First, I would like to thank my advisor for his continuous support during the program, as he was always there to listen and to give advice. He taught us many different methods to approach a research methodology and the need to be consistent, to accomplish any goal.
I would like say thanks to all my colleagues at college who have always supported me in my work. I thank them for their interest, help and support, as they were always there to meet and talk about my ideas and solve my problems.
Special thanks go to my parents, for their patient support, deep love and showing confidence in me, when I doubt myself. Without their encouragement I couldn't have completed this research paper.
In the current situation, when the world economy is facing disruption, companies need to establish where they are heading in the medium and long term. Managers, today need to be aware if their company is positioned suitably to continue delivering the desired results, and to cope with the current economic crisis. Effective Financial Management is critical to the economic health of a company. Companies today use Financial Management not only as a tool to create value for its investors but also as an assessment tool to judge their performance in achieving their desired strategic, financial and business objectives.
The company that has been chosen for this review is involved in providing value to clients and business solutions through information technology systems and solutions that leverage information technology. These solutions include providing clients with readymade and bespoke software, system design and implementation services and infrastructure financing.
My role in the company has been the Manager Finance, and my role includes identifying investment opportunities that would add to the existing market value of the company and also to monitor the performance of the existing investments made by the company and to report to the management about the performance of my division and company's investments towards targeted strategic and business objectives.
The study is targeted at the company as a whole, and provides a review in to the financial management process adapted by the company including an identification of the key financial policies and protocols, analysis of actual and budgeted accounting information and evaluation of a proposed capital investment appraisal.
FINANCIAL MANAGEMENT IN THE ORGANIZATION
Financial Management Defined
Financial management described as a technique of the management of the finances of a company in order to enable the company to achieve its strategic and business objectives.
The main objectives that financial management serves for a company can be defined as,
- It assists in creating wealth for the company.
- Helps in generating and managing cash, for the future business opportunities.
- Helps provide for an adequate return on investment by taking account of all the risk factors involved and opportunity cost of the investment made.
Financial Policies, Procedures and Protocols
- Accounting method: Company prepares its accounts and subsidiary records under accrual method of accounting. This provides for recording for income and expenses when the entitlement has been established for income and when expenses are due to be paid
- Capital cutoff point: The company expense out any assets purchased in an accounting period if such assets costs less than £3,000 in aggregate or individually. Costs of the assets purchased by the company in an accounting period that are in excess of £3,000 is capitalized and is then depreciated in as per the depreciation policy of the organization.
- Insurance coverage: Company will maintain an adequate insurance cover for all its tangible and intangible assets exceeding £5,000.
- Depreciation / Amortization: Company charges depreciation / amortization on its assets (tangible and intangible) on straight-line basis, after taking into account of their residual values.
- Impairment: Impairment will be charged on assets (tangible and intangible) in conformity with the Generally Accepted Accounting Principles (GAAP).
- Chart of accounts: All finance and accounting staff will be provided with a chart of account relevant to their account coding and budgeting responsibilities, which must be updated on a routine basis.
- Closing procedures: Company as a policy closes all the modules of its accounting system on a monthly basis. These are closed by the 15th of the month following to which they pertain.
Meeting Stockholders Expectations
Financial Management refers to managing the future business needs of an organization to ensure administration and management of its financial assets. This is process is referred to as Financial Decision Making. It covers the identification and management of managing risks, in a way that result in maximizing the profits of a company from its investments, resulting in an increase to the wealth of shareholders.
The investors of a company prefer to get rich not poor, this is why they expect from the managers of the company to invest in every project that is expected to pay more than what it is actually going to cost.
Impacts of Information Technology
The continuously changing business environment and technological advancements confronts the business managers the company with the challenge to make decisions regarding commitment of capital resources along with maintaining the level of costs at an acceptably low level without risking its long term IT agility and capacity.
IT acts as the backbone of every single operation in an organization. It is important for the mangers to ensure that the data and the reports they use as a basis of their decision making are reliable and precise and reflect in all possible ways the data required for effective financial decision making.
