Principles of Financial Management: A Comprehensive Report

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PRINCIPLES OF FINANCIAL MANAGEMENT
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Table of Contents
LO 1:...........................................................................................................................................................3
P1:...........................................................................................................................................................3
The Rational Approach:.......................................................................................................................3
The Behavioural Approach:.................................................................................................................4
The practical approach:........................................................................................................................5
The personal approach:........................................................................................................................6
M 1..........................................................................................................................................................7
Strategies of maximizing the shareholders value:................................................................................7
Advantages of Decision making:.........................................................................................................8
D 1:..........................................................................................................................................................9
Techniques for detecting fraud in the organization:.............................................................................9
LO2...........................................................................................................................................................10
P2..............................................................................................................................................................10
M2.............................................................................................................................................................11
D2..............................................................................................................................................................13
LO3...........................................................................................................................................................14
P3..............................................................................................................................................................14
P4..............................................................................................................................................................17
M3.............................................................................................................................................................19
D3..............................................................................................................................................................20
Conclusion.................................................................................................................................................21
REFERENCES..........................................................................................................................................22
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LO 1:
P1:
Approaches to support effective decision making in the organization:
There are several ways of making a decision in the organization which is mostly performed by
the mangers of the organization (Accounting management, 2015).
• Some of the approaches are economical and rational such as rational approach
• another approach that tries to account for the limits on rationality when it comes to making
the decision is the behavioral approach.
• The third approach includes the qualities of behavioral and rational approaches.
• The third approach is related to difficult situations and is a personal approach that
concentrates on decision making (Accounting management, 2015).
The Rational Approach:
The rational approach is a step by step system of making a decision, it is known that work of the
organization completely depends on the decision-makers who have got all the pieces of
information and objective about the organization.
The rational approach some steps which are as follows:
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• State the situational goal.
• Identification of problem.
• Determining decision type.
• Generation of alternatives.
• Evaluation of alternatives.
• Choosing an alternative.
• Implementation of plans.
The Behavioural Approach:
This approach assumes that decision-making management works with the surrounded rationality
rather than with the perfect rationality supposed by the rational approach (Bayt, 2016). It is the
thing that hinders the decision making managers from dealing with the information regarding all
aspects pertaining to the problem and tackle it with good solutions.
So this approach is neither exhaustive and nor fully rational and solutions brought are not
entirely ideal. The decision making management working the surrounded rationality controls the
inputs which help in the decision-making process (Bayt, 2016). They concentrated mostly on the
two or the three favorable options.
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The behavioral approach involves the following features:
• It involves the use of the rule of thumb which reduces uncertainty in making the decisions of
the organizations.
• It involves the process of sub optimizing which means accepting the less than the best
possible outcome which can further affect the firm’s performance.
The practical approach:
This approach includes the process of rational and the features and condition of the behavioral
approach which provides a more realistic process for decision making in the organization (Bayt,
2016).
According to this approach the decision making management rather than creating the options the
decision makes see beyond the thumb rule and by satisfying the limitations and should try to
create more options within a given period, money and practicality conditions.
In this approach, there is involvement of moderating influence in the behavioral approach and
the involvement of an analytical framework in the rationing approach (Bayt, 2016).
The mangers who have got the habit of jumping from one decision to another and take impulsive
decisions and barks the order to the employees do not use the information or rational approach
for making any decision.
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The personal approach:
Earlier all three approaches involved the process of making the decisions. Here in the personal
approach, it involves decision making by the people under the situations of nervousness, anxiety,
worrying, etc in the organization or in the personal life (Bizfluent, 2017).
In the year 1977 Jain and Mann have provided a model regarding the issue of decision making
during the situations of nervousness, anxiety and bad experiences.
Some of the characteristics of the models are as follows:
(a) It deals with personal life decisions such as the nature of education and the institution,
marriage, career and major company’s decisions (Bizfluent, 2017).
(b) It analysis the decisions which have already been taken and that might go wrong.
(c) It finds the mechanism through which the people try to avoid the difficult decisions which
are the rationalization and procrastination.
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M 1
Techniques and methods of controlling cost in the firm:
• Just in time System:
This system’s aim is to produce the required items and products in a particular time to a
particular place , just in time purchasing needs the items which involves the high carrying cost so
to reduce this inventory carrying cost just in time system can be beneficial as reduces the
investment in the inventories because of the order of small quantities (Bizfluent, 2017).
• Target costing:
It involves the process through which the product has been produced and the design of the
product, so the firm can decide about the cost of the product which have been manufactured and
which will enable the firm to make a profit and when the product is sold in the market at the
market-driven price. This analyzed or estimated price is known as the target price.
• Life cycle costing:
It involves the estimation of the product’s entire life cycle and costs incurred, it particularly
involves determining whether the profit earned during the manufacturing stage can cover the
costs incurred in prior and the post-manufacturing period.
