Financial Management Issues - Assignment Example

FINANCIAL MANAGEMENT BY What is credit control and its impact on the company’s financial statements? Credit control is the practice of managing payments flowing into and flowing out of the organization. It generally deals with the organization’s creditors, that is, the individuals or institutions who the firm owes money to and the firms debtors, that is, individuals or institutions who owe money to the organization. Similarly, credit controls are measures and procedures adopted by a firm to make certain that its credit customers pay their debts (Van Horne & Wachowicz Jr. 2001). Effective credit control is an essential part of sustaining a sound cash flow. Effective credit management includes all the business activities ranging from sales to the collection of debts. It basically deals with credit analysis, invoicing, debtors, credits and payment warning signs, collection techniques, preventing cash flow issues and debt analysis (Brigham & Daves 2009). In terms of financial statements, the first and the foremost impact of credit control is on the accounts receivable of the balance sheet of a company. Credit control suggests that the company has to manage its accounts receivables because shorter the collection period for the accounts receivables, the more the company benefits. The reason behind this is that, if the company does not receive the cash from its debtors on time, the value of the accounts receivables on the balance sheet will reduce which will negatively affect the assets of the company. Similarly, late payments from the customers will also result in the company paying its creditors late, which would increase the accounts payables and ultimately increasing the company’s liabilities. Thus, the deterioration in the accounts receivables will have a negative impact on the financial position of the company (Brigham & Houston 2009). Similarly, credit control has an impact on the income statement of a company as well. In order to increase sales, a company might relax its credit policies. This can be done by increased the collection period, relaxed credit standards, along with a lenient collection policy. Thus, increase in sales would ultimately increase the net income in the income statement, validating the effect of credit control on the income statement (Brigham & Daves 2009). The cash flow statement basically deals with the inward and outward movement cash in an organization. The variation between the two within a certain period of time is the net cash flow. Therefore, credit control can also effect the cash flow statement. The reason behind this is that the receipt of sales from the customers is the company’s primary operating activities. If the business does not manage its credit effectively, the amount of cash generated from the sales will reduce which ultimately reduce the cash inflow (The trade creditor’s guide to statement of cash flows 1999). Write about considerations that companies need to make before investment. The primary goal of any business firm is to earn profit. One way through which firms can earn profits is investments. Investment is the buying or creation of assets with the purpose of generating revenue in the future. Usually investment entails making use of capital to buy equipment or a building or any other asset, which will then generate returns to an organization over a period of time (Savvides 1994). The key factor in making the investment decisions is the risk-return tradeoff (Van Horne & Wachowicz Jr. 2001). This is the evaluation of the risk that is associated with the investment and the benefit or return that will be generated from making the investment (Van Horne & Wachowicz Jr. 2001). If the return from the investment is greater than the risk associated with the investment then the company would take measures to make the investments and vice versa. All other considerations are based on the risk-return tradeoff such as the amount of the investments. This means the size of the investment that needs to be made and whether the company can afford it or not (Savvides 1994). Similarly, with most investments, the expected time or duration of the investment is an important consideration in both the decision to invest and the rate of return. When companies decide which investment to make, besides considering the revenue gained over time, they also consider the amount of time the invested money will take to be recovered (William, Haka & Bettner 2008). Thus, it is the period in which investment is paid off. Furthermore, periods in which investment can be recovered should not be too long, because business there is a certain amount of risk associated with longer periods therefore; companies prefer shortest payback periods as compared to longer payback periods (William, Haka & Bettner 2008). On the other hand, the payback period does not specify the revenue that can be generated from the investment. For this purpose, companies can evaluate the investment by comparing it with other investments being offered. The investment with the highest rate of return and the shortest payback period will be favored by the organizations (Van Horne & Wachowicz Jr. 2001). In addition, another factor involved in making investments is inflation which is not increase in prices but it is the depreciation in the value of money (Savvides 1994). Thus, companies also need to keep in mind the timing of cash flows which means that the value of cash in possession at the moment might be worth more than the promised gains on some future date (Van Horne & Wachowicz Jr. 2001). Furthermore, the ability to manage the investment is a huge consideration and will, certainly play a part in an investment decision (Van Horne & Wachowicz Jr. 2001). What are Cash flow, Income Statement, Balance sheet and examine the advantages of using them. One of the major ways for investors and creditors to analyze whether a company will be in a position to pay its future debts is to study and analyze the company’s financial statements (William, Haka & Bettner 2008). Financial statements are outlines of financial operations of an organization. They are monetary declarations of what is believed true about an organization (William, Haka & Bettner 2008). The three main financial statements are: The balance sheet is a statement that depicts where the firm is positioned in financial terms at a certain date. It offers the user with the information about existing resources along with the claims to those possessions. The income statement is a statement that illustrates particulars and outcomes of an organization’s operations related to revenue for a period of time. It offers the user with information about the revenue generated by the organization by specifying the causes of revenue and the expenditures which lessen earnings. The statement of cash flows is a statement that shows information of the company’s operations entailing cash during a period of time. (William, Haka & Bettner 2008) Financial statements have a number of advantages, the most common being financial analysis. By preparing a set of financial measures comprising of ratios and other measurements, financial statement analysis can offer important insight about the business (Burton 2008). Thorough financial statement analysis generally results in the calculations of important ratios from the statements. Ratios are frequently used to evaluate performance or as diagnostic instruments to indentify possible problem areas. Financial analysis permits managers of a company to better understand the business and identify trends or situations that might be harmful. Thus, the organization can examine its own performance over the period of time through financial statements analysis and gauge its overall success. Similarly, potential investors might ask for information to help them gain a better understanding of the business they plan to invest in, therefore, financial statements allow investors to get an idea to make a decision about the investments of their funds in a certain company (Brigham & Houston 2009). Possibly one of the biggest advantages of preparing financial statements is the ability to lessen the vulnerability of one’s business to fraud (Burton 2008). As mentioned earlier, financial statements offer insight into the operating activities of the company, therefore, not only can regular financial analysis identify abnormalities that might be indicative of fraud, but also, the discipline of preparing financial statements and exploring the causes of unanticipated changes help management detect employees involved in deception (Burton 2008). Similarly, regulatory institutions like International Accounting Standards Board can make certain whether the firm is following accounting standards or not (Burton 2008). Financial statements can also help the government institutions to examine the taxation that is owed by the company (Burton 2008). Thus, the preparation of financial statements can result in a number of benefits for the company. References Brigham, EF & Houston, JF, 2009, ‘Fundamentals of financial management’, South-Western College Pub, United States of America. Brigham, EF & Daves, PR, 2009, ‘Intermediate financial management’ South-Western College Pub, United States of America. Burton, J 2008, ‘Private companies reap multiple benefits from financial statements’, Denver Business Journal. Retrieved November 28, 2010, from http://www.bizjournals.com denver/stories/2008/01/21/focus4.html Savvides, SC 1994, ‘Risk Analysis in investment appraisal’, Project Appraisal, vol. 9, no. 1, pp. 3-18. Retrieved November 28, 2010, from http://129.3.20.41/eps/fin/ papers/0409/ 0409020.pdf The trade creditor’s guide to statement of cash flows, 1999, Credit Research Foundation. Retrieved November 28, 2010, from http://www.crfonline.org/orc/cro/cro-10.html Van Horne, JC & Wachowicz Jr., JM, 2001, ‘Fundamental of financial management’, Prentice Hall, United States of America. William, JR, Haka, SF & Bettner, MS, 2008, ‘Financial & managerial accounting: the basis for business decisions’, McGraw-Hill Companies, London. Read More