Financial Management

Introduction and Background of Financial Management

There are two very important areas of Financial Management which are managerial finance and corporate finance. Managerial finance is a significant branch of financial management that involves managerial implications of financial techniques. Moreover, the focus of financial management is on financial assessment rather than on financial techniques for managerial decision making. (Gitman, 2003) Corporate Finance focuses on corporate financial decision making. The basic objective of corporate finance is on maximizing shareholders and corporate value. The basic difference between managerial finance and corporate finance is that managerial finance is concerned with the managerial financial decision making of all the firms while the corporate finance focuses on a single corporate at one time. One of the most common examples of corporate finance is Capital Budgeting. (Harvey, 1997) In this paper, there is a discussion on different financial management topics and terminologies. In the first section, an argument regarding financial data, its reliability with accounting standards is made. Then this discussion is followed by the financial data analysis tools and techniques. Second section covers important discussion of budget and its related topics. It also covers a brief overview of risk management. Then the final section covers some important topics related to accounting rate of return, net present value, internal rate of return and break even analysis etc. In the end, paper is concluded with recommendations and it also includes bibliography and references.

Learning outcome1:

Section 1 topic 1
Financial data
Financial Data of a corporation could be defined as a data on firms performance in terms of operating profit, assets, liabilities and profits in a fiscal year. Some important facts and figures are discussed in the financial data of the company to assess and to make recommendations to the corporations current positions in financial performance. Reliability of Financial Data The reliability of data depends upon techniques for data collection, and data analysis. For significant and result oriented financial analysis, reliability and accuracy of financial data available plays the key role in decision making and financial projections. Financial decisions are very important in an organization as all the stakeholders value is directly associated with the financial management of an organization. Without accurate or reliable availability of financial data, the decision making could be in the wrong direction and that may lead the firm in a financial crisis. The firm should take effective and efficient measures to ensure the reliability of Financial Data.

Accounting Standards
Accounting standards are the defined rules and regulations for accounting systems. In some countries, these standards are designed by the government, while in other countries, any other institute which is an expert in the area of accountancy and finance make accounting standards. (India Study Channel, No Date)

Accounting standard board (ASB)

It determines and identifies those areas where accounting standards and rules are needed to be formulated. This board is assisted by the government, study groups and different institutions etc. (India Study Channel, No Date)

International accounting standard board (IASB)

It is an autonomous body operating in London UK which make international accounting standards. More importantly, it is privately funded and privately assisted organization.

General accepted accounting principal (GAAP)

It is a standard criteria or framework regarding guidelines financial accounting principles and practices. It is also referred as accounting standards. It is characterized by standard rules and procedures for accounting across the globe.

Institute for public sector accounting standard (IPSAS)

Public sector entities around the world use IPSAS rules and standards to devise and make financial statements. It is a system which is especially designed for public sector and it is efficient for public sector.

Validity of financial data

Validity of Financial Data refers that the phenomenon selected for data collection is accurate and efficient. Also the results of deducted from data analysis are true and effective. Moreover, a financial data is said to be valid if the results gathered can be generalized. The importance of data validation and data reliability has already been discussed above.

Timely: Financial statements should be published in March or December?

It is important to note that there is no standard rule for timely publishing of financial statements. It depends on company financial objectives, government regulations or requirements (tax returns) or shareholders interests. Some corporations publish their financial statements in March while some organizations publish in December. It is not either good or bad to publish financial statements in March or December.

The whole performance of the company is indicated in the figures of financial statements?
The above statement is true because all the important and significant aspects of performance of the company are stated in the financial statements such as assets, liabilities, owners equity, common stock, profits and losses and depreciation. All these financial figures do not provide an indication of companys performance in the past but also provide a picture of the future. The figures of financial statements can be used to forecast and predict the future performance of the organization to achieve its objectives. These figures could be used to make some strategic decisions regarding companys performance, objectives and policies.

External auditor
An external auditor is an audit, accounts and finance professional who does not belong to the organization and is an outsider whose objective is to assess and audit the companys financial and accounting performance. An external auditor also assesses and diagnoses the errors and frauds in financial statements and balance sheet. External auditors are normally from

government, other companies or any other legal entity or organization. External auditors provide an unbiased financial view of the company.

Auditing practice board (APB)

It is part of financial reporting council and its objective is to lead the development of auditing practices and procedures in England and Ireland. It ensures public confidence and establishes high standards of auditing. (Auditing practices board, No Date)

What are the rules and responsibility of external auditors?

