Principles of Financial Management: A Comprehensive Report

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Principles of Financial Management
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Contents
Introduction.................................................................................................................................................3
1...................................................................................................................................................................4
2...................................................................................................................................................................6
3...................................................................................................................................................................8
4.................................................................................................................................................................10
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
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Introduction
Management accounting practices enable the company to adopt and apply various management
tools and techniques which enables them to arrive at a conclusion, relevant for the decision
making the process. The aim of the assignment is to understand such techniques and tools for
the decision-making process and eventually to increase the value of the shareholders' value by
increasing the profit earning capacity of the company. It also considers the role of other
stakeholders in the decision-making process.
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1.
Decision making is the most important component of the management process in the company,
such that it helps the company to make use of all the gathered data and information, generated
both externally and internally and arrived at a conclusion. Decisions are taken by the company
impact the business operations of the company and affect the profitability of the company in the
long run, and hence, the company may adopt different approaches as per its requirements.
 Rational Approach: It is the most commonly used approach whereby the management
possesses all the relevant information about the problem and adopts a systematic
approach towards solving it. Normally, a company follows a pre-defined sequence of
activities while adopting such approach and hence such approach is more suited in
structured problems.
 Behavioural Approach: This approach adopts the concept of rationality while problem-
solving. It is assumed beforehand that the complete problem might be out of the gambit
of rationality and hence subsets of the problems are considered for the problem solving
and hence solutions might not deal in the most optimum manner (Chai, et. al., 2013).
Approaches may be adopted as per the nature of the requirement of the problem, and hence, it
leads to another difficult choice of technique to be used. Some of the techniques that may be
sued by the company are:
 Decision matrix: it is the decision tool used to evaluate all the possible alternatives to the
problem and hence requires of application matrix approach towards the problem-solving.
It involves the creation of a table considering all the factors associated with the problem
and hence helps to choose the best possible alternative.
 Pareto Analysis: Pareto analysis requires the application of 80-20 rule to the problem-
solving process. According to this analysis, 20% of the items account for 80% for the
result, and hence, the majority of the company resources are to be diverted to this 20 % of
the items. It helps the company to identify the key areas and hence plan accordingly.
 SWOT Analysis: SWOT stands for Strength, Weakness, opportunity and Threat that a
company may be facing in its business operations. Strengths and weaknesses are
basically the internal factors affecting the company, while the other 2 are external factors.
Identification of such traits enables the company to take timely action and hence promote
efficiency (Kaner, 2014).
 Cost-benefit Analysis: Such analysis helps the company to analyse the cost and benefit
aspect of a decision and hence take such analysis into consideration during the decision
making the process. It brings efficiency and effectiveness.
During the decision-making process, certain factors are required to be kept in mind to arrive at
the optimum decision through the process. Such factors may be:
 Structured and Non-Structured problems: Structured problems are problems which
are of routine nature and hence can be solved by using the already available information,
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whereas unstructured problems are off-routine and require special techniques and tools of
predictive nature to be able to be solved.
 Risk and Uncertainty: Management may be reluctant to the idea of the risk, and hence,
it restricts their options and or even tools which can be applied to make the decision.
More the risk, better are the opportunities, and hence, management outlook towards the
risk makes all the difference (Mira, et. al., 2014).
 Social and Cultural Influences: Management style is greatly influenced by the social
and cultural influences it has both on the internal and external level. People’s beliefs,
morals and ethics guide the management in a certain way, such that the management has
to consider such factors.
 Information: Availability and nature of the information greatly influence the timing and
impact of the decision-making process such that it should be available when it's required
the most.
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2.
Stakeholders are the interested parties to the business operations and processes of the company
and may be interested for different reasons as per their requirements. Major stakeholders may
include creditors, investors, government authorities etc. and hence each one of them has their
own reason for them to be interested in the financial information and statements of the company.
A company is required to manage its stakeholders effectively and hence should take certain steps
to ensure the same:
 Identification of all the stakeholders: All the stakeholders are required to be identified
at the beginning of the year, such that it will enable the company to keep the
requirements and needs of all the stakeholders into consideration during the decision
making the process. This will enable the company to keep them satisfied.
