You are on page 1of 15

Finance for Strategic Managers

Unit 7.4
Level 7
Student Name
Student ID

Table of Contents
1.1 Necessity of financial information in business

1.2 An identification of the business risks related to financial decisions

1.3 financial information that is required to make strategic business decisions

2.1 Structure and content of the financial statement

2.2 Interpreting financial statement

2.3 Calculation of the financial ratio and support in business decision

3.2 Sources of long-term and short-term finance

11

3.3 Examination of cash flow management technique and importance of cash 13


flow management
4.1 different business ownership structures and the corporate governance, legal 14
and regulatory requirements
4.2 Evaluation of methods for appraising strategic capital or investment 17
projects.

1.1 Necessity of financial information in business


Why Do Managers Need Financial Information
To investigation business performance: Financial data gives a generally picture of operational
aftereffect of a business and managers need such financial data to dissection for making
future arrange and strategy about the organization.
To make and execute strategy: With a perspective to staying intense in today's aggressive
business environment, managers break down the financial data and make strategy as per the
dissection and acknowledging others related factors of the business.
To settle on investment decision: Managers investigate financial data to assess if any merger
and securing opportunity is accessible and it serves to focus the plausible investment
opportunity.
To address risk connected with the business: Business is dependably risky and without risk no
business organization can accomplish its objective and objective. Thusly, managers audit the
financial data to see if any conceivable future risk is advancing and connected with the
economy. (icabtutorial.com)

1.2 An identification of the business risks related to financial decisions


The managerial scene is regularly characterized by circumstances of risk and questionable
matter. The decision-production methodology is an endeavor to diminish, alleviate, or even
evacuated risks and questionable matters. All things considered, the decisions of managers
effect the degree to which risks and doubts remain.

Decision making inside a risk management connection ought to consequently look for,
wherever conceivable, to recognize, quantify, and ingest risk. Business risks are normally
considered accompanies:
Strategic risks: These are mechanical risks that emerge from contending in a particular
industry and can incorporate macroeconomic risks (the arrangement of purchasers and
merchants reliable with the standards of supply and interest), transaction risks (the
operational risks from M&a action, divestures, or associations), and guru relations risk (the
risks connected with corresponding adequately with the investment group).
Financial risks: These are determined from potential misfortunes in the financial records of a
business. They can incorporate risks from contributing capital, risks to primary or investment
esteem, or risks to different business related transactions.
Operational risks: Risks that emerge throughout the regular operations of the business. This
differs impressively around distinctive commercial ventures.
3

Legal risks: The degree of a business' consistence with all relevant laws might direct the
overal effect of legal risks on decision making.
Different risks: Usually risks connected with energy majeure. This is challenging to record
for and incorporate inside decision-production criteria. (gbr.pepperdine.edu)
1.3 financial information that is required to make strategic business decisions
Financial measurements have long been the standard for surveying a company's performance.
Part of fund in securing and overseeing particular and measurable financial strategic
objectives on a facilitated, incorporated groundwork, in this manner empowering the firm to
work effectively and successfully. Financial objectives and measurements are secured
dependent upon benchmarking the "best-in-industry" and incorporate:
1. Free Cash Flow
This is a measure of the company's financial soundness and shows how proficiently its
financial resources are constantly used to create extra cash for future investments.
2. Economic Value-Added
This is how the money adds up commitment on a risk-balanced groundwork and helps
management to make viable, auspicious decisions to stretch businesses that build the
company's economic value and to execute remedial movements in those that are destroying
its value.
3. Stake Management
This calls for the proficient management of current stakes (cash, receivables, stock) and
current liabilities (payables, gatherings) turnovers and the upgraded management of its
working capital and cash change cycle.
4. Financing Decisions and Capital Structure
Here, financing is constrained to the ideal capital structure (obligation degree or influence),
which is the level that minimizes the company's expense of capital. This ideal capital
structure decides the association's store acquiring limit (short- and long haul) and the risk of
potential financial distress.
5. Benefit Ratios
This is a measure of the operational effectiveness of a firm. Productivity degrees additionally
demonstrate wasteful ranges that oblige curative activities by management; they measure
benefit associations with deals, absolute stakes, and total assets.