An external auditor is an audit, accounts and finance professional who does not belong to the organization and is an outsider whose objective is to assess and audit the companys financial and accounting performance. An external auditor also assesses and diagnoses the errors and frauds in financial statements and balance sheet. External auditors are normally from government, other companies or any other legal entity or organization. External auditors provide an unbiased financial view of the company.

Organizational culture
An organizational culture is an important dimension of organizational vision, mission, values and leadership. Organizations do have cultures and organizations have developed a code of conduct based on their organizational philosophy and leadership. Organizational culture is important from auditing point of view because it may influence the auditing, accounting and financial systems directly. (Black, 2003)

Section 1 Topic 2
Analytical tool and techniques
Financial analysis tools and techniques play a significant role in financial management and financial decision making. There are different tools and techniques used for financial analysis. Some ratios are more proactively used to analyze financial performance of the organizations. These are liquidity ratios, profitability ratios, investment ratios, efficiency ratios, and comparative analysis of financial data etc.

The value of financial analysis

For significant and result oriented financial analysis, reliability and accuracy of financial data available plays the key role in decision making and financial projections. Financial decisions are very important in an organization as all the stakeholders value is directly associated with the financial management of an organization. Without accurate or reliable availability of financial data, the decision making could be in the wrong direction and that may lead the firm in a financial crisis. The firm should take effective and efficient measures to ensure the reliability of financial data and analysis.

Liquidity ratio
Liquidity ratio is characterized by assessing corporations short term financial performance. Current ratio, quick ratio and operating cash flow ratio are different kinds of liquidity ratio. In short, it is the ability of the firm to convert short term assets into cash in case of any uncertainty in the marketplace. The high liquidity ratios ensure the high the financial stability of the company.

Profitability ratio
Profitability ratios estimate the firms capability to generate earnings as compared to its expenditures and other costs during a specific period of time. Examples of profitability ratios are profit margins, return on asset and return on equity. High profitability ratio relative to competitors means that company is performing well financially in the marketplace.

Investment Ratio
One of the most famous examples of investment ratio is price/earnings ratio. It is not a good measure to assess financial performance but it is widely used by financial experts across the world. High investment ratio reveals the strength of an organization is making investments rapidly and timely. Another investment ratio is earning per share.

Efficiency ratio
Efficiency ratio presents that how well a company is utilizing its assets and liabilities internally to maximize returns and to achieve organizational objectives. Some examples of efficiency ratios are accounts receivables turnover, fixed asset turnover, sales to inventory and sales to net working capital etc. An increased efficiency ratio means enhanced profits and financial performance.

Comparative analysis of financial data

Comparative analysis of financial data includes comparative analysis of financial statements of different organizations to benchmark and assess financial performance of the corporations.

Limitation of comparative ratio

The basic limitation is using comparative analysis is that different corporations use different accounting standards. Therefore, the results are sometimes contradictory or may cause misunderstanding of companies financial performances.

Section 1 Topic 3
Comparative analysis
Comparative analysis are the compare between the ration of the two company which tels us after the comparison that which ratio is good for which company.

Section 1 Topic 4
Limitation of financial ratio
There are different drawbacks associated with different financial ratios. For example, in case of liquidity ratio, some assets or elements in the balance are different to be convertible to cash quickly and these elements may have different or uncertain liquidation values. Some problems associated with financial ratios include ratios are subject or limited to accounting methods (Different accounting standards dilemma), some ratios are not meaningful in their selves, while some ratios may require a reference point.

Depreciation
Depreciation can be viewed in two perspectives. First perspective refers to decrease in the value of assets due to wear and tear. Second perspective is that we could allocate costs to the usage of different assets.

Transparency
Transparency refers to lack of hidden agenda or data or some information. In transparency, all the stakeholders have easy access to all the information. Transparency is important for integrity and reducing corruption in the organizations. Financial statements and Balance sheets of organizations are supposed to transparent to the other stakeholders such as governments, corporations, and customers etc.

Interpretation Ratio
Different ratios could be interpreted and different results could be estimated or obtained by interpreting the financial ratios in different perspectives.

International Norm
The interpretations of financial ratios discussed in the previous section are an international norm. But firms may customize the norms as compatible with their organizational cultures.

