Analysing the importance of Financial Management

Category: Accounting

Financial Management can be defined as **the management of finance of business / organisation in order to achieve financial objectives **.The purpose financial management is to create wealth for the organisation, generate cash flows, managing risk and ensures return on investment plans

There are three significant components involved in Financial Management

Financial Planning:-

Organisation will have to make sure that they sufficient funds on hand to meet their requirements on the given timelines. Financial planning effectively looks after short, medium and long term objectives of the business. Financial planning mitigates the risk and warrants smooth cash flows and also plays very vital role in the event of acquisition and mergers.

Financial Control:-

Financial controls helps to take monetary measures to increase profitability of the organisation and also cost effectiveness. It also enhances financial reputation of the company and facilitates to achieve optimum utilisation of resources. Financial controls exclusively designed for the best interest of stake holders and gain trust of the share holders

Financial Decision Making:-

Financial Decision making process fundamental base for any organisation to continue their success and market capitalisation. Decision making is a effective process in all levels of the organisation & exceptionally when dealing with the cash organisation should be more cautious to take right decision on a right time

For ex:- Investment decisions, Capital budgeting, Fund raising etc


Q1.a) Valid and the reliable financial data:

Data should be reasonable and confidential and modified in usual intervals. Accurate auditing must be done externally (outside the company) and internally (inside the company) with approved. Very good and correct data/suitable data must be mailing to the directors of the company. Stand on the available data they could precede with high quality decisions, these decisions are strategic decision of financial department and company decisions also. When the directors going to take ineffective decision because the data provided for them is out of date. Relativity is very important because the data which is acquired in exact process, to the exact persons to the related departments. It specifically suggests the rationale and the appearance of each and every employee regularly.

Whatever decision we take, the information existing for that is extremely accurate and reliable, in calculated way. The over data which is available for decision making should be removed so we can able to prevent doubts and indecisions.

The point which is satisfying data must be bring out in giving and arrange the correct and precise data to existing and valid customers/services. It planned to approach and fastening the data in very short period of time. It has to rising up the data, make improve it and take out it. The error must be setting right by altering.

Q1.b) Influences:

It affects on the internal auditing. Market's cost reveals all relative data, the primary purpose of business news is to correspond financial capacity of and data regarding the sources and presentation of the treatment mutual helpful to persons having sound privileges to such data.

Market exploit reduces the whole thing, from basic principles the whole relevant data is before now reproduce by cost. Costs are moving in to trends.


cash flows/liquidity


Financial structure /financial process

Capital investment - shareholder ratios

Balance sheets, profit and loss accounts

Q1.c) Functioning of internal and external auditing:

The primary functioning business computer. Information technology (IT) transformed the method of accounting, information storing, recovered, and controlled. This latest scheme guide to totally changed audit tracks. The revolt turn into a dynamic growth as the computer industry maintained permanent, fast mechanical improvements.

In addition to the introduction of computers to the business world, other IT-related events

*Beginning auditioning by using Information Systems

* Prioritisation of Computers

* AUDITAPE: get through Auditing from Information Systems, from the opening, auditors from externally had a complexity time in check through the computer. Primarily, the greater part of auditor's reviews just around the computer pay no need, the higher part, and the result of "EDP" on the audit.

Q2) Techniques for performance measuring:

Mainly "Wall Street analysts and investors tend" to centre on profit on equity is the first method of firm performance. High number of decision makers concentrates on this point of view as well, distinguish that this is the first that give the impression to obtain the largely concentration from the shareholder unity. But this is the better metric.

If share holders are not beware, it can redirect notice from organization basic fundamentals and head to cruel surprises

Q3.a) Many types and a variety of techniques are using in analyzing the financial performances, such as relative statements, time table of alters in working capital of the company, normal amount of proportion, income study, tendency study, & ratios study.

The below two are the very important techniques and tools of financial analysis:

" Vertical and Horizontal Analysis

Ratios Analysis "

But we consider ratio analysis is the best method for financial performance.