 Establishment of agreement between the stakeholders: It is important for the
stakeholders to be on the same page regarding the company businesses and processes and
hence, such agreement may be established in an early stage only. This will enable the
company to evade any possibility of disagreement.
 Efficient Communication: An efficient channel of communication may be set up
between the management and the other stakeholders, such that it will enable the company
to keep them updated of any advancement and changes that have occurred over the
period. This will also enable the company to get their feedback on certain issues and
hence benefits the decision-making process (Beringer, et. al., 2013).
 Engaging Stakeholders: it is important that the stakeholders are engaged in the decision-
making process, such that the decision-making process is not biased towards a single or
multiple stakeholders groups and hence helps the company to arrive at the optimum
decision through the process. This will also enable the company to keep a check on the
stakeholders’ needs and requirements.
 Timely delivery of Information: Efficient communication involves the timely delivery
of information to the stakeholders, which would keep them updated regarding all the
changes and modifications carried over the period of time.
 Understanding their point of view: Efficient communication will not be an effective
process in general if the same is not followed by the fact that the views or opinions of the
stakeholders other than the management are taken into consideration.
Despite being management’s optimum efforts to align and manage stakeholders, scenarios may
occur where their interests may clash and require management intervention to solve the same.
Few of the tools to manage such conflicts may be:
 Neutral Perspective: Management should try to have an objective outlook towards the
problem, such that it will help them to assess the information in a more unbiased manner
and thus arrive at more practical and realistic solutions.
 Play the role of the mediator: Management is required to play the role of the mediator
such that they need to do the job of the listener and not that of the speaker, which would
enable them to listen to the opinions and issues of all the parties and arrive at a more
informed decision (Noe, et. al., 2017).
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 Win-Win Situation: An effort should be made to arrive at a win-win situation, such that
both the parties leave satisfied as it will benefit the company in the long term.
 A forum or space of discussion: It is advisable for the company to develop and establish
a medium for stakeholders to interact where they can discuss and solve problems on their
own, and hence the management assumes a more passive role.
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3.
Management Accounting
The accounting system that facilitates the managers of an organization in decision making for
better performance in overall aspects is called Management Accounting (Bănărescu, 2015). It
aids the managers to evaluate the process of production and operational activities in every aspect.
Management accounting guides in applying proper tools and techniques for evaluating the weak
areas and taking measures to eliminate them.
This form of accounting plays a key role in controlling the costs enveloping the production
process. There are certain techniques which are implemented such as:
 Material Control This technique revolves around the systematic management of
materials. It starts with the purchase, storing and ends with the consumption of the
materials. This keeps a track of the regular supply of the items and timely availability of
materials.
 Labor Control Organizations need employees to work for them. Labor control is the
efficient utilization of labor with minimum costs attained. It indicates how well the
company can make the employees work.
 Standard Costing The most efficient method of cost controlling technique is known as
Standard Costing. When production is its final stage, the cost of the product is assigned.
But, there is an actual price of the good which is produced, and there is a price which
should have occurred for the same (Boubaker and Mansali, 2014). Standard costing
identifies the difference between the two prices.
 Budgetary Control To function efficiently, managers make a budget to monitor and
control costs and operations. The managers set financial goals to utilize the resources in a
sustainable manner. The budget is then used to compare the actual performance with that
of estimated (Fullerton and Widener, 2014).
 Overheads Control The business of a firm includes various activities that do not
necessarily revolve around production. These activities include utilities, marketing, legal
fees and they sometimes increase the budget. To monitor these, overheads control
technique is applied. It is achieved by implementing Total Quality Management,
decreasing working capital and evaluating maintenance costs.
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Management Accounting plays a key role in maximizing the shareholders’ value. The
shareholders invest capital in the organization after looking at the financial statements. The tools
of budgetary control help in the formulation of budgets which aims at permanently eliminating
additional costs from the system (Liebenberg and Hoyt, 2012). This would lead to the generation
of higher productivity which will eventually lead to higher profits.
