Managerial Finance

Abstract:
Managing finances in efficient way is as crucial in business as the business itself. This is the reason
companies hire financial analysts and financial expert to best manage their finances. In this report I
have explained some important financial aspects that a company must consider especially when a
company is being merged with other company, as is the case in the scenario. This report consists of
five learning outcomes and one numerical problem. A brief overview of contents of this report is:
 The relationship between financial analysis and business risk assessment in decision
making
 the purpose and structure of financial statements in relation to decision‐making
 Sources of finance for short and long term business decisions
 Ways in which different ownership structures influence the measurement of financial
 Performance
 The place of ethical, governance and accounting standards in financial reporting and
business decision‐making
LO1-Understand the role of financial information and financial analysis in business risk
assessment and decision making

1.1- Examining the factors that guide and drive decision making in business:
The data that the managerial accounting provides to the management of any organization helps in
deciding that what type of products the organization should sell and helps to identify the way to sell
these products. Numerous factors help the manager to make decisions in the business for example the
owner of the business does not knows that which area needs his attention. To know about this he will
contact the manager of accounting who will explain various costs related to departments of the
organization. This is the part of managerial accounting and is known as relevant cost analysis. After
decision of the products, the customers of the product are determined. The employment of techniques
of activity based costing the management is able to decide upon the steps required to produce a
product or a service. These methods helps to decide if a product is to be produced or not. The
information from the manger tells which type of customer is generating more revenue and then they
direct their efforts to that segment of customers. The mangers have the information of the common
and optional costs.

1.2- Assessing the significance of financial factors in business decision making:

There are certain financial factors that affect the process of making decisions. The financial factors
includes rates of markets, government regulations and liquidity. The financial analysis is the
important function of the finance department. The information generated from the financial analysis
is very useful for the organization to make decision about the inputs required to run the business.
Balance sheet and income statement are the main source for the financial analysis. Balance sheet
represents the assets and liabilities of the organization while income statement shows the revenues
and expenses incurred or earned in the organization. Balance sheet shows the financial position of the
business. The income statement shows the performance of the organization. The major parts of
income statement are the revenue earned and the expenses incurred to produce these revenues.
Creditor is an internal and external financial factor that effects the process of decision-making.
Creditor is an important factor because most of time the organization is depending on the creditors as
they also effects the current financial position of the organization.

1.3 Identifying the characteristics of business risks that affect financial and business decisions:
Some risks directly effects the decision making process of the business. Risk is the likelihood that
organization will earn according to the expectation or will suffer loss. Sales volume, input cost,
competition, unit price and the economic situation of the country are the various risks. Organization
that has less debt ratio in its capital structure faces less risk as it can fulfil its responsibilities timely.
Debt and equity are the two sources of finance in any organization. An appropriate ration of debt and
equity is favorable for organization. Lot of debt financing puts the organization at risk. Debt
financing has some benefits as well; interest rate of debts is withheld from tax. Debt financing is not
suitable in speculative conditions. The laws of government and the socio-economic environment
effect business risk. Customer risk involves the change in the preferences and tastes of the customer
by the time. Some risks are associated with the supplier who is the source person of providing raw
materials to the organization. Similarly, market rate risk is the risk that involves the change of rates
globally and in the national market.
1.4-Summerizing financial priorities that should be considered in business decision making:
There are some priorities related to finance that are considered necessary for the process of making
decisions. These priorities are important for the improvement in the socio – economic environment.
Quality information related to finance and accounting to present the rational picture of the
organization. Financial systems fairly presents the picture of financial position of organization in a
specific period. The information obtained from the financial position helps to make accurate
decisions about organization. If a person knows how to read the financial statement then he can
easily understands the business. . In order to ensure the accuracy of the financial statements, the
auditing of financial statements is considered coherent.
LO2- Understand how financial statements and their structure provides sound basis for
business decision making
2.1- Comparing the accrual and cash flow basis of accounting and financial reporting and
implications of each business decision making:

Cash Based Accounting

In the cash based accounting the amount of expenses are paid and the cash is received when the
revenue is recognized in the time. In cash base accounting there is no account receivable and account
payable. Revenues are recorded in the income statement in the time in which the cash is received
from the customer and expanses are recorded in the income statement when they are paid. There is
no match of revenue and expenses in the accounting period. The books are kept based on actual flow
of cash. It is sometimes beneficial from the text point of view and is suitable for small businesses.

Accrual Based Accounting

In accrual basis of accounting revenues are recorded in the income statement when they are earned
and it often occurs before receiving cash from customers. Expenses are recorded in the income
statement when they expire or occur in accounting period. The accrual basis of accounting presents
more accurate pictures of the profit of the organization because the income statement prepared
records all the revenues that are actually earned during the accounting period and the expenses that
are incurred to produce these revenues. A clear picture of the organization’s financial position is
shown in accrual-based accounting.

