Financial Management Report: Zara's Financial Strategies and Controls

This report provides a comprehensive analysis of Zara's financial management practices, encompassing various aspects of financial decision-making, strategic planning, and control systems. It begins by exploring different approaches to decision-making, including knowledge-based methods and the strategic decision-making process, considering both internal and external factors influencing Zara's profitability. The report then delves into the application of financial management principles, evaluating short-term, medium-term, and long-term goals, while critically assessing the maximization of shareholder wealth through techniques like Return on Capital Employed (ROCE) and Internal Rate of Return (IRR). Furthermore, the report examines the role of management accountants and accounting control systems, including the use of technology and control systems for financial planning. Finally, the report evaluates how financial decision-making supports sustainable performance, including internal and external controls, fraud prevention techniques, and the use of financial ratios, investment appraisal, cash flow statements, trial balances, and break-even analysis to maximize ROI and support effective financial strategies.

FINANCIAL MANAGEMENT

Table of Contents
INTRODUCTION................................................................................................................................3
LO1 Application of different approaches used to support effective decision making ........................3
Knowledge based approach: .....................................................................................................3
Process of strategic decision making .........................................................................................4
M 1 and D 1................................................................................................................................5
Constraints of fashion industry.................................................................................................6
macro and micro factor determine profitability.........................................................................6
LO2 Analysis of financial management principles which are used to support effective financial
strategies ..............................................................................................................................................7
Evaluation of short term, medium and long term goal................................................................7
M2 and D 2.................................................................................................................................7
Critical Evaluation of maximisation of shareholders wealth......................................................8
Cash flow for the new bakery.....................................................................................................9
LO3 Evaluation of role of management accountant and accounting controls systems .......................9
Evaluation of application of financial management techniques to present financial data for
decision making..........................................................................................................................9
Use of advanced and new technologies for building integrated and inclusive financial system10
Control system for financial planning ......................................................................................10
M3.............................................................................................................................................11
D3 .............................................................................................................................................12
LO4 Evaluation of ways in which financial decision making support sustainable performance ......13
Company internal and external control.....................................................................................13
Advantages of external control ................................................................................................13
D3..............................................................................................................................................14
Financial management techniques for identifying and preventing fraud.................................14
Financial ratio of Marks and Spencer and Next PLC..............................................................14
Evaluation of the outcomes of investment appraisal techniques are used to maximise ROI....16
M4.............................................................................................................................................17
Evaluation of value of cash flow statements, trial balance and break even for financial decision-
making ......................................................................................................................................17
REFERENCES...................................................................................................................................19

INTRODUCTION
Financial management refers to the process of planning, organising, controlling and
monitoring the financial information. This assignment will provide understanding of the
organisation internal and external controls. Moreover, It will include financial management
techniques for making effective decision. Furthermore, This study will provide understanding of the
new technologies used in financial system. It will contain information about investment appraisal
techniques for maximising the return on capital employed.
LO1 Application of different approaches used to support effective decision
making
Knowledge based approach:
It is a strategic decision making process, in which manager collect all the relevant
information and data from formal and informal sources. Information are gathered about product
quantity, its target and other supportive information. Generally this approach is adopted for
particular project(Todorović and et.al., 2015)Basic component of these approaches are open
communication between manager and employee, share information from stakeholders, healthy
discussion and fair voting with collaborator and develop trust culture.
Zara allow its internal as well as external stakeholder to participate in product development.
Its internal collaborators are employees, government and department manager. And external sources
of information are supplier and investor. External people render information like market condition,
customer expectation, competitor strategies and resources, measuring progress. Internal people
contributes their knowledge, experience and skill of making policy, plan and objectives etc.
Advantage of internal stakeholder contribution:
 At the time of decision making process, employee has enough knowledge of
organization culture, resources and process, which make their information and
suggestion more relevant to Firm.
Disadvantage:
 As they only think from organization profit objective there knowledge and
information are limited and narrow.

