The understanding financial data, and developing and making judgements on proposals against strategic objectives - Essay Example

? Table of Content Introduction 2. International Financial Reporting 3. Interpretation of Accounting Information – Public Limited Companies 4. Budgeting and Organisational Objectives 5. Investment Appraisal Techniques Financial Management 1. Introduction: This module aims to understanding financial data, and developing and making judgements on proposals against strategic objectives. It will give learners a foundation in financial techniques and principles applicable to the strategic management process. In this module we observed the role played by the finance and accounting function in the operation of a business. We recognized the following main functions: The raise of funds or financial management The role of financial reporting and The budgeting and organisational objectives. Financial management is a division of the finance and accounting purpose i.e. concerned with the financing of an industry’s activities. Finance is usually raised through loan capital, share capital and state finance or through inside generated funds. This report is prepared for Roberta Kelly and providing good budgeting plan to her business. It is designed to give the learners a chance to investigate the principles that support the financial decision making procedure and how they are applied into business. It is an international module providing a broad overview of financial values for all learners and a base for additional in depth study of finance and accounting. The report consists of International Financial Reporting, Interpretation of accounting information, Budgeting and Organisational Objectives and Investment appraisal Techniques. 2. International Financial Reporting: International Financial Reporting Standards (IFRS) is a group of accounting standards build up by a sovereign, not-for-profit business called the International Accounting Standards Board (IASB). “The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting” (Definition: IFRS (International Financial Reporting Standards 2008). Financial reporting is the arrangement of financial data in a form that is helpful to interested parties. It includes the collection and presentation of data for utilize in management accounting and financial management. 3. Interpretation of Accounting Information – Public Limited Companies: For the comparison study and understanding of the Transportation sector we have chosen the two companies i.e. 1. MET Plc 2. KGL PTS. Both of the companies are well established in the transportation sector and they are diversifying their business worldwide. Marwyn European Transport Plc is newly established company in the transportation sector; it is formed by the leading Transport industry executives to exploit the opportunities in the European transport industry. They are now focusing on the German bus and coach industry and presently operating 250 buses in Germany. The MET is established as a wholly owned subsidiary company of the MMP (Marwyn Management Partner Plc.). The board of directors of the company has a belief on the attractive investment opportunities in the public transportation of the European countries and so they are willing to operate the business by keeping the favors of the stakeholders. Initially they are targeting the largest bus markets in the country. KGL Passenger Transport Services (KGL PTS) in Kuwait, a supplementary of KGL Holding, was recognized in 2005. Being the showpiece of KGL Holding’s Passenger Transport Management Company, the KGL PTS has developed themselves as one of the most important passenger travel service companies within Kuwait and Middle East. As they are offering different means of carrying to suit the necessities of customer both publicly and commercially, they are still leading the sector. The head quarter of KGL PTS is in Kuwait and they are operating in Sharjah, Abu Dhabi and in the United Arab Emirates (UAE). KGL PTS’ most important services include the carry of passengers through buses whether it is the national or international line and also the personal (private) taxi and limousine operations. As the KGL PTS is a ‘customer first’ company, they are dedicated to offer secure, trustworthy, and economy voyage experiences for its clients and customers through its diversified transportation methods. The obtaining of the financial data is done by searching their websites and downloading the annual reports. But the assessing of financial data is not an easy thing as it is difficult to understand whether the company updated the fake or actual data. The fraud data increases the risk for the auditors of the company, so a hypothesis method is used to reduce the fraud risk. Some non-financial research methods are widely accepted in order to reduce the fraud risk and assessing the validity of the financial data. The hypothetical method involves the normal research methods like sampling, analyzing the data etc. In the financial report it is clear that, “the parent company’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error” (Supply Chain Management 2010). The parent company of MET is used to assess the financial status of that particular company, I the report they have stated that “MMP is a corporate vehicle launched to pursue acquisition led growth strategies. The Company identifies and works alongside management teams with proven sector expertise to deliver capital value through the execution of its “buy and build” strategies. MMP offers its management teams the kind of support normally available only too much larger companies” (Interim Consolidated Financial Statements (Unaudited) for the Period from 15 October 2010 2011, p. 2). There are some tools and techniques which can be used for the analyzing of the financial reports they are as follows, Cross sectional analysis Time series analysis Cross sectional cum time series analysis The brief explanation of these techniques is given below: Cross-sectional analysis: this method is known as known as inter firm comparison. This method helps in analyzing financial uniqueness of a venture with monetary characteristics of another similar venture in that particular