Unit 7.4 Finance for Strategic Managers
You are a longstanding manager in a family firm which is a small but growing organisation. Your particular 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 your experience he has asked for your advice.
Heintends to create a file on finance for strategic managers which he can use as an aide memories.
Prepare the first section of the file providing examples where appropriate.
This must have the following sub sections
Assessment Criteria 1.1/1.2/1.3
The second section of the file must provide information on published financial statements. You must include at least one actual example of published accounts in order to illustrate the points you are making. This section must include
Assessment Criteria 2/1.2/2.2/3
The new manager has made it clear that he needs to understand how businesses assess and finance various activities. The next section of the file must therefore cover
Assessment Criteria 3/1, 3/2, 3/3
As the business is growing, the new manager wishes to have a section of the file which considers a number of issues related to expansion
In this section of the file you must
1. consider different business ownership structures and analyse the corporate governance, legal and regulatory requirements of these. For each of these structures compare and contrast the roles and accountability of owners and managers in making decisions.
2. carry out an evaluation of methods for appraising strategic capital or investment projects.
Assessment Criteria 3/4, 4/1, 4/2
Guidelines for assessors
The assessment criteria for the unit specify the standard a learner is expected to meet. They demonstrate that the learning outcomes have been achieved. The suggested evidence listed below is how learners can demonstrate that they have met the required standard.
|Task number||ACs||Suggested evidence|
|1||1.1/1.2/1.3||This section of the file must include an explanation and assessment of why financial information is required and where it is used in business. The learner must also clearly identify the business risks and how they are inter related with financial decisions. This task also requires the learner to provide a comprehensive summary of the financial information required for strategic decision making.|
|2||2.1/2.2/2.3.||In this section of the file the learner must demonstrate their ability to analyse published financial statements and accounts. Using this data learners must:|
|3||3.1, 3.2, 3.3||The learner should explain the meaning of long and short term financial requirements and clearly show the difference between them. The table must be comprehensive and show different financing methods appropriate to different types of assets. There needs to be a range of techniques to manage cash flow and the learner must show their understanding of the critical nature of cash flow management.|
|4||3.4, 4.1, 4.2||In the final section the learner must demonstrate their understanding of different ownership structures and the implications of these. The learner should analyse a range of different ownership structures. For each of these the learner must analyse the governance, legal and regulatory requirements. There then needs to be a clarification of the roles of owners and managers in each structure which also compares and contrasts these roles and their accountabilities.|
There must be a balanced and thorough evaluation of the appraisal methods for strategic capital and investment projects.
Finance for Strategic Managers
Looking at the competitive environment of current corporate market managers have various responsibility regarding carrying out the operations. In particular finance managers play crucial role because he/she have authority and responsibility regarding managing the inflow and outflow of funds within the company so that desired results and outcomes can be generated (Duffy, 2000). Herein, researcher has undertaken the case of healthcare organization, which requires proper management of money so that proper medical services can be given to the patients. Therefore, investigator focuses on evaluating the need of financial information within the NHS along with this, its financial position has been evaluated on the basis of ratio analysis. Further, variance between short and long term economic requirement of business is illustrated with the help of different cash flow management tools and their significances. Lastly, ownership structure of structure and accountability of managerial level people in making decisions has been understood and viability of project is computed through the capital budgeting techniques.
To carry out the operations of business, varied information is required and especially financial information so that managers can make smart and effective decisions. Following are the financial information required by the managers of NHS:
There are several risks and uncertainties associated with the NHS and it may directly hamper the decisions related financial position. Thus, managerial level people require adequate and accurate internal and external information to support their decisions so that hurdles and hindrance can be avoided or mitigated.
Before making any strategic financial decisions, it is important for the managerial level people of NHS to gather appropriate information from the financial statements of the company so that they can justify their decisions. Following are the wide range of information that is required to make strategic business decisions:
Company publishes its account to provide wide range of accurate and reliable information to different stakeholders:
On the other hand, it is required to understand the structure as well as published accounts. Effective following of hierarchy in business would be helpful to understand the process of working and interpret financial data in the published accounts.
Structure of Financial Information and its contents:
Formats of published accounts:
Less : Sales Returns / Allowance
Cost of Goods Sold:
Cost of goods sold
Gross sales profit (Loss)
Net Operating Income
Total Other Income:
Net Income (Loss):
Format of Balance Sheet:
|Current Liabilities |
Other long term Loan
Capital and Net Profit
|Current Assets |
Cash in bank
Other Current Assets
Total Current Assets
Furniture & Fixtures
Land & Buildings
Other Fixed Assets (Less Accumulated depreciation)
Total Fixed Assets
The tools that the managers of NHS can utilise to get information from financial statements are:
Ratio Analysis: Ratio analysis is a financial tool that assists in evaluating profitability, solvency, liquidity and efficiency position of NHS so that if required potential measures can be employed in different areas and better results can be generated. Further, with the help of ratio analysis managers of NHS can compare the performance of business with past results, industry standards or competitor’s performance so that decision can be made on future contingency (Kevin and et. al, 2010). All these expenditures are recorded in balance sheet of NHS (Srinivasan, 2012).