6. Growth Indices

Growth lists assess deals and piece of the pie growth and focus the satisfactory exchange off
of growth regarding diminishments in cash flows, overall revenues, and rates of return.
7. Risk Assessment and Management
A firm must location its key lacks of determination by distinguishing, measuring, and
regulating its existing risks in corporate legislation and administrative consistence, the
probability of their event, and their economic effect.
8. Tax Optimization
Numerous utilitarian territories and business units requirement to deal with the level of tax
obligation attempted in directing business and to comprehend that moderating risk likewise
lessens wanted taxes. Besides, new activities, acquisitions, and item development ventures
must be weighed against their tax suggestions and net after-tax commitment to the
association's value. (gbr.pepperdine.edu)
2.1 Structure and content of the financial statement
Balance sheet
A balance sheet is an articulation of the resources possessed and regulated by a business at a
solitary point in time.
It gives a preview of assets, liabilities and capital at a point in time.
It gives data about the organization's trusts and how they are utilized within the business.
Benefit and misfortune account
The Profit and Loss Account is a proclamation which shows complete business income less
costs.
The P&l record quantifies and clarifies the increases or misfortunes of the organization over
the time of time limited by two balance sheets
It gives a rundown of the year's exchanging exercises:
Revenue from bargains (turnover)
Business costs
Profit or (misfortune)
How the benefit was utilized.
Cash flow explanation
This is an explanation which demonstrates the flow of cash into and out of the business.
It is not the same as a benefit and misfortune account.
5

The cash flow explanation just records developments of cash and, for instance, does not
incorporate credit bargains or buys until such time as cash really flows.
Explanation of aggregate recognised additions and misfortunes
The STRGL is a financial explanation which endeavors to highlight all shareholder
additions and misfortunes and not only those from exchanging.
It is a rundown of every last one of benefits and misfortunes made throughout the year.
It is important on the grounds that not all increases and misfortunes are indicated on the P
and L record.
Notes to the records
Provides a more point by point dissection of a percentage of the entrances in the records
including:
Disclosure of accounting policies utilized (e.g. deterioration) and any progressions to these
policies.
A demonstration for any deviation from accounting norms.
Sources of turnover from distinctive geological ranges.
Details of altered assets, investments, offer capital, debentures and stores.
Directors payments (what amount of the Directors earned)
Earnings for every stake
Accounting policies
Companies must depict the accounting polices they use in planning financial articulations.
Companies have a decision of accounting polices in numerous territories, for example,
remote monetary forms, goodwill, benefits, deals and stocks.
As diverse accounting polices will bring about distinctive figures it is important to state the
approach that was utilized so book lovers of the records can make an educated judgement
about performance. (tutor2u.net)
2.2 Interpreting financial statement
Business accounts are generated to help their clients. Run of the mill clients and the
utilization they make of accounts is indicated below:
shareholders -to scout nature of bearing of organization, and productivity, dissolvability,
value of organization and different indications of health.

Employees - to reconnoitre work security and degree for compensation and benefit
increments.
Suppliers - to watch that an organization is producing the cash to have the capacity to pay up.
Inland Revenue - for estimations of Corporation tax. there are three primary financial
proclamations that are generated by organization accountants. These are:
1. The Balance Sheet setting out the financial position of the organization at a specific minute
in time e.g. the year end.
2. The Profit and Loss Account indicating how the benefit or misfortune of the business has
been generated.
3. A cash flow proclamation setting out the cash inflows and outflows to the business
throughout a specific period of time. (businesscasestudies.co.uk)