Evaluation of stock
The above different ratios are also widely used for evaluation of stocks such as return on assets and return on equity etc.

Industrial Norm
Sometimes, there is a difference between international and industrial norms. Industrials norms are customized according to the local or domestic values of the industry.

Internal and external stake holder

Internal stakeholders for the corporation include employees, volunteers and donors etc. External stakeholders of the company are its customers, competitors, society and shareholders.

Learning outcome 2:

Section 2 Budget Topic 1

Introduction and definition of Budget
It is a list of planned expenses and revenues which a company maintains to manage its financial performance. It is actually a planning for spending, earning and saving. It provides revenue as well as expenditure forecasting. (Sheffrin, 2003)

Why budget is important?

Budget is important because budget plays are very strategic role in forecasting and planning for achieving organizational objectives. A well planned budget ensures efficient financial performance to reach organizational mission.

Budget tools
Zero Base Budget It is technique in which the traditional budgeting process is reversed. Traditionally, increases were justified by departmental managers and amount already spent was sanctioned. In zero base budgeting, all the expenses and functions of all the departments are reviewed and assessed rather than only notifying the increases. (Small Business Accounting Guide, No Date)

Incremental Budget
Incremental budget is prepared on the basis of previous budgets efficiency and performance and incremental amounts are added to the new budget. It is the traditional way of budgeting. (Tutor 2 U, No Date)

Budget and financial Constraints / or problems

There are different kinds of budget and financial constraints or problems. One of the most important problems is principle agency problems. It refers to the difference of objectives or goals mismatch between the shareholders and managers of the company. Managers may have different objectives and shareholders basic objective to maximize their value. The conflict and dispute causes several financial and budget problems such as wrong budgeting, wrong financing and investing decisions, and dysfunctions. The managers could be motivated in the organization to achieve shareholders objective by increasing their stakes and aligning their objectives with the shareholders objectives.

How to increase the sales?

Sales can be enhanced and increased by customer focus and efficient customer relationship management.

Seasonal stock in bulk

Seasonal stock in bulk incurs extra expenditures on the firms budgeting. Efficient inventory handing and inventory management skills must be implemented to solve the above problems.

Customer loyalty
Customer loyalty refers to intentional repeat purchase and recommendation to others. A customer is said to be loyal if he makes intentional repeat purchases and recommends our company to others.

Stock accumulation
Stock must be accumulated but there should be optimal quantity of inventory or stock to meet the needs of customers. It is because extra stock or inventory incurs extra costs in the form of inventory management and inventory handling costs.

Indirect cost
These are the costs which are incurred indirectly and these costs have impact on the budget of the organizations. Some examples are: providing carriage outward facility to customer by a discount store or cash and carry store.

Debtors
Corporations may sell goods and services to their target customers on credit. In this particular case, companies become debtors to customers.

Marketing technique, awareness to the customers

The more the companies are aware of a brand, the more they will purchase that product or service. Awareness does not mean just knowing but it means a complete comprehension of benefits. Companies efficient marketing communications in the form of advertising and promotion increases awareness of a product or service.

Section 2 Topic 2
Strategic Objective of the company:
The strategy of a company is designed under the light of its organizational philosophy, visions, missions and leadership philosophy. Leadership influences organizational philosophy, visions,

missions and organizational objectives. Strategic objectives refer to what the company wants to achieve in the marketplace using a strategy. Therefore, leadership philosophy shapes the strategic objective of an organization in the marketplace.

Budget outcome analysis against organization objective

Budgets are analyzed that if these are designed to exactly according to the organizational objectives or not? If a budget is against organizational objective then it is modified because it is a threat to the organization. Organization is good to go if the budget is compliant with organizational objectives, vision, mission and philosophy.

Finance and business plan

Finance and business plan is designed to meet the financial and strategic objectives of the organization in the marketplace such as investing, financing and capital budgeting decisions to earn revenues and profits in the market. The basic objective of the business plan is to gain a sustainable competitive advantage in the marketplace relative to competition.

Lock the strategic objective through finance to the budget

Financial figures and facts stated in balance sheets and financial statements are important indicators to predict organizations future in the marketplace. Finance provides means for go or no go decisions for organization to reach its strategic objectives. Finance and budget track the way of organizational success.

Section 2 Topic 3
Variance Analysis
Variance analysis is conducted to assess the risks associated with the investments. The more the variance in returns of investments or portfolios, the more risky is the project. Variance analysis is an efficient tool for financial decision making and portfolio management.

