Finance for Strategic Managers - Essay Example

FINANCE FOR STRATEGIC MANAGERS Finance for Strategic Managers 1.1. Need For Accounting Information The effective monitoring of the operations of a business firm best occur with the availability of financial information (Codjia, 2014). It arises as the most essential tool allowing for the functioning of such strategies directed towards accounting, as well as meeting the business objectives. Various reasons arise pointing to the great need for financial information by business organizations. One entails the assessment of finance requirements as pertains to determining the profitability, costs and asset value of a business. With any business, the key objective rests with the need for profit making. This means that the determination of profitability of a business requires that proper and accurate accounting records become available. Without reasonable profit making in any business, the long-term success arises as an unseen possibility. The process of sourcing for finance proves to be a difficult task for most business firms. A key reason for this is the lack of valuable accounting data that would stimulate the interest of prospective investors (Codjia, 2014). Obtaining finance serves a number of roles that allow for the sustenance of business activities, while utilizing the available resources efficiently. In the financial markets, the availability of reliable information remains to be greatest tool for concerned parties, mainly the investors. Lack of valuable information in these markets hampers the decision making process of investors. This relates to the formulation of decisions directed towards the allocation of capital. Eventually, the incapability of business firms to attract investments acts as a limiting factor that hampers the overall growth of the business (Bloomberg & Schapiro, 2014). As key elements in any business organization, various stakeholders require the availability of financial data in order to make valuable decisions. Shareholders or owners of a business will require assessing the financial performance of their investment. Without financial data, a company fails in meeting the needs and expectations of its stakeholders (Codjia, 2014). Customers make the final decisions as pertains to the product or service offerings of a business firm. Thus, creation of value remains an impossible feature with a business as the purchasing decisions divert to other business parties and competitors. A major objective of businesses is the determination and achievement of business goals (Codjia, 2014). Financial information arises as essential element necessary for setting targets. The evaluation of the performance of a business stands as an easy process with the availability of such data. The business processes align along the established goals and vision of the business. The availability of financial data allows for the appraising of new and ongoing projects. Here, the business remains focused on its operations, with necessary changes arising. Further, this translates to great improvements in the management of various risks associate to business organizations (Codjia, 2014). Project implementation requires that the ascertainment of costs, as well as revenue, becomes possible to determine the need for such initiative. The management of risk appears as a tedious process that requires the formulation of a number of strategies. Financial data allows business firms to estimate the probable uncertainties in addition to their financial implications (Codjia, 2014). Lastly, the business internal and external needs arise with the available financial information. With reliable and accurate data, such requirements focus on addressing issues in an effective manner. 1.2. Business Risks Risks occur as key challenges for all businesses. Various forms of risks occur for different businesses organizations, with some arising mutually. There exist internal and external types of risks that pose the greatest threats to any business. Internal factors for risk occurrence in a business include organizational and operational risks, strategic risks, innovation, financial and employee risks. Organizational and operational uncertainties become part of the various business processes relate to administration and operations. These include such variables as faulty IT systems, improper record keeping procedures, and disorganized chain of distribution (vic.gov, 2014). Strategic risks affect the capability of business firms to attain their set goals. These occur due to various reasons such as changes in technology levels and customer needs and preferences. Innovation arises as an essential requirement to businesses as they seek to achieve a competitive advantage. Associated risks entail the training of staff and welfare recognition, the adoption of latest and reliable technology and the various procedures formulated for the overall, marketing initiative. Financial risks stand as essential component of the financial system within a business organization (vic.gov, 2014). Business transactions become a common feature of businesses attracting the greatest uncertainty. Employees become important resources that allow for the growth of businesses. Having a workforce within a business organization poses a number of potential risks including health, strikes, and untimely performance. External risks on the other hand include compliance risks, natural or environmental risks, technological risks, political risks, health and safety risks and economic risks (vic.gov, 2014). Compliance risks occur as part of the legal requirements and regulations binding on the operations of any business. These include such factors as taxation, health and safety, fair-trading and employment. Business practices portray will also be affected by a number of factors within their area of operation. These entail the environmental uncertainties facing a business including natural calamities