Importance of Strategic Management in Preparation of Financial Accounts - Report Example

Running head: Importance of strategic management. Importance of Strategic Management in preparation of Financial Accounts In APA Style Aruna Nemani Academia-Research.Com Abstract Recognizing the importance of Strategic Management presented in the Financial Statements, understanding the difference of budgeting and forecasting, knowing the effect of fiscal year implications in the financial reporting, importance of income statement, cash flow statement and balance sheet. Importance of Financial Statements The purpose of preparation of Financial Statements is to present a periodical review of the investment activities of a firm and the returns achieved through such investment in the most presentable manner (Jain & Narang, 2006). The financial statements thus prepared are useful for many outsiders like Equity Shareholders (also known as the owners of the firm), Creditors, Investors, Employees, Government, Research Scholars, Consumers and Managers inside the firm who deal with the firm either directly or indirectly. Hence, they need to be reliable. Reliability of such statements is put to test when they are prepared in accordance to the guidelines laid in GAAP formulated by the CPA. For this purpose, it has mandated the preparation of Income Statement, Balance Sheet, Cash Flow Statement and the Funds Flow statement. It also stresses on the Auditors’ report, Directors’ Report and the footnotes which may give a better understanding about the non-monetary changes taking place in the firm. These guidelines explain: 1. The Importance of Strategic Management in Financial Statements, 2. A Classic example of importance of Strategic Management, 3. The difference between budgeting and forecasting, 4. The effect of fiscal year reporting, 5. Importance of Income Statement, Cash Flow Statement and Balance Sheet. Importance of Strategic Management in Financial Statements: The insider tips, Business continuity plan and footnotes, which represent strategic analysis of the firms’ management, are prepared in tandem to the financial statements and they appear in the footnotes and annexure to the four statements. This type of presentation is to be done in the lines of Strategic Management wherein the golden rule is that, the firm may forego some opportunities or incur certain losses to ensure its own healthy longevity. Strategic Management stresses on the need of minimizing the squeezing of cost efficiencies which may be depicting a better picture in the near future but are comprehensively detrimental for the future of the firm. Accordingly, practices of downsizing, delayering, re-engineering and cutting down of quality improvements which are usually attempted by the firms just to report growth in the concern particularly at times of minor recession ( like the one which we are facing now) will show their negative effects in the long run. To ensure that the third parties are not duped of such wrong reporting, strategic management of Financial Statements is important wherein explanations must be given to the following points. Threats faced by the firm due to increased competition Threat of availability of substitute products in the near future Threat of intense competitive rivalry, if any to the firm Threat of consumers winning over the seller that the markets may change from oligopoly to perfect competition etc. and the RFM analysis Reduced cost efficiencies due to certain internal cost reduction operations (Porter, 1979). The above points should be necessarily reported for adhering to the policy of transparency in financial reporting. The Income, Cash Flow, Funds Flow and Balance Sheet are not enough to disseminate all the required information. They play a vital role in financial reporting only in combination to the strategic reporting which is usually found in the foot notes of the financial reporting. In order to make prudent investment decisions, the users of the financial statements need to take out time and go through the strategic information presented in the footnotes rather than just assessing the profitability of the firm by going through the net profit figures reported in the financial statements (Riggs, 2007). For example, in one year, a firm may report a profit of 20% in comparison to 10% which was achieved last year. At the same time, it may report decrease in expenditure and increase in income of the firm in the Cash Flow Statement. If one just goes through these two statements, he/she may conclude that the firm is growing which may not be true. Instead, analysis as to why the expenditure decreased and what is the reason of increased income, is it recurring type or not and the opportunity cost incurred for gaining such income should all be taken into account. A Classic example of importance of Strategic Management: One such classic case has occurred just few days back involving two major internet giants Microsoft and Yahoo. Yahoo who was unable to retain its market cap in the recent times was threatened of a hostile bid from Microsoft for a deal of 44.6bn compensation (i-Tech. 2008). If only this deal was affected, strategic impact is to be felt on three companies in the following ways. 1. Microsoft would emerge the leader due to cost efficiencies which may not be effective in this year of financial reporting due to the huge cash outflows for investment into Yahoo. 