Importance of financial information in business
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Introduction to Strategic Managers
Strategic decision making is an integral part of business that allows managers to develop the strategies in a line with company's mission, vision as well as long and short term objectives. However, information from internal and external environment play lead to an optimal decision. For the view point of organization's success, finance is the most importance resources and its management is required to gain profitable results (Barnes, 2006). The managers surely needed financial information to make viable decision for business. The report herewith is designed to represent the importance of financial information in business and in strategic business decisions making. In this regard, a leading company of UK retail market namely “Home retail group Plc” is taken into account.
The aforesaid entity deals with home and general merchandise within UK and has capture significant market share (Home Retail Group, 2015). The company has earned total sales of £5.7bn in the year 2014. This study presents the calculation of financial ratios for Home retail group Plc for the year 2014 and 2013 and shows how it supports strategic decision making. Furthermore, the long and short term financial sources are compared on the basis of strategic decision making. Along with this cash flow management techniques and its importance is showcased in this report while explaining the application of investment appraising or capital budgeting techniques.
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Assessment of why financial information is needed in business
Financial information is a significant part of business that help business in going through the financial position. The major aim of using financial information is to identify financial efficiency of corporate entity as well as to make viable decisions. Financial information is needed to develop the strategies in accord to the financial goals. This include: amount of sales for a particular period as well as the information of purchase of raw material. These all information is needed to design future courses of actions (Bull, 2007). Information in regard to the purchase of assets is important to identify the cash outflows. In other words, financial information is known as the heart of business management. To an extent, it can be said that it is difficult to run a business without having proper information of financial resources. The major source of financial information are accounting reports and financial statements. The aforesaid information pertaining to financial resources is helpful to managers in evaluating financial condition as well as operating performance of a corporate entity. It has been witnessed that financial information is needed by business to prepare annual reports (Murphy, 2001). These annual reports are prepared on the basis of financial information for entire years or a specified time period (Ryan, 2009). These statements or annual reports are used by the internal and external stakeholders. The accurate information leads to significant improvements in the management of business. However, the major role of financial information is in decision-making.
Business risks related to financial decisions
The organization makes strategic decision on the basis of varied information pertaining to internal and external environment however, there is a specific risk associated with the financial decisions. The foremost business risk is associated with the company at the time when not single debt is taken. Further, there are major kinds of risk such as strategic, compliance, financial, and operational are involved with the business. An effective management of risk is involved to improve the efficiency of company. The points below represent the various kinds of risk involved in business:
Market risk: The market in which company operates its business generally carries risk that affects the operations of company. The uncertain demand from marketplace is the foremost risk involved with financial decisions (Srinivasan, 2012). The new and updated trends which take place in the market also contains risk for business. In addition to that, market risk includes inflation, fluctuation in market trend and recession.
Compliance risk: The compliance risk is significantly associated with laws and regulations of government in the operating region. Compliance risk occurs just because of changes held in legal policies that are associated with customer relationship management, health and safety, taxation, trade policies and so on (Barnes, 2006). Whenever the policies change, it puts both negative and positive impacts of business.
Operational risk: Operational risk is associated with financial decision making, however, this is associated with the internal system of enterprise. The operational risk has significant capability to influence growth and development of business. Sometimes, improper management of financial resources leads to operational risk.
Summary of the financial information needed to make strategic business decisions
To make strategical business decisions company requires accurate financial information so that strategies can be designed in link with the financial objectives. The points below presents the financial information that is required to support strategical decision making.
Cash inflow and outflows : To support the strategical decision making organization requires information of cash inflow and outflow for a particular time span so that proper management of finical resource can be ensured (Smit and Trigeorgis, 2012). This is required to manage surplus and reduce the chances of deficit.
Profits and losses : The long term investment decision, product planning, market research, innovation and all depends to the availability of cash and profitability of business. However, to support the decision making organization requires financial information of net and gross profit of the enterprise that will assist in decision making.
Cash projections: The information of cash projection in business are required to support decision making however, it is associated with budgeting activities. In addition, the cost associated with financial sources are discovered and actual results are compared with expected ones (Kaplan and Atkinson, 2015).
