Wal-Mart: Managing Finance - Case Study Example

Wal-Mart: Managing Finance Annotated Outlined Company Profile (Annual Report: Wal-Mart 2014) The online published annual report of Wal-Mart (2014) will be used to conduct the research. It provides detailed information about the costing, management accounting systems and other capital decision that have been undertaken by Wal-Mart. 2. Budgeting Process (Annual Report: Wal-Mart 2014) It is an effective source to obtain detailed information about the capital, budgeting and accounting systems that the company adopted to persuade its business process. (De-Almeida & William 2014) The statistical data and information provided in the article would be an effective source to understand the capital management techniques opted by the firms operating in retail industry. The information provided in the article is effective way to understand how the firms make use of its financials to structure its costs and budget in to obtain maximum profits. 3. Management Accounting Information system (Annual Report: Wal-Mart 2014) One of the reasons to use the annual report of Wal-Mart is that it provides detailed information and related data to the costing and accounting system of the firm. (Debarshi 2011) Management Accounting by Debarshi is an effective source to enhance understanding about the multi-faced approaches that are undertaken by the organization to manage it finances. It briefs about the essential traditional approach that the organization make use to design its budgets. Moreover, it develops understanding about the cost estimate, allocation, control, and planning and performance evaluations techniques that are taken by the organization in various conditions. One of the other major reasons that this source is opt for this research paper is because it provides core concepts regarding costing decisions and methods of the organization in a comprehensive manner (Vanderbeck 2013) It provides detailed information about the management accounting information systems that are used in contemporary business environment in the different industries. The information in the book about the management accounting information system that is used in the retail industry is also well briefed. It can be used as a base to understand the prevailing trends in the retail industry. 4. Costing Process (Debarshi 2011) It explains about the costing techniques focusing on its cost allocation to obtain cost-volume profits under different economic circumstances. Hence, the information provided in the book will be effective to understand budgeting process of Wal-Mart in different business scenarios and market conditions to sustain its profits (Vanderbeck 2013) The concepts and principles of the cost accounting are the basic foundation to understand the capital decisions of the firms. Thus, this book will be an effective source to develop in-depth understanding about the budgeting process and capital decisions of the organization. 5. Capital decision (Annual Report: Wal-Mart 2014) The data has been extracted from the financial statements to determine capital decision company undertakes. (Callahan, Stetz & Brooks 2011) . It will develop understanding about the how the income and expenses of the organization are affecting its budgeting plans, techniques the organization uses to keep its budgets on track to improve its profitability. The information provided in the book will allow determine how the budget plans and capital decision that the organization is taking to capitalize its operations profitable. Moreover, it will brief about the risk assessments techniques, costs and benefits on the basis of financial performance of the organization. The source is chosen because it will enhance knowledge and understanding crucial aspects of the capital decision that the organization in order to maximize its profits and returns on investment. 6. Capital Acquisition and Structure (Callahan, Stetz & Brooks 2011) The source provides brief information about the financial management concepts determining how the organizations make use of its capital resources, it allocation, budgeting and costing to sustain profitability of the organizations. The reason to opt for this source is because it elaborates about the functioning, adherent risks and consequences the firms encounter to management financial resources for its project. (Fabozzi & Drake 2009) It will develop understanding about the how the income and expenses of the organization are affecting its budgeting plans, techniques the organization uses to keep its budgets on track to improve its profitability. Company Profile Wal-Mart is the world’s largest American retailing company that runs a chain of discounted departmental stores across the globe (Annual Report: Wal-Mart 2014). The company operates in more than 5,200 stores across America, Europe, Africa and Asia. The operations of the company are divided into three major divisions that are Wal-Mart Stores US, Sam’s Club and Wal-Mart International. 2. Description of firms budgeting process Wal-Mart’s business model is focused on the low costing strategies. The company make use of flexible and static budgeting techniques to persuade its business operations (Annual Report: Wal-Mart 2014). The budgeting process and procedures of Wal-Mart are focused on lower business cost of capital. The volatile in the retail market is high; it is because of the intensified market competition in the retail industry. Currently, the budgeting process that the company depicts higher gross returns on investment that is based on the significant fixed cost of the total assets (79 percent) and the low gross profit margin (Annual Report: Wal-Mart 2014). The company collectively makes use of the real options techniques, Net Present Value and Internal Rate of return to forecast its decisions. Therefore, Wal-Mart mainly uses the flexible budgets in its business. In addition, the company sets objectives and goals that it aims to attain through identifying overheads costs and allocation of the capital (De-Almeida & William 2014). It is dependent on the forecasted demands that are based on the past sales and projections of the new products, season, consumer behavior and perception for developing budgeting processes. 