2.3 Calculation of the financial ratio and support in business decision


Analyzing Liquidity
Liquid assets are those assets that can be converted into cash quickly. The short-term liquidity
ratios show the firm's ability to meet short-term obligations. Obviously, Cash by itself does
not generate any return only if it is invested will we get future return. In quick ratio, we
subtract the inventories from total current assets since they are the least liquid (among the
current assets. (Prof. Phill Russeil, 2003)
1. Current Ratio = Total Current Assets/Total Current Liabilities
2. Quick or Acid-test Ratio = Total Current Assets - Inventories /Total Current Liabilities
3. Cash ratio = Cash + Marketable securities/Current liabilities.
These ratios indicate the degree to which a firm is depending on debt to back its
investments/operations and how well it can deal with the debt commitment. On the positive
side, utilization of debt is advantageous as it gives significant tax benefits to the firm. Note all
out debt ought to incorporate both short-term debt (bank progresses + current share of longterm debt) and long-term debt, (for example, securities, rents, and notes payable). (Prof. Phill
Russeil, 2003).
Asset-Equity Ratio or Leverage Ratio= Assets/Shareholder's Equity
1. Total Debt ratio = Total Debt/Total assets
2. Debt-Equity Ratio = Total Debt/Equity
3. Long-term Debt to capital = Debt/Debt + Equity

For a lender, more important than the degree of leverage is the firm's ability to service the
debt and this is captured in the following ratio.
Analyzing Sales and Profitability
Profitability is a relative term. It is hard to say what percentage of profits represents a
profitable firm as the profits will depend on the product life cycle, competitive conditions in
the market, borrowing costs, expense management. For example, it is quite possible that the
sales growth rate figures are impressive due to inflation (rather than an increase in the
number of items sold). (Prof. Phill Russeil, 2003).
Analyzing Efficiency
These ratios reflect how well the firm's assets are being managed. The inventory ratios show
how fast the inventory is being produced and sold. While a low ratio is good it could also
mean that the firm is being very strict in its credit policy, which may drive away some
customers. Ratios #1 and 2 focus on efficiency in making payments. (Prof. Phill Russeil,
2003)
1. Accounts Payable turnover = Purchases/Accounts Payable
2. Days AP outstanding = (Accounts Payable/Cost of Sales)*3 65
(memoireonline.com)

3.1 Difference between long term and short term finance


Long-term vs Short-term Financing
Long term and short term financing both offer firms a brief or long term help in times of
financial trouble. Short term financing is generally simpler to get and is much of the time
utilized by littler and bigger firms indistinguishable. Long term financing, then again, is more
challenging and riskier to acquire, in this manner, just bigger firms or firms with solid
insurance can get long term advances.
Rundown:
Long term and short term financing are diverse to one another mostly in view of the time
period for which the money is given, or the debt/loan reimbursement period.
Short term financing generally alludes to financing that compasses a time of less than a year
to one year. Since the risk with such short term funds is bring down, any organization
particularly more modest firms will have simple access to short term financing.

Long term financing alludes to financing that compasses a longer time of time that could
head off up to about 3-30 years or more. Long term credits are riskier and banks or financial
8

organizations giving the advance have more to lose since the measure obtained is bigger and
time of reimbursement is longer. (differencebetween.com)
3.2 Sources of long-term and short-term finance
Attaining the objectives of corporate fund obliges suitable financing of any corporate
investment. The wellsprings of financing are, blandly, capital that is self-created by the firm
and capital from outside funders, got by issuing new debt and equity.
Long-Term Financing
Businesses need long-term financing for gaining new supplies, R&d, cash flow improvement
and organization extension. Significant systems for long-term financing are as accompanies:
Equity Financing
This incorporates favored stocks and regular stocks and is less risky as for cash flow duties.
In any case, it does result in a weakening of portion possession, control and profit.
Corporate Bond
A corporate security is a security issued by a corporation to raise cash viably in order to grow
its business..
Capital Notes
Capital notes are a type of convertible security exercisable into portions. They are equity
vehicles. Capital notes are like warrants, aside from that they often don't have an expiration
date or an activity cost (thus, the whole consideration the organization hopes to gain, for its
future issue of portions, is paid when the capital note is issued).