as floods and windstorms, damage of property and failure in power. Keeping up with the latest advancements in technology occurs as an essential requirement of any business. This process proves to be highly tedious, as companies are required to determine a number of issues. These include an evaluation of the technological performance of competitors, gathering relevant information on technology and monitoring on current trends while striving to achieve technological niche (vic.gov, 2014). Political and economic factors in the business environment affect the operations of a business organization. Changes in the whole government system or policy formulations stand to be major factors having an influence in the survival of businesses. Additionally, economic change including inflation, fluctuations in interest rates and recessions pose great threats to the operations of any business. Risk modeling arises as a strategic approach that entails the quantification of uncertainties in a business organization (Kuehn, 2014). Various risks in the financial markets including credit issues such as debtors’ bankruptcy, and market risks, for instance, decline in the value of an investment portfolio. The determination and quantification of possible uncertainties becomes essential for every business firm. For complex systems such as those integrating I.T frameworks require such risk management strategies involving a systemic approach. The interdependence of business procedures, analysis of credit risks in investment portfolios integrating commonly dependent organizations, and the determination of market changes become the recent issues of focus by most business firms (Kuehn, 2014). 1.3. Financial Information The financial data of a business organization becomes essential for managers as they formulate such decisions geared towards achieving the set business objectives. Such consideration entails various forms of information including profitability, cash flow, business value, projections of expenses and business equity (quickmba.com, 2010). Profitability involves the determination of the accrued profits or losses occurring for a given trading period. With low profitability, managers have a key role of formulating such strategies aimed at addressing arising issues. The income statement becomes the common financial reporting tool showing the profitability of a business firm in a given period. Cash flow represents the movement of balances available in the bank and at hand for a particular period. Various business activities depict cash flows in a business firm including investments, operational processes and financial activities, such as in the share markets. Positive cash flow points to financial stability in a business firm. Without this, managers should be wary of devastating impacts to the growth of the organization. The balance sheet provides financial information on the business value of an organization in a given period (quickmba.com, 2010). Costs projections reflect the utilization of available resources within an organization. Managers requite this information in order to formulate strategies directed towards cost–cutting measures. 2.1. Published Accounts Published accounts or corporate reports provide the public with information pertaining to the performance of a business firm. Managers make use of this data to evaluate their performance against that of competitors. These accounts provide data on the performance of a firm in the current allowing its comparison to the past period (Khanna, 2012). The challenges faced by a business organization as provided with past financial data provide a platform for the formulation of effective strategies. The product and image of the company clearly reflect with such information provided in published accounts. Further, this becomes evident with the current additional business activities geared towards social responsibility (Khanna, 2012). The users of accounting data include all business stakeholders from employees, customers, suppliers, competing rivals, shareholders, management and the society. Various statements appear for business organizations as pertains to the reporting of financial information. These include the income statement, balance sheet, management accounts, and accounts of costs and expenditures. The preparation of these statements requires that businesses adhere to the guiding principles of accounting, such as the going concern and the accrual basis. The international accounting standards (IAS) form the basis for preparation of these accounts. Managers formulate better decisions with accurate and reliable data on financial performance. 2.2. Interpretation The interpretation of financial accounts offers manager with an opportunity of formulating financial policies with the aim of achieving certain goals including the reduction of production and operational costs. Benchmarking arises as an effective approach that applies to business managers in their desire to monitor on the performance of the overall market or competitors within the market. Through such processes, a business adopts better strategies that enhance the performance and growth of the firm. Internal data providing such information as revenue growth over a period, sales and expenditure allow managers to implement such strategies aimed at improving the overall business operations (ccdconsultants.com, 2010). 