Ratios Analysis:

Financial Ratios description, benefits, categorization and boundaries:

The ratios analysis is the very important and powerful mechanism of financial performances. The simple meaning of Ratios is one figure stated in terms of another figure Profitability Ratios:

Profitability ratios are calculated from the output of firm procedures or total performance and efficiency of the company. Below are few of the major profitability ratios:

"Gross profit ratio, Net profit ratio, Operating ratio , Expense ratio, Return on shareholders, investment or net worth , Return on equity capital, Return on capital employed (ROCE) Ratio, Dividend yield ratio, Dividend payout ratio, Earnings Per Share Ratio and Price earnings ratio".

Liquidity Ratios:

Liquidity ratios calculate the small phrase solvency of financial performance of a company.

Below two are very important and main liquidity ratios.

"Current ratio

Liquid / Acid test / Quick ratio ".

Q3.b) Many kind stakeholders involved in financial matters mainly management, advertising department, R&D, suppliers, government of the parent company as well as Japan government, employees, share holder of the company and purchasing department.

By considering the purchase department they need to know the how much funds are available and how much quantity of material they required based on the funds they are going to purchase enough amount material. Every department should be needs financial information.


Board meeting are really very important to measure financial performance of the company and take necessary actions according to the criticality of the situations. There are few necessary elements need to be discussed using Annual reports of the company

Share capital:- Which explains about market capitalisation of the company and net worth of the company and will take decisions on further investment plans

Q4) Financial reporting standard are very help full for present market conditions, due to high volatility in the market these accounting standards filter the existing methods and procedures to expose the variations in the market.

Standards set up for preparing the financial statements:-

Financial statements should reveal true and rational financial structure of business

Financial information should be relevant, timeliness, reliable and understand ability.

FASB (or) other financial boards also encourage foreign entities to start up their business in the domestic market by facilitating

Flexibility in exports and imports

Intermediary between the company & local government


An) Comparisons:-

Budgeting will be utilized as an Economic planning for the future needs and budget is a financial plan.

The budget corresponds and organise towards problem solving.

By placing realistic goals during a budget, an industry can certify that its strategies are achievable.

Ahead through budget planning's, an industry can take decisions on how much production - in the kind of supplies or benefits can be reached. Simultaneously, the cost of production can be intended and alter can be arrange where suitable.


Budgeting is a quite multiple procedure and a few companies mainly undersized firms may come across to the job is in large amount of a load in conditions of time and an extra possessions, as well as only partial advantages. However, several granters such as loan companies like banks frequently need the preparation of budgets as section of the company plan. As a common law, the profit of generating the budget should go above its actual cost result.

The budget is very simple to reach without any benefits to the company in detail it head to lesser quantity of production and higher expenses than prior the budget was recognized. Budgets must be fixing at practical levels, it creates the greatest utilization of the existing resources.

2. Tools available for Budget preparation

"Payback Period Method

Cost benefit analysis

Breakeven Analysis

Net present value

Internal rate of return

Weighted average cost of capital"

By considering the every situation like economic position, financial rules, liquidity position and cost labour in the Japan, I suggest that NPV is the best method for the calculation of budget.


Sales budget = Units per annum * Selling price

Selling price of M is 10% increased every month and R is 20% increased every month

In month October the sales budget is 2400*4.4=£10,560


The labours are skilled and unskilled labour. £30 for skilled and £15 for unskilled.

Number of hours for Miracure is 800 and product Rotarix is 900 for each month.

Product M skilled labour can work 400 hr, unskilled labour can work 400 hr. Product R skilled labour can work 450 hrs, unskilled labour can work 450 hr.

Labour budget = hours worked * wage per hour

In October Miracure Skilled = 400hr*£30= £12,000

Unskilled = 400hr*£15=£6,000


Production budget = (Sales + Closing stock) - Opening stock

We get sales values from sales budget table.

Closing stock is 40%of sales value.