Financial Management Process
The process Financial Management is critical to companies because it impacts the availability of the resources (financial and non-financial). It is of vital importance that a company (Financial Managers) makes best possible use of resources available to it while making business decision. This is only possible when the financial managers are aware of the risk and uncertainties in the environment as decisions necessarily involve certain unpredictability that relates to an element of risk and uncertainty relating to the future.
CURRENT FINANCIAL PLANNING AND BUDGETING
A budget presents a formal statement of resources set aside by a company for carrying out activities at a given point of time in future. They are defined as they key control technique in companies for the measurement of the performance. Budgeting systems can help in achieving organizational objectives by providing measures for controlling and allocating costs.
The company currently prepares performance budgets organizational level, which is then broken down in to divisional and departmental budgets.
Financial planning is a process that presents before organizations, the current financial position and the adjustments required in the business (or spending) pattern to achieve the desired objectives. It plays an important role in helping them avoid financial setbacks.
Financial planning can be termed as the foundation stone, on which organization can build up their future to offer them growth and profitability. It is an integral part of the strategic plan followed by organizations to achieve their strategic objectives. A financial plan generally incorporates the core priorities (goals) and strategic values of a company, with comprehensive strategies to achieve those goals.
Financial planning helps organizations to manage and structure the investments it makes, in a way that best suits its organizational strategies aimed at the achievement of the objectives. If devised in advance, it enables effective monitoring of all the financial decisions.
Financial Control plays an important role in the company's success and its survival. Financial controls ensures that the policies, procedures and strategies adopted by a company to achieve its objectives, are adhered to and complied in the manner that provides the cost effectiveness and enhancement in the shareholder's wealth.
FINANCIAL STATEMENT ANALYSIS
Profit and Loss Account
It is used to summarize the trading transactions (sales, purchases, income and expenditure) of a company and the resulting profit or loss for a given period.
It also describes how profit or loss has arisen i.e. by categorizing and comparing different classes or revenues and costs.
It provides a picture of the financial position of a company at a given time, usually at the end of an accounting period. It also reflects the year-end balances of the total assets and total liabilities of the company in addition to its shareholders equity.
Cash Flow Statement
The cash flow statement gives a company a snapshot in to the cash inflows and outflows in order to meet future scheduled financial commitment and obligations. The cash flow statement serves as a continuously evolving budget, because of the help it offers to the financial decision makers in their decision-making needs.
Analysis Actual and Budgeted Financial Statements
For an analysis between the actual and the budgeted results I am presenting the financial statements of the company for the year ended December 31, 2009 and 2008.Management prepares a budgeted Profit and Loss Account at the company level which is then broken down to define and establish departmental level targets. The company does not however produce budgeted Balance Sheet and Cash Flow Statement, as the investment in assets, expected future obligations and cash flows from the operations couldn't be determined with such accuracy as the operating results.
Reasons for Variations from the Budget - 2009
In 2009, the total sales increased by 4.04% of the budgeted sales (5% adjusted to the currency). This was lead by growth in sales by the company of its key products and because of the actions taken by portfolio actions by the company and targeted business investment strategies that were directed towards the existing and new market segments presenting long-term growth and profits to the company. This increase reflects a strong demand of company's products, as the customers trusted the company's products to improve the work efficiency of their operations, as in the current economic structure all the customers are focused in reducing the cost of IT infrastructure.
Selling and administrative expenses
In 2009, the total selling and administrative expenses increased by 3.99% of the budgeted expense (5% adjusted to the currency). This was primarily due to the spending resulting from acquisitions made by the company. Workforce expense increased by 1.4% of the budgeted increase, this was because skill balancing that is in line with the strategic road map of the company and is a key element of the business model. In addition, bad debt expense also increased by 1.5% that reflects the current economic environment faced in many industries.
Increase in interest expense is due to the increase in debt associated with the financing of share repurchase agreements.
Increase in other income was as result of foreign currency gains by the company. However the gain was partially offset by reduction in interest income resulting from cut down in the interest rates and loss on derivative instruments for hedging the currency risks.
