Strategic Finance for Managers - Assignment Example

STRATEGIC FINANCE FOR MANAGERS Table of Contents 1.Introduction 2 1.1.Objective 3 2.Overview of the Organisation 3 2.1.Accounting and Financial Policies of the Organisation 4 2.2.My area of responsibility in the Organisation 6 3.The role of Management accounting in strategic management process 7 4.Financial Management techniques for the management of Planning and Controlling 9 5.Recommendation 13 6.Conclusion 15 7.Reference 16 1. Introduction Finance is the life blood of any business, even for the non profit making ones. The efficiency of financial and accounting policies determines the effectiveness of operational activities. These policies help a business to maintain consistency in both managerial activities as well as in the decision making process. Finance and accounting policies of an organisation primarily revolves around three objectives. Firstly, it aims to obtain sufficient amount of capital for investment purposes. Secondly, it helps to manage investments, costs and revenues in an efficient way. Thirdly, it helps to attain the financial objectives of the firm i.e. to increase the profitability of business and create wealth for the investors. With the expansion of modern trade and business, financial aspect of a company has become inextricable from the strategic management process. Moreover, financial information is also required for decision making process. Therefore, it is extremely important to follow proper financial models and accounting policies so that the information revealed is authentic for the decision makers to be used in the strategic management process. This paper will attempt to analyse various financial and accounting models for the management of strategic finance. At first, the objective of this paper will be properly defined and justified in respect of this paper. Secondly, a brief overview of an organisation will be discussed based on its business function, market, financial profiles. This will be followed by an analysis of the financial and accounting methods to understand the efficiency of operational activities. The next section will deal with strategic finance and will undertake a discussion on its role and various techniques for financial management. On the basis of analyses and evaluations, some recommendations will be proposed for developing better strategic financial management. Finally, the concluding sections will summarise the important findings of the paper. 1.1. Objective Proper finance and accounting management method is very necessary for business and it must be critically analysed and evaluated on a regular basis for measuring its efficiency. The managers of an organisation are responsible for planning, directing and ensuring proper utilization of financial resources for increasing the profitability (Cichon et al, 1999, p.245). This process requires use of effective financial techniques. Many companies use different accounting policies for managing and reporting their financial activities. The objective of this paper is to critically evaluate the financial management techniques followed by an organisation. In the process of analysis, attempts would be made to figure out the extent to which this framework of financial technique is helpful for enhancing the performance of the managers. 2. Overview of the Organisation Sinclair Pharma is a UK based reputed pharmaceutical company that provides solution for oral care, gynaecological and dermatological diseases. The company was founded in1971 and initially it was engaged in the sales and marketing of the pharmaceutical products. The company has experienced rapid growth through acquisition of small and medium scale pharmaceutical companies like Salix Pharma, ProPharma, Biosurface, Euroderm, Dermatologie etc. The acquisition of these companies has helped Sinclair Pharma to increase its product ranges. In 2003 the company was listed in London Stock Exchanges and it raised around £8.9 million by issuing its first IPO (Sinclair-a, 2010). The company owns an operation for growing sales and marketing which is present in three European countries i.e. France, Spain and Italy. It has expanded its network globally through marketing partners and it is also trying to capture the emerging markets for its pharmaceutical products (Sinclair-b, 2010). The company offers products for dermatology, oral care and wound care. It has developed several brands for each product. The company’s mission and vision statements clearly state its strategy and objectives. The mission statement of the company is “as a leading skin and mouth disease specialist, we strive to improve the health, appearance and confidence of our patients, creating value for healthcare providers and shareholders” (Sinclair-c, 2010). The company focuses on constant development of its research and technology for the improvement of its products. In this process, the company utilizes advanced technologies and intellectual property to create new products according to the requirement of the market. The company has 38 registered products in UK and US. It has been able to develop partnership with more than 100 companies in the world thereby adding value to its business. 