The opening stock is closing stock of previous month.


1. an) Values flexible budget = values in standard budget * (Units sold /unit)

For example: Revenue in flexible budget = £120,000*(7,000/7,600) = £130,286.8

Variance=actual result - flexible budget

For example: In Revenue =132000-130286.8=1714.2

In this question the causes of the variance are raw materials, labour and over head variables like minute repairs of the equipments, water bill ect. By using the below ideas to improve the functioning.

Purchase the raw material in huge amounts in cheapest price and store for long time then used when the cost of raw materials is very high.

Effective utilisation of equipment so that it helps to decreasing the number of staff.

The important terms of the very high effective performance achievable under the greatest feasible specifications, make use of existing conditions and equipments.


1. an) Benefits of the NPV:

By analysing the total income and expenditures of the GSK the calculated NPV is positive so this acquisition should be under taken. The investment on the acquisition will increase organisation value. It possibly will produce the cost of capital. It creates better value.

The below are more benefits when the NPV is positive

When company needs to go into a modern market world

When company needs to launch latest product outputs with the help of R&D

When company needs to attain governmental benefits

It improved share value in the marketplace

To decrease the operation cost and/or manufacturing cost

To acquire very higher competitiveness

The firm recognize how and placing

For economic influence

To increasing the profitability

2. an) Net present value (Cost of capital is 10%)

Total in flow

Initial capital is £4.1millions

Revenue from operation is in year one = £1,800,000 it is raising by 4% in each year

In 2nd year £500,000 granted from Japan government

Residual value at end of the year is £1,500,000

Revenue of 2nd year is = £1,800,000+ {£1,800,000*(4/100)}.

Cash schedule:-

The labour expenditure is £60,000 in 1st and 2nd year there after it is raised by 3%.

The cost material is £500,000 in 1st year thereafter it is raised by 5%.

Administration cost is £50,000 it is same for every year.

Marketing cost in 1st year is £150,000 and 2nd year to 4th year is £250,000 after onwards 2% go up every year.

Cost R&D of the company is expected to be £350,000 in 1st year after it is raise by 3% in each year.

Net cash flow = total income - total cash schedule

Present value = net cash flow*cost of capital

Net present value = - initial value + total present values

NPV(cost of capital is 10%)

Considering the above NPV value the project should be taken.

It get back the initial capital

Its greet the financial expense, the compel yield on initial capital

The NPV of the taking project make equals the rise in share holder riches or worth. A worth-maximising the firm want to build up and make the most of various positive Net present value projects as it can, sequentially to increase the riches of their shareholders.

3. an) the discount factor is altered to 8% the NPV is

By analysing the NPV at cost capital is 10% and NPV at cost capital is 8% I would say going to Japan is worth full.

Likely causes

To increase the profitability it will causes to decrease the cost of capital.

Rate of interest and risk these two are the major factors here.

Increasing the global economy rates causes fall in the interest rate.

If the money is loose, then people are not charge you more to use it hence decrease in interest rate.

Based on the above point we can decrease the total out flow and make more profit it will causes economy value it means the cast of capital is decreased.

4. an) Internal rate of return

IRR= NPV at lower rate + {NPV at lower rate/(NPV at lower rate - NPV at higher rate)}

Here IRR is = £432,946.47

5. an) strategic implication:

Mainly strategic implication depending on the two major facts

1. Looking at the benefits what we have

2. Likely problem (setbacks and advantages)

Based on the two point make a decision to enter in to the Japan market.

1. What benefits we have?

By calculating the NPV we get it is positive so interest rate is decreased, globalisation, high share value, global exposure, revenue increment, these things are helping the reduction in cost of capital. Employees supposed that the higher panel performed to minimise initial risks and unnecessary.

2. What are the likely problems we have?

Economic conditions, Cost of labour, Resources, political situation might be unfavourable.

Based on the above benefits and likely problem they are going to decided the condition are favourable and they are going to Japan.