Short-Term Financing
Short-term financing might be utilized over a time of up to a year to help corporations
increment stock requests, payrolls and day by day supplies. Short-term financing incorporates
the accompanying financial instruments:
Business Paper
This is an unsecured promissory note with an altered development of 1 to 364 days in the
worldwide currency market. It is issued by expansive corporations to get financing to meet
short-term debt commitments.
Promissory Note
This is a debatable instrument, wherein one gathering (the creator or backer) makes an
unconditional guarantee in keeping in touch with pay a determinate whole of cash to the next

(the payee), either at a settled or determinable future time or on interest of the payee, under
particular terms.
Holding based Loan
This sort of credit, often short term, is secured by an organization's assets. Land, accounts
receivable (A/r), stock and gear are common assets used to back the credit. The advance may
be supported by a solitary classification of assets or a synthesis of assets (case in point, a
consolidation of A/r and gear)
Repurchase Agreements
These are short-term advances (regularly for under two weeks and oftentimes for only one
day) organized by offering securities to a guru with a consent to repurchase them at an altered
cost on a settled date.
Letter of Credit
This is a record that a financial establishment or comparable gathering issues to a merchant of
merchandise or administrations which gives that the backer will pay the dealer for products or
administrations the vender conveys to an outsider purchaser. The guarantor then looks for
repayment from the purchaser or from the purchaser's bank. (boundless.com)
3.3 Examination of cash flow management technique and importance of cash flow
management
1. Cash FLOW not Cash. requirement to be clear that cash flow is not the same as bank
balance. Contemplate the parts of cash flow and understand that ledger is only a segments.
2.review Receivables. Overseeing cash flow begins with balance sheet. cash flow could be
earnestly enhanced by overseeing accounts receivable. Without bargaining client connections,
ought to combatively gather exceptional sums due.
3.initiate Inventory Analysis. Overseeing cash flow incorporates hard assets. ought to inspect
inventory.institute animated stock lessening battles, including "cleansing" idled or surplus
stock.
4.discover Discounts. Notwithstanding overseeing cash flow through receivables and stock,
can hunt down chances to decrease your anticipated cash outflows. One of the most ideal
approaches to do this is by discovering merchants or lenders that will offer rebates.
5. push Payables. The obligation side of balance sheet assumes a part in overseeing cash flow,
also. Assuming that think on it, center strategy is to carry cash into the organization as
quickly as could be expected under the circumstances and hold up as far as might be feasible
before paying cash from the organization.

10

6. produce Projections. Likewise with such a large number of things in business, if don't have
a guide to where going, unrealistic to get there. The most ideal approach to do this is through
customary cash flow projections. Essentialness of cash flow management
(businesscasestudies.co.uk)
4.1 different business ownership structures and the corporate governance, legal and
regulatory requirements
Sole traders
Sole traders make up an immense extent of businesses in the UK. They are regularly selfsubsidized, exclusive endeavors telecommuting or out of a van without any employees.
(smarta.com)
Organizations
Running a business could be a forlorn thing to do, especially throughout the intense times.
Enrolling as an association permits to impart expenses, obligations and risks with an alternate
individual. In exchange, have somebody to help and help settle on the significant decisions.
(smarta.com)
Restricted companies
Restricted companies and their managers are particular legal substances, which means while
are answerable for the business, won't bring about misfortunes assuming that it runs into
inconvenience. (smarta.com)
Limited liability partnerships (LLPs)
LLP limit the measure of obligation its accomplices have for the organization to the sum they
have put resources into it - which implies lenders can just seize the business' assets, as
opposed to accomplices' close to home assets, if the business runs into inconvenience.
(frc.org.uk)
The development of corporate legislation in the UK has its establishes in an arrangement of
corporate falls and embarrassments in the late 1980s and early 1990s.
The UK business group recognised the requirement to put its house in place. This prompted
the setting up in 1991 of a trustees led by Sir Adrian Cadbury which issued an arrangement of
proposals - known as the Cadbury Report in 1992. The Cadbury Report tended to issues, for
example, the relationship between the executive and CEO, the part of non-official chiefs and
covering inner control and on the organization's position.
A prerequisite was added to the Listing Rules of the London Stock Exchange that companies
ought to report if they had accompanied the proposals or, if not, illustrate why they had not
finished so (this is known as 'agree or clarify').