Financial requirements : The information pertaining to financial requirement of company is needed facilitates strategical decision making for which, financial statements are reviewed.
Explanation of the purpose, structure and content of published accounts
The major purpose of financial statements is to provide information pertaining to the financial health of company to internal and external users. The major financial statements are Balance sheet, income statement and cash flows statements all such information included in such kinds of statement provides clear picture of business to the financial users.
The content included in financial statement supports the decision making of business. From the balance sheet, managements can assess the amount of liabilities owned by company this is supportive is assessing financial obligations. It has been witnessed that financial users required the information pertaining to liquidity and profitability position of a company. The amount of profitability can be accessed from income statement that facilitates investment decisions (Borad, 2009). The content included in cash flow statement include information pertaining to financing, operating and investing activities and amount involved in such statement. The content included in financial statement is helpful in deciding future cash projections. The information included in such statements provides information to the stakeholders whether the organization is capable to pay credit or if it is profitable to invest in the company. However, the management can that the expected growth of the organization is strengthened through a strong relationship between management of cash and financial resources.
Interpretation of the financial information in these accounts
The major financial statement are Balance sheet, Income statement and Cash flow Statement. The information included in all such statements assist in identifying the overall performance of business and the status of financial health. The major role of such information is in assessing the financial ratios from which the status of business in financial terms can be identified in a simpler and easier way (Annamalai and Jain, 2013). The income statement contains the information of profits and balance sheet presents the information in respect with the liquidity of firm. On the basis of information included in financial statements the liquidity, profitability, solvency performance of company can be assessed (Guzman, 2015). Along with this, the information contains with financial reports is helpful in conducting competitive analysis. However, the efficiency of company can also be assess with the information which is included in financial reports. The possible capital and revenue expenditure of company can be known through the information that is having with financial reports. The cash flow statement includes the information of cash inflows and outflows of business for a specific time provide however it also provides the information of cash available with business so that investment decisions can be supported.
Financial ratios are calculated on the basis of financial information that is included with financial reports. The different ratios are calculated to asses the financial health of company so that the future investment decision can be supported. Profitability ratios include net profit, gross profits and operating profit ratios that are helpful in assigning profitability of company on which basis management takes decision such as expansion, product development, innovation and research etc. It has been witnessed that net profitability of company has been increased as compared to previous years, however, net profit and gross profits have also increased. It presents a fruitful sign for future investment and other decisions.
In the aspect of liquidity ratios, current ratios and quick ratios of business have been improved than compared to previous years therefore, the organization can make decision in respect with sound liquidity position of business (Annamalai and Jain, 2013). The company is seen efficient in terms of meeting the short term financial obligations. The company can make decisions for taking loans and paying off in shorter time without any defaulter.
The efficiency is judged through the efficiency ratios of business. It has been witnessed that total asset turnover ratio of company has been decreased on the other hand total inventory ratio has been improved. It has been witnessed that debt to equity ratio is improved as compared to last year indicated that company has made equitable balance between debt and equity. This all information is used to assess the financial position of company and making effective decision for future investments (Guzman, 2015).
Explanation which clearly distinguishes between long and short-term financial requirements for businesses
Financial funds are needed by the company to purchase assets as well as investing in various projects. There are major two kinds of source such as internal and external. Internal sources are those are raised within the business. On the other hand, external sources are raised from outside the business. Further, these are divided into long term and short term sources of finance. In long term sources, of finance company takes loan generally for 5 years and also raised funds for a long run source such and retained earning. The loan taken is also considered as the external but long term sources of finance (Buckle and Thompson, 2004). On the other hand, reduction in working capital and selling of assets are short term source of finance. To make research and development expenses, the company goes for acquiring long term financial sources. The long term source of finance are required to make investment decisions, on the other hand, short term financial resources are needed to make tactical business decisions. However, to make long term financial decisions or strategical decision, it is required to make use long term financial resources (Barnes, 2006). In addition to that, short term financial resources are required to carry out day to day operations as well as long term financial sources are used for project investments.