|Gross Profit Ratio||(Gross Profit/ Net Sales) *100||0.11%|
|Net Profit Ratio||(Net Profit/ Net Sales) *100||0.34%|
|Current Ratio||Current Assets / current Liabilities||1.4383083073|
|Quick Ratio||(Cu. Assets - Cl. Stock)/Cu. Liabilities||1.3432317735|
|Return on capital employed|
|Return on capital employed:||(Net Profit)/ (Capital employed)||1.01%|
|Asset turnover or efficiency ratio|
|Asset turnover ratio||Sales revenue / Total assets||2.2275490092|
The above computation shows that the management of the profit making company is inefficient in managing the funds in a way that would help the growth of the organization. GP and NP reflect the gross and net profits of the company based on its net sales respectively. Since the GP and NP of the company is 0.11%, and 0.34% respectively, it clearly indicates that despite being a NPO, the management is able to cover all its expenses from its operational performance. The Current and Quick ratios reflect the ability of the company to pay off its short term liabilities using its current assets. The liquidity position of NHS shows satisfactory results at 1.43 and 1.34, which indicate the capability of the firm in meeting its short-term financial obligations through its current assets.
Financial need takes place in every kind of organization. They can be classified on the basis of time under two heads:
Short-term finance is essential to meet daily requirements of the business and this is useful for managing business liquidity. Every business has to incur several expenditures; therefore, it is necessary to have proper cash reserve ratio (Palepu and Healy, 2007). Short-term finance requirements need to be satisfied in order to meet the operating expenses of the business. The sources of raising short term funds are – operating activities, loan from banks, etc.
Long term financing, on the other hand, are requirements of funds for longer time duration, say, 15-20 years. Long-term finance is essential for the purpose of purchasing land, machinery and in the areas where huge investment is required. Corporate bonds, equity funding, loans, retained earnings and selling of fixed assets are some of the sources through which financial arrangements are made (Hershey, Austin and Gutierrez, 2015). Long-term finance requirements need to be satisfied because it aids the company in supporting long-term initiatives such as construction of a production facility, making acquisitions, financing events such as the repurchasing of shares, etc. Acquisition of long-term funds helps a company in the end to meet its goals and objectives.
Long term business might be essential for business organizations. This kind of financing includes multiyear reimbursement terms that can some of the time keep going for a considerable length of time. While transient advances may have higher loan fees at first, entrepreneurs who go up against long term financing ordinarily end up paying more in intrigue. This is on the grounds that the long term length enables enthusiasm to develop after some time. It is additionally commonly increasingly troublesome for an entrepreneur to get long term financing. This is on the grounds that they should adhere to progressively customary loaning procedures much of the time and battle with the strict passing models set up by bigger banks. At last, which sort of financing choice is best relies upon your particular business needs. For most entrepreneurs, a momentary advance will probably be progressively appropriate. Be that as it may, now and then long term financing might be essential. In any case, it's essential to work with a moneylender who comprehends the operations of independent companies and can tailor your advance to help your prosperity.
There are various sources of funds available with NHS such as internal, external and other and from all such sources, NHS could manage all the necessary activities and operations.
|Short term finance sources||Long term finance sources|
|Short-term finance sources are the one where in NHS can raise money with the help of personal capital and retained earnings. In order to deliver quality services to the patients, it is essential for NHS to have basic services and such services can only be delivered if NHS has the arrangement of short-term modes of financing (Nobes, 2014). |
Retained earnings: Under this NHS can make use of funds that are available with it. Through this, it can meet it short-term requirements for funds in an effective manner. It enables the company to raise funds from its own sources without external sources, but the amount of funds that can be raised is limited to the financial position of the company.
Bank overdraft: It is regarded as the facility wherein the firm can withdraw greater amount in comparison with the balance that exists in the account of an individual. However, bank overdraft rates are usually very high and therefore, the companies tend to avoid it as a source of raising funds.
|Long-term finance sources are useful in the case where in large amount of investment is required for business processes. (Chand, 2015). These sources are useful for NHS for retaining its position in health care sector: |
Bank loan: Loan from banks are offered for a fixed duration of time and it is regarded as the most suitable financial source that assists in meeting the long-term need for funds. However, high bank rates and stringent policies for grant of loans are a disadvantage of this source.
Leasing: In this NHS can take assets for certain duration of time for which is required to make payment of rent. The advantage of this is in terms when the cost of assets is greater than rental price. However, the disadvantage lies in the fact that the company is never in direct ownership of the asset and regular charges in terms of maintenance and repairs need to be made.
