Financial Management of Family - Case Study Example

Introduction The family of choice is made up of five members. The father who is basically was the bread winner of the family, the mother and three children of whom two are adults and one is still a child. The father’s name is Mr. Johnson; He is a tutor in one of the private Language teaching college. He is 50 years old and he holders a degree in bachelor of education (English). He works as n English teacher. The mother’s name is Catherine. She is also a teacher but in a high school. She also holds a degree in bachelor of education (science). She is 45 years old. The position she holds in the school where she teaches is simply a teacher. Together they have three children. Their firstborn son who is a student in the university is 25years old. He is a fifth year student studying Bachelor of Science medicine. The second born child is a girl who is 22 years old. She is a first year student in the university studying bachelor of Law. The last born is a son who is 15 years old. He is a student in the high school. The family is basically depended on the earnings of the father who at least earns a higher salary for most their daily expenses before setting up a family business. Financial management refers to the act of planning, directing, organizing and also controlling the activities that entails finances like funds utilization, procurement and savings. It entails the application of all the management principles to the financial resources of that particular enterprise (Peter, 50). The family has applied a numbers of financial management principles to ensure that its finances are well managed. The current situation of the family is not bad. This is because the family has a number of assets. It has two companies which are very important in helping the family financially. The family owns a mansion which stands on two acres of land. The family also owns two vehicles. The following are the details about the family businesses. The family’s first business is a called Aqua Company. Aqua is a company that is involved in the distribution of the most high quality mineral water to the traders like wholesalers, catering outlets and other industries. It has a total of three hundred employees in two of its outlets one being in Scotland and it is the headquarters as well as the location where the company obtains its water from a spring over there while the other one in Southern part of England. Aqua is a company that is very keen as far as the issue of competition is concerned. It can not be second to any other company. Recently, the company has bought Easy Bottler which is a company based in Midlands which was also processing mineral water but of very low quality. The second business is a business that entails the production of a device called pomegranate. It is actually a device that is supposed to make things easier for the people as far as the issue of language barrier is concerned. It is like a touch screen phone on looking at it but it has a different function. It is mainly manufactured for the purpose of helping the people in their all ordinary living. Like a phone it can be used as a touch screen, GPS navigation feature is used for searching for the places one needs to be conversant with like a map. Then as internet surf one can use it to surf comfortably just like the computer and also to be used for accessing the emails. It has other features like a translator, coffee machine, projector and home theatre. The main and most important feature about the device is the translator of the language because a business person does not have to worry about attending a meeting anywhere in the world where any kind of language is in use. Holidays will also be better for people since anywhere in the world they can understand the natives’ language through the use of the translator. It is able to translate a total of fifty languages. All that needs to be done is inserting language expansion card inside that device and then when the device is inserted one is ready to talk to any kind of a person in their language. Savings and money transmission products The family has a saving account with the mashreq Bank. The following is a comparison between the bank and two others. mashreq Bank Barclays bank Cooperative bank A little fixed deposit is required No fixed deposit is required A minimum amount of only $1000 is required Interest rate per annum on the savings is 5% Interest rate per annum on the savings is 10% Interest rate per annum on the savings is 15% The bank only allows withdrawal only once in three years The bank only allows withdrawal only once in two years The bank only allows withdrawal only once per year The bank does not give any ATM Cards for the savings accounts The bank does not give any ATM Cards for the savings accounts The bank will give any ATM Cards for the savings accounts Borrowing products The family has a credit from a bank known as Lloyds Bank. It should be noted that the family does not have any kind of a loan. Basically it should be noted that speaking to any creditors can really help in the improvement of financial situations. The bank they have a credit card from has some disadvantages as compared with other banks. The following are the comparison Lloyds bank Barclays bank Cooperative bank Charges a very high rate of interest (for every $1000 worth shopping an interest of $10 is charged) The interest rates are not very high (for every $1000 shopping an interest of $8 is charged) The interest rat is very low (for every $1000 shopping done an interest of $5 dollars is charged.) Balance transfer is applicable of about 6% per 6months No balance transfer Balance transfer is not applicable Card levels do not apply It offers card level depending on the customer loyalty (Gold and silver) It offers card level depending on the customer loyalty (Gold, silver and bronze) Card type is master card Card type is master card Card type is visa Interest free days are 30 Interest free days are 45 Interest free days are 60 Loan interest is 30% Loan interest is 25% Loan interest is 10% According to the comparison shown above, it is very obvious that Lloyds bank is not the best for the family to continue dealing with. This is because as compared the other two banks, even the interest rates for the loans are lower. It is therefore recommended for the family to take up a loan with the cooperative bank and also to take a credit card with the Cooperative bank because it offers suitable financial deal. This will help the family in the process of saving. Investments products The family has invested in shares. It owns shared in five big international companies. This is a very good step but they also need to make much more investment. I would recommend