Examination of cash flow management techniques and its importance
Management of cash is an important aspect that contributes in the success of business. The foremost financial aim of business is to manage the cash inflow and outflow in business. The proper cash management helps in attaining desired profitability and a crucial indicator of financial health and business performance. The management of cash provides an information in regard to the company's sufficient funds to make future financial decisions. In order to make effective management of cash company has to consider various techniques so that the working capital can be managed (Krzysko and Marciniak, 2001). The most famous ways to control cash is that the company can collect payment as quickly as possible. However, it facilitates cash investment in proactive activities. To the other hand, budgeting is another cash management technique that is used in the business to estimate the future cost so that cash can be managed in a fruitful manner. To the other hand, contingency plan development is an effective way to manage cash within business. Overall, cash management is an effective technique that helps in controlling business expenses and increasing incomes.
Techniques of managing cash flow:
Management of working capital: Working capital includes the management of inflow and outflow of cash in business. It is very essential to manage working capital on short term and long term basis and it also helps to manage the operational activities of organization. Short term finance can be efficiently manage through inventory management, management of cash receivable and payables within specified time period. On the other side long term finance in cash flow can be manage through payment on installment basis which decreases the problem of large payment and helps to manage surplus in cash budget (Smit and Trigeorgis, 2012).
Monitoring of cost: All the expenses and cost of the operational activities are to be managed on monthly basis and also to get best possible credit period deals from suppliers.
Management of inventory: For the better management of cash flow in business, it is essential for the company to manage its inventory turnover period (Weaver and Weston, 2007). It assists to avoid overdue payment and management of inventory in business as per the requirement.
Different business ownership structures and Roles and accountability of owners and managers in decision making
There are three kinds of business structure such as sole proprietor, partnership and limited company. All there are having different governance, legal and regulatory requirements. However sole proprietor do not follow any legal formulaties and other entities have to follow the rules and regulation as compared to other structural bodies. For limited companies, it is required to prepare financial statements as per the guidelines of IFRS. On the other hand, the partnership firm requires to prepare individual partner's account (Murphy, 2001). By partnership firm, it is required to have a deed that will include the terms and condition of business. In such kind of firms, active partners have the responsibility to manager the work on the other hand nominal partners do not have any responsibility. However, the limited companies are owned by government as well as public. In addition to that, financial statements of such companies are to be prepared as per the accounting standards i.e. GAAP and IFRS. Further, in the limited companies shareholders have all the rights regarding business affairs and decision making.
In case of sole proprietorship business no such legal laws and regulations are present where business can easily carry out operations and it is not required to comply with the legal guidelines. Further, public limited company has to comply with accounting standard which are IFRS and GAAP. It is required for companies to comply with the overall guidelines developed by the government. Apart from this in case of partnership business not only commercial transactions are recorded but those associated with partners are also undertaken. Further, in case of business such as sole proprietorship and partnership owners of the business can take decision for their personal benefit and interest of others are not considered (Weaver and Weston, 2007). On the other hand, in case of Limited Liability Company it is required for directors to take each and every decision in favour of shareholders and other individuals associated with the company. Therefore, in this way the three different business ownership structures differ from each other in the form of legal regulations. Business like sole proprietorship is free from legal laws and no regulations are required to be followed (Annamalai and Jain, 2013). On the other hand corporate governance of limited company is totally different which takes into consideration different areas such as carte of all stakeholders, ethical functioning, respect for workers, respect for human rights, respect for environment, activities of social and inclusive development etc. Further, in case of sole proprietorship and Partnership Company no such corporate governance policies are present
Evaluation of methods for appraising strategic capital or investment projects
The investment appraisal technique are used to asses the viability of investment projects. These are also called as investment appraisal techniques. Internal rate of return, Net present value, Payback period and Profitability index are the major techniques to assess the investment projects (Weaver and Weston, 2007) The famous techniques of investment appraisal is Net present value as it considers time, value and money of a project.
The report above described the importance financial information in decision making process. It has been witnessed that internal and external users uses financial information to promote their decision making. The report concluded that ratio analysis is used to interpreter the financial information that is helpful in making strategic decisions that are directly linked to the growth of enterprise. Moreover, the financial statements are used to asses the financial health of company and are known to assess the financial performance of business in the market place through competitive analysis.
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