2.3. Ratios & Interpretation The use of financial ratios becomes a common trend with most business firms as pertains to the determination of the financial position. These ratios portray the existing correlations occurring for various aspects relating to the business activities of a firm. Managers employ the use of these financial reporting tools as a measure towards unforeseen risks. Nonetheless, a comparison between different elements becomes necessary in order for businesses to effectively address the arising issues. In the evaluation of the firm’s progress towards meeting the objectives of the business, small business owners and managers utilize the use of financial ratios to formulate competitive strategies (ccdconsultants.com, 2010). The financial capability of a business firm and its operational performance reflect clearly using financial ratios. This allows the management to provide a positive image for the company in various processes including attracting investments from prospective investors, proving credit worthy to banking institutions in case of sourcing for finance. The financial factors under consideration determine the financial ratios that apply. In this case, liquidity ratios arise where the management wishes to determine the financial ability of a firm in meeting its debts. Managers use profitability ratios to determine the utilization of assets by a business firm, as well as its level of control on associated costs while focusing on attaining a significant amount of revenue. Leverage ratios monitor on the various approaches employed by a business organization in financing and measuring its financial capability in meeting obligations. The speed at which a business firm converts its non-cash assets to cash becomes a measurement of the efficiency ratios (ccdconsultants.com, 2010). The measurement of the response of investors to available company stock in addition to the additional costs reflects from the use of market ratios. Nonetheless, the use of financial ratios poses a number of limitations, which becomes a determinant of the arising business condition under examination. Such challenges include the hampered financial reporting for such firms having a number of divisions operating in different market sectors. Market changes resulting to such situations as inflation affect the balance sheet of a business firm due to its influence on its profitability (investopedia.com, 2014). 3.1. Long and Short-Term Finance Of great importance to the management of a business firm rests with the need to offer an accurate match of the long term and short term financing mix directed towards existing assets requiring financing. This requires that the availability of cash flow and proper timing arise as essential. Long-term financing entails such instruments as issued equity, capital notes and corporate bonds. On the other hand, short-term financing include the use of promissory notes, repurchase agreements, letters of credit and commercial papers. Managers focus on long-term finance with the aim of enhancing on the assets and project implementation in an organization. Short-term finance mainly applies for ongoing business operations. Business organizations strive at sourcing for financial resources in order to sustain business operations, as well as continue meeting the needs of various stakeholders. 3.2. Sources of Finance Various sources of finance occur for business organizations as pertains to equity and debt financing. In terms of debts finance, financial institutions including banks, credit unions and co-operatives offer a number of financial services to business organizations. These services provide solutions that address both current and long terms issues. In this case, products and service offering will include such tools as loans, credit loans, invoice financing, leases on equipment and overdraft facilities. Retailers also stand to be key sources of debt financing for business firms. In this view, managers establish good business reputations in order to attain particular financial services such as furniture purchases, technology installation and application (qld.gov, 2014). Various retailers offer storage services for business manufacturing organizations, thus, reducing on the overall costs of production as relates to storage. Suppliers offer trade credits to business firms. However, the terms and conditions usually vary, with trade credit only occurring for businesses having an established relationship with the concerned suppliers. 3.3. Cash Flow Management The management of cash flow within a business remains to be a great focus of business managers as they seek to ensure the financial stability of a business organization. In this view, various practices occur as relates to the control and management of cash flows. Forecasts remain a necessary measure for organizations as they determine the amount of cash for conversion to cash from non-cash assets available in the business. The management of stock becomes the greatest focus of business organizations (qld.gov, 2014). In this view, managers provide for appropriate frameworks ensuring that there is constant supply of business inventory. Trade payables and trade receivables refer to the amounts of income paid to creditors and collected from debtors respectively The guiding principles of an appropriate cash flow management become clear. The first point of consideration entails the management’s assurance that then business has more money coming in than going out. Further, money also needs to come in on time to enable early payment to suppliers. This allows the business to concentrate on new inventory investment. With great easy cash, the business also stands at a better position of buying, thus, enhancing its negotiating power. Resultantly, the business saves a significant amount of cash resources in the long-term (qld.gov, 2014). Managers need to anticipate for any possible shortfalls in funds as this allows them to make contingency cash flow plans including the provision of credit extensions. 