Financial Management
Table of Contents
Part 1
Introduction
This report is divided into two different parts. The Principles of Financial Management and will discuss about the range of approaches, techniques and factors that contributes to effective decision making. There are different types of decisions that a business needs to make like personal and organizational decisions, and individual as well as group decisions. It also specifies that how the management accounting functions support this appropriate financial monitoring and control systems are in place, maximize performance and help ensure long term sustainable growth.
The key approaches of the most appropriate decision making are –
Autocratic Decision Making - It refers to a style of decision making in which all decisions related to the business organization are taken by top management and decision making process is entirely under the hands of top management and this power is not delegated to the sub- ordinates.
Participatory decision making – In this form, when there is a huge uncertainty involved from taking the decision, the management should ensure participation of the people affected from the decision while taking the decision.
Consensus based Decision Making - When the business decision is not taken for any business matter for which instant decision is need to be made, then the consensus approach for decision making should be adopted, in which the consent of 100% employees must be taken before making a decision.
Democratic Decision Making – When the decisions in an organization are taken by all the members in an organization in a democratic manner, that is every employee is allowed to vote in the decision making process, then it is called as the Democratic Decision Making.(Marchau, Walker and Bloeman 2019)
Various Techniques for Decision Making
There are various techniques that can help in taking business decisions such as –
Trial and error - In the trial and error method the business decisions are taken by trying different methods and then choosing the most appropriate way for taking the business decisions . The business decision in this procedure is taken for the less uncertain matters.
Pro and con technique - In this method the business decisions are taken on the basis by deciding the advantages and disadvantages of each factor involved and this technique is implemented with the help of different techniques and field analysis.
Net present Value (NPV) and Present Value – It is a capital budgeting technique in which business decisions are taken on the basis of different cash inflows for various years at a discounted rate. This would help in identifying the profitability of various different business investments.
Multi Voting – In this method every employee is asked to give some ideas related to a particular matter and then the most appropriate option from all the different options given is chosen by the management. (Sherman 2019)
Factors which Contributes to Effective Decision Making –
Alternatives Available - When there are various different business alternates available, the business decision should be such in which is most suitable as per the needs of the business.
Uncertainty - When the business decision to be taken involves a huge amount of risk, then the most appropriate option with the least amount of risk should be selected.
Interpersonal Issues – The relations between different departments, the chain of command within the organization all must be kept in mind before taking a most appropriate decision.
Complexity - The complex nature of business activities, there are various limitations that may affect any business decision such as, limitation of resources, limitation of time etc.
The management accounting function that may help in decision making are-
Managerial Accounting may help in decision making by as it helps in determining the Break Even Point, the PV Ratio, ABC analysis, Management tools and measuring the performance and taking appropriate actions to improve the performance. (Lepistö and Ihantola 2018)
Financial Strategies to Improve Stakeholders Value are –
There are different financial strategies to maximize stakeholders needed and to meet the stakeholder’s needs are –
Increase per unit price: To expend the per unit price for the product assuming that the demand for the product is inelastic and will not be affected much by increasing the price. Increase in the price would also help in increasing the profits of the business, and hence will ultimately helps in meeting stakeholders need.
Sell more units - The business unit should try to sell more units as the more the sales will be the more will be the profit. The more will be the profit, the more the company will be able to meet the needs of all stakeholders.
Utilize the Fixed Cost more appropriately – The fixed cost is the cost that remains constant irrespective of the number of units, so the more units will be produced, the better the fixed cost will be utilized. The better the cost utilizes the more value is provided to the stakeholders.
Decrease Unit Cost - The lesser will be the cost of production, the more will be the profits. The more the profits of business the more it will improve Stakeholder’s value.
Functions of Management Accountant in Regard to Financial Control and Monitoring
Management accountant is the person who undertakes business decisions in an organization with the help of the financial information; he interprets the financial information to take financial decisions. (Youssef, Moustafa and Mahama 2020)
Controlling and Planning Businesses - It is the main function of the financial manager to plan and to take necessary steps to implement to the working of the business so as to achieve the overall goal of the organization and to improve profits.
Controlling a team of financial experts - It is the function of management accountant to manage the team of financial experts in an organization, and to ensure their efficient working to achieve the overall financial goal.