the family to form partnership with other companies that are dealing with the same products like it is. By doing that, the company will be able to extend its businesses in other part of the world and also open other branches which will increase its incomes. Accounting is a practice in any given organization that involves binding of all organizational space together in a real sense whereby one of the paramount boundaries of that organization is usually defined as per the boundaries of the system of its accountability. Accounting refers to the collection, identification, accumulation, measurements, preparation, analysis, interpretation and then presentation of information about an activity or activities in an organization. This is whereby for any person to be termed as being part of that organization, he or she must be part of its accountability system. In order for any manager to maintain a smooth and a good organizational culture, he or she should adopt some very important organizational theories (Hill & Jones, 80). The theories that any organization will adopt must provide a strong link between the employees and the management for easy and accurate accountability. This means that they have to be structured in such a way that they provide great motivation and courage to the employees for the purpose of improving their working skills and productivity. In addition, the theories also must infuse some aspects of the organization like values, experiences attitudes and beliefs. This is because these organizational theories are the instrument that every organization uses to cause motivation among all of its workers and employees. These theories comprises of beliefs and ideas of which each and every member of that organization must comply with so as to achieve the objectives and the goals of that particular organization. This then means that the theories must be made in such a way that they are acceptable to all the members of the organization whether in the management or employee level. Accounting practices are very important in as far as the success of any organization is concerned. This is because the information derived from the process of amounting is what influences the actions of the managers and the employees of the organization. This means that the accounting information can be referred to as being socially constructed since it affects every person in the organization (McDaniel & Gates, 98). Accounting is also a process that in it can not function effectively without the use of some theories. This is whereby some theories like the contingency theories must be involved in the accounting process so as to avoid some of the loopholes which may fail the process According to the family, the following are the main reasons as to why they practice financial management. To ensure the family has adequate and regular supply of finances To ensure there are adequate returns to all of its shareholdings which basically are very much dependent on the earning capacity of the family, the market prices of the shares and their expectations as the shareholders in different organizations and companies. To ensure the family is practicing optimum utilization of funds. This is whereby they family ensures that priorities are set as well as budgets drawn whenever there is a need for financial usage To ensure they are investing safely To be able to make sound structures of the capital Most expenditure cut downs by families are done following financial crises. This section provides a discussion of a family budget proposal. The report entails a critical assessment and appraisal for the structure of finance, control, systems and the effect of its implementation. A critical review and appraisal of the existing practices which are related to the finance control and their relevance in terms of the indicators in the context of the management of finances are also discussed. The report finally makes an interpretation of the financial data that is supplied to help in making an effective and logical recommendation to be used in strategic decision making process. The family must reduce its expenditures and thus a proposal is required on how to effectively implement this without impacting negatively on the operation of the firm. The family is expected to make a 5% cut in its total expenditure and areas which are likely to contribute to this are the employees, equipment and, expenses and premises. Cost reduction strategies Employees How Effect How to reduce the negative impact Increase working hours Cut wages Offer intensive training Introduce pensions Lose of employee morale leading to strikes and lose of service Training will improve the quality of services offered to the community by employees Pensions will improve employee morale Outstanding employees in their duties need to be motivated through rewards and recognition and promotions. Reduce working hours Reduce the number of workers being promoted Non replacement of retiring employees Increase the number of employees on retained duty system and reduce the number of regular employees Reducing working hour may compromise the service offered to the community Cutting the number of employees being promoted will de-motivated and will lead to mass employee turnover resulting in loss of talented employees. Reduced number of permanent employees will imply that those remaining will have increased work load which may lead to workplace related stress. This may compromise service delivery. Division of work and specialization may reduce workload and enhance efficiency at the firm. Equipment The family’s is planning to sell off old equipments from the businesses and funds from the sale to be used in acquisition of new ones. The new machinery to be bought are expected to be more sophisticated in terms of technology and are also expected to cut on expenditures on fuel. The new equipments will also increase efficiency at the firm hence cutting costs of running the firm. The introduction of these new machines is expected to result in loss of jobs since some of the machines may replace manpower. However, the family will have to incur training cost for employee to use these equipments. Thus through acquisition of new machineries, the firm will be able to cut down operation costs in the end. By selling some of its old equipments, the firm will reduce the amount of loan required to finance such ventures (Chandler, 190). Premise The family is planning to acquire premises for their offices as well as the storage for the equipment to be used during the provision of the services. The means by which the process will be done will include issuing some tenders which charge cheaper rent as well as other expenses like the security. The process of acquiring a premise is usually