Financial Aspect within any Organisation - Research Paper Example

Financial Aspect within any Organisation Roles “The fundamental success of a strategy depends on three critical factors: a firm’s alignment with the external environment, a realistic internal view of its core competencies and sustainable competitive advantages, and careful implementation and monitoring” (Porter, 1996). External environment usually relates to factors such as inflation, exchange rate risks, political risks and all those factors that are deemed to be outside the control of an individual organisation. Internal review includes factors that are usually within the control of the organisation such as labour, product quality and many more. Financial aspect within any organisation is considered to be an internal review and the financial managers are the ones responsible for financial planning in such a way that it is embedded within the entire strategic plan to give favourable results for the organisation both in the long-run and the short-run. Financial managers are supposed to manage a firm’s resources so that it can meet its goal and objectives. The major aim of a financial manager is to examine the financial data of any given organisation and to give recommendation to the top management regarding strategies that would improve the financial performance of a company. The different role of a financial manager include capital budgeting decisions, capital structure decisions, providing tactical advice over merger and acquisitions, dividend policy decision and all other investing decisions that may involve portfolio management as well. All these different roles and functions merge together to form the basis of any strategic plan and these financial matters help in understanding the growth that a company will make with reference to its profitability and long term growth. Sales Forecast Forecasting is usually used by companies to estimate future results. Although these estimates are not 100% accurate, they usually give an insight to many issues such as an idea about the future drawn by using different assumption and techniques. Sales forecasting is one such technique whereby any company predict the volume and the amount of sales that may be achieved by different sales staff through different regions in which the company operates. There are three different approaches that are adopted in sales forecasting. These are: Top-down Sales Forecasting; it is a technique whereby the sales figure are planned by the top level management and these figures are forwarded to lower level management in form of sales quotas/limits/targets which the lower level management should attain Bottom-up Sales Forecasting; is an approach whereby these sales figure are put in by the employees responsible for the sale. The sales team forecast a target which they think they can sell and after this target forms the basis for the entire company’s revenue plan. Hybrid Sales Forecasting; is an approach whereby both the top-down and the bottom-up approach is used. The top management derives the sales figure at the corporate level whilst the sales staffs derive it at the operational level. Both these figures are compared together and any discrepancies between the two are henceforth amended. The benefit of using this hybrid approach is that it tends to eliminate any discrepancy or a biased judgment of sales and the both the top and the bottom level management work together for the success of the organisation. The hybrid approach produces variability and it also creates participation from the lower level management which as a result increases motivation. The disadvantage of this technique is that it consumes too much time of both the top and the bottom level management (Kahn, 1998). Credit Standards Credit standards are a set of standards that a financial institution or a company uses in to decide whether a particular credit can be offered to any given client or not. Usually these credit scores are determined using some statistical techniques such as FICO scores and many others. Credit standards are calculated using many different methods and assumptions and these techniques include assessment of credit history and financial soundness of any particular client. Companies do tend to change their credit standards, these changes are made in order to examine changes and to find out whether profits can be made via relaxation being given to the credit terms. The economic logic of changing the credit standards is to gain from additional profits because relaxed credit terms would result in enhanced profitability due to the fact that more people would be willing to buy the product of such an organisation. The phenomenon involves the comparison of profitability created by a reduction in the credit standards of the company. The leniency being brought in up in the credit standards would have an effect on the profitability of any particular company. This would be because the relaxed credit standards would attract more customers who would be buying on credit terms and in return this would increase the profitability of the organisation. The profitability in this case would only increase if the sales revenue generated from relaxing the credit standards would be higher than the bad debt losses and the additional servicing costs that would be rendered because of such changes in the credit standards (Megginson et al, 2009). Callable Bonds “A callable bond is a bond that can be redeemed at the will of the issuer by the payment of a specified amount. Usually, the bond is not callable until a specified number of years after its issuance” (Kolb et al, 2007). Usually there are two types of options, one being the European style while other being the American style. The American style are more flexible in nature and hence they can be exercise at any time before the maturity date, the European options on the other hand can only be exercised at the date of maturity. Considering that the friend’s advice is based upon the American style option, the callable bond would definitely produce gains for me as an investor because if the company decides to call the bond prior to maturity, I would be receiving a premium payment on the purchase of the bond by the company, besides that I would have also received the interest payment till the time the company call back the bond. Companies usually tend to call back bonds when the market interest rates fall, hence in these circumstances, companies but back their issued bonds at a pre-determined rate and they get to re-finance at a lower interest rate. This as a result makes the company to avoid huge interest rate payment that would have been otherwise paid by the