Maximizing Shareholders Wealth - Shareholder’s wealth is different from the profit motive of the business. Shareholder’s wealth is maximized when the market price per share increase and the price earning ration also improves.
Preparing Financial Reports and creating budgets on the basis of these reports - The management accountant should prepare budgets for the business for the future period and formulate policies on the basis of these budgets.
Conducting Internal Audits - As internal audit of the business needs to be prepared by the internal management to the company to support the statutory audit, the internal audit in the company can be prepared by the financial manager also. (Gartenstein 2018)
To maintain effective communication with the Managerial Staff – The management accountant of the company must take steps to ensure that effective communication and uninterrupted flow of information in the organization. These will help in proper motivation of the employees to motivate them to achieve organizational objective. (Bender, 2013)
Techniques of Fraud Detection –
There are various ways in which the frauds in an organization can be detected – ( Chen, Lion and Wu 2019)
Fraud Detection by Tip Lines – Mysterious information given by an unnamed person on the company’s website is the most used way to detect and to prevent fraud in the organization. But various small organizations do not have websites, so this method of fraud detection becomes impossible for them. However, the organization should do steps to ensure the anonymity of the informer; the organization should do steps to ensure the proper reward is given to the informer.
Identification by External Auditors – The auditors are the person who detects fraud in the organization by analyzing the assets and account of the organization. When the auditors declare that the accounts of the company are correct and are also free from all the disqualifications, then the auditor certify the company’s account as correct and free from errors.
Identification by Internal Auditors - While the audit of the organization is performed by certified auditors, the organization can internally perform audit. This audit is performed by internal employees of the organization. It can be performed by senior accountant or any other person in the company who has accounting knowledge and are concerned with identifying internal frauds and take steps for their prevention in the organization.
Fraud Identification by Mischance - Sometimes the organization may identify a fraud by mischance, or an admission by any person for the commitment of the fraud. Sometimes the people who committed a fraud didn’t do much efforts to properly hide their fraud and are often get caught by the professionals who have specific knowledge and experience for fraud detection.
Techniques for Fraud Prevention –
The various techniques in which the organization can detect frauds in an organization are – (Piciniu 2018)
Know Your Employees - The employees of the organization are the most valuable resource for any organization. The organization should take steps to ensure that the employees in the organization are properly motivated and are given adequate bonuses.
Form a Information Reporting Group - An organization should form a reporting cell in which all the employees are felt safe to report any mishappening that is happening or is going to happen in the organization. The employees must feel safe to report their concerns and must be accordingly rewarded for bringing the issues in the concern of the management.
Implement Financial Control - The organization should take steps to ensure that proper control system is implemented in the organization and all necessary steps are taken to ensure that the frauds in the organization are timely detected and proper actions are taken to control them.
Employ Reliable Professionals – Employees are the most valuable assets for any business organization, if the proper knowledgeable employees are hired by a business, it could benefit them for a long term and if the employees in the organization are not trustworthy the organization could suffer with an enormous loss.
The different Approaches for Ethical Decision making are –
The various approaches for ethical decision making are – (Hunt 2017)
Utilitarian Approach - It refers to making the choice between what is right? And what is wrong? What effect can it make if we choose a particular choice? All these questions need to be answered before making a decision as per the utilitarian approach.
Fairness Approach - Whether a particular decision if made is just or unjust. The organization should implement a policy of fairness in which all the employees are treated equally and a fair dispute resolution system is being implemented in case of any dispute.
Right Approach – In this approach the business decisions are made on the basis of what is right decision. It is decided on the basis of what is ethically, culturally and morally a right decision to take.
Collective Benefit Approach - An ethical business decision should be taken on the basis of the decision which is for the collective benefit or for the benefit of all and not for a particular group like the approach towards using a recyclable products and a forestation policy etc.
Integrity Approach - Integrity refers to a particular moral excellence. It refers to the idealism of what is morally correct and business decisions should be such that which is morally correct. ( Noothigattu, Gaikwad and Procaccia 2018)
Recommendations on how Management Accountants can Improve Financial Decision Making –
Management accountant for any organization plays a crucial role in the organization. He takes all the decisions related to the inventory management, the make or buys of a product related decisions, identify the cost profit volume for a product etc. Management accountant also plays an important role in the financial decision making and his actions can help in improving financial decision making as - (Mirgorodskaya, Andreeva and Sichev 2017)
Appropriate Activity Based Costing Analysis - ABC analysis is also known as always better control, in this method of analysis in which the products of the organization are divided into categories ‘A’ category, ‘B’ category and ‘C’ category. The ‘A’ category is most profitable and the inventory is most tightly controlled, the ‘B’ category, it is moderately profitable and the inventory is slightly loosely controlled ant the last category is the ‘C’ category, which is the least profitable and the inventory is most loosely controlled and with the least inventory records. This analysis would help the management to take appropriate financial actions related to dividend, investment and capital decisions.
