Basic Concepts of Financial Strategic Management Essay

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Finance -- Finance for Strategic Managers -- Stage

I am a longstanding manager in a family firm which is a small but growing organisation. My responsibility is finance. A new member of the family has just joined the firm fresh from completing a post graduate (level 7) qualification at college. He is clear that in order to ensure the business's continued success he must develop the financial skills required to assess and manage finance within the business. He wishes to begin by understanding the role of financial information in business strategy and given my experience he has asked for my advice. He intends to create a file on finance for strategic managers which he can use as an aide memoire.

Body

Section 1:

An Assessment Of Why Financial Information Is Needed In Business

Business often turns on decision making and effective decisions need financial and non-financial information. Financial information, which often comes from accounting, serves management's decisions by collecting and examining raw data, and then converting that data into usable information (Zager & Zager, 2006, p. 35).

b. An Identification Of The Business Risks Related To Financial Decisions

"Risk" is the probability and extent of negative results from a decision. When a business manager makes a decision, he/she must weigh the possibility and degree of loss the business might suffer because of that decision. Due to the fact that a business manager must often make decisions with uncertainty, having imperfect information about existing circumstances, future circumstances or future results, many business decisions involve risk. There are several types of risk involved in decision making, one of which is financial risk. Financial risk involves possible financial losses that could be caused by factors such as poor resource distribution, interest rate fluctuations, tax policy shifts, commodity price fluctuations or currency value fluctuations (Boundless Management, 2016). Since a strategic manager cannot perfectly foretell the future, he/she must make decisions without knowing all current circumstances and or future circumstances/results, which is financially risky.

c. Financial Information Needed For Strategic Business Decisions

The financial information needed for strategic business decisions normally consists of the information provided by: balance sheets; profit & loss accounts; and cash flow statements (Zager & Zager, 2006, p. 36). A balance sheet is a "snapshot" basically consisting of Capital (source of money) + Liabilities = Assets (where the money is currently). It shows individuals/entities owning company resources and exactly what they own, company assets, company debts, reserves, stock values, capital assets, cash on hand, and the value of shareholders' funds (Businessballs, 2016). A profit and loss account (P&L) is basically a trading description for a fixed period of time. It shows how well a company has executed its trading activities, displaying profit performance through sales revenues, costs of sales/goods sold, a gross profit margin (or "contribution"), fixed overheads and/or operating expenses, and a profit before tax figure (PBT) (Businessballs, 2016). Finally, a cash flow statement displays the flow and availability of cash through and to the business during a specific period. A cash flow statement, which often encompasses a full trading year, must be reliable, as cash must be available to pay suppliers, staff and other creditors in order to survive (Businessballs, 2016).

2. Section 2 -- Information on Published Financial Statements

a. Example Of Published Accounts

Published accounts are a company's financial records that have been prepared, audited and sent to shareholders and other interested individuals/entities. Typically, a company's board of directors presents a copy of the profit and loss account, balance sheet, director's report and auditor's report before the company's annual general meeting. For example, Virgin Atlantic Ltd. openly publishes its key financial records, including its audited balance sheets; profit & loss accounts; and cash flow statements, effective December 31st of each calendar year. They are readily available at a variety of sources, including "CompanyCheck" online (CompanyCheck Ltd., 2016).

b. Purpose, Structure And Content Of Published Accounts

Published accounts are professionally prepared, audited and published for the purpose of giving reliable information to stockholders, potential investors, government authorities, and other interested persons/entities. Due to legal requirements, they are often structured as statutory accounts, including a 'balance sheet', which shows the value of everything the company owns, owes and is owed on the last day of the financial year, a 'profit and loss account', which shows the company's sales, running costs and the profit or loss it has made over the financial year, notes about the accounts, a director's report and depending on the company size, possibly an auditor's report (Government of the United Kingdom, 2016).

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Their content includes reliable information for a reported period (usually a year) about: company performance, often in comparison with the prior year; performance possibly in relation to production, sales, profit before tax and profit after providing for tax; challenges faced by the company and steps the company took and/or is taking to meet the challenges; sources and uses of funds; product information; whatever the company owned and owed; research and development and their progress; capital projects undertaken, continued and/or completed by the company; employee-management relations; the economic scene and its effects on company performance; the company's role and actions in social responsibilities; the company's future prospects; commitments and liabilities for which no provision was made and the reasons for not making provisions; details of any material liability arising after the balance sheet date and before the directors adopted the accounts; utilization of capacity and reasons for under-utilization of capacity.

c. A Calculation Of The Financial Ratios From The Accounts

A financial ratio is the comparative amounts of two designated numerical values taken from a company's financial statements that assist in evaluating the company's financial condition. Quite a few financial ratios are used in accounting to judge a company's overall financial condition. The financial ratios from the published accounts of Virgin Atlantic Ltd., for example, include: pre-tax profit margin; current ratio; sales networking capital; gearing; equity in percentage; creditor days; liquidity/acid test; percentage of return on capital employed; percentage of return on total assets employed; current debt ratio; total debt ratio; percentage of stock turnover ratio; and percentage of return on net assets employed (CompanyCheck Ltd., 2016). These are by no means exhaustive, as there are approximately 30 relevant financial ratios that can be loosely organized in six general categories: liquidity measurement ratios, including current ratio, quick ratio, cash ratio and cash conversion cycle; profitability indicator ratios, including profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed; debt ratios, including debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio, and cash flow to debt ratio; operating performance ratios, including fixed-asset turnover, sales/revenue per employee and operating cycle; cash flow indicator ratios, including operating cash flow/sales ratio, free cash flow/operating cash ratio, cash flow coverage ratio and dividend payout ratio; and investment valuation ratios, including per share data, price/book value ratio, cash flow coverage ratio, price/earnings ratio, price/earnings to growth ratio, price/sales ratio, dividend yield and enterprise value multiple (Loth, 2016).

d. An Explanation Of How They Support Strategic Decision-Making

Each financial ratio supports strategic decision making by giving a more accurate picture of a company's condition, stand-alone performance and competitive performance from a certain perspective. The use of a variety of financial ratios examining a company from various perspectives gives an increasingly accurate picture of the company's overall condition, stand-alone performance and competitive performance, which helps the strategic decision-maker understand and account for possible financial benefits/risks while making his/her decisions. The more accurate a picture of the company's condition, the better equipped is the strategic manager in making optimal strategic decisions (Loth, 2016).

3. Section 3

a. Clear distinction between long and short-term financial requirements for businesses

A business's long-term financial requirements are fixed capital requirements. They are needed for the business, even at its earliest stage and are "fixed" in that production/service does not consume them; rather, they have reusable value and are normally depreciated over a long time. Fixed capital requirements might include land, factories, office buildings, equipment and any other requirement that is not repeatedly purchased to produce a good/service (Investopedia LLC, 2016). Short-term financial requirements are working capital requirements, sufficient short-term assets to pay short-term debts (Investopedia LLC, 2016).

b. Table Comparing.....

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