period. This is turned as a meaningful analysis as the comparison is more effective. Time series analysis: This is also known as intra-firm comparison. According to this method, the association among dissimilar items of financial declarations is recognized, comparisons are made and outputs obtained. The bases of the comparison are the,  – Comparison of the monetary statements of dissimilar years of the similar commercial units. – Comparison of monetary statement of a particular year of dissimilar commercial units. Cross-sectional cum time series analysis: This mode of analysis is proposed to compare the monetary characteristics of two or more business firms for a particular accounting era. This method is likely to enlarge such a comparison over the time (year). This approach is considered as the most successful in analyzing of financial statements. By comparing the financial data of the both company, it is very clear that the KGL PTS is the better company with greater financial performance. The most important thing is that Roberta can adapt the method of KGL PTS’s financial report as an example of a wealthy financial statement. Roberta’s intention is to aware that there are a number of large PLC’s within the transport sector, and would like to understand these businesses better and comparison study of these two financial statements will help completely. Performance audit of each of the organizations, which analyses financial statements and assesses the validity of the data available, have done to the best possibility and Robert’s business can be better if follows the KGL PTS’ s method. 4. Budgeting and Organisational Objectives: Budget is a financial plan designed for the future prospects. Financial constraints prevent the organization from achieving the objectives / targets. “The usefulness of these tools is that they provide a clearer view of “what is” and “what is possible.” It puts your current situation and your choices into a larger context, giving you a better way to think about where you are, where you’d like to be, and how to go from here to there” (Budgets, Financial Statements, and Financial Decisions n.d.). If the organizations have a well defined and planned budget, the company can achieve the target in the long run without any constraints. Depending upon the cost and other factors, the organization can effectively plan the budget. There are various budget techniques. In every business, constrains and targets are interrelated. For the smooth functioning of targets achievement, there should be a clear financial plan and budgets which can identify the risks and help the organization to stand in the market. Roberta Kelly is an owner of three bus companies, 2 coach firms and 6 taxi businesses. Her businesses have grown across the north east of England over the last three years. And she thinks she desires to recruit extra people to assist her with the financial management of the company. “In very large organizations, the structure generally matches the finance and accounting responsibilities of the firm. The operation of budgetary control can produce a more efficient and effective management control system. It also carries the potential problem of encouraging functional insularity to the detriment of the firm as a whole” (Needle, 2004, p. 595). A good business plan is essential for three main reasons. It provides business owners a present evaluation of the business in addition to a roadmap for the prospect. It assists a business develop, both physically and through external funding. It is necessary to have a modern business plan so as to secure financing, ranging from an overdraft service or bank loan to business enterprise capital funding. Finance department’s carry on to be undermined by a lot of the same troubles: budgets are not aligned with plan, financial reporting procedures are slow and difficult, and key business information is not accessible rapidly enough to decision-makers. The use of corporate performance management method is considered as the best practice in addressing these problems. Following are the good budgeting plans for the Roberta’s business; Recognize and plan your performance for the period in question with the staff. Decide what each of the costs will be, by category. Utilize previous invoices or budgets as a guide. Assess what the sources of income will be, containing earned profits from services or sales, international funders, local funds and governments. Analyze the dissimilarity between the returns and expenses. Create alterations to balance the budget. Decide what costs need to be decreased and how it may require considering a different level of facility. Expand a plan for the unanticipated, for instance if funds do not arrive at the probable time, if there is a disaster, or if there are cost fluctuations. Present the cash flow statement and draft budget to staff, the key groups within the industry for inputs and endorsement. Being transparent regarding the budget with the key stakeholders assist to legitimize the organization. Create any alterations and confirm the revenue and expenses budgets, in addition to the timing of the expenditures and income. Addition to the timing of the expenditures and income. “A company’s objective budget is the overall financial plan showing expenditure of the available funds. It is driven by the aims and objectives of the organization as well as what the organization can actually accomplish” (Planning A Budget: A Davis Service Group Case Study 1995). In this case study, Roberta Kelly needs to accept the unexpected changes by planning a flexible budget. A detailed plan is needed to find out the fuel cost, cost relating to vehicles and other costs which will affect their business. As transport business is concerned, more concentration should be given on the release of fuel, which is one of the important frightening factors and the key issue. Fuel cost in the coming future is expected to be very high. Therefore, Roberta Kelly has to plan the fuel cost while implementing the budget. “It states that the fuel rice will be rise and higher tax rate needs to be given by cars that emit carbon dioxide” (As per the budget of 2011-2013). Financial Constraints and Organizational