Take Make or Buy Related Choice - The management accountant of a organization take various actions related to the whether to make a particular product or to buy it from the marker, this decision is made by analyzing the total cost related to the production of the product and identify the total cost if the product is not produced and is purchased from the market. Which of the following option is more profitable is chosen. This choice by the management accountant would help them to take best financial decision suitable to the needs of the organization.
Prepare Budgets / Plans and Management Reports - The management accountants of the business prepare the reports and do the functions related to dealing with the information. They mainly prepare reports in an organization and prepare various budgets depending on the needs of the organization. By preparing budgets the managers can prepare a roadmap for the future actions of the employees. And this pre preparation can help in taking various financial decisions needed to be taken by the organization.
Proper Inventory management – Economic Order Quantity can ensure proper inventory management in the organization and can help in accessing the cost related to the cost of carrying and ordering of the inventory. This managerial accountant function can help in taking the necessary financial decisions in the business.
Conclusion
This report have discussed about the approaches, techniques and factors that contribute towards an effective decision making. Management accounting is the branch of accounting that deals with applying the managerial functions in the accounting process. This reports also discussed the about the effective and efficient financial strategies to maximize the value of the shareholders and the necessary steps taken to meet their needs. It discussed about the role of the management accountant in regards to financial control and monitoring. A business needs to make various decisions; this report discussed about ethical decisions and the steps taken towards taking an ethical decision.
References
Bender, R., 2013. Corporate financial strategy. Routledge.
Chen, Y.J., Liou, W.C., Chen, Y.M. and Wu, J.H., 2019. Fraud detection for financial statements of business groups. International Journal of Accounting Information Systems, 32, pp.1-23.
Gartenstein, D., 2019, the uses of management accounting, Bizfluent, [Online], Available at : < https://bizfluent.com/about-5549234-uses-management-accounting.html>, accessed on: February 9, 2021.
Goretzki, L., Strauss, E. and Weber, J., 2013. An institutional perspective on the changes in management accountants’ professional role. Management Accounting Research, 24(1), pp.41-63.
Hunt, J., 2017, Ethical decision making [Online] Bizfluent. Available at: < https://bizfluent.com/info-8438086-ethical-problems-management-accountants.html >, Accessed on: February 9, 2021.
Lepistö, L. and Ihantola, E.M., 2018. Understanding the recruitment and selection processes of management accountants. Qualitative Research in Accounting & Management.
Marchau, V.A., Walker, W.E., Bloemen, P.J. and Popper, S.W., 2019. Decision making under deep uncertainty: from theory to practice (p. 405). Springer Nature.
Mirgorodskaya, E.O., Andreeva, L.Y., Sugarova, I.V. and Sichev, R.A., 2017. Balanced budget system: organizational and financial tools.
Noothigattu, R., Gaikwad, S., Awad, E., Dsouza, S., Rahwan, I., Ravikumar, P. and Procaccia, A., 2018, April. A voting-based system for ethical decision making. In Proceedings of the AAAI Conference on Artificial Intelligence (Vol. 32, No. 1).
Picnic, A., 2018, the importance of fraud detection, Bizfluent, [Online], Available at: < https://bizfluent.com/info-7978548-importance-financial-strategy.html >, Accessed on: February 9, 2021.
Sherman, F., 2019, Role of decision making in a business, [Online] Bizfluent. Available at: < https://bizfluent.com/facts-6831439-role-decision-makingbusiness.html >, Accessed on: February, 9, 2021.
Part 2
Introduction
This report will shed light on critical evaluation of Unilever Plc., by using various appropriate ratios, an observation report on the data that might help the management to take operational and strategic decisions. It will discuss about different Investment Appraisal Techniques and how these techniques are used in maximizing the Return on Investment. It will shed light on different Management accounting techniques like the Break Even Analysis and Cash Flow Statement in taking informed financial decisions. At last recommendations, of how management accounting techniques can be used to support good decision making and ensure long term financial stability of the organization will be discussed in this report.