Tax
A tax is a financial charge which is enforced by the government or legislative bodies on the businesses and individuals of an organization. Revenues from taxes are spent for social welfare and for developing the economy.

Stock
There are two meanings for stock. Stock refers to inventory stored for customers. Companys share capital is also called common stock.

Share value
Share value refers to the value of common stock in the marketplace. Share value could be at premium, par or discount depending on the companys performance and financial stability in the marketplace.

Land
Land is the fixed asset of an organization which is used as a factor or production or to facilitate the business process.

Machinery
Machinery is used for operations or to facilitate operations in the organization. Almost all the organizations reduce the value of machinery in the form of depreciation expense.

Finance and business plan

Finance and business plan is designed to meet the financial and strategic objectives of the organization in the marketplace such as investing, financing and capital budgeting decisions to earn revenues and profits in the market. The basic objective of the business plan is to gain a sustainable competitive advantage in the marketplace relative to competition.

What resources are necessary to achieving the objectives?

An organizations core capabilities and competencies are necessary to reach organizational objectives in the marketplace. A core capability is a competitive advantage which a firm has in the market place. A core competency is a unique skill which a firm may have relative to competition. When both capabilities and competencies are utilized efficiently, the organization reaches its objectives.

Approach to the market

Those companies have effective approach to market which have efficient marketing channels in the marketplace. A marketing channel may be direct or indirect depending on the intermediaries involved. Supply chain management systems of organizations become competitive advantages in the form approach to market if these systems are managed efficiently.

Analyzing the market situation

The best way to analyze the market situation is using Porter five forces or industry analysis. Porter five forces include bargaining power of customers, bargaining power of suppliers,

competitive rivalry, threat of substitutes and threat of new entrants in the marketplace. Some other measures used to assess the market situation are PESTEL analysis and SWOT analysis.

How to control the Costing system?

Costing system could be controlled efficiently by management and expertise. Mismanagement incurs extra costs and expenditures to the company. The company should work out to minimize its variable costs and indirect costs to increase efficiency. Moreover, an efficient cost control system should be implemented to increase integrity and performance.

How to face the unexpected expense?

Unexpected expenses can be faced and control through efficient contingency planning. The corporation should be proactive in risk management and it should adopt efficient risk response strategies to face unexpected expenses and to minimize the adverse effects of uncertainty.

How to reduce /expenses system in organization?

Expenses system in the organization could be controlled by efficient and effective management. The company should identify its potential extra burdens or costs and should adopt effective costing system to reduce expenses in the organization.

Key Financial Indicators of Budget

The key financial indicators of budget include enhanced profit margins, reduced expenses, increased assets and decreased liabilities.

Key Financial Indicators of time line

The key financial indicators of time line include enhanced profit margins, reduced expenses, increased assets and decreased liabilities.

Gross profit
Gross profit refers to the profit of the company without deducting interest and taxes. After deduction of taxes and interests, gross profit becomes net profit.

Efficiency of fund utilization

Efficiency of fund utilization refers to low fund consumption leads to more performance or productivity. It is essential for the financial performance of an organization to have efficient fund utilization.

High level execution, knowledge and Power of the Company

Level of execution refers to market leadership of the company and its ability to change the trends of marketplace and industrial norms. Today, almost all the companies have same kinds of competencies and capabilities. Knowledge has now become a source of competitive advantage in the marketplace. Successful organizations make efficient knowledge banks for free transfer of knowledge. Power of company can be defined as the ability of a company to influence the strategy or decision of other companies in the marketplace.

Purpose of the Gross profit

The purpose of earning gross profit is to increase earnings and revenues. Gross profit also enhances shareholders wealth and value.

Learning outcome 3
Section 3 topic 1
Breakeven point
It is point where a company is at no profit or no loss position. Above the breakeven point are profits while below are losses for the company. Breakeven point could be calculated as fixed cost divided by contribution margin. Contribution margin is calculated by deducting variable cost per unit from price per unit.

Net profit
Net profit is calculated after deducting interest and taxes from the gross profit. Net profit is disposable for the company.

Effectiveness of the profit

Profits are important for financial performance. High profits refer to efficient financial performance of the company. High profits also indicate enhanced shareholder wealth and value.

How to manage that money?