2.1. Accounting and Financial Policies of the Organisation Sinclair Pharma is a public company and is listed in London Stock Exchange and Euronext. According to the company law, it is necessary for the listed companies to prepare and disclose their financial reports for each financial year. As far as the accounting policy is concerned, the company follows ‘International Financial Reporting Standard’ (IFRS) as the entire European Union follows this method. The director of the company is bestowed with certain responsibilities for preparing the financial statements. The director along with the management board must select proper accounting policy that ensures consistency of the financial activities. It is important for them to make reasonable financial planning and estimation. In order to detect any fraud and error in the financial statement, the company has assigned an independent audit committee. The primary responsibility of this committee is to review the financial reports and verify the consistency of the applied accounting policy. According to the principal accounting policy, the company is required to prepare and disclose its financial statements. These financial statement includes goodwill, intangible assets, tangible assets, inventories, borrowing, inventories, taxation, expenses for employee benefits, share based payments, income statement, balance sheet etc. The company is exposed to many types of financial risks like foreign exchange risk, credit risk, interest rate risk and price risk. For managing the financial risks, the company uses only “short term forward currency contracts” (Sinclair-d, 2009). According to the management policy, the company does not use financial derivatives to avoid financial risks. To under the financial position of the company, the income statement of the company is given below. Table 1: Consolidated Income Statement (Source: Sinclair-d, 2009) 2.2. My area of responsibility in the Organisation Sinclair Pharma is one of the leading pharmaceutical companies in UK and its organisational culture and management style strives to create leadership quality in its employees. I have been working for the company as Assistance Manager (Finance). My primary job is to assist the finance and accountant managers to handle the financial aspects of the company. My area of responsibility in the organisation includes assisting my seniors to supervise the financial reports and accounting activities. In this process I have to apply my academic financial knowledge in day to day happening. Besides, I also have to assist them to prepare other allied activities like budgets based on the internal and external analysis of the company. Often, the financial managers also invite us to participate in the decision making process for financial purposes. 3. The role of Management accounting in strategic management process The role of managerial accounting has changed in the modern business structure. Earlier, managerial accounting system was considered to be different from operational activities as it was dependent on staff capacity. At present, managerial accounting and finance help all cross functional teams of an organisation in various operational and non-operational activities. Besides, managerial accounting and finance is instrumental in managing the strategic process of an organisation. “An organisation’s management team, on which managerial accountants play an integral role, seeks to seeks to create value for the organisation by managing resources, activities, and people to achieve the organisation’s goal effectively” (Hilton, Ramesh, Jayadev, 2008, p.4). In order to develop effective and relevant financial statements, each company follows a standard accounting method. The primary purpose of maintaining the accounting standard is to disclose useful information for the stakeholders of the company including the internal managerial teams. Another major purpose of accounting standard is to develop and retain market efficiency by disclosing the financial position of companies. For producing effective financial reports, the accounting standard followed by the organisation must be relevant, reliable, neutral and comparable. Each of these features that form an ideal accounting standard has been discussed below. Relevant: The financial information disclosed by the company must reveal relevant information that should genuinely reflect the company’s financial position and performance. Reliable: The financial information must be valid and error free. Misinterpreted financial information will lead the managers to make a wrong decision. Neutral: Financial information should not be biased and must take into account the entire operational activity. Managers make decision on the basis of performance and capability of each functional department. Therefore, financial information must reflect the true picture of the entire cross functional department. Comparable: In order to measure and evaluate the financial performances of operational activities, the information should be comparable. It will help the managers to identify the financial position of the company (Commonwealth of Australia, 1997). Currently, GAAP (general accepted accounting principal) and IFRS (international financial reporting standard) are the two dominating accounting standard. IFRS is the latest and has been develop for global business structure. Many companies have shifted to IFRS from GAAP as it is more prominent, transparent and useful for revealing vital financial information. The international accounting standard, IFRS has been developed by the IASB (International Accounting Standards Board) which is “the independent standard-setting body of the IFRS Foundation” (IFRS Foundation, 2010). The IFRS foundation is committed to develop and promote globally accepted financial reporting standard in order to provide solutions to the financial users. In order to comply with the international accounting and financial