very expensive but the only way to ensure the cost is cut is through considering the location. In this case the firm has ensured the premise is located in a place that is central to the community it is serving as well as in a place where materials like water for fire extinguishing will be ready available, cheaply and in plenty. This is expected to reduce operation costs for the businesses. The premises are being sourced in areas which are prone to emergency risks and near to where raw materials required for serving the community such as water and carbon dioxide are readily available. This will cut on transport costs for moving to areas hit by emergency (Finlay, 122). Operational boundary and authorized limits The calculation of authorized limit should be able to provide headroom above and below the operational boundary for the company to experience unusual movement of cash. Thus, the authorized limit provide for the 5% variation required by the company to attain its objective. This proposal aims to reduce the cost by 5% of the total cost. The figure obtained will be rounded off to the nearest £0.5 million of the operational boundary to provide the headroom. After obtaining the headroom, the treasury management policy is determined by the authority. This policy governs how finances ought to be borrowed and invested in the firm. This is usually done prior to commencement of each new financial year (Burns, 199). The setting of operational boundary limit and authorized limit takes into consideration the following indicators: Interest limits exposure. The authority is involved in the setting of the upper and lower limits of its exposure to changes and effect of interest for the variable loan rates and fixed rates of interest. Borrowing structure maturity. Under this, the authority sets the upper and the lower limits its exposure to changes and effect of interest for the variable loan rates and fixed rates of interest of the following year with reference to the maturity of the company’s rate of borrowing. Any borrowing that is made by a firm ought to mature within ten years and should not be less than 50%. The 50% new borrowing of a firm must have a maturity period of between two to ten years and borrowing must always have a maturity period that exceeds two years. Thus maturity profile for new borrowing is dependent on market conditions or factors in existence. The following table provides maturity structure of projected borrowing. Period Upper limit % Lower limit % Under 12 months 0 0 Between 12 and 24 months 0 0 Between 24 months and 5 years 50 0 Between 5 years and 10 years 50 0 10 years and above 100 50 The code of treasury management. The code for managing all the services related to treasury in public services is usually determined by the authority management. The total sum of principle invested for more than one year. It is envisaged that a firm will not make any investment lasting more than one year. Thus any investment lasting for more than one year calls upon the authority to set a limit in order for its investment to be safe. How the family has accommodated the risk areas Risk management enables firms, companies and families or even individuals to define and plan for the way risks in a system will be accommodated. The family has taken responsibility of managing risk areas adequately. To accommodate the risk areas the family has properly weighed and measured financial risks and their implications to aid in decision making process. In order to attend to unexpected risks, the family’s business maintains enough balances of revenue to ensure long term stability and planning in addition to smooth running of the firms. The family is aiming at increasing its returns in relation to its costs of operations. It uses probability values to accommodate all the risk areas. To obtain these values the firm uses the following formulae: ∑ (each possibility × the associated possibility). From previous emergencies, the firm is aware of the rate at which some risks such as fire and other accidents occur within the businesses. Thus, the family is concerned with prevention of these accidents in addition to addressing their effects in case they occur. The firm is also aware that increased fire outbreaks are being caused by increased migration to congested residential areas (Salder & Craig, 100). Thus the family is working with housing sector stakeholders and insurance companies to help in curbing fire outbreak and other accidents. Most of its businesses are located in areas that are prone to floods resulting from great storms and increase in sea levels. This often leads to destruction of property, disease outbreaks, and even loss of life and property. The greater family is working with environmental agencies in the region to reduce impacts of floods to the community. To help in rescue activities the family has equipments which are used during such emergencies and employees are well trained to use them. Even though the firm is involved actively in responding to floods, it has no specific duties during such times. This has been a challenge to the firm and thus it has embarked on analysis of the risks that are expected during flooding to enable it deal with it effectively and efficiently since public demand for its services is great during flooding season. The family is also analysing environmental trends in order to understand the techniques to be employed during emergencies resulting from such (Thompson & Martin, 200). This is expected to help the firm reduce the resources needed in such emergencies. The firm is also looking for ways of being eco friendly through reduction of use of carbon in fighting fires. Due to economic down turn, many other companies and residents in locality have compromised fire and other safety measures in place. This presents a challenge to the family since they have to depend on its resources and fire incidents are bound to increase. Reference Burns, Terence. The Management of Innovation. London: Tavistock, 2001. Chandler , Albert. Management theory and practice. London: Thomson, 2002. Finlay, Patrick. Strategic management: an introduction to business and corporate strategy. New York: Pearson Education. 2000. Hill, Clifford. & Jones, Gates.. Strategic Management: An Integrated Approach (8th Ed.). California: Cengage Learning, 2007. McDaniel, Cage, and Gates, Richard. Marketing research essentials, 2nd Ed. London: Taylor & Francis Publishers. 1998. Peter, Fred. The practice of management. New York: John Wiley & sons. 2007. Salder, Peter., & Craig, John. Strategic management (2nd Ed.).London: Kogan Page Publishers. 2003. Thompson, John. & Martin, Fred. Strategic management: awareness and change (5th Ed.). California: Cengage Learning EMEA , 2005. Read More