11

UK regulatory framework
A regulatory framework that means to enhance benchmarks of corporate legislation is more
inclined to succeed assuming that it recognises that administration ought to help, not oblige,
the entrepreneurial authority of the organization, while guaranteeing risk is appropriately
overseen.
The UK has developed a business based approach that empowers the board to hold
adaptability in the route in which it organises itself and activities its obligations, while
guaranteeing that it is appropriately accountable to its shareholders.
Under UK law, shareholders have nearly broad voting rights, including the rights to designate
and reject distinctive executives and, in specific circumstances, to assemble a general
conference of the organization. Certain prerequisites identifying with general gatherings,
including the procurement of data to shareholders and game plans for voting on resolutions,
are likewise situated out in law, as are a few necessities for data to be uncovered in the yearly
report and accounts. These incorporate prerequisites for a Business Review (in which the
board sets out its assessment of the organization's future prospects) and a report on chiefs'
remuneration, on which shareholders have a bulletin vote. (frc.org.uk)

4.2 Evaluation of methods for appraising strategic capital or investment projects.


Analytical methods
The suggested analytical methods for evaluation are for the most part discounted cash flow
systems which take into account the time value of cash. Individuals by and large want to gain
benefits as right on time as would be prudent while paying expenses as late as could be
expected under the circumstances. This idea of time inclination is basic to fitting evaluation
thus it is important to ascertain the present values of all expenses and benefits.
Net Present Value Method (NPV)
In the NPV method, the incomes and expenses of a task are evaluated and after that are
discounted and contrasted and the beginning investment. The favored choice is that with the
most elevated positive net present value.
Discount rate
The discount rate is an idea identified with the NPV method. The discount rate is utilized to
change over expenses and benefits to present values to reflect the rule of time inclination.

12

The same basic discount rate (typically called the test discount rate or TDR) ought to be
utilized as a part of all expense benefit and expense viability investigations of open segment
ventures.
The current suggested TDR is 5%. However, in the event that a business State Sponsored
Body is discounting anticipated cash flows for business ventures, the expense of capital ought
to be utilized or even a project specific rate.
Internal Rate of Return (IRR)
The IRR is the discount rate which, when connected to net incomes of a venture sets them
equivalent to the starting investment. The favored alternative is that with the IRR most
awesome in overabundance of a specified rate of return. An IRR of 10% implies that with a
discount rate of 10%, the task equals the initial investment. The IRR methodology is
normally connected with an obstacle expense of capital/discount rate, against which the IRR
is analyzed.
Benefit / Cost ratio (BCR)
The BCR is the discounted net incomes partitioned by the introductory investment. The
favored choice is that with the ratio most terrific in abundance of 1. In any occasion, a task
with a benefit cost ratio of under one ought to by and large not continue. The playing point of
this method is its effortlessness.
Payback and Discounted payback
A variant of the payback method is the discounted payback period. The discounted payback
period is the measure of time that it takes to take care of the expense of an undertaking, by
including the net positive discounted cashflows emerging from the venture. It ought to never
be the sole evaluation method used to survey a task yet is a functional performance marker to
contextualise the venture's expected performance.
Affectability dissection
Affectability dissection is the methodology of creating the results of the expense benefit
examination which is touchy to the expected values utilized as a part of the investigation.
This manifestation of dissection ought to likewise be a piece of the examination for vast