Objectives: Constraints can be meant as anything that stops from doing something. When a business is concerned, a lot of objections and constraints will come on the way particularly in the finance side. Finance is the life blood of every organization. Without a stable finance, a company cannot achieve their objectives. In this case study, the transport business problem is involved. Therefore the main issue related to a transport company is the fuel issue. As fuel price is increasing day-by-day, more finance is needed to cover the fuel cost. The next financial issue is on the preparation of the budget. Adequate finance is needed to prepare a well organized budget plan mainly for the auditors. So budget should be prepared keeping in view all these matters. Legal Requirements of Budget: There are many legal requirements involved once a budget is planned by the business. The budget is prepared by the budget officers estimating all the related costs involved in the budget. They have to consider the fuel cost and other related cost which are expected in the near future. A draft budget is prepared and is handed over to the legislature for any clarifications. The draft budget should include the projected cost, strategy and the policies. Once the budget is prepared, it is handed over to the board of directors for finding out any clarifications in this matter. The budget is discussed with the parliamentary committees. Work sessions will be conducted to discuss the pros and cons of the budget by the managing directors, finance personnel’s and other higher authorities. When it is approved by the members presented at the meeting, it is given for final presentation. Then the budget is taken to the implementation stage. The executives have the power to prepare the budget reports and they can change the budget if necessary. In the final stage, an independent auditor will check the contents of the final budget keeping in mind the objectives of the business. The above information shows that Roberta Kelly needs to broaden their financial information. She should have clear and accurate financial figures and other information related to accounts. There is a requirement of efficient employees like a finance manager, board of directors and auditor to help her in the preparation of budget plan. Accounting Conventions Related to Budget: Correct and accurate information are needed to prepare a good budget. For this, the company needs to have a clear accounting plan and principles. Accurate figures must be there to reach a conclusion about the budget presentation. In accounting convention, the business must rely on the “historical cost.” Historical data plays an important role in estimating the future cost. It gives a clear view about the cost which is expected in the near future. Consistent and reliable figures and information will be obtained with the help of the historical data. Correct measurement of monetary values need to be made. The budget cannot be made unless and until there is a clear monetary measurement. The business must be a separate entity free from all monetary issues. Reliable facts and figures needed to estimate the future budget. An important accounting convention relating to budget is the materiality. Material facts and information are needed to prepare the budget. Only with the materiality of figures the auditor can judge the financial performance of the company. The budget should focuses on: 1) Administration expenses 2) Transportation expenses 3) Fuel Expenses 4) Meeting and other related expenses 5) Audi-Visual expenses 6) Remuneration for the auditor Analyzing Budget Outcome Against Organization Objectives: An organization has specific and certain objectives. This helps in the smooth functioning of the business. With the help of a well planned budget, an organization can easily achieve their objectives in the short period. For this correct estimation of the cost and the related expenses are needed. The budget should clearly mention the vision, mission, values, business objectives, business strategy and environmental issues which include the strength, weaknesses, opportunities, threats and the competitor. Budgeting suggests information to create quality in meetings through reallocation, replacement, and choice. With a planned Budget, a manager must be able to achieve mission of the budget. Every organisation should be able to observe the vision and should be able to know-how the organization's values within the meeting. The business needs to analyse whether the budget is achieving the mission and meeting the objectives, determine where to invest the funds taking into account of the stakeholder’s needs and requirements, consider where the money spent will be more visible and allocate the fund there. 5. Investment Appraisal Techniques: Investment is an important factor of building or establishing a new business. Fresh assets like the equipments and the machines can enhance efficiency by reducing the various cots which are associated with labor and help in achieving the competitive advantage. The reserves in product expansion, study, exploration through wide research and the innovation of the new ideas can contribute to the immense opportunities in the new area and proficiency in the upcoming markets can boost to much exciting enlarge opportunities. At the similar time, you require to evade overstretching inadequate financial possessions or controlling your capability to follow other option. Deciding where to center the asset is a necessary element of building the majority of your prospects. Even an assignment or budget is not considered to produce revenue, but it should be related to the investment appraisal to recognize the best way to accomplish the aims. The works mainly elucidate the time value of money conception and apply it to troubles of savings appraisal in a definite world. The recreation of the supposition of assurance occurs in the subsequent two chapters. Here we think on the fundamentals as the system can be and is used in long-term and short-term savings assessment, in assessment of finance methods, considering monetary assets, risk managing etc. While considering in mind the time value of money, the various concepts that bare