reporting standard, Sinclair Pharma has been following the IFRS accounting standard to report the financial information. The application of IFRS for disclosing the financial reports has not contributed much in establishing the effective management and control system in the organisation. The primary objective of the IFRS is to make the company’s financial activities transparent that is helpful for the users of financial statements. From the investors’ perspectives, the IFRS has been successful in meeting their objective. “International Financial Reporting Standards were not designed as a standard for managerial decision making and control purposes”(CIMA Insight, 2009). However, the management of Sinclair Pharma has observed that after the implementation of IFRS, the process of accounting management has narrowed down. The management of Sinclair Pharma has been following several financial management techniques to improve the managerial activities. 4. Financial Management techniques for the management of Planning and Controlling In order to achieve greater level of efficiency in strategic process, financial planning and control system of an organisation is very important. Effective and efficient planning and controlling process help an organisation to enhance its enterprise value. For proper planning process, it is very important to understand the organisation’s internal strength and weaknesses. The strength of an organisation will help it to develop its core competencies and to formulate corrective plans for removing its weaknesses. The financial managers have to use several management tools and financial techniques to plan and forecast the operational activity. In this respect, budgeting is the most useful financial technique that forecast the sales and to control the cost of the operational activities (Weaver & Weston, 2004, p.139). For financial planning and cost controlling, the company must design and follow appropriate budgeting process. Allen has identified five steps to design an appropriate budgeting process. These steps have been discussed briefly. Scanning the external and internal environment of the organisation: The first step in budgeting process is to analyse the organisation’s internal and external factors. In this stage, the management must figure out the external factor affecting the demand of the market as it helps the organisation to forecast the sales. The forecasted sales have to be realistic and achievable. Internal scanning of the organisation is crucial for determining the strength and weaknesses in order to produce the desired level of production. Setting the short and long term financial objective: After analysing the internal and external factors, the budget committee must recognise the financial objective of the organisation which must be communicated to the entire cross functional teams. It will help the management to motivate the employees to achieve the desired level of sales. Preparing operating budget: The management must prepare the necessary operating budgets on the basis of forecasted sales. Operating budgets include revenue and expense budget that determine future costing and profit for the organisation. Preparing capital budget: Once the company determines its future revenue and expenses based on the forecasted sales, the company must summarize its future income statement and balance sheet. These estimated statements include the expected adjustment of capital expenditure and gain (Allen, 2004, p.256). The above budgeting process will reveal the expected accounting and financial activities that help the management to take effective strategic steps to control the organisation. For creating effective strategic management accounting, some management techniques must be implemented. Management techniques like activity based costing, performance management and balanced score card approach etc enhance the management of accounting and finance. These techniques have been discussed below. Activity based costing (ABC): ABC is a very useful accounting tool that helps to determine the actual cost of product and services and it must be implemented in decision making process. ABC helps to find the actual cost of the resources and processes that is necessary to perform the operational activities of an organisation (Lewis, 1995, p.114). Figure 1 portrays the important areas identified by ABC. Figure 1 (Source: Lewis, 1995, p.115) As per the above diagram, the ABC traces the valuable resources and these recourses are utilized for important activities. It helps the company to determine its cost objective. Financial performance management and measurement: Financial performance management and measurement is very necessary for controlling and evaluating the organisational performances. According to Waggoner, “performance measurement can be viewed as the process of quantifying the efficiency and effectiveness of purposeful action and decision making” (Verweire, & Berghe, 2004, p.6). For financial performance management and measurement, variance analysis and ratio analysis are very useful accounting and financial tools. Variance analysis helps to compare the budgeted and actual performance of an organisation and helps the management to realise the present cost and to optimise the future cost. Ratio analysis is important for quantitative analysis of the financial statement. Ratio analysis can be conducted by calculating the return on investment, net residual income and economic value added. Balanced Scorecard: Balanced scorecard (BSC) is the most popular and effective management model that relates the financial and non-financial perspective of an organisation. According to Kaplan and Norton, the developers of balance score card, “balanced scorecard (BSC) translates an organisation’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and system” (Armstrong, 2001, p.685). Figure 2 presents the balance scorecard model. Figure 2: Balanced Scorecard Approach Management (Source: Nimax, 2008) The BSC model brings together four vital perspectives of an organisation for the management strategic process. It enables the managers to consider the operational performances and improves the cross functional communication. 