13

ventures. In the event that a choice is exceptionally delicate to varieties in a specific variable
(e.g. traveler demand), then it ought to presumably not be embraced.
Situation examination
The situation examination method is identified with affectability dissection. Although the
affectability dissection is based on a variable by variable methodology, situation examination
recognises that the different factors affecting upon the stream of expenses and benefits are
between autonomous.
This procedure of substituting new values on a variable-by-variable support could be alluded
to as the estimation of exchanging values. These can give fascinating bits of knowledge, for
example, what change(s) might make the NPV equal zero or then again, by what amount of
must expenses or benefits fall or ascent, individually, keeping in mind the end goal to make a
venture advantageous. The exchanging value is normally exhibited as a % i.e. a 20%
increment in investment expenses decreases venture NPV to 0.
Distributional Analysis The figuring of NPV's makes no recompense for the dissemination of
expenses and benefits around parts of social order. This is a paramount disadvantage if the
planned objectives of a programme/project pointed at particular pay bunches. Differential
effect may emerge due to pay, sexual orientation, ethnicity, age, land area or incapacity and
any distributional impacts ought to be express and quantified where suitable.
(publicspendingcode.per.gov.ie)

Reference:
Why Do Business and Managers Need Financial Information | ICAB TUTORIAL.
[ONLINE] Available at: http://icabtutorial.com/why-do-business-and-managers-needfinancial-information/. [Accessed 09 March 2014].
The Role of Finance in the Strategic-Planning and Decision-Making Process | Graziadio
Business Review | Graziadio School of Business and Management | Pepperdine University.
[ONLINE] Available at: http://gbr.pepperdine.edu/2010/08/the-role-of-finance-in-thestrategic-planning-and-decision-making-process/. [Accessed 09 March 2014]

14

Annual Report and Accounts - Contents. [ONLINE] Available at:


http://www.tutor2u.net/business/accounts/annual-report-and-accounts-contents.htm.
[Accessed 09 March 2014].
Interpreting financial information Accounts business studies and business english | The Times
100. [ONLINE] Available at: http://businesscasestudies.co.uk/businesstheory/finance/interpreting-financial-information.html#ixzz2uoI0I6Yp. [Accessed 09 March
2014].
Memoire Online - The use of accounting ratios in decision making - Lambert KABERA.
[ONLINE] Available at: http://www.memoireonline.com/12/09/3058/The-use-of-accountingratios-in-decision-making.html. [Accessed 09 March 2014].
Difference Between Long-term and Short-term Financing: Long term vs Short term
Financing Compared. [ONLINE] Available at: http://www.differencebetween.com/differencebetween-long-term-and-vs-short-term-financing/#ixzz2uoLugNPo. [Accessed 09 March
2014].
Short-Term Financing - Introduction to Capital Budgeting . [ONLINE] Available at:
https://www.boundless.com/finance/capital-budgeting/introduction-to-capital-budgeting/longterm-vs-short-term-financing/. [Accessed 09 March 2014].
The importance of cash flow - Controlling cash flow for business growth - Chartered Institute
of Management Accountants | Chartered Institute of Management Accountants case studies,
videos, social media and information | The Times 100. [ONLINE] Available at:
http://businesscasestudies.co.uk/cima/controlling-cash-flow-for-business-growth/theimportance-of-cash-flow.html#ixzz2uorvVy3u. [Accessed 09 March 2014].

Small business advice on company formats and business structures | Smarta. [ONLINE]
Available at: http://www.smarta.com/advice/starting-up/company-formation/companyformats-and-business-structures-explained/. [Accessed 09 March 2014].
Corporate Governance . 2014. Corporate Governance . [ONLINE] Available at:
http://www.frc.org.uk/corporate/ukcgcode.cfm. [Accessed 09 March 2014].
Legal forms of business Types of organisation business studies and business english | The
Times 100. [ONLINE] Available at: http://businesscasestudies.co.uk/businesstheory/strategy/legal-forms-of-business.html#ixzz2uoodcwxe. [Accessed 09 March 2014].

The Public Spending Code: D. Standard Analytical Procedures Overview of Appraisal


Methods and Techniques | The Public Spending Code. [ONLINE] Available at:
http://publicspendingcode.per.gov.ie/overview-of-appraisal-methods-and-techniques/.
[Accessed 09 March 2014].

15

You might also like