3 .Management accounting information system The constant development and the changes in the global retail market plays a dominant role for the organization operating in the retail industry to choose appropriate management accounting information system. Wal-Mart is focused to ensure efficiency of its operation while maintaining low costing model (Debarshi 2011). Thus, the management accounting system of Wal-Mart have been constantly changed and upgraded according to the advancement in the information technology and business environment. Currently, the company emphasizes on Just In Time, Inventory Management and Economic Quantity Order techniques used in its management accounting system (Annual Report: Wal-Mart 2014). However, these management accounting systems of the company has been amended with the passage of time. Wal-mart is focused on the low costing strategies (Debarshi 2011). Hence, the adoption and changes in the management accounting systems of the company have been taken place time to time (Debarshi 2011). The determinant to prevailing changes in the management accounting system is dependent on the external factors that the company aims to anticipate. The company makes use of the Just-In-Time management system for its inventory control. It allows the company diverts its costs and allocate accordingly. Wal-Mart makes use of Just-In-Time Management to manage its inventory and focuses on accommodates that are high in demand. In addition, the company make use Economic Order to sustain the prices and keep control on its costs. It allows the company to sustain the balance between price and quantity due to which its goods don’t have to hold in the warehouse for a longer period. It makes use of the risk-free rate to determine the interest rate and opportunity cost. The inventory management is based on the assessment of the value of stock. It allows the company to measure and predict the valuation of the retail inventory. 4. Costing process The costing process of Wal-Mart is dependent on lowering the direct costs. The core competency of Wal-Mart is attained through its cost efficient supply chain management that allows the company to reduce its overheads and direct costs (Vanderbeck 2013). It eventually allows the company to increase its profits, through reducing average costs of the each unit due to which the company offers discounted prices to its customers. Wal-Mart makes use of advanced technology and systems in its logistics in order to sustain its competitive edge in the industry (Annual Report: Wal-Mart 2014). Moreover, the company keeps track of its administration expenses and others costs that it revises time to time to minimize its costs. However, the company ensures that the cost of capital of the company is lowest (Vanderbeck 2013). Therefore, the induction of the technology in its operations is one of the effective ways to control its costs. 5. Capital decisions The capital decision of the company involves the purchase of the new assets, plant, expansion or the up gradation or repair of the current assets. Wal-Mart makes use of various capital budgeting decision tools to make capital decisions. However, the process of determination of the project is dependent on the returns anticipated from the particular investment. Since, Wal-Mart is a merchandising company the returns of the company are the determinant of its capital decisions. Wal-Mart makes use of three common capital decision tools that are, Net Present Value, Payback period and Internal rate of return (Vanderbeck 2013). The Wal-Mart is working in three major businesses. The priority of the organization is to improve the financial organization; this is due to the drastic changes in the financial sector. The Organization is providing the finance internally and also through some external sources. The policy that the organization is following is to improve and strengthen the “Return on Invested Capital” that will help make the organization appealing to the “Portfolio Managers”. The external expansion relates to the “Industrial Loan” they are obtaining that will help in minimizing the costs. The use of Debit and Credit cards by the customers will help the organization to pay itself in the future. The application of each capital budgeting decision tools is dependent on the cash flows and opportunities that the company aims to attain. The main objectives of these tools are to determine the returns that the company would attain investing or acquiring an asset. The company makes use of Payback Period mainly for its new projects of acquiring its assets, such as vehicles. It tells about the cost of the total project and provides estimates of the inflows that are expected to gain from this particular investment. Moreover, Net Present Value (NPV) is mainly used to evaluate the project mainly investment decisions of Wal-Mart such as acquisition of the new stores, plant, stock, financial instrument etc based on the discounted rate that allow to compensate the uncertainties related to the project. 6.Capital acquisition and structure Wal-Mart’s capital structure is mainly focused on its overseas operations. The international operations of the company yielded greater opportunities for Wal-Mart. Thus, the decisions of acquisition and mergers of Wal-Mart are focused in developing countries (Annual Report: Wal-Mart 2014). Wal-Mart’s discounted business model remains to be a dominant aspect that allows the company to utilize its acquisition in a foreign market (Debarshi 2011). Moreover, the financial aspects contribute to determining valuation of the company (Fabozzi & Drake 2009). Hence, the company mainly looks ahead for its acquisitions on the basis of its financial positioning (Annual Report: Wal-Mart 2014). Wal-Mart makes us debt financing and equity financing for its capital decisions. The financial of the company (2014) indicated total debt to total equity of 61.90 percent (Callahan, Stetz & Brooks 2011). It indicated that the company is aggressively dependent on debt financing for its growth. The company is considered to be a giant in the market. The current situation illustrates that the company is backed by Equity financing largely, the proportion of the debt financing lies in 65:35 ratio respectively. The company gathers the Equity by selling the Common Stocks to the public and the executives as well. One of the reasons that the company opts for debt financing is because it allows the company to reduce taxations expenses that significantly impacts its profits. 7. Conclusion On the basis of the information obtained it can be determined that the Wal-Mart’s capital decisions are made focusing on its low costing capital business model. The investment decisions of the company are dependent on the external factors mainly macroeconomic conditions. However, the capital decision of the company is undertaken considering the opportunities. The company makes use of Just-in-Time, Inventory Management and Economic Quantity Order Technique as its management accounting system that allows the company to save its time and takes control of its costs. The company aims to sustain its competitive edge in the industry acquiring new and upgrading its assets. The capital decisions of the company are identified on the basis of the financial positioning and market conditions. List of References Annual Report: Wal-Mart 2014, Wal-Mart, New York. Callahan, K, Stetz, GS & Brooks, LM 2011, Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability, John Wiley & Sons, New York. De-Almeida, JR & William, E 2014, Access to finance, working capital management and company value: Evidences from Brazilian companies listed on BM&FBOVESPA, Journal of Business Research, vol 67, no. 5, pp. 924-934. Debarshi, B 2011, Management Accounting, Debarshi Publication, New Delhi. Fabozzi, F & Drake, PP 2009, Finance: Capital Markets, Financial Management, and Investment Management, John Wiley and Sons, New Jersey. Vanderbeck, E 2013, Principles of Cost Accounting, Cengage Learning, Mason. Read More