Introduction to Finance For Strategic Managers
Management of financial resources plays a crucial role in accomplishing the business objectives of organization. Strategic financial management involves a defined series of steps that includes setting of business goals, identifying resources, analysis of data and finally, making the decisions (Banerjee, 2015).
In this project report, there is a discussion regarding the financial aspect of Debenhams which is one of the leading retailing companies of UK. The report gives focus on the comparison between short and long term finance for business as well as on the importance of management of cash flows and other financial statements.
An assessment of the reason for which financial information is needed in business
Financial information works as the heart of business. Financial information plays a very important role in making financial planning and decision. Financial information is mainly collected from various financial accounting statements. Financial statement like balance sheet helps in giving the exact picture of assets and liabilities which is important for the organization (Smit and Trigeorgis, 2012). It helps in identifying the exact financial position of business which results in making the final judgement regarding business expansion. Profit and loss account gives information regarding the wages that are paid out of the business and expenses that occur in the firm. On the basis of financial information which is collected from the profit and loss account, Debenhams can identify the efficiency and performance of business. Through the information taken from profit and loss account or income statement, investors can evaluate the company's past performance and can assess the uncertainty of future cash flow (Ball, Jayaraman and Shivakumar, 2012). Financial information is needed to find out or to maintain the record of success of business. The financial information is collected from the financial ratio which helps in analysing the actual performance of company as compared with its financial objectives (Wheelen and Hunger, 2011). With the help of financial information, Debenhams can measure or examine the quality and position of business which helps in making assumptions for more successful business in the future. By collecting the financial information, true and fair presentation of business efficiency can be examined.
Identification of business risks related to financial decisions
Risk related to a financial decisions refer to the possibility of a loss or default ion the organization. Risk is one of the major factors which creates problem in front of company while making the financial decision. There are various risk factors which affect the financial and business decision of Dagenham. They are as followed-
Macroeconomic condition of market – Market condition affects the revenue of company in case of fluctuation or a slowdown in the market.
Uncertainty of investment- There are high risk related to the uncertainty of firm's return over its assets (Beck, Levine and Loayza, 2000). For example, the firm may or may not receive the expected return for the capital.
Credit Risk:- This risk is associated with the borrowing of the business going into default. Investors may loss their principal and interest if any creditors refuses to pay the borrowed money due to any reason (Jõeveer, 2013).
Liquidity Risk- This risk arises when the asset or the commodity can not be easily traded in the market. There can be loss in the assets liquidity or funding of the liquidity (Brealey, 2012). These risk arise when asset cannot be sold in the market due to any market risk and and when the asset does not meet the demand in the market, respectively.
Market Risk- There are greater risk related to the market like, falling prices of the stock of the company, high interest rates prevailing in the market, fluctuations in the foreign exchange rate and rise in the price of the commodity like oil, gas and etc (Banerjee, 2015).
Sales risk- It is affected when demand of company’s product as well as through the price per unit of product (Guzman, 2015) falls. For example, company like Debenhams which is a retail firm is having high amount of business risk due to uncertainty of demand of its product in the market.
Other business risk includes demand variability, product quality, research and development activities, input cost variability etc.
Summary of financial information that is needed to make strategic business decision
The finance department of company generates variety of financial information that is helpful in the decision making. By proper collection of financial information, Debenhams can be benefited in the following way.
Decision Making- Financial information helps in deciding the business strategies for example, ways to reduce cost can be figured by accessing the financial statements which consists of the operating cost indulged in a certain product (Jõeveer, 2013).
Facilitates Credit – Financial information helps a company or a business to make decision about the credit requirements. There are many instances in which company requires credit from the market or a lender. In these cases financial information provides insights about whether a decision can be made to take credit from the marker or not. (Kono and Barnes, 2015).
Helps in calculation- With the help of financial information, managers can make calculations about the feasibility of a certain decision. It is important for the company to accumulate the feasibility and success of a certain decision made by the management and the top level of the organization (Cheng and Humphreys, 2012). of the firm can make a plan about all the measures that can be adopted to raise the profitability of company.
Improves purchasing skills - Financial information helps in deciding the time and cost to purchase a new capital assets (Davison and Warren, 2009). For example, if Debenhams is planning to expand its business then in that case, company wants to purchase new capital asset. Financial information collected from the balance sheet and cash flow statement will help in making the right purchase decision.
Defining purpose, structure and content of published accounts
The purpose of financial statement is as under:
Financial statement is prepared by company in order to present the information in front of internal and external stakeholders (Drake and Fabozzi, 2012). The other main purpose of published accounts of Debenhams is to provide information regarding financial efficiency and health of company to all stakeholders.
Income statement analysis provides information to investors regarding the financial position of company (Sorge, 2011). Income statement of the organization includes two aspects that are debit side and credit side. Debit side shows all the expenses that are incurred by the firm and credit side shows all the profits and earnings of company.
Content of published account of Debenhams includes:
- Consolidated financial statement which gives information regarding the financial position of organization (Annual report of Debenhams plc, 2014).
- It contains the information regarding assets and liabilities of firm which is required by the investors and other stakeholders to identify its efficiency.
- It contains the record of financial summary of company in the form of consolidated balance sheet, income statement and cash flow and the accounting ratio.
- It contains the details of new and discontinued company's operations.
- Key performance indicators.
