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Finance For Strategic Managers
Finance is a fuel in the business. Finance is an elixir and proves to be of great help for the purpose of value creation in businesses. All the activities that are conducted in any organisation are connected either directly or indirectly through finance(Kolk and Pinkse,2010 ). Financial decisions are most crucial decisions for the business. In the present report the discussion will be regarding the financial information that is going to be required while making the financial decisions for an organisation. Also, efforts have been made to highlight the major risks associated with the businesses. The detailed analysis are performed for Clariton Hotel operating in UK which is a growing company. The organisation is engaged in providing hospitality services.
1.1 IMPORTANCE OF FINANCIAL INFORMATION
The main objective regarding preparation of financial information is to assess the financial position of the business. Apart from this the financial information also enables the users to make comparison for different periods. Therefore an effective assessment can be made regarding the financial performance of the company and the economic decisions can be made taken on that basis. Financial information has distinctive significance for the different users which is
discussed in detail as follows-
Business Managers- Financial information is required by them to manage the liquidity and finances of the company effectively. This will ensure an adequate assessment of the business which can be useful for financial decision making.
Shareholders & Prospective Investors- They use financial information to make an assessment of the risks & returns of the company and take investment decisions. Prospective investors require financial information for the purpose of taking decisions regarding the viability of the investments(Irwin and Scott,2010 ). Financial information is useful for making predictions about the future earnings, dividend policies of the company. Also an effective assessment regarding the risks and returns from the particular assessment can be made by a prospective investor.
These institutions require the financial information for the purpose of decision making regarding whether a particular business has repaying capability or sufficient earnings for the timely repayment of the loans. The financial health of the company is being assessed by the financial institutions. This is being done with the help of the financial information provided by the business.
The financial statements and other financial information of the company is being assessed by the suppliers to assess the credit worthiness of the company for the purpose of providing credit on the goods or raw material supplied. The other terms of credit is based on the basis of the financial health of an the Clariton hotel.
They require the financial information for the purpose of ensuring a steady supply of the goods in future.
The financial information of Clariton Plc is of vital use for employees as well as it helps them to assess the future remunerations and about job security.
Governmental authorities require financial statements for the purpose of making assessments of tax liabilities and other duties that are required to be paid by an organisation. Also comparison can be made regarding the data provided in the return by Clariton with that of the actual financial information.
1.2 Identification of business financial risks
Financial risks of the business can broadly be broadly divided to the three segments namely- Capital structure risks, liquidity risks, and long term stability risks. A brief description of the of these risks along with some important risk management techniques are discussed as follows-
Capital structure risks-
These risks are high when the capital structure of an organsation is unbalanced. That could be due to en excess of debt or equity( Simons,2013.). This will affect the returns of the company and thus there are going to financial disturbances. Hence it is extremely important to manage the capital structure that is to employ adequate equity and debt portions in order to maintain an appropriate returns for the investors.
These risks occur when there is inadequate cash or other liquid assets with the business to repay its current liabilities. Liquidity position of the hotel is a vital factor as it poses threats of bankruptcy. These can be managed by making an detailed assessment about the company's short term liabilities along with the contingent liabilities and maintaining adequate working capital for its repayment.
Long term stability risks-
Long term stability of Clariton hotel is connected with the various sources of finance that are being used to buy long term or fixed assets. The inefficient management of these assets will enhance the risks of insolvency for the hotel. Hence it is very important to manege these risks in order to develop the business of Clariton.
The other risks to which Clariton is exposed are strategic risks that are due to the irrelevant or inefficient strategic policies of the company. Another risks could be operational risks that could be due to the hurdles faced by the hotel in carrying out its routine operations. All these business risks can be managed by following an effective risk management. The different steps involved in the process of risks management and which will help Clariton to manage its risks are-
1.Identification of risks
2.Analysis Of risks
3.Evaluation of risks
4.Treating the risks
5.Monitoring & reviewing risks
These steps are required to be followed for each of the financial and other risks identified for the purpose of managing risks effectively for Clariton.
1.3 Financial information
The financial data that is required for strategic decision-making for Clariton are its cash flows statements which which reflects the movement of cash flows and thereby helps ion making analysis regarding the various activities and about the major cash inflows and outflows. Balance Sheet of the company is required for decision making regarding the employment of the adequate assets and managing liabilities of the business(Shiller,2013 ). Profit and Loss statement discloses the revenues and the expenses and thereby help in controlling excess expenditures and framing policies for increasing the revenues. Then another important financial information is the ratio analysis which help in making comparisons regarding the profitability and other aspects of the business.
2.1 Purpose, contents and structure of accounts-
Purpose-The general purpose for the preparation of the financial statements is to provide a structured information about the operations performed by Clariton. Financial statements as the whole are prepared by companies to analyse data which is being presented and take various strategic decisions. These decisions could be either related to the credit positions, or investments decisions, or may be related to the taxation and strategic planning.
This statement includes an elaborate information about the assets and the liabilities which are both short term and long term. The description regarding these is provided in the notes to accounts which are to be prepared after the financial statements.
Profit and Loss Statement-
This statements is prepared to present in detail the revenues arising from distinct sources and the expenses incurred for earning those incomes.
Cash flows statement-
This statement reflects the movements of cash flows for a particular period.
Structure- Financial Statements for Clariton are required to be prepared in the format stated in IAS-1.
The interpretation is being given in the notes to accounts(Ahmed and Duellman,2011. ). It includes the details of the figures in the financial statements. The financial statements can be interpreted by the help of the notes to accounts.
2.3 Financial Ratios-
The various financial ratios that can be used for the purpose of assessing the liquidity of the company are current liability ratio, quick assets ratios. Also ratio analysis can be used for making comparison from the financial statements of the previous years and that of its competitors.