Advantage of external stakeholder's contribution
 They Render pool of diverse, latest and different idea and information.
 Their information gives hint of their expectation from firm, which help Zara to set different
objectives(Karimi and Davoudpour,2017).
Disadvantage
 Render ton of irrelevant data.
 Possibility of receiving twisted, incorrect and biased information because stakeholder want
their interest and profit first.
Process of strategic decision making
Zara make its cloth in its textile factory and for accessories like handbags, watches, jewelry,
sunglasses and shoes, it relies on external buying (assembling and in sourcing). Following is the
process of manufacturing strategic decision can be use by Zara:
Identification of problem or opportunity
Right recognition of problem lead half way to success. Here, Zara analysis the impact of
decision on stakeholder like customer get benefited or it put negative impact on them. Like internal
manufacturing effect pricing of product.
Gather information:
Zara manager collect information for making external buying decision like cost,
transportation charges, assembling cost, and for manufacturing raw material cost, distribution, R&D
and packaging cost etc(Reymen and et.al., 2015).
Alternative judgments:
Zara has option to go for self-manufacturing, or buy
From products from other companies like shoes from shoe company and place the name Zara or but
different part and assemble it by own.
Marketing the alternative :
Company gives more preference to option, which is more cost, quality and time effective
and have smooth accessibility.
Choose alternative and review decision:
Company take suggestion from its supplier, employee and shareholder about its strategic
manufacturing decision. Once decision is taken manager also conduct periodic evaluation and
consulting process.
In business unit, decision making aspects can be divided into two parts such as:
M 1 and D 1

 Formal decision making: In the context of Zara, formal decision making aspects include the
use of information system, specific structure as well as procedure.
Advantages
 It is a structured way of making decision
 It includes both oral and written
 This decision making are regarding matters to achieve business objectives.
Disadvantages
 There is lack of flexibility
 There is communication barriers as many members are not provided an opportunity to
speak.
 The decision made by top management may not be effective
 Informal decision making: It includes decision which are taken by the firm like Zara
regarding promotional aspects without any meetings, mail etc.
advantages
 It is more flexible than formal decision making
 Every member is involved in decision making processing
 Better understanding
disadvantages
 There is no structure format of making decision
 There are chances of interpersonal conflicts
 It is more costly than formal decision making process
Advantage of strategic decision making process
 Decision making Process increases the depth of knowledge regrading product, process and
stakeholder by having lots of information and collective understanding.
 Participation of stakeholder gives multiple perception and best decision outcome. It also
enhances the morale and motivation of people.
Disadvantage of decision making process
 It is a time taking process and it results relies on accuracy of information.
 Decision quality can adversely effect discorded perception.

Constraints of fashion industry
Fast adoption of fashion: fashion industry is highly sensitive to change in trend and
preference. If company product and fashion not matched with each other, it will lead to huge
financial loss for Zara.
Availability of quality fabric:
Zara is committed to render high quality leather and fabric to its customer. Availability of its
raw material depend on textile agriculture quality and quality(Wheelen and et.al.,2017). Adverse
environmental factor increases the cost of production and lower the profit margin.
Cultural factor:
Globally present fashion company Zara has to change is clothing according to the culture.
Like company cannot render same dress appearance in western and Asian countries which limits its
diversification opportunities.
Economic factor:
Increase in income tax, shrink the customer disposable income, which eventually affected
reduced company sale. And, rising interest rate can affect company expansion plan as it has to pay
more interest now.
macro and micro factor determine profitability
Internal factor
pricing:
Pricing policy directly impact the profitability. Higher margin render high profit opportunity,
marginal pricing and lower pricing is only able to cover the cost.
Overhead cost:
These fixed costs do not change with production quantity. Higher fix cost is not good for
organization. Company can manage this cost by outsourcing.
Direct cost
These variable costs are get changed with number of units. Like the more Zara produces, the
more it has to pay to acquire raw material((Margaretha and Supartika,2016).
External factor:
Competitor's :
Zara has to give discount, coupons and different offer to its existing and potential buyer, to
counter its competitor, if it offers high discount it has to compromise with profit.
Substitute product
In case customer get the same quality product in lower price, customer can shift form Zara
to another Firm. It adversely impacts the number of unit sale. Less sale unit render less profitability.