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Strategies of maximizing the shareholders value:
• The Bottom Line:
Increasing the shareholder’s value is the most important goal of the company, for increasing it
one of the strategy is to improve the brand name and the product , bottom line means the profit
which is required to distribute the dividends to the shareholders.
• Managerial incentives:
Providing managers with the stock option is an effective way to motivate managers to increase
the shareholder's value.
• Initial public offering:
It means the company offers common stock which is to be sold in the public (Bizfluent, 2017).
Before selling the common stock in the public it has to make sure that the company should thrive
without the common stock. This makes sure that the company is bounded on the common stock
to increase the profit, but does not have the intention to make a profit in general. the company
which bounds on the common stock for maximizing the income, in general, may not be
sustainable in the future.
Advantages of Decision making:
(1) Various perspectives – Decision making plays a positive role as it involves the different
individual’s opinion which opens up many solutions for solving any kind of problem
(2) Improve understanding and knowledge (Bizfluent, 2017).
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(3) Increase in the commitment of growth for the team.
D 1:
Techniques for detecting fraud in the organization:
• Detection of fraud by tip lines – Detection by the tip line method is the most common method
among the organizations to detect the fraud. It is a kind of website or hotline which helps in the
detection of the fraud.
• Fraud detection by the external auditors – Frauds can be detected by the external auditors
also, as a firm always needs an external auditor to know about the working and any kind of
wrong activity going on in the organization (Afrifa, and Padachi, 2016).
Various approaches to make ethical decisions:
• Unilateral approaches – According to this approach an ethical decision is the decision that
provides more weight over the evil.
• Rights approach – this approach throws the light on the person’s dignity on their ability to do
anything in their life which is right and has the moral right to do so (Afrifa, and Padachi, 2016).
• Justice approach – This approach puts a question mark on the action to know about the
fairness of the action.
• Common good approach – this approach supports the idea of giving the advantage to all by
the ethical action.
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LO2
P2
Organizations should implement effective financial strategies in the management which would
help the organization to attain long term success and financial stability. The organization should
implement certain financial management principles in its process so that it can lead to the smooth
functioning of the organization. Following are some of the key management principles to be
adopted by the organization for its long term sustainability:
 Cash Management- Cash management principle is an important principle that the organization
should adopt for financial stability. Cash management principle is managing the cash in such a
manner that the needs of the company are fulfilled whenever required to meet the financial
obligations. If the future obligations cannot be estimated properly then it can cause major
problems for fulfilling operations of the company. Management of accounts receivable and
payable is also a part of the cash management principle. Management should properly keep a
track on accounts receivable and accounts payable for managing cash of the organization (Afrifa,
and Padachi, 2016).
 Budgeting & Forecasting- Another important principle that an organization should adopt to
achieve financial stability in the long term is making of budgets and forecasting. Forecasting and
making budgets is an important aspect of every business, as if forecasting is not done properly
then it can lead to huge losses for the company. Budgets also help the company to make plans for
the future which can help in achieving the future goals of the organization.
 Capital Structure and Capital Budgeting Analysis- Organization should focus on the capital
structure of the company as the mix of equity and debt in the capital structure should be
appropriate as required by the company. If the mix of capital structure is inappropriate then it
would lead to unnecessary costs for the company and can lead to instability of finances in the
future. Also, proper principles should be adopted to take appropriate capital budgeting decisions.
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If the project selected is inappropriate then the organization would not be able to achieve its long
term plans.
 Documentation – It is also the important principle of financial management that will ensure the
company to grow consistently. This will help management to make overseeing the reports of the
company regularly so that it helps in achieving the financial strategies for the purpose of
achieving goals and financial sustain in business for over the period of time.
 Justification – It should be necessary that any transaction of business-related should have reason
and proper evidence that which support the transactions (Yigitbasioglu, 2016). Thus it will lead
the company to use the financial strategies in an effective way in order to attain company
objectives and able to stand on the top where the company wants to be in the future.
 Consistency – It is necessary for the management of the company that the business transactions
are to be handled consistently. They should adopt policies which help in finding the similar type
of transaction within the business which ultimately help in achieving financial strategies which
are made for them (for sustain at financial level).
M2
The principles of financial management are important for the company business because it helps
in achieving the financial strategies in an effective way that will lead organization to grow and
develop their business and also be sustained in the market by possessing good financial strength.
It also is important in such a way like it provide the rules and norms which should be adopted in
business so that business affairs can be run smoothly and efficiently. Thus it eliminates any
barrier which prohibits company to reach their goals. The other reasons that aid supports the
importance of financial management principles are:
 Aid in planning the cash management system so that management will make their decisions in
the interest of the organization. The cash management system aid company to analysis the cash
in business so it can make a plan or strategies for the motive of achieving organizational goals
which are set for long term purpose like achieving a good return from an investment which is
made on the project (Lukka, and Järvenpää, 2017).
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