /
Sales*100 15.49 15.55
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Gross profit ratio helps in identifying gross margin of an organisation gain from their certain
period of turnover. Higher ratio of gross profit refers higher efficiency level of organisation. In
2017 Gross Profit ratio of Shell was 15.49 %. Margin of gross profit increase in 2017 15.55 %
this refers that organisation earn more profit in 2018 and their efficiency ratio increase (Eker
and Eker, 2018).
(GBP in Million) Year 2017 Year 2018
Net Profits 13,435.00 23,906.0
Revenues 305,179.00
388,379.00
Net Profit Margin (%) 4.40 6.15
(GBP in Million) Year 2017 Year 2018
Current Assets 95,404.00
97,482.0
Current Liabilities 79,767.00
77,813.0
Current Ratio 1.20
1.25
Managers calculated net profit ratio to analysis profitability rate of their organisation for
a particular time period. It is useful for identifying how much % company generate income on
their turnover. In 2017 Shell generate 4.40 % net profit and in 2018 ratio of net profit increase by
2% this depicts that the company uses effective policies which help their organisation to
enhancing their profitability rate.
Current ratio is used by manager to determining liquidity status of their company to pay
short-term liability requirement of their organisation. Higher current ratio shows higher liquidity
level of pay short term debt liabilities. Manager of Shell uses this ratio for preparing better
strategies of managing their operating cycle (Jafari and Garkaz, 2017).
(GBP in Million) Year 2017 Year 2018
Shareholder's Equity 696.00
685.00
Net Profits 4.25 6.01
Return on Equity (%) 6.68 11.88
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Manager of Royal Dutch Shell uses return of equity ratio to identify rate of earning they gain
from investing in their shareholder’s fund. Higher rate of equity shows higher margin of
returning cash flows. Return of equity ratio increase from 2017 to 2018 of Royal Dutch Shell this
implies that organisation uses effective policies for their shareholders.
Effectiveness of investment appraisal technique in decision making
Investment Appraisal Techniques
Investment appraisal technique used by organisation to identified best alternative for
investment decisions among other alternatives. These techniques are the part of capital budgeting
technique. Manager of Royal Dutch Shell uses this tool to analysis best projects which generates
more benefits in future. After identifying best alternative for investment managers prepare
strategies which help in reducing cost of generating product.
Payback period
Years Project A
Cash inflow
Cumulative
cash inflow
Year 1 25000 25000
Year 2 100000 125000
Year 3 250000 375000
Year 4 300000 675000
Year 5 50000 725000
Year 6 50000 775000
Formula: Completed year + Initial investment – cumulative cash inflow at the end of the year /
Cash flow of next year
Project A: 3 + 600000 – 375000 / 300000
= 3 + 225000 / 300000
= 3 + 0.75
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= 3.75 years
Payback period is used to analysis the time period required by an organisation to recover initial
investment. Higher payback ratio defines that project needs long time to recover their invested
capital. Manager of Shell use payback period to identify which period take less time to recover
their invested capital. If organisation invest in project A then it will take 3yeras and 8 months to
recover their cash flows (Cheung and Pok, 2019)
Accounting rate of return
Accounting rate of return:
Formula: Average net income / Initial investment * 100
Calculation of net income:
Formula: Net cash inflow – depreciation
Depreciation = Initial investment / life of project
= 600000 / 6
= 100000
Years
Project A Deduct
depreciationCash inflow
Year 1 25000 100000
Year 2 100000 100000
Year 3 250000 100000
Year 4 300000 100000
Year 5 50000 100000
Year 6 50000 100000
Calculation of average net income:
Project A: Average Income = (-75000) + 0 + 150000 + 200000 + (-50000) + (-50000)
= 175000
= 29167
ARR = 29167 / 600000 *100
= 0.0486 * 100
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= 4.86%
Accounting rate of return determines average rate of earnings an organization generates by
investing in a project. Higher rate of return shows that business organization gain higher profits
by investing in particular alternative. Business entity will be generated 4.86% average profit if
they invest in project A (Divya and Ranjith Kumar 2017).
Net present value and internal rate of return
Net present value:
Formula = Total cash inflow – Initial investment
Step 1:
years Cash flow PV @ 10% Discounted cash flow
1 25000 .909 22725
2 100000 .826 82600
3 250000 .751 187750
4 300000 .683 204900
5 50000 .681 31050
6 50000 .564 28200
Net Present Value = 557225 – 600000 = 42775
Net present value is a specific present value of future earnings. This technique is used by
organization to identify those alternatives which generates higher values in present. Higher net
present value shows high level of efficiency of product. If company invest in project A then it
will generate negative amount of present value.
Importance of financial management techniques in decision making:
Help in identifying profit: Financial management techniques included cash flow,
breakeven analysis, techniques of capital budgeting etc. These tools are help organisation to
analysis future profit generated by through business activities.
Determination of long term goal: These techniques helps organisation to determine
long term goals of an enterprises as managers decide their future plans after examine their
relevance financial ratios and vales of cash generated for particular time period (Kimbro and
2016).
Help in formulating polices: Managers uses breakeven analysis to formulate policies
related to managing their cash flows. Other tools of managerial financing uses by organizations
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to evaluate performance of their business entities for particular time period. After comparison of
financial data managers prepares strategies through which they can gain completive advantage in
market place.
Determination of capital structure: Decisions are taken on the basis of status of
financial capital of an organisation. These tools are help in determining capital structure of a
business entity. Cost of capital methods help management department to evaluate cost structure
and capital structure of an organization. Manager of Shell will be used this technique to
determining their capital structure. This will also help managers to take decision regarding
allocation of fund and resources to particular activities.
Management of financial activities: Cash flow statement used to identify net amount of cash
AND CASH EQUIVENT ACTIVITES GENRSTE IN A particular time period. Manager of
Shell will use management accounting tools to control their wastage activities which are the
reason of wastage cash outflows.
Help in take decision regarding distribution of profits: Managerial accounting
techniques included ratio and trends analysis. These tool helps in identifying ratio of profit
distributed among their shareholders. These tools also useful to identify profitability level at
specific time period. Manager of Royal shell limited use financial management techniques use to
take decision on regarding dividend distribution and bonus to their potential shareholders.
Financial management techniques are most valuable tools in a running business organisation.
Without applying these techniques managers cannot take essential financial decision.
Importance of financial decision making to maintaining long term sustainability:
Financial decision making is a process of taking essential financial decisions regarding
future growth of an organisation. Capabilities of managers is depending on the skills of making
investment portfolio which helps in enhancing future growth of the company. Financial decision
used in maintain long term sustainability of business organization. Managers take decision
related to capital, investment, dividend distribution, equity shareholder policies, inventory
management decision, to manage sustainability of their organization. Main objective of a running
organization is to maintain their sustainability in market are for long time period. For this
essential financial decision are required. An organization only stay long in competitive
environment if they have efficient capital structure and effective financial policies. If manager
take wrong decision regarding investment or new inventions, then they cannot be surviving in
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