Company can reduce this threat by giving extra ordinary and beyond the expectation product to
people.
LO2 Analysis of financial management principles which are used to support
effective financial strategies
Evaluation of short term, medium and long term goal
Goal setting help the organisation in measuring its performance relating to the set goals
which will helps in achieving their target objective effectively and efficiently. Short – term goals of
the company assist in achieving the objectives with a year. Short -n term goals are planned for
improving the strategies and activities of the firm to achieve the company's long term objectives.
Setting short term goals assist in measuring the performance of the company to achieve long term
goals. Long term goals of the companies is to achieve higher profitability, higher market share etc.
which require more than one year to be achieved (Renz, 2016). However, if the organisation have
set the short term goals incorrectly that will affect the firm in achieving its medium and long term
goals.
It is analysed that The goal of Zara consist of short term and long term. The short term goal
of Zara is consist of those objectives which are achievable within one year for instance to increase
the sale of Zara by 10% within 6 months. The long term goal of Zara is to be the market leader in
the fashion industry. The ethics for Zara includes the way through which its operations are
performed . Zara is performing it activities in an ethical manner. Moreover, Zara in order to
maximise its shareholder wealth is providing them various benefits such as high dividends etc.
Zara in order to be successful must set the short term goals wisely for achieving the other
goals of the firm. Setting goals effectively and efficiently helps in providing the organisation with
effective financial strategies. Financial strategies helps the organisation in improving its financial
performance which helps in increasing the profitability of the firm. Financial strategy includes
managing the cash flow, financial management etc (Barr and McClellan, 2018). Zara must perform
its financial activity in ethical manner in order to arrive at ethical decision as it will help the
organisation in improving its brand image which will attract more customers towards the firm and
will also help the organisation achieving its objectives effectively and efficiently.
M2 and D 2
It means financial management principles assist in improving the performance of the firms
and achieve the organisational goals and objectives effectively. But if the financial management
principles are not followed properly the firms is not able to achieve their goals and objectives in

specified period. The principles of financial management includes proper recording of accounting
information , measuring the performance ion the basis of performance indicators etc.
Ethical principles are the standards sets for making ethical decisions in order to perform the
operations ethically. It includes principals such as justice, fairness, autonomy etc. ethics are the
rules and standards of practices. Ethic play an important role in financial decision making in order
to make the decision fair for the business growth and success. Organisation by considering the
ethics while making financial decision is able to make effective financial decision. The role of
ethics in decision involves trust, confidentiality, code of ethics etc.
Critical Evaluation of maximisation of shareholders wealth
1)Return on capital employed
Year Cash inflows
1 55000
2 55000
3 55000
4 55000
5 77500
Sum of inflows or savings 297500
Capital employed 210000
Operating profit (Sum of inflows or savings – capital
employed) 87500
ROCE (Operating profit / Capital employed) 87500 / 210000 = .46
On the basis of above it can be interpreted that the organisation will have less capital
employed as the return on capital employed is less. Less return will affect the shareholder's wealth
and in order to maximise the shareholder wealth organisation must reduce the capital employed for
increasing the return which will be beneficial for the shareholders.
Computation of IRR
Year Cash inflows
0 -210000
1 55000
2 55000