Shareholders provide certain values to the firm which helps them in achieving their goals in the
near future. Few of which are:
 Structure of appropriate organizational structure.
 Framing relevant policies and strategies.
 Following proper guidelines.
The relationship between the management and the shareholders is the core of financial
governance (Pagano and Volpin, 2015). The performance of the company is sometimes the point
of conflict between these two. The techniques of management accounting enable us to write off
this conflict by giving suitable solutions.
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4.
The organization can face issues such as fraud in terms of fudging financial reports, theft from an
employer, irrelevant costs, and undisclosed stock and so on. These frauds can cause major
damage to the company’s reputation. The company has to shell out extra money to solve these
cases and keep vital information safe with the management (Boubaker and Mansali, 2014). They
have to internally create various checkpoints to control such incidents to reappear in the future.
Firms are advised to have an anti-fraud committee which will provide a critical shield to prevent
these incidents. There are certain things which are kept in priority while dealing with fraud, such
as:
 Building a profile of potentially fraudulent activities This involved a detailed listing of
areas where the chances of frauds are very high. After the assessment of the areas, the
risks are qualified in terms of their vulnerability. The frauds which can damage the image
of the company on global markets are taken care of first.
 Testing data for safety The data of the company has to be tested multiple times for
creating similar results. If the data is test driven, then the chances of fraud reduce. Firms
should enable maker, checker, and authorizer for every transaction which is recorded
(Bănărescu, 2015). When these internal controls will be implemented, the data will be
safe.
 Improving controls Managers should strengthen controls over the authorization of
transactions and continuously audit the same to validate the effectiveness of controls.
These controls are highly effective when the data is very large. It is noted that drastic
improvements in efficiency, consistency, and quality are noted after applying this
method.
 Communicating the key indicators It is very important to communicate all the policies
to each and every employee of the firm. This will create a fear in their minds, that if they
attempt to do fraud, their activities will be monitored, and it will be easier to track them
down (Pagano and Volpin, 2015).
 Immediate notification to higher authorities Sometimes, managers do not report small
issues to higher authorities. This can lead to big problems in the future. The process of
reporting should be changed in the firm to maintain transparency. If any small issue is
noted, it is to be immediately communicated to higher authorities for proper actions.
 Amendment of broken controls The chances of fraud increase if only one employee is
responsible for various tasks. Controls are required to be set on every transaction. If this
is not being duly followed by the employees or the process is broken, then the manager
has to reframe the responsibilities (Liebenberg and Hoyt, 2012).
Approach to Ethical Decision Making
The organization should not compromise on the ethics and values of the company in the
greed of achieving higher profits. The managers should make ethical decisions that will not
compromise on their as well as the company's integrity. Let us look at some approaches
towards ethical decision making:
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 Utilitarian Approach The manager should consider all the benefits and harms of the
decision they are taking. They should keep in mind the availing consequences. Utilitarian
Approach focuses on these points.
 Rights Approach When dealing with different parties, inclusive of employees, the
managers should consider their moral rights. He should not take any decision which will
be indecent towards them.
 Justice Approach While making decisions, the managers should keep in mind that their
decisions are doing justice to every party. Every person should be treated fairly.
 Virtue Approach Decision making should focus on the virtue of the course of action.
The actions of the management should be in a manner that uplifts society.
 Common Good Approach While pursuing this approach, the management should keep
in mind that what good they are delivering to society. The reflection of the decision is
good for the company and society or not (Fullerton and Widener, 2014).
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Conclusion
Through this report, we have learned the impact of techniques of management accounting in
controlling different costs and how it maximizes the shareholders’ value. The costs incurred in
the business activities are of various types. They may or may not affect the price of the product,
but it affects the total cost of the overall activities. The techniques of budgeting keep stringent
control on the costs. It helps in reducing costs. Budgets help the firm to reach its financial goals
on a given time, which creates a good image for the shareholders of the company.
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