5. Recommendation For establishing an effective financial management, an organisation has to focus on its accounting and financial techniques to ensure organisational growth. Based on the above analyses and discussion, some plausible suggestions have been recommended to the management of Sinclair Pharma. These recommendations are given below. In order to comply with the international accounting standard, the company should continue with IFRS accounting standards as it helps to make financial statements more transparent. For decision making processes, the management must design and follow internal accounting and financial policies. The company is exposed to various types of risks and for minimising them, the company must follow proper financial risk management model. In this process, the company has to use financial derivates to avoid such risks. Budgeting is the most important financial techniques for an organisation and hence the company must design an appropriate budgeting process for planning and controlling purposes. It is important for the management to understand the organisational strength and weaknesses before implementing the financial strategies based on the accounting information. The company must develop better communication system among the cross functional departments and each department must participate in budgeting process. The company must utilize the forecasted as well as the previous accounting information for decision making processes. For enhancing the financial performances, the company must implement financial performances measurement techniques like variance and ratio analysis. However, for such analyses, it is very important to obtain relevant and valid accounting information. Organisational structure along with management style must promote proper accounting standard and financial techniques. In this respect, the management must follow balanced scorecard approach. It will help the financial managers to consider the cross functional teams while framing the accounting and financial strategic processes. 6. Conclusion Accounting and financial information is extremely valuable for strategic accounting and financial management process. The management of Sinclair Pharma applies IFRS accounting standard for disclosing its financial statements. However, IFRS method does not provide sufficient support to the decision making process as it has been developed for financial users like investors. Therefore, the management of Sinclair Pharma is required to follow some other accounting tools and financial techniques for planning and controlling the organisation. 7. Reference Allen, J. E. 2004. Assisted living administration: the knowledge base. 2nd Edition. Springer Publishing Company. Armstrong, M. 2001. A handbook of management techniques. 3rd Edition. Kogan Page Publishers. Cichon, M., International Labour Office and International Social Security Association. 1999. Modelling in health care finance: a compendium of quantitative techniques for health care financing. International Labour Organization. CIMA Insight. 2009. IFRS: can of worms or silver bullets for accounting system?. [Pdf]. Available at: http://wiwi.uni-giessen.de/dl/down/open/bwl4/131cf46f0881a08b9f5da3ae0bd5b64a2e945159ccd32f024c24dabec327ce604c310ce14b95372b19c4ba9b4d4abbdd/CIMA_Internet_Version.pdf. [Accessed on September 28, 2010]. Commonwealth of Australia. 1997. Accounting Standards. [Pdf]. Available at: http://www.treasury.gov.au/documents/281/PDF/full.pdf. [Accessed on September 28, 2010]. Hilton, R. W., Ramesh, G. and Jayadev, M. 2008. Managerial Accounting 7E. Tata McGraw-Hill. IFRS Foundation. 2010. About the IFRS Foundation and the IASB. [Online]. Available at: http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm. [Accessed on September 28, 2010]. Lewis, R. J. 1995. Activity-based models for cost management systems. Greenwood Publishing Group. Nimax, G. October 15. 2008. Balanced Scorecard. [Pdf]. Available at: http://www.virginia.edu/processsimplification/Management%20Methodologies.pdf. [Accessed on September 28, 2010]. Sinclair-a. 2010. History. [Online]. Available at: http://www.sinclairpharma.com/history.html. [Accessed on September 27, 2010]. Sinclair-b. 2010. Our International Operations. [Online]. Available at: http://www.sinclairpharma.com/our-international-operations.html. [Accessed on September 27, 2010]. Sinclair-c. 2010. Our mission & strategy. [Online]. Available at: http://www.sinclairpharma.com/our-mission-strategy.html. [Accessed on September 27, 2010]. Sinclair-d. 2009. Annual Report. [Pdf]. Available at: http://www.sinclairpharma.com/tl_files/sinclair/content/files/investor_relations/reports/sinclairpharma_annualreport_2009.pdf. [Accessed on September 27, 2010]. Weaver, S. C. & Weston. J. F. 2004. Finance & Accounting for Non-Financial Managers. McGraw-Hill Professional. Verweire, K. and Berghe, L. 2004. Integrated performance management: a guide to strategy implementation. SAGE. Read More