3 55000
4 55000
5 77500
IRR 12%
On the basis of above it can be interpreted that return interest rate is more that is 12 %
which shows that the company will have more returns using the IRR. This shows that by using the
internal rate of return the organisation will be able to maximise its shareholder wealth.
Cash flow for the new bakery
particular Amount
Cash inflow : sales 75000
Cash outflow: recruitment cost 30000
salary 2500
equipment cost 20000
Total cash outflow 52500
Net inflows 22500
On the basis of above computation it can be interpreted that The new bakery will have
profit in the future as per the cash flow it can be analysed that the net inflows for the period is
22500 which is beneficial for the company. Moreover, the new bakery have equipment which will
support the firm in its long term growth and financial sustainability.
LO3 Evaluation of role of management accountant and accounting controls
systems
Evaluation of application of financial management techniques to present financial data for decision
making.
Financial management techniques are those which are used by organisation for protecting
the financial data. These techniques include ratio analysis, trend analysis, cash flow analysis etc.
which are used by Zara for effective decision making. The organisation by using the ratio analysis
can identity the different ratio by taking the information from the income statement and balance
sheet. It includes ratio such as profitability ratio, liquidity ratio etc.
On the basis of ratio analysis Zara company can identify their profitability level which will

helps in determining their performance level. It helps decision maker in making financial decision
and investment decision for increasing their profitability (Barr and McClellan, 2018). Using
financial management techniques provide assistance to organisation in identifying the risk factor
which may affect the business operation which helps the organisational taking effective measures to
reduce the chances of risk. However, financial management techniques are based of past
performance due to which the analysis may not provide the company with exact result due to the
organisation may not be able to effective decision.
Use of advanced and new technologies for building integrated and inclusive financial system
Organisation are using advanced and new technology for building integrated and inclusive
financial systems reducing the risk of financial misappropriation. Financial system helps the firm in
transferring the money. It includes financial transaction between lenders, investors, borrowers etc.
Financial system includes accounting software which are used to record the financial transaction
(Financial management system, 2018). This system helps in automating the transactions which will
provide data integrity and security. Moreover, it will provide track on the various operation which
have been undertaken. However, new technology also have various disadvantage that includes that
using financial system is difficult to use and required the professional for interpreting the results
provided by the system.
Control system for financial planning
Zara company uses component of cost and the following is the past data of this company :
Particulars Units £
Monthly demand for finished goods 200
Annual carrying cost per unit £1.60
Cost of placing an order £20
Normal usage of input cost per week 50
Maximum usage per week 70
Minimum usage per week 30
Reorder period ( weeks) 5-7

a) Re-order level
maximum usage 70
maximum lead time 7
re-order level 490
b) safety stock
maximum daily usage 70
maximum lead time 7
normal usage 50
safety stock 440
c) Re-order quantity
average daily units 6
delivery lead time 7
safety stock 440
Re-order quantity 482
d) Minimum level
Re-order level 490
average usage 50
average lead time 6
Minimum level 190
e)Maximum level
Re-order level 490
minium usage 30
minimum lead time 5
re-order quantity 484
Maximum level 824
f) average inventory
order quantity 200
2
average inventory quantity demanded/2

100
In order to improve the role of management accountant and accounting control system It is
recommended that they must perform there duties with integrity and honey and must not
misappropriate the financial statement. They should develop their skills and knowledge for
providing the company with better solutions for achieving the organisation growth.
M3
Role of management accountants and their evaluation
Integrated accounting system assist the management accountants to integrate their
accounting procedure for recording the various transactions.
Role of management accountants
 It plays the role of planning for short terms ans long term for achieving the business
objectives.
 It provide accurate information regarding the various operations of management.
 Preparing the budgets for the future to reduce the cost.
 Improving the profitability of firm by formulating various strtagies.
Management accountants is responsible for measuring the performance with the standards
set b y the organisation and identify deviations. Moreover, it is responsible for coordinating
accounting operations.
Advantages
 It measures the actual performance with the standards.
 It helps in increasing efficiency of firm.
Disadvantages
 There may situation where management accountant may not be able to make effective
decisions.
 The conclusion drawn by the management accountant may not acceptable by other top
management.
D3
The role of management accountant can be improved by providing proper knowledge and
understanding to the management accountant regarding the organisation process, procedure etc. It
should perform the work ethically and make decision ethically. By improving the role of
management organisation is able to improve the financial decision making which assist in achieving