Cash flow statement is useful in managing all the organizational operations in effectual manner and through this, expenditures can also be recorded in optimum manner. NHS can record all the expenses and income with the help of cash flow management and this further investment can also be made (Liao, 2013). The importance of Cash Flow management techniques are:
4. Methods of appraising capital strategy projects
The following techniques outline the assessment of strategic capital/investment projects:
Investment appraisal is considered as the process that can be utilized for assessment of whether the investment project is worth to be conducted. The technique of capital budgeting involves net present value. This has been computed in the manner stated below:
Net present value: It is referred to as the method that states difference among the total discounted cash inflows and initial investment.
Net present value:
|Year||Cash flow of A (£)||P.V factor @ 10%||Present Value (£)|
|Total present value (£)||73775.5|
|Initial investment (£)||50000|
|Net present value (£)||23775.5|
|Year||Cash flow of A (£)||P.V factor @ 10%||Present Value (£)|
|Total present value (£)||75264|
|Initial investment (£)||50000|
|Net present value (£)||25264|
Interpretation: It can be interpreted that Project B needs to be selected as it possess greater NPV. However decision regarding rejection of Project A is required to be done by organization.
Gliedt and Hoicka (2015) stated that it is important to focus on corporate governance systems that emphasize on the policy makers. Liberalization, privatization as well as deregulation of the activities can be helpful to shift decision making responsibility from the government to private sectors. It is important for the organization to have adequate experience on the process. The effectiveness of corporate governance mechanism is not taken as granted. There are several investments in the organization, where is important to focus on exchanged payment process and promise of future returns. Comparison of the value of the market places can be helpful to understand comparable assets and provides indicator of the grabbing hands. There are several significant process compared to others.
The business does not vary in size as well as industry in terms of ownership. Some of the business process is owned by the persons where people own by the large numbers of the stakeholder. It is important to own through charitable foundations and trusts where different structures can overlap with multiple number of procedures are important. Legal and ownership structure can determine several legal responsibilities and process of dividing profits. It is not essential to go into the detailed legal forms as well as ownership structure that can be helpful for the organization appreciating diversity of business (Falkheimer et al. 2017). The legal forms as well as ownership structure of the particular business organization to focus on the process. There are different types of organizational structure such as sole trader, limited company and business partnerships.
In sole trader, a person running the business properly can be helpful to make proper process in the business. Sole traders can keep profits of the business after payment of tax. Hence, it is essential for the organization enhancing the procedures and understands the procedure.
On the other hand, it is important for the organization to focus on other aspects so that it would be helpful to run business. In addition, it is required to develop such plans so that owners of the organization run business effectively (Ogunsiji and Ladanu, 2017). On the other hand, an organization does not focus on the law regards that makes effective sense to develop legal standing as a person. A limited organization has the rights as well as obligations to develop proper plan. It is also important tom improve productivity of the organization. An organization can set up effective process by running the business. Finance of the limited organization can share specific process by implementation of business process.
On the other hand, business partnership deals with arrangement of the individuals for sharing ownership of the business (Aguilera et al. 2016). There are several types of partnership where general partnerships as well as limited partnership are obtained. It is important for the organization to set the right process and it is important to set the structures of the business. Legal as well as ownership structure is important for business size as well as industry sector that are not completely independent for the business process.
Legal as well as ownership structures and business size are considered as the major aspects of business. In addition, the sector is not completely independent of each other. The sole traders have tendency in small businesses and not least as a single person rarely has financial capacity to finance a large business. It is not viable running small work as the physical as well as financial investment needed is so large (Ogunsiji and Ladanu 2017). On the other hand, the industry sector as well as legal form is closely related. The law firms as well as some other professional service firms with more professional working in the United Kingdom are legally required setting up the partnerships as well as no other ownership and legal structure is permitted.
It is also important to make an evaluation of the requirements for financial information in business. Identification of the risks associated with financial and business decisions can be helpful for the business process (Dittmar and Field 2016). In addition, financial information needed in strategic business decision making and purpose, structure and content of published accounts can be helpful to gain competitive benefits. interpretation of financial ratios from the accounts and process of supporting strategic decision making and distinguishes between long and short term financial needs for business as well as comparison of the sources of long and short term finance for business are useful for the enterprise. Cash flow management techniques and evaluation of cash flow management is significant (Christ et al. 2016). Apart from these, business ownership structures and analysis of governance, legal and regulatory requirements and assessment of methods to appraise strategic capital or investment projects are the major procedures of business.
It can be concluded from the study that financial information is needed for the purpose of decision making. In addition to this it has been inferred that financial position of NHS is sound and it discloses its accounts in an effective manner. The basic success of a business strategy depends on critical factors. Hence, alignment with external environment in an organization needs a realistic internal view of core competencies as well as sustainable competitive benefits. In addition, careful deployment of business strategy and monitoring can assist to get competitive benefits in the market. In the present study, Talent plus UK has been selected as a case study organization. The particular organization is based on IT processing and outsourcing. The requirement of financial information within the organization and financial position of the particular organization is evaluated. On the other hand, variance between short and long term economic business requirement that would be helpful to understand the business process of the organization.