3.1Diffference between long and short term financial requirements of business
Business finance needs can be classified in to two categories namely long and short term finance needs. Long term finance needs refers to the amount of finance that company require for more than a year. On other hand, short term finance needs indicate the fund that firm needed to meet its financial requirements within a year. Working capital is used to meet day to day finance needs of the business. Managers on single time period have to take decision in respect to short term and long term finance needs of the firm. This is because for carrying out large size projects it is important to arrange long term finance so as to ensure that sufficient amount of money will be available to meet finance needs of the project (Bamber, Jiang and Wang, 2010). On other hand, short term finance is required perform day to day business activities of the firm. Hence, it can be said that there is a difference between long and short term finance requirements because long and short term funds are used for different purpose by the managers. Thus, Clariton hotel must clearly determine its short term and long term finance needs so that it can be ensured that when funds will be required they will be available in sufficient amount on time to the business firm. Short term finance requirements are determined by considering number of factors like the present number of the current ratio and expenditure that is made by the firm on quarterly basis in its business. Whereas, in order to determine long term finance requirement existing capital structure and cost of finance is mainly taken in to account (Brealey and et.al., 2012). Apart from this, plan that firm prepare in respect to investment that it will made on its project in upcoming year in also considered while determining long term finance needs of the business. Thus, it can be said that short and long term finance requirements of the business are determined on the basis of varied factors.
3.2 Comparison of long and short term source of finance
On analysis of cash flows it can be said that values of closing balance increased from the month of January to March. Thereafter, cash flow declined for the months of April and May. This reduction is observed because sales of the firm declined from £ 65000 to £61000. Even though firms does not curtail its expenses. Raw material purchase increase consistently and firm buy more goods on credit basis even sales declined on hope that market conditions will get improved. Hence, cash balance declined in cash flow statement. Cash flow can be improved by following strong cash management and expense control strategy. Firm must purchase less goods on credit and must track expenses on daily basis. By doing so curb can be maintained on elevation of expenses.
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Purpose of budget
The main purpose of preparing a budget is to ensure that resources will be utilized effectively in the business and stiff control will be maintained on the cost (Coleman, Maheswaran and Pinder, 2010). Other main purpose of the budget is to measure the firm performance for specific time period.
Importance of budget and way in which budgetary control work
There is huge importance of budget because by using same effective utilization of resources can be done by the managers. Moreover, elevation in expenses can be controlled which lead to elevation in the firm profitability(Ahmed and Duellman,2011). Under budgetary control actual performance is compared with standard valued and corrective actions are taken if negative variance is identified in case of specific variable.
In case of material variance is positive because firm use resources according to its production requirements. Firm give more wages to its employees and due to this reason labor cost increased even production declined. Fixed overhead remain same even production get changed. Electricity variance is positive because due to decline in production, less variable units of electricity is consumed. Sales variance is positive because sales price of the firm product is increased. Hence, it can be said that firm needs to reduce its labor force and must do their best utilization. By doing so negative variance can be converted to positive.
4.1 Structures and roles as well as responsibilities
In case of company corporate governance is very strong. In the company all employees even CEO is responsible for his action to the shareholders. Hence, there is strong mechanism of control in terms of policies and procedures in company (Irwin and Scott, 2010). There are strong rules and regulations in the company and due to this reason legal system of same is very strong.
Role and responsibility of owner
Owner: Owner play an important role in controlling business operations and giving strategic direction to business. Owner is accountable to shareholders for the business performance.
Role and responsibility of manager
Manager play an important role in looking after day to day business operations. Manager is responsible to the top managers for strong or poor performance of the business firm.
Corporate governance system of the sole trader business is not so strong like company. As sole trader at its own discretion form rules and regulations (Simons, 2013). Hence, many loopholes remain in CG structure of the business firm.
Role and responsibility of owner
Owner: Owner maintain entire control firm business activities (Baker and Wurgler, 2011). Owner is responsible to treat all stakeholders in proper manner.
Role and responsibility of manager
Manager play role in smooth functioning of the business. Manager is responsible to sole trader for communicating information about day to day performance of business activity.
4.2 Project evaluation methods
Payback period: This method reflect the time interval in which project cost can be recovered by the managers. No project is assumed viable because both of them are covering investment amount in same duration.
ARR: This technique indicate mean return that can be gained on the project (Shiller, 2013). ARR of project A is 53% and same of project B is 44%. Hence, former one is assumed viable for company (Ahmed and Duellman, 2011).
NPV: This method help one in computing worth of project in numbers after considering investment amount. NPV of project A is greater than other one and it is selected for firm.
IRR: This method is used to estimate the real percentage profit that can be delivered by the project to firm. IRR of project A is 36.32% and same of other one is 17.32%. Hence, former is again selected for the firm.
It is concluded that financial information must be used by managers for making business decisions. It is also concluded that ratio analysis must be done time to time in order to evaluate business performance. Long and short term source of finance must be used by the firm with due care. This is because if same will not be done then business problem will come in existence. Investment appraisal method must be used to select most viable project for the business firm.
Ahmed, A.S. and Duellman, S., 2011. Evidence on the role of accounting conservatism in monitoring managers’ investment decisions. Accounting & Finance. 51(3). pp.609-633.
Baker, M. and Wurgler, J., 2011. Behavioral corporate finance: An updated. National Bureau of Economic Research.
Bamber, L.S., Jiang, J. and Wang, I.Y., 2010. What's my style? The influence of top managers on voluntary corporate financial disclosure. The accounting review. 85(4). pp.1131-1162.
Bamber, M. and Parry, S., 2014. Accounting and Finance for Managers: A Decision-making Approach. Kogan Page Publishers.
Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.