Ratio Analysis
Unilever Plc.
Various ratios of the working of Unilever Plc. Are
Ratio Analysis |
|
of Unilever Plc. |
In £ |
Current Ratio |
Current Assets/ Current Liabilities |
|
16,430 / 20,978 = .78:1 |
Operating Profitability ratio |
Operating Profit / Net sales *100 |
|
8,703/ 52,000 *100 = 16.73% |
Net Profit Ratio |
Net Profit/ Net sales *100 |
|
6,026 / 52,000 *100 = 11.58% |
Return on Investment |
Earnings Before Interest and Tax / Capital employed |
|
8,708 /43, 828 = 19.86% |
capital Employed |
Total Assets - Current Liabilities |
|
64,806 - 20,978 |
|
43,828 |
Solvency Ratios |
|
Debt Equity Ratio |
Debt / Equity |
|
23,566 / 13,192 = 1.78:1 |
Unilever Plc. Is a British company established in the year 1929, and has maintained its top position as the producer of consumer goods since then not only in the Britain but also in other countries.
As per the basis of the ratio analysis of the business, the Current Ratio of the company is calculated at .78, while he ideal current ratio for a business is 2:1, the current ration of Unilever is even less than 1 indicating very low current assets available to meet current liabilities.
The company has an operating profit ratio of 16.73%, the company is earning an operating profits. It has a quite high operating profits ratio.
A net profit ratio of after interest and tax of 11.58%. The company is earning high net profits and is earning good profits.
The return on investment ratio of the company is 19.86%. The company has a quite satisfying return on investment.
Unilever has a debt equity ratio of 1.78:1 which indicates that the company has 1.78 times debt more than equity. (Daryanto 2020)
Operating Decisions – Such decisions that are related to the day to day operations of the business are known as the operating decisions. Whereas,
Strategic Decisions – Decisions taken by the business that are related to the long term profitability of the business mainly the decisions related to the capital budgeting decisions.
As per the above ratio analysis, it can be concluded that the current ratio of the company is quite low, even low than 1, which indicate that the low current ratio of the company can have a negative impact on the working of the company, as the current assets require to cover the current liabilities expenses are low. And the Return on Investment is 19.89% which indicate that the company provides a quite decent return on the net capital employed, it will have impact on strategic decisions taken by company. The ratio between debt and equity of the company is 1.78:1 and current ratio of .78:1, indicate that the company has more debt than equity and do not have many current assets to fulfill the interest cost, which have impact on both operating and strategic decisions taken by the company. (Schmidt and Wilhelm 2012)
There are various investment appraisal techniques that can be used by Unilever Plc. Investment appraisal refers to the method by which you can identify the whether a particular investment s worthy or not. The three different investment appraisal techniques are – (Abor 2017)
Accounting rate of return |
Payback period |
Discounted cash flow |
It refers to the method of capital budgeting in which the cash inflow before deducting the depreciation is taken and divided by the average investment to calculate average rate of return from a particular investment. |
It refers to time period taken by the company to cover cost of investment in the machinery. |
It is calculated with the help of calculated a discounted rate of cash inflow. It is based upon expected cash inflows taken at a discounted rate. |
It is not calculated at the discounted rate of cash inflow. |
It may or may not be calculated at the discounted rate of cash inflow. |
It is always calculated at a discounted rate. |
It is calculated in percentage. |
It is calculated in number of years. |
Cash inflow in the business is calculated at the discounted rate of return. |
At Unilever Plc. The The Accounting rate of return, payback period and the discounted cash flow can assist in maximizing the Return on Investment as a
Proper investment appraisal will help in taking a the most appropriate capital budgeting decisions in an organization
Well researched capital budgeting decision will return in increasing the return of investment of the company in the long run.
These techniques will help in choosing the most appropriate investment option and the best investment option will help in choosing the best investment in capital assets.
Capital budgeting will help the business to choose the best investment option as these decisions are irreversible and cannot be changed once they are undertaken.
Investment appraisal techniques are the most appropriate method before taking any investment decision as capital assets have large amount of cash involved and require high understanding of investment appraisal techniques.
