Financial Management: Decision Making, Financial Ratios, and Management Accounting Techniques

Financial Management

Introduction:

This report focused on the process of decision making, which is most important part in any company or the business organisation as well as concentrates on the approaches and techniques, which used to support the decision making process in the company helps to achieve the business objectives. In this report shows the financial management principles and role and functions of the management accounting, which helps to increase the stakeholder value in the company. There is the calculation of financial ratios of the Amcor Plc which presents the financial health of the company, and difference between three investment appraisal techniques as well as management accounting techniques and role of cash flow statement & break- even point.

Part 1:

(a) Financial decision making: It is the process that responsible for the business’s decisions, which is related to the equity of shareowners as well as liabilities of the business organisation. Financial decision making helps in setting the objectives of the business or a company. Financial decision making is an important part for an organisation or a company. There are two types of approaches, which used to support the business’s decision making. (Greenberg and Hershfield 2019) These are as follows:

• Knowledge based approach,

• Formal approaches,

• Informal approaches.

Knowledge based approach: Knowledge based approach support the designed systems to assure more effectively decision making using the appropriate data, knowledge, and time in the company. It is also concentrates on the objectives, quantitative as well as data ti inform the process of decision making in the company.

Formal approach: The formal approach is basically made using the system, structures as well as processes. The formal approach helps to maximise the efficiency of the company or the business organisation. It also helps in the decision making for the company. The top management of the company communicates with the company’s staff by using the system of formal down- ward communication as well as the staff communicates with the managers or high authority of the company using the informal approach. It helps to the management to make the decisions relevant to the company’s profitability in future. (Bagheri et al, 2018) The formal approach structure is makes purposely by the business organisation’s managers to achieve the business objectives. For example: Amcor Plc. Company use the formal approach. The management of the company use this approach for the decision making process. With this approach the company can take easy and fast decisions. It also maximise the wealth of shareowners. It involves tools of internal information, market research, sales department, etc.

Advantages of formal approaches:

1. Maximise overall effectiveness: In the company, it is important to use better techniques or methods to improve the value of business. Formal approach helps to maximise the efficiency of the business as well as increase the productivity. It also used to following prearranges regulations, hence increase or maximise the overall the effectiveness of the company.

2. Quick accomplishment of work: Sometime the management of the company need to communicate with the company’s staff then the formal approach can helps in the communication to work quickly and make the right decisions.

Disadvantages of formal approach:

1. Delay in action: Sometimes it delay in action related to the decisions of the business organisation. It also slows to take the decisions as well. (Dragomir et al, 2018)

2. Ignorance: In the formal approach, the peoples are ignored the major point in the decision making.

3. Inflexible: The nature of the formal structure is inflexible. Sometime the company doesn’t follow the rules in the formal structure.

Informal approach: The informal approach is better at motivating the persons to go beyond as well as above their work responsibilities, engaging staff in collaborative the work, sticking to the changes, and communication the data information quickly. The structure of the informal is the complex web of influences, judgement calls, interactions, and relationships that make the business what it is- the productive, real tensions which develop the difference in between getting the things good & done and getting the things good better than the anyone else. The rules of the informal don’t seek to change the criteria of formal. For example: the plc use the informal approach to take decisions quickly for the future. (Peng Jager and Lowie 2020)

Advantages of informal approach:

1. Fast communication: The informal approach is the fast communicate structure in the business organisation or the company. It helps to communicate with the staff clearly as well as takes decision quickly.

2. Correct feedback: The informal approach also helps to correct the feedbacks of the staff in the company; it makes better understanding in between the management and employees.

3. Remove conflict: It helps to filling the gaps of procedural, mediating conflicts as well as facilitating company’s negotiations. If in the company, there is any conflict between the employees or managers then it will also help to remove the conflict. The small companies also find it most effective approach because it take decisions after listening to point-of- view of everybody. (Peng Jager and Lowie 2020)

Disadvantages of informal approach:

1. Importance to individual interest: It gives importance to the individual interest satisfaction as compare to the interest of the business organisation.