3.4. Investment Appraisal Techniques Investment appraisal describes the process of assessing the level of expected returns from the generated expenditures. Additionally, the procedure allow for business managers to formulate reliable estimates of long term forecasts in terms of related costs and benefits of suggested business initiatives. The foreseeable life of a given initiative in an organization becomes a key determinant of the process of evaluation conducted by managers in view if the costs and benefits (kaplan.co.uk, 2012). Various means stand out as pertains to the determination of investment performance, calculated for a given period. These include the use of net present value (NPV), internal rate of return (IRR), payback period, accounting rate of return, and discounted cash flows. The accounting rate of return, for instance, measures the profitability of a give investment over a particular period. A comparison of profits occurs for this period alongside the capital outlay awarded by a business for a given business initiative (kaplan.co.uk, 2012). 4.1. Ownership Structures Various forms of business ownership stand for business firms, which have an impact on their overall operations. The common forms include sole proprietorships, public and private limited liability companies, partnerships, co-operatives, government organizations and charities. The scope of business operations and the nature of business determine the appropriate form of ownership to consider (nolo.com, 2014). Managers will look at a number of factors including the legal requirement costs, and the accrued advantages of operating within a particular business form. For instance, sole traders require limited capital in order to commence on their trading activities, with the level of control standing to be minimal. On the other hand, limited companies allow the management body to formulate and ensure the formulation of major decisions. Certain challenges appear with the use of these business forms (nolo.com, 2014). For a sole trader, the failure to meet a particular debt obligation renders the whole business susceptible to a resale in order to recover the amounts. However, limited liability companies are the best forms of business organizations because they stand out on their own as legal bodies, and free from their owners. As such, a limited company has the legal capacity to make decisions, enter into contracts, sue and be sued, as well as, own and dispose property. Consequently, a business manager in charge of a legal entity such as a limited company is only liable to the organization to the extent of his or her poor decision-making, or the lack of appropriate execution and discharge of his or her duties. Furthermore, the owners of the business do not have to attach personal property to cover the debts of the company in case of liquidation or winding up. This is because their liability is only limited to the level of contribution to the capital of the company at the time of formation or incorporation, such as the value of their shares at market value. 4.2. Accountability and Roles Managers in any business organization need to remain accountable for various activities. This demands for formulation of such planning frameworks directed towards ensuring that proper approaches apply as relates to addressing the various needs and expectations of business stakeholders. In this view, the interest of shareholders remain to be important for business companies as they form the larger part of the decision making process of any organization. Control issues arise in most firms, demanding for the effective utilization of business policies that clearly outline the key responsibilities and roles of various parties to a business firm (utoronto.ca, 2014). In terms of decision-making, issues of conflict need a resolve in order to eliminate the possibility for reduced co-ordination of business activities. The focus of the management of any business rests with the need to ensure that the identified organizational strategies assist in the achievement of the overall business objectives. For every decision, the business takes, and for every step the business takes, it has to ensure that it takes on board the views and suggestions of all the necessary stakeholders involved with its interests. this will eliminate the rejection of a new policy, lack of the necessary support required to move an option, as well as, deny the company an opportunity to take advantage of emerging opportunities within the market due to indecision. furthermore, a transparent system of decision formulation enables the company to marshal all the support it needs from all concerned stakeholders, such as the shareholders, the employees, as well as, the executive team. Consequently, this will lead to the successful implementation of the business idea or project set forth for the company. This also allows for the provision and stipulation of rules and regulations that govern the operations of business activities, especially those concerned with management operations, and as such, ensure transparency and accountability among all managers. References BBC.Co.UK. (2014). Sources of Finance. Retrieved May 21, 2014 from http://www.bbc.co.uk/schools/gcsebitesize/business/finance/sourcesoffinancerev2.shtml Bloomberg, M. & Schapiro, M. (May 19, 2014). Give Investors Access to all the Information they Need. Financial Times. Retrieved May 21, 2014 from http://www.ft.com/cms/s/0/0d9ccea6-db66-11e3-94ad-00144feabdc0.html#axzz32pnxoka0 Ccdconsultants.Com. (2010). Financial Statements Analysis: Interpretation of Financial Ratios. Retrieved May 21, 2014 from http://www.ccdconsultants.com/documentation/financial-ratios/financial-ratios-interpretation.html Codjia, M. (2014). The Need for Financial Information in Accounting. 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The Four Financial Statements. Retrieved May 21, 2014 from http://www.quickmba.com/accounting/fin/statements/ Utoronto.Ca. (2014). Roles and Responsibilities in Accountability and Innovation. Retrieved May 22, 2014 from http://www.research.utoronto.ca/faculty-and-staff/manage-your-research-funding/roles-and-responsibilities/ Vic.Gov. (March 17, 2014). Evaluate Business Risk. State Government of Victoria. Retrieved May 21, 2014 from http://www.business.vic.gov.au/disputes-disasters-and-succession-planning/how-to-manage-risk-in-your-business/types-of-business-risks Read More