Financial Decision Making
The various financial decisions in the organization are taken on the basis of various finance decision making tools such as cash flow statement, statement of assets and liabilities etc. Financial decisions plays a most important role as finance plays the most important role in an organization as it is the life blood of any organization. Without finance an organization cannot exist.
Cash flow statement- A cash flow statement is prepared on the basis of total cash inflows and total cash outflows by the business. The net change in the firm’s total cash is calculated in the cash flow statement. (Bizfluent 2017)
Break Even Analysis – It refers to a situation when there is no profit and no loss in the business. Any sales below or above of the breakeven level will only result in increase or decrease in the level of total profits of the company. (Gartenstein 2018)
Every business has to take three types of financial decisions –
Capital Decision
Investment Decision and
Dividend Decision
Every company needs cash to function, a company can function without profits for sometime but it cannot function without cash as cash is needed for funding all the functions in the business. Companies’ survival is relative to its cash generation capability. If it can generate more cash, it will increase its current ratio and the more will be the current ratio the better will be its ability to fulfill the current liabilities. But too much as well as too little cash can be dangerous for the business, it must be in optimum level. The level of cash in the business can affect its financial decision making.
Breakeven Analysis can also helps in financial decision making as it identifies the minimum number of sales the company has to incur in order to keep functioning. If the sale of the business is less than BEP then the company will incur loss and if sales is more than BEP than there will be profits. This BEP analysis of the business will help it in taking financial decisions as if the BEP is low, the company will earn more profits and it could give more dividends.
Management accounting techniques can be used to support good decision making and ensure long term financial stability of an organization as - (Ameen, Ahmad and Abd. Hafez 2018)
Cost Analysis – The management accounting technique will help in analyzing the total production and other costs for the business, and helps the management of the business to take actions according to the cost determined to maximize the profits of the business.
Targeting the Appropriate Audience - Management accounting techniques will help the management accountant to identify the most appropriate audience for their product on the basis of various factors such as demography, age of the target customers, their level of expenditure etc.
Make or Buy Decisions - Identifying whether to produce a product themselves or to buy them from another manufacturer and sell product at a profit is one of the main function of management accounting.
Prepare Various Budgets - The management accountant prepare various budgets like the cash budget, production budget, sales budget etc. for the business and formulate various different policies as per the budgets prepared.
Planning Function - Planning is the main function of management; it refers to making a roadmap for the future activities of the business. All the other functions of management like organizing, controlling are subsequent steps of planning process.
Controlling Function – It is the last managerial function, it refers to comparing the actual results with the desired results, and taking corrective actions in case of any deviations. Controlling function can be used for decision making. (Nielsen, Mitchell and Sørreklit 2015)
Conclusion
In this report it has been discussed about the appropriate ratios of Unilever Plc., the current ratio is the company is calculated at .73:1 which is quite low and the operating profit ratio and the net profit ratio both are quite high. The company has a high return on investments in the business. These ratios have also helped in taking the operating and strategic decision for the organization. The various investment appraisal techniques that are used in taking decisions were discussed and their impact on maximizing the Return on Investment of the company. The role of cash flow statement and breakeven point in taking an informed decision by the company is discussed. At last recommendations were given on how management accounting technique can be used to support good decision making.
References
Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Palgrave Macmillan, Cham.
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management Accounting and How It Can Be Implemented into the Organizational Culture. Dutch Journal of Finance and Management, 2(1), p.02.
Bizfluent, 2017. How to prepare cash flow statement. [Online] Bizfluent. Available at: < https://bizfluent.com/how-4452440-prepare-cash-flow-statement.html >, [Accessed on: February 10, 2021].
Gartenstein, D., 2018, How to calculate break even points in units, [Online] Bizfluent, Available at: < https://bizfluent.com/how-2363740-calculate-breakeven-point-units.html >, Accessed on: February 10, 2021.
Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 66-82). Taylor & Francis.
Schmidt, G. and Wilhelm, W.E., 2012. Strategic, tactical and operational decisions in multi-national logistics networks: a review and discussion of modeling issues. International Journal of Production Research, 38(7), pp.1501-1523.
Thompson, J., 2019, the characteristics of management accounting,[Online] Bizfluent, Available at: < https://bizfluent.com/info-7801027-characteristics-management-accounting.html >, Accessed on: February 10, 2021.