to be kept in mind are the net asset value, internal rate of return and the pay back. The various concepts have to be understood during the work. “The net present value (NPV) is described very fully both in principle and application and in how the decision rules are derived. Different sets of circumstances are introduced to show how the NPV approach can cope with the situations met in an imperfect world; Different sets of circumstances are introduced to show how the NPV approach can cope with the situations met in an imperfect world” (Chapter 2: Basic Investment Appraisal Methods n.d.). Time value of Money: Money or Cash has diverse value above time; owner of money can also use the money on utilization now or hold-up the expenditure by providing the money awaiting it is required for utilization. The remuneration for the wait in expenditure is the interest expected by investing. The sum of importance is needy upon the total of time and the rate of interest. So if one is aware of the certain prospect receipt of cash, there should be a sure value today, which we call the current value, which will be its equal. By getting today a sum of cash equivalent to the current value, the beneficiary would be uninterested among the upcoming receipt and today’s receipt. The variation connecting the two receipts is the time value, the payment for the passage of time. The present value of an expectation’s amount is also identified as the discount rate. The main techniques discussed for understanding the same are, Net present Value Internal Rate of return Pay back period Accounting rate of return Net present Value: The net present value is also known as the discounted cash flow method, “It is an application of a fundamental concept in economics and finance called the Time Value of Money, which, in turn, utilizes the arithmetic of compound interest in reverse. A dollar received in the future is less valuable than a dollar received today” (Kolakowski 2012). The procedures and the steps included in the NPV are, Decide all cash flows connected with a project or savings and their time (e.g., years, months or the days in which they take place). The cash flow associated has possibility to be both negative and positive, depending on the income and the expenditure. Establish a proper interest rate, also recognized as a discount rate, to take every potential cash flow to its equal present value (PV). Affix the PVs of all cash flows, both positive and negative. Internal Rate of Return: “The internal rate of return (IRR) is the rate of return promised by an investment project over its useful life. It is some time referred to simply as yield on project. The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash out flow with the present value of its cash inflow In other words, the internal rate of return is that discount rate that will cause the net present value of a project to be equal to zero. [Factor of internal rate of return = Investment required / Net annual cash inflow]” (Internal Rate of Return (IRR) Method in Capital Budgeting Decisions 2011). The easiest and the majority direct advance when the net cash inflow is equal each year is to separate the asset in the project by the probable net yearly cash inflow. This calculation will give way an aspect from where the internal rate of return can be calculated. Pay Back Period: This includes the total time taken for the returning of the amount, it identifies mainly the duration of the cash returning period, the pay back period can be calculated by dividing the necessary or the required investment by the net cash inflow. Average Rate of Return: ARR offers a rapid approximation of a project's value over its practical existence. ARR is consequent by decision earnings before taxes and interest. ARR is mainly frequently used inside when choosing projects. It can in addition be used to calculate the presentation and the viability of project and additional inside an organization. It is not often used by investor, and should not be used at all, due to the following reasons. “Cash flows are more important to investors, and ARR is based on numbers that include non-cash items. ARR does not take into account the time value of money — the value of cash flows does not diminish with time as is the case with NPV and IRR. It does not adjust for the greater risk to longer term forecasts. There are better alternatives which are not significantly more difficult to calculate” (Accounting Rate of Return (ARR) 2005). Appendix: Cash flow Year 1 -?80,000 Year 2 ?90,000 Year 3 ?100,000 Year 4 ?110,000 Year 5 ?120,000 Total cash flow - ?500,000 (?500,000*5%) /5 = ?5000k. Investment = ?5000k. Note; Financial statement of Marwyn European Transport Plc and KGL Passenger Transport Services are taken from the annual report of the period 2009 to 2010. Reference List Accounting Rate of Return (ARR). 2005. Moneyterms.co.UK. [Online] Available at [Accessed on 27 February 2012]. Budgets, Financial Statements, and Financial Decisions. n.d. [Online] Available at [Accessed on 27 February 2012]. Chapter 2: Basic Investment Appraisal Methods. n.d. University of London External System. Available at [Accessed on 27 February 2012]. Definition: IFRS (International Financial Reporting Standards. 2008. Search Seurity.co.UK. [Online] Available at < http://searchsecurity.techtarget.co.uk/definition/IFRS-International-Financial-Reporting-Standards> [Accessed on 27 February 2012]. Interim Consolidated Financial Statements (Unaudited) for the Period from 15 October 2010. 2011. Marwyn Management Partners plc. Print. Internal Rate of Return (IRR) Method in Capital Budgeting Decisions. 2011. Accounting for Management. [Online] Available at [Accessed on 27 February 2012]. Kolakowski, M 2012. NPV. About.com. [Online] Available at [Accessed on 27 February 2012]. Needle, D 2004. 4th Edn. Business in Context: An Introduction to Business and its Environment. Thomson Learning. Available at [Accessed on 27 February 2012]. Planning A Budget: A Davis Service Group Case Study. 1995. The Times 100: Business Case Studies. [Online] Available at [Accessed on 27 February 2012]. Supply Chain Management. 2010. KGL Holding. [Online] Available at [Accessed on 27 February 2012]. Read More