Reasons for Variations from the Budget - 2008
In 2008, the total sales increased by 1.57% of the budgeted sales (3% adjusted to the currency). This was due to increase in all industry sectors except the financial sector. This was driven by strong increase in demand in game and networking processors. This increase was further contributed by productivity initiatives and cost efficiency by the company. However the total effect of increase was mitigated to some extent by the decline in company's revenue from personal computing, this was because of the divestiture of the business.
Selling and administrative expense
The total selling and administrative expense has decreased by 3.25% of the budgeted expense (4% adjusted to the currency). This was driven by the charge relating to the restructuring activities undertaken by the company. Workforce expense increased by 2.6% of the budgeted decrease in addition to the retirement related benefit expense as compared to the budgeted amounts. The decrease offset to some extent by an increase in the operational expenses of the company resulting from investments in different markets.
Increase in other income was because of the higher effective interest rates.
The decrease in the other income, compared with the budgeted amount is because of lower income earned by the company from its real estate activities. During the previous year company had high gains from real estate transactions and this was the primary driver to the current year's high budgeted amount. Contributing to the total decrease have been foreign currency transaction losses and losses to derivate instruments on hedging contracts entered by the company.
FUTURE STRATEGIES AND BUDGETED PERFORMANCE
Company's strategic objectives for the next year would be to increase on its revenues by at least 7% on the existing figures. The company expects the major increase from its financing revenues. The company would expect to achieve these targets by vertical integration of its processes by acquiring other entities in the same line of business. This is expected to affect the direct costs of production, which is expected to increase in the same line. However this would be mitigated through the synergic effect of the business integration.
The company is expecting to bring down its interest costs by 3-4% through payment of some portion of its debts and as the acquisitions will be funded through the issue of share capital. The company also expects to perform well in the real state business and expects the foreign currency changes to be less adverse then they were in the current year i.e. 2009.
Factors effecting performance and Counter Strategies
The targeted performance may be adversely influenced by the current recession in the economic scenario. Further technological improvements and competition in the existing markets may also have an adversely affect on the expected performance. However the company can take certain preventive measure to make sure that it achieves its targeted objectives. This can be achieved through making major investments in emerging markets in the world and transforming their service delivery capacity and integrating the operations rapidly, at the right cost and in the right business environment.
CAPITAL INVESTMENT APPRAISAL
The company is appraising for a new line of products that requires capital investment in a high-tech machine having an estimated life of 6 years. This machine would be purchased at an initial cost of £27 million and will have a salvage value of £3 million at the end of 6 years. The company charges straight-line depreciation on all of its fixed assets; hence the depreciation charge comes out to be 4 million.
The company has made the following estimates of sales and costs.
Net Present Value (NPV)
Net present value method discounts (present value) the expected cash flows that a company expects from an investment using it cost of capital. This is matched with the present value of all the cash outflows (initial and subsequent) related to the particular investment. The investment is worth undertaken, if the discounted value of the future cash flows exceeds the present value of all the outflows.
Internal Rate of Return (IRR)
Internal Rate or Return (IRR) method attempts to find a rate that equates the initial cost of an investment with its cash flows in the future years, i.e. it is the rate at which the NPV is zero. IRR is calculated using interpolation and rationalizes accepting the investments for which the IRR exceeds the target rate of return.
Accounting Rate of Return (ARR)
This method attempts to calculate the rate of return an investment should generate if it has to be undertaken. If this rate exceeds the company's targeted rate of return the investment is undertaken.
This method provides the financial managers a quick and simple way of calculation and looks at the entire life of a project (investment).
Discounted Pay Back Period
Discounted payback method takes in to account the time value of money and calculates the time for a project to pay for its initial investment based on the present value of the cash flows expected from the project.
REPORT TO THE MANAGEMENT
Based on the analysis of the proposed investment through different appraisal methods, it is evident that the investment will offer the company a return that I higher than its targeted rate of return and its current cost of funds (capital).
This means that if the company will invest in this project the company will not only recoup its initial investment but will also generate cash flows through the life of the projects, which would bring value to the company and will increase the wealth of the stockholders.
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