2. Time consuming: In the informal approach, it takes a lot of time as well as it difficult to implement the policies in the business organisation.

Management accounting functions support the decision making:

The management accounting concentrates on the aim of accounting at informing the management about metrics of operational business. In simple terms, ‘management accounting is the process to determining, identifying, communicating, analysing, as well as measuring the data to the managers of the company. It helps in to make or buy the decisions as well as forecasting the cash flow of the business. (Hertati et al, 2021)

The functions of the management accounting also help as well as support the company’s decision making. The functions of management accounting are such as planning, organising, monitoring, decision making, and controlling. These functions are important tools of the business organisation to make the decisions. The information of management accounting is used by the management of company to determine that how to sell products and what should be sold. The management accounting functions focuses on the proper reporting as well as recordation of the transactions of accounting to be in compliance with the applicable framework of accounting like IFRS and GAAP.

Role of shareholders in decision making: Shareholders are the internal users of the company, which helps in making the decision for the company’s profitability. Shareholders can be divided into two categories:

• Internal shareholders,

• External shareholders.

Internal shareholders: The internal shareholders usually have the interest of finance in the business organisation or a company. These involve stakeholders, the investors and board of directors. They helps in the decision making as well as they have the rights for voting in the company’s success. (Leonard 2019)

External shareholders: The external shareholders is usually concerned with the company’s decisions makes as well as meet with the current data or leadership to the board of directors to analyse the ideas. The external shareholder role is often reflects the environmental concern, community and government.

‘Make or buy’ decisions: The organisations use the analysis of quantitative to determine whether buying or making is the cost- efficient technique. It is the part of strategic decisions to make or buy based on the influencing factors. There are the factors which influence may or buy decisions:

• Flexibility,

• Save money,

• Increase the volume, and

• Quality.

Limiting factor analysis: It is the technique that the company try to search out the way to increase the output of the productivity. The limiting factors are the main reasons that put the limit on the output of the company’s production. It includes machine capacity, labour, and raw material.

(b) Financial management defines organising, planning, controlling, and directing the activities of financial like utilisation and procurement of enterprises funds. It means applying the principles of management to the enterprise financial resources. The important objective of the financial management is to make sure enough and regular funds supply to the concern as well as ensure the funds utilisation to the minimum degree. In the financial management, it is also important to set the goals to achieve the financial objectives such as long term goal, and short term goal. (Zietlow et al, 2018)

Key financial management principles:

The financial management principle plays an important part in the business organisation. In Amcor Plc. uses the principles of financial management. There are the financial management principles:

(1) Setting objectives to achieve the financial goals: It is the principles of the financial management, which helps to achieve the objectives of finance. Financial goals such as saving for house, retirement, vacation, starting the business,0020paying off debt as well as building an emergency fund. To achieve the financial goals the company should concentrate on the business as well as should keep company’s accountable. If the company want to achieve the financial objectives then first they should set the particular financial goal. The company should make a make a budget, which concentrate on the expenses and debts. It should develop the skills to improve the income as well.

(2) Ethical financial management: In the financial management principles it is important to conduct their financial activities in an ethical way. It is important to ignore the difference of interest in the relationship of professional as well as act with integrity and honesty. In this principle, the company provide the objectives as well as information relevant to the report to the employees.

(3) Maximising shareholder wealth: Thee shareholder wealth maximisation principle holds that the higher return to the shareowners is and ought to be the goal of the activity of corporate. From the perspective of financial management, this timing and risk associated with the predicted earnings per share to increase the stock price of the business organisation or a company. (CARLSON 2021) When the managers of the company try to increase company’s wealth, they are actually trying to maximise the stock price of the company. If the price of stock maximises then the value of business and stakeholder’s wealth increase. The stakeholders also expect the return on investment, and then it will also help the strategic goal of the any financial plan.