Money from profits could be utilized in two ways. This money could be reinvested in the form of retained earnings. Secondly, it can be given as dividends to shareholders.

Interpreting the Budget outcome

The budget outcome could be interpreted with efficient planning and financial performance resulted from the budget. Budget is an important stage and determinant for financial performance.

Variance analysis
Variance analysis is conducted to assess the risks associated with the investments. The more the variance in returns of investments or portfolios, the more risky is the project. Variance analysis is an efficient tool for financial decision making and portfolio management. The reasons for using variance analysis are 1. Risks are estimated efficiently in budget 2. It is most advanced statistical tool to measure risk and uncertainty 3. It provides the quantitative picture of financial performance 4. Accounting standards do not contradict with variance analysis or there is no impact of different accounting standards on variance analysis. 5. It is an effective tool for making projections and predictions.

Section 3 Topic 2
What are the professional methods by which financial proposal are judged?
There are different criteria to judge financial proposals and different methods are used professionally to judge financial performance. It depends on organizations perspective to adopt an efficient method for analyzing financial proposals. Firms use accounting rate of return, payback, net present value, internal rate of return and weighted average cost of capital to analyze financial proposals. The most reliable professional methods are internal rate of return and net present value.

Explain strength and weakness of financial proposal and give feedback?

The greatest strength of a financial proposal is effective presentation and financial viability to convince the shareholders and board of directors. Every aspect of opportunity must be covered or discussed with efficient risk management and risk response strategies and contingency planning should be brought under consideration. The weaknesses of financial proposal could be the inability to present the benefits associated with the financial initiative. Financial proposal must be devised and designed by keeping in view the target audience or the person to whom the proposal is supposed to be presented.

Explain the difference between the capital and revenue expenditure and give small example?
A capital expenditure is an expense which results in increase or acquisition of an asset or it enhances the earning capability of an organization. On the other hand, revenue expenditure is an expense which is required to maintain the earning capability of an organization such as maintenance of assets etc. For example, if a business purchases new machinery then it is a capital expenditure and if it maintains it and incurs some costs then it is revenue expenditure.

Section 3 Topic 2
Accounting rate of return
Accounting rate of return (also called average rate of return) is one of the simplest accounting measures used for evaluating financial investments and projects. Average rate of return is calculated as average net income divided by average net investment. It is the simplest measure

that is used in capital budgeting and financial decision making. Higher rate of return indicates projects financial viability and high returns. (Answers, No Date)

Net present value

It is one of the most efficient financial measures which are used in capital budgeting decisions. It covers both aspects of cash inflow and cash flow during a project. It can be calculated as the sum of Present values of all project cash flows and deducting the initial investment from this sum. The rate which is used to discount the cash flows is called opportunity cost or discount rate. Net present value depends on the financial principle which states money today is worth more than money tomorrow. While comparing two projects, the project with higher NPV wins the competition. (Nagalingam, 2000)

Internal rate of return

It is the second most efficient measure using is capital budgeting decision making. It compares the profitability of investments. It is simply referred as rate of return. As can be seen from name, its calculation does not involve environmental factors for assessing financial decisions. It is also supposed that the net present value of projects is also zero. (Chris Thron, No Date)

Breakeven point
It is point where a company is at no profit or no loss position. Above the breakeven point are profits while below are losses for the company. Breakeven point could be calculated as fixed cost divided by contribution margin. Contribution margin is calculated by deducting variable cost per unit from price per unit.

Margin of safety
The intrinsic value of stock and its market price is called margin of safety.

Contribution
The difference between selling price per unit and variable cost per unit is called contribution.

Semi fixed cost

Semi fixed costs are those costs which are fixed to a certain level of activity. These costs may increase or decrease after that level of activity.

Conclusion and Recommendations

From the above discussion, we have discussed some important points regarding financial management and its terminologies. Financial management is the backbone of an organizations performance and it is way to reach organizational goals. An organization needs to implement a strong financial management system to manage organization and its direction effectively and efficiently. Decisions regarding financial projects and proposal are important but in the end we would like to make some recommendations for financial performance and effective financial management. The organization must establish an efficient costing system to manage financial performance and to control expenses The organization should always use Net Present value for assessing capital budgeting decisions as it is the most accurate and most reliable measure for assessing financial performance.

 The organization should be a champion in knowledge management as the knowledge has now become one of the strongest competitive advantages which a firm may have in the marketplace.