2. Yahoo would receive huge cash bailment and report increased profits but with a dagger in the BCP. 3. Google, the silent spectator would resort to fraudulent reporting only if this particular information is not disseminated in its financial reporting. However, Yahoo was clever enough to evade the hostile bid even at the cost of bad financial reporting this year to go further with innovation of its own brand. This strategic planning if sustained would surely lead Yahoo to heights some day. In the same way, increased reporting of incomes through sale of fixed assets, change of accounting policies followed, and various strategic decisions taken by the management in the due course of business are to be carefully analyzed by the users before they invest in such firms. The difference between budgeting and forecasting: The budgets give a speculative view of the expenditure to be incurred for investment in the near future and forecasts estimate the cash flows arising due to such investment decisions, respectively spell the future plans of the company (Quicken, 2000). The effect of fiscal year reporting: Earlier, importance was given to fiscal year reporting that the companies would postpone their increased expenditure to the next financial year just to avoid loss reporting. But, in today’s world wherein, every minute counts in the case of investments, such postponement may be highly devastating. So, irrespective of the financial year whether it starts with the onset of calendar year, April – March, October – September, (in accordance to the practices followed by the firms in that particular country), the firms are making investment decisions with due reporting in the footnotes with the presumption that the reader goes through all the fine print. Strategic management gets its due recognition only when financial statements are prepared in a consistent way. Actually, they give the concrete evidence of the success of the strategic management and as such, their study is also very important. Importance of Cash Flow, Balance Sheet and Income Statement: Income Statement: The Income Statement records every material fact to be shown under convenient heads to give full details of such expenditure/income. Previous years adjustments are recorded separately because the previous books cannot be reopened. Cash Flow Statement: The Cash Flow Statement differs a lot in comparison to the Income Statement that it records only the cash inflows/outflows whether material or not and ascertains the correct balance of cash in hand/bank at the time of financial reporting. Balance Sheet: It is a statement of sources of funds and application of funds and can be prepared only after successful preparation of the Income Statement. It is popularly used to analyze the comprehensive functionality of the firm by extracting various Accounting ratios by the information presented in there. One such important ratio is the PE multiple which depicts the strategic efficiency of the firm. Conclusion In this way, both the techniques of reporting – strategic and monetary are intermingled with each other and the users of such reporting need to understand the importance of strategic information presented in the footnotes failing which, they may lose money due to bad investment decisions. Particularly at times of minor recession, like the one we are going through, this paper is an effort to inspire you to have a comprehensive understanding of both the monetary and non-monetary aspects presented in the reports to save your hard earned money in profitable enterprises. Citations: Jain and K.L. Narang, 2006. (15th Edition). Advanced Accountancy. Financial Reporting. Pg No.-II – 903-924, II-1122-1132. from Kalyani Publishers. Henry Riggs. 2007. Understanding the Financial Score. Footnotes to Financial Statements. Pg. 25. Retrieved 16th Feb,2008, from Morgan and Clay Pool Publishers Website :http://books.google.com/books?id=z6zjIxnE7eYC&printsec=frontcover#PPA25,M1 Michael E Porter. 1979. Wikipedia. Porter’s 5 Force Analysis. Retrieved Feb. 16th,2008, Website http://en.wikipedia.org/wiki/Porter_5_forces_analysis i-Technology News Desk. Feb. 1st, 2008. Ajax World Magazine. Microsoft Bids $44.6BN for Yahoo!. Retrieved 16th Feb, 2008, Website http://ajax.sys-con.com/read/494428.htm Forecasting vs. Budgeting. Sep. 9th , 2002, Intuit. Quicken 2000 for Windows. Retrieved Feb.17th,2008, Website http://www.thefreelibrary.com/Gary+Hamel:+the+search+for+a+new+strategic+platform-a099733307 Read More