(4) Delivering sustainable long term growth: To achieving the sustainable as well as strong growth is one of the treasury priorities. The aim of the sustainable growth is to assure the United Kingdom can maintain the growth of economy that will not able to the nation to prosper. It also helps to achieving the long term objectives of the business organisation. It is also important to enhance the productivity while reduce the problems of financial risks. (Fajardy and Mac Dowell 2017) For the effective financial strategy it is important to sustainable the financial activities, which helps to achieve the long term goal as well. It indicates the allocating capital budgeting for the sustainable problems increase the company’s competitive advantages. The financial management also plays the major role in promoting sustainable business development as well as practices.

Financial strategy: The business organisation financial strategy is essentially focused with utilisation as well as procurement of funds. The main purpose of the financial strategy is to assure regular and adequate funds supply fulfilling the future as well as current requirements of the company or business organisation. It deals with departments like cost structure analysis, functions of accounting, evaluating profit potential, and financial resources. It also concentrates on the financial management alignment with the business and corporate goals of the company to gain the strategic benefits. The main objective of the financial strategy is to increase the stakeholder’s wealth. The goal of the business organisation must be not corporate each shareowner as well as the company has to balance the customers wants as well as needs of the parties of interest.

Financial sustainability: It is the method which is used in business organisations for the profit purpose. The financial sustainability also helps to keep the business or their work going and if the company would have to pay for, then growing it fully will be the part of company’s plan of financial sustainability. The plan of the financial sustainability will also involve other resource like volunteer employees, in- kind- support from other business organisations. It also involves convincing the other company to take on the project that is started. (Bartolacci et al, 2018)

(c) Management accountant role: The management accountant of the company plays an important role in the process of decision making. The roles of the management accountant are as follows:

(1) Long term and short term planning: It is important in the business forecasting for future as well as economic events for creating the plans for future such as strategic management accounting, market study, strategy of formulating corporate, and long term plans. It also helps to monitor and control the financial terms as well. (Zarzycka 2017)

(2) Maintaining optimum capital structure: The management accountant plays a major role in funds raising and their application. The management accountant has to decide about the controlling and maintaining the mix in between equity and debt.

(3) Decision making: It provides important data to the management of the company in taking the short term decisions such as make- or- buy, products & goods pricing, project financing, optimum product mix, and lease or buy. The decisions of long term period are investment appraisal, capital budgeting, and project financing.

Functions of management accountant: The management accountant make a framework for the system of the management accounting. The management accountant collects the accurate information and develops the financial report of the business organisation. Management accountants also can improve the financial decision making. The functions of management accountant are as follows:

• To continuously government influences, social forces, appraise economic, and analyse their effort upon organisation,

• To collaboration as well as supervise statements preparation to the government agencies, (Bragg and Bragg 2020)

• To conduct the tax operations as well as policies,

• This functions involves the administration and formulation for policy of accounting and statistical statements compilation and special statements as required,

• It helps in controlling the organisation’s performance by using the accounting ratio, cash flow statement, budgetary control, etc.

Accounting control system: The structure of accounting control system of the business organisation consists of procedures as well as policies to provide the reasonable assurance that particular objectives of entity will be achieved. It also put in place to assure the company operates effectively, and provides the accurate statements of finance. It protects the company’s assets as well as prepares the financial report timely. (Abdusalomova 2019)

The accounting control systems also determine as well as control the adopted by the company. The compliance with regulations as well as laws is not the accounting controls purpose. The three important areas of control of the accounting system are preventive control, detective control, and corrective control.

Cost control and effective financial planning: Cost control is the process of the regulations by the action of executive of the operating costs an undertaking. The aim of the cost control is achieving the sales target. It includes the setting standards. Financial planning is describes as to evaluating the required capital as well as determining the company’s competitions. The company has to control the cost of expenses to increase the revenue of the company. It also supports the strategic and tactical planning to increase the company’s productivity.