Interpreting information in these accounts
Published accounts of Debenhams provide ample of financial information to the manager of company as well as to other stakeholders. Income statement of Debenhams interprets the information regarding income and expenditure of business operations. Along with this, cash flow statement of company provides information regarding inflow and outflow of cash activities in the business. It assists the manager in making effective decisions regarding firm’s expansion and other investment decisions which contributes in accomplishing the goals of Debenhams (Brigham and Ehrhardt, 2013). In contrary to this, assets and liabilities side of balance sheet provides information to the investors about liquidity and financial performance of organization. It assists in rendering realistic view about the operations of company to shareholders, suppliers and other stakeholders to attract them in making investment in Debenhams and in purchasing its shares which results in increasing the revenue of company (Banerjee, 2015).
Difference between long and short term financial requirement of businesses
Short-term requirement of funds is to meet the current needs of organization. On the other hand, long term requirement of funds are for meeting the long term needs of enterprise. Short-term requirement of funds is to fulfil the current expenses of company like payment of wages, salary etc. In contrast to this, long term requirement of fund is for expansion, investment, new launching of product, purchase of fixed assets like building, machinery, furniture etc. Debenhams is planning to expand its business; in that case, it requires long term sources of finance (Moyer, McGuigan and Rao, 2014). Short term requirement of fund is for performing the tactical decisions while long term requirement of funds is for the strategic decisions. Company can delay to pay to suppliers but sometimes, they demand for the quick payment of raw materials or finished goods that they have supplied. In that case, to fulfil the short term requirement of funds, company has to arrange funds from short term sources of finance. Short term financing is a fast and flexible way for companies to obtain working capital for the daily operations of business in case when there is insufficient amount of cash flow. In contrast to this, it is quiet a big procedure to arrange the funds from long term sources of finance. The funds sourced for short term requirement for Debenhams will not allow it to get the tax benefits. But, in case of long term sources, that is, debt, Debenhams can enjoy tax saving on the interest on debt.
Cash flow management techniques and assessment of the reason for which the management of cash flow is so important
Management of cash flow plays an important role in making the financial and business decisions of company. Debenhams can manage its cash flow effectively by taking into consideration various techniques described below.
Management of working capital- To mange cash flow it is important to mange the working capital requirements of the company. A business requires working capital to pay off cost and expenses incurred by the organisation (Carlin and Ford, 2014). If the firm uses excess of working capital it may create shortage of cash which will not be a ideal situation for the business. Thus it is evident that management of working capital techniques assist Debenhams in managing its cash inflow and outflow activities.
Management of business risk- This techniques requires the company to analyse the predicable risks that may prove vulnerable for the organization. The mangers will be required to plan for the risk that are predictable by estimating companies position in the market (Sorge, 2011). For example, availability of cash for the new operation line or meeting the deadline of the client are the risk that are generally encountered by an organization. This techniques lets the manger in understanding the estimated risk and take precautionary measures by analysing and proper understanding.
Management of payable and receivables- Another technique is to mange the receivable and payable of the company. For this the manger will have to pay attention on recoding for example, any sale performed by the company must be immediately recorder. Or on the other hand the manger can try to carefully analyse the creditors payment terms. Whether the payment have been received or it is delayed, is a important aspect that be timely rerecorded in the cash flow (Berk and et.al., 2013). Company needs to collect its payment as quickly as possible which facilitates the investment of cash in other productive activities of organization and maximizes the time period to pay to its debtor so that cash can be managed .
Considering different business ownership structures and roles and accountability of owners and managers in making decisions
- Limited Company- Financial statements which is prepared by the limited company includes profit and loss account and the balance sheet.
- Sole proprietorship- It is the simplest form of business which is run and controlled by one single person (Brealey, 2012). Balance sheet, statement of owner’s equity, cash flow statement and income statement are prepared by sole proprietors.
- Partnership- It is a written agreement relationship between two or more people for carrying out a business with common objectives and goals (Moyer, McGuigan and Rao, 2014). There are no such legal requirements in forming a partnership but partners have to sign a Deed of Partnership. The financial statement prepared by Partnership includes Income Statement, Statement of Partner's Capital and
In Debenhams, owner and manager plays an important role in making effective decision which contributes in accomplishing the organizational goals and objectives. It is the responsibility of main owner and top level authority of company to make sound policies and strategies which makes a way for company in getting success (Annamalai and Jain, 2013). Along with this, owner and manager of Debenhams are responsible for their business decisions whether it is good or bad for company. Effect or success of their decisions is analysed by increasing the sales as well as profits.
Evaluation of methods for appraising strategic capital or investment projects
Investment appraisal techniques can be used as a technique in making effective decisions while making the selection of particular project. It also assists in evaluating the effect of investment project on cash flow of company. For making the investment decisions, Debenhams can use Net present value techniques, Average rate of return and Payback period (Barnes, 2006). The detailed description of these investment techniques are as under:
By summing up the project, it can be concluded that financial planning and information plays a very important role in making the financial decision. Further, for the expansion purpose, Debenhams can use long term sources of fund. Current ratio and debt equity ratio of Debenhams states that the financial position and performance of company is sound. So, firm can take the funds from long term sources. Besides this, it can also be inferred that investment appraisal and proper cash management techniques help Debenhams in accomplishing the organizational objective and in achieving long term success.
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- Cheng, M. M. and Humphreys, K. A., 2012. The differential improvement effects of the strategy map and scorecard perspectives on managers' strategic judgments. The Accounting Review.