company (Kolb et al, 2007). Exchange Rates Usually the trading pattern of any given country determines its currency’s exchange rate but there are many other reasons that also add up together with the trading practice and constitute change within the exchange rate of any given currency. Inflation is one major factor that constitutes changes to the exchange rate of any given currency. A lower inflation rate is bound to have increased purchasing power as compared to other currencies, this reduced inflation in any given country helps in enhancing the value of that particular country. Political stability is also one of the major factors that may bring changes within the exchange rate of any given company. A firm and stable economy would attract increased investors, this as a result would pull funds from strong countries and the confidence in that stable economy would gradually increase. Public debt is another factor that can bring change to the exchange rate within any country. Large public debt would attract increased inflation and hence as a result would deteriorate the exchange rate of that country. Current account deficit also reflect poor exchange rates. A current account deficit would suggest that a country is spending more on its international trade rather than it is earning from there. This suggest that a country would be importing more and paying more in foreign currency rather than exporting more and receiving more local currency, this as a result would increase the supply of the local currency and this would reduce its value within the international market. Common Stock There are many different reasons that contribute towards the changes being brought upon book value per share of common stock in any given company. One of the major reasons of such change to the book value per share of the common stock is because of the sale of shares; this sale of shares would as result increase the total book value if the shares being sold are sold at a rate which would be higher than the existing book value per share. Redemption of shares may also cause severe changes in the book value of a share. If a company would buy back its own shares, this would decrease the book value of the existing shares and on the contrary if new shares are issued at a higher price than the one at which the earlier shares were issues, the book value per share would increase. The issue of new shares usually dilute the earnings of the existing shareholders; this is because the profits would have to be divided amongst an increased number of shareholders. Another way through which the book value per share can be altered is through the distribution of dividends. Dividends paid out would reduce the book value of the common stock. Mergers and acquisitions Operational synergy involves the bonding of people and processes within an organisation in such a way so that the company/organisation keeps on expanding to the efficiency being created by the people and the processes working out within any given company. Synergy refer to achieving results in such a manner that different range of skills and techniques are employed within an organisation to achieve dramatic results, these skills and competencies are different and rare when compared to other organisations. Operational synergy as a whole can be achieved between two firms when the two firms’ would already possess competencies that if combined together would be considered to bring great competitive edge because of their rarity. Managerial synergy is considered to be an efficiency theory in which two firms can be merged together in such a manner that one firm’s extra managerial expertise (that would be going wasteful in that organisation) would be employed in some other organisation where the managerial expertise and experience would be really low. This merger would as a result create effective managerial synergy within both the organisations since the less experienced organisation would be furnished with the excess managerial expertise and experience offered by the veteran organisation. Financial synergy is a result of a merger in which the basic aim is to achieve financial efficiencies as a result of using the advanced competencies of one another in such a way that the costs are reduced or the revenues increased. One major aim of financial synergy is to achieve economies of scale and this is usually achieved when the learning and expertise of one organisation is properly implemented in the other organisation which is being merged. In spite of attractive synergies there are certain reasons due to which a probable merger may not take place between two willing companies. One of the major reasons for such an action is because the merger might be creating a monopoly of that particular company that is getting merged, hence the government may force their way into such a merger and would disallow such an act. There are many different bodies that have been created to avoid such mishaps; the Competition Commission in the UK is one such example such bodies (Megginson et al, 2009). Failures Business failure refers to a company that has stopped trading because of its inability to make profits. Profit is the basic fundamental reason for which a company strives and when such reason is not achieved, it results in the cessation of the operation of that particular company. There are many different causes due to which such a business failure may occur. Political instability is one of the major reasons that may result in a business failure. If, for instance, a war erupts in any area of the world, it would be very difficult for companies to operate in those areas as the international trade also halts in war zones. The other reason that may contribute towards a business failure include, liquidity i.e. bankruptcy, recession, lack of expertise of management to operate, obsolescence of the product that is being offered by any given product, etc. A business failure cannot be usually predicted but there are certain techniques such as the Z score that can be used in some instance to predict business failure (Megginson et al, 2009). References Kahn, K. B. (January 01, 1998). REVISITING TOP-DOWN VERSUS BOTTOM-UP FORECASTING. The Journal of Business Forecasting Methods & Systems, 17, 2, 14. Kolb, R. W., & Overdahl, J. A. (2007). Futures, options, and swaps. Malden, MA: Blackwell Pub. Megginson, W. L., & Smart, S. B. (2009). Introduction to corporate finance. Mason, OH: South-Western Cengage Learning. Moyer, R. C., McGuigan, J. R., & Kretlow, W. J. (2009). Contemporary financial management. Mason, OH: South-Western/Cengage Learning. Porter, M. E. (1996). What is strategy?. Boston, Mass: Harvard Business School Press. Read More