Internal and external controls:

Internal control is the practices or procedures within the business organisation to assure that the business achieve the organisation’s target set in the strategies. It also ensures that the management risk, customer assets custody and property protection in completely arranged. It is important to control the risk within the organisation.

The external control is activity taken by the party which is outside and it impacts the business’s governance. The trust that one’s behaviour and experience are determined by circumstances, external factors, luck and other persons compare to the internal control. (Bragg and Bragg 2020)

Techniques for fraud detection: The Techniques of the fraud detection is important for the company to find out the different types of fraud as well as traditional frauds. There are the techniques or methods of the fraud detection. These are as follows:

• Analytics techniques: It helps to find out the abnormal frauds. The analytics techniques compute the parameters of statistical to search the values that increased the standard deviation averages.

• Ad- Hoc: The Ad- Hoc helps to search the fraud by the hypothesis means. It allows examines the information of the financial reports. (Jain NamrataTiwari and Jain 2019)

• Continuous analysis: It helps to setting as well as creating up the score to run against the high information volume to recognise the errors as they happen over the time period.

Approaches and prevention to ethical decision making: There are the approaches and prevention to ethical decision making is as follows:

• The polluter pays principle: It is the standard of risk which permits the behaviour of risk taking and then, if something goes not right, clean- up of assigns for suffering to those who make the harms.

• The gambler’s principle: It counsels risk takers to ignore the damages that if takers occurred would be unacceptable of ethically, ranging up to the biggest the disasters of technologies, involving the existential risks, and global catastrophic.

Part 2:

(a) Financial decision making: Financial decision making involves comparing benefits and limitations of a decision regarding money. Generally, one of the best indicators of a good decision making process is the condition of the bank as well as investments accounts. In Amcor Plc, the financial decision making also helps to taking the right decision regarding the company’s profitability as well as productivity. (Bhandari and Adams 2017) The strategies to take the right decision in the company are as follows:

• Understand budget,

• Analyse the company’s financial report,

• Determine the financial performance,

• Include the management team in the process of decision making, etc.

Financial ratios of Amcor Plc.

(1) Gross profit ratio: It is the technique of the company, which measures the effectiveness as well as performance of the company. (CARLSON 2020)

Formula: Gross profit ratio = Gross profit/ revenue* 100

Interpretation: The above table is about the calculation of the gross profit ratio of the Amcor Plc. In 2018, the result of the gross profit ratio was $ 19.92 and in 2019, it was $19.02.

(2)Net profit ratio: The net profit ratio is ratio of the profits of after tax to revenue or net sales. It is used to compare the business’s results with their competitors.

Formula: Net profit ratio = Net profit/ sales* 100

Interpretation: The above table is about the calculation of the net profit ratio of the Amcor Plc. which shows the total sales and net profit of the company. In 2018, the net profit was $586.6 and in 2019, it was decreased to $ 437.4. In 2018, the total sales or revenue of the company was $9,319.10 and in 2019, it was increased to $ 9,458.20. The result of the net profit ratio in 2018 was $ 6.29 and in 2019, it was decreased to $ 4.62.

(3) Quick ratio: Quick ratio is the type of the liquidity ratio. It measures and determines the capability of the company. It also called as acid- test ratio. It also helps to estimates the company’s liquidity position. (Tumanggor 2020)

Formula: Quick ratio or acid- test ratio = (Total current asset- inventory)/ current liability

Interpretation: The above table is about the calculation of the quick ratio of the Amcor Plc. which helps to measures the performance of the company. In 2018, the current asset and current liability of the company was $ 3,620.30 and $ 5,055.20. In 2019, the current asset and current liability was $ 5,210.10 and $4,541.80. In 2019, the current asset was increased and current liability was decreased compared to the last year. In 2018, quick ratio was $0.45 and in 2019, it was $ 072. In 2019, it was decreased compared to the last year. (Annual report 2019)

(4) Current ratio: It is the working ratio, which helps to determine the business or company’s ability to meet their short time period duties. (Tumanggor 2020)

Formula: Current ratio = Current asset/ current liability

Interpretation: The above table is about the calculation of current ratio of the Amcor Plc. In 2018, the current ratio of the company was $ 0.72 and in 2019, it was increased to $ 1.15.

(5) Operating ratio: It shows the comparison in between the cost of goods and the operating expenditures with the revenue of the company. (Bragg and Bragg 2020)

Formula: Operating ratio = Operating expenses/ net sales* 100

Interpretation: In the above table showed the result of operating ratio of the Amcor Plc. In 2018, the operating ratio of the company was $ 10.66 and in 2019, it was decreased to $8.37.

(b) Investment appraisal techniques:

(c) Role of cash- flow statement: The cash flow statement is to identify as well as determine the important cash- flow happening during similar time period as the business organisation’s income report and between the relevant organisation’s balance sheets. There are the roles or importance of the cash flow statement:

(1) Creating excess cash: The Amcor Plc runs the business for the earning profits motive. The profit of the company helps in making the money; it can be implemented as well as identified by concentrating on the statement of cash- flow. (MURRAY 2020)

(2) Short time period planning: The statement of cash- flow is considered to be a vital as well as useful technique for the Amcor’s management for the purpose of the planning of short term.

(3) Long time period planning: It also plays an important part in the cash- flow statement. It helps the Amcor’s management in creating the cash planning for long time period. It helps in decision making.

Role of break- even analysis: It is the economic technique, which is used to control the company’s cost structure. (Bragg and Bragg 2021) There are the roles of break- even analysis:

(1) Setting targets and budgeting: The break- even analysis easy and simple to fix the objectives as well as make the budget for the Amcor Plc. It also practised in the establishing the company’s target.

(2) Monitors and controls cost: It also controls and monitors the company’s product costs. It can be affected by the variable and fixed cost. (Goyal Dave and Verma 2018)

(3) Manage the margin of safety: The cash flow statement also helps the Amcor plc to decide the least sales number required to make the profits. The cash flow statement helps in decision making in the company.

Role of trial balance:

The trial balance refers to the statement that the company’s accountants will create or generate when the period of accounting is ended. The accountants will use the statement of trail balance to assure that the calculation of credit and debit are similar as well as indicates the all entries of journal are to be balanced. It plays an important role in the organisation. It shows the financial performance of the company.

(d) Management accounting techniques: The techniques of management accounting are useful in the long term financial stability as well as to support the good decision making. (Rasyid Sugiarto and Kosasih 2017) There are the techniques of management accounting:

(1) Cash flow statement: Cash flow shows the all cash inflows and outflows of the company. It helps in making the decisions that the company how decrease the expenses in the business and how increase the profitability.

(2) Trail balance: It shows the credits and debits of the company. It shows all incomes and expenditures of the company. It helps to find fraud or error in the company and also fix the accounting books are correct.

(3) Break- even analysis: It defines the total sales amount the company needs before earned the profits. It also helps the company to identify and determine the fixed costs.

Recommendation:

The management accounting tools helps in decision making which helps to make profit for the Amcor Plc. The company should use the management accounting technique to improve the business value as well as increase the productivity and profitability. The techniques should ensure the long term financial stability of the company. It is also important to keep the business stable to growing the company.

Conclusion:

The above report showed the different type of approaches such as knowledge based approach, formal and informal approach, which helps in the decision making process in the business organisation or a company. The shareholders play an important in the decision making in the company. It includes internal and external shareholders. In this report included the make or buy decisions and limiting factor analysis as well as the principles of financial management and role of management accountant. In this report showed Amcor Plc. financial ratios which help to presented the financial performance. In 2019, the performance of the company is better than the last year and difference between NPV, ARR and pay- back period.

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