2.2- Explaining the structure and content of final accounts and their uses for business decision
making:
The resultant products of the accounting system are financial statements and these are known as final
accounts. The final accounts include balance sheet and trading profit and loss account. Trading profit
and loss account is used to determine the profit and loss in the business in a particular period it is
also called an income statement. Balance sheet is the final account that represents the position of the
organization on a particular date. Balance sheet is also known as position statement, the components
of final accounts depends on the nature of business entity. Trial balance is prepared after preparation
of final accounts. Sole proprietorship, partnership and joint stock companies are the types of business
entities that have varied final accounts.

2.3 Interpreting financial information in balance sheet, income statement and sources and
application of funds statement:

Balance Sheets

Balance sheet provide a detail information about current assets, fixed assets, current liabilities, fixed
liabilities and owner equity. Assets are the possessions owned by the company. Liabilities are the
debts to be paid by the company. Owner equity is known as capital, network or shareholders equity.
The company when sell its entire asset and pay all of its liabilities the remaining is shareholder
equity. The accounting equation is calculated by:
Assets = liabilities + owner equity
This equation is used to prepare balance sheet of the company. In balance sheet, the assets owned by
the company are represented on the left side and liabilities + owners’ equity are represented on the
right side of balance sheet. The inflows and out flows of the company are not shown in the balance
sheet. The whole picture of the organization assets can be seen through balance sheet.
Income Statements
Income statement is the report that describes how much revenue the company earns in a specific
period. It also represents the expenses in cured to produce these revenues. The amount of revenue
earned by the company from the product of sale or service is represented on the top of income
statement, which represent gross revenues because expenses are not deducted. Net revenue of the
company are calculated when return and allowances are deducted from gross revenues. It is the final
profit and is termed as net because of the reason that all the allowances are excluded. To calculate the
total amount of gross profit cost of sales are deducted from net revenues. Still it is not the total
income, as some expenses are not excluded yet. Depreciation and other operating expenses are
subtracted from gross profits to gain operating profit before interests and income tax expense. After
this deduction, the revenue is termed as income from operations. To calculate net profit or net loss
income tax is deducted from the income from operations.
2.4 Differentiating between financial decisions relating to revenue and capital expenditures:

The financial decisions related to revenue and capital expenditure are different. Capita; expenditure
is an expenditure in cured to gain benefit for a longer period. It might include buying of transport,
software’s that control the functions of computer hardware. Revenue expenditure are the expenses
incurred for short period. These are quickly utilized. Revenue expenditure have the properties like
reproduction of the product and service that are not concerned with the longer period. Daily expenses
that are in cured by the firm are included in revenue expenditure.
Capital expenditure enhances the capability of the firm to earn revenues. The expenditure that
benefits the company for more than a year are included in capital expenditures. These are the
expenditures in cured by the company physical assets like building and equipment. It is often used to
undertake new projects to increase their scope of operations. The capital expense is required to be
capitalized by spreading the cost of expenditure over the life of the assets. Amount of capital
expenditure depends upon the industry in which it operates. Capital expenditure alter the future of
the business. The capital expenditure is added to the asset account hence increasing the cost and
value of the assets.
2.5 Calculating financial ratios from final accounts that will help in business decision making:
Ratio calculation
Glaxo Smith Kline (GSK) PLC 2013 Calculations
Following ratios are commonly used in the process of making decisions of business. The ratios are
calculated for the year 2013 with the help of the data of Glaxo Smith Kline.
Net profit margin:

Net profit margin = 100 × Profit attributable to shareholders

Turnover
= 100 × 7,424

42,984

= 17.27%

Return on Equity:

ROE = 100 × Profit attributable to shareholders

Shareholders’ equity
= 100 × 7, 424
 9,449

= 78.57%

Return on Asset:

ROA = 100 × Profit attributable to shareholders

Total assets
= 100 × 7,424

67,450

= 11.01%

Current ratio:

Current ratio = Current assets

Current liabilities
= 22,267

22,467

= 0.99

Quick ratio:

Quick ratio = Total quick assets

Current liabilities
= 14,980
 22,467

= 0.67

Cash ratio:

Cash ratio = Total cash assets

Current liabilities
= 6,936

22,467

= 0.31

Inventory turnover:

Inventory turnover = Turnover

Inventories

= 42,984

6,455

= 6.66

Receivables turnover:

Receivables turnover = Turnover

Trade receivables, net of provision for bad and doubtful debts

= 42,984
 6,692

= 6.42

Payables turnover:

Payables turnover = Turnover

Trade payables
= 42,984

4,336

= 9.91

Working capital turnover:

Working capital turnover = Turnover

Working capital
= 42,984

-200

= –214.92

Average inventory processing period:

Average inventory processing period = 365

Inventory turnover
= 365
 6.66

= 55

Average receivable collection period:

Average receivable collection period = 365

Receivables turnover
= 365

6.42

= 57

Operating cycle:

Operating cycle = Average inventory processing period + Average receivable collection period

= 55 + 57

= 112

Average payables payment period:

Average payables payment period = 365

Payables turnover
= 365

9.91

= 37
 Cash conversion cycle:

Cash conversion cycle = Average inventory processing period + Average receivable collection
Period – Average payables payment period

= 55 + 57 – 37

= 75

Debt to equity:

Debt to equity = Total debt

Shareholders’ equity
= 29,764

9,449

= 3.15

LO3- Understanding sources of finance and how business finance fixed assets and working
capital
3.1-Differentiating between long term financing needs and working capital needs:
In the financial analysis working capital is one of the factor that indicates the operational liquidity of
the firm. This helps to determine that whether sufficient long-term funds are available for financing.
Hence, it is important to calculate the working capital needs of the business. It is utilized to provide
finance for shorter time responsibilities. If the working equity is low then less money is required.
Long-term financing involves longer monetary requirements in a year. It might include long hiring’s,
debt certificates.
3.2 Comparing sources of long-term financing and working capital:
Working capital
The profiles of working capital represent the method of responsibility of the business. The business
that have a large amount of working capitals has many cash sales. Working capital has some
amount that is required to keep up to help the company in the process of decision-making.
There are different ways to identify needs of working capital. Needs of working capital
fluctuate during the year? Many financial and non-financial industries have different profiles of
working capital.
Long-Term Sources
There are many sources of long term financing when a business is started there is a clear idea about
the fixed assets company decides about raw material, required finance, growth and development,
long term , and short term financing. Personal sources are the most used source for long-term
financing. Retention of profits is a source of cash that are generated by the commerce. Bank loan is
an external source for long-term financing.
3.3 Identifying why access to working capital is critical to business continuity:
Working capital is the fund used for short-term employment that helps the firm to in cure money
expenditures and provide deposit to the lenders. Working capital is a type of fund that is required by
the organization to manage its daily dealings. Working capitals is required by all professions but
sometimes it is difficult to evaluate the amount of money that it requires because it has to delay
occasionally for ninety days. Working capital is critical to business continuity because there is the
time when financial institution is willing to aid by the help of money by the shorter period. However,
there will be conflict in expanding this advancing.
3.4- Examining critically techniques used to manage cash flow and the key business decisions
on which cash flow impacts:
Cash flow management is a practice of balancing income to the expenses. Companies cannot spend
money until they receive, which shows that they have to appropriately mange the inflows and out
flows of cash. Sustain working capital while managing the inflow and out flow of cash is a big
challenge for bigger firms.
 If the company has used lot of working capital to pay for the assets then it has to come up
with the crunch that avoid it to pay for purchase of materials and supplies so it is better to
maintain level of working capital.
 Examine expenditures regularly and do not be calm by expending trade.
 Before extending credit to customers do research that, can they pay their bill on time?
 Increase sales by attracting new customers or sell additional goods to existing customers.
 Offering prize discount to customers is better practice that can affect profit margin.
 Revolve credit lines or equity loans, as this will secure the loans.
  Track cash flow results every month to determine whether the cash flow that a business need
is being created.

3.5-Evaluating methods for making capital expenditures or investment decision and criteria
applied to these by organization:
Firms can use different schemes to estimate equity expenses.
Paybacks: use to reimburse the money, used for scheme.
Internal rate of return: estimates the income with respect to time and money estimate equity expenses
discharge during the whole time.
Similarly, net present value and accounting rate of return are the tools.
3.6 explaining possible benefits and risks of off-balance financing:
Off-balancing financing helps the firm to maintain debt to equity ratio. It enhance the total monitory
shape of the firm. Off-balance financing allows an entity to borrow without any substantial effect on
calculation of indebtedness. Most common examples of off-balance sheet financing includes joint
ventures and operating lease. Off-balance sheet financing is not common over the years because
accounting standards have declare a problem in using this method. It has a risk of fraud and exploit
borrowings in risky way.
LO4-Understading different ownership structures and how they influence and measure
financial performance

4.1- Analyzing critically the financial implications of business ownership structures:

Business ownership are of following types.

 sole proprietorship

 partnership

 corporation

 non-profit corporation

a business owned by one person or more than two person is very simple to establish because it does
not requires any type of deposit or charges to establish an enterprise. While for limited liability
companies it is very hard to build an entity a registration with the government and a certain amount
of charges are required to establish a business. The mangers of that firm or company have to choose
an administration. Companies have to maintain the financial statement for every accounting period.
They have to deposit taxes on the income earned.
The system of companies allows a job to trade its legal rights in the firm with that of shares.
Therefore, it is not difficult to draw the attention of the investment in equity and employee and
maintain workers by offering them with a worker share possibility.
4.2- Analysing critically corporate governance, legal and regularity environment of different ownership
structures:

Sole proprietors are not answerable to stakeholders or the directors the regulations of the companies
are not applicable to the sole owner.
Firms and companies banded together are accountable for the management of the firm.
Corporation is a legal entity with the people having common interest. The companions are
responsible for their liabilities independently many companies that collaborate for the deduction of
competition are not legal firms. The firms that are owned by the government follow certain
principles and arrangements and are accountable for labours, shareholders and administration.
4.3- Comparing and contrast stakeholders ‘interest of owners and managers in decision
making:
It is very difficult to eliminate the conflict between mangers and the shareholders. The conflict of
interest between managers and shareholders is a cause of problem for the administration. The
mangers are given the responsibility to perform their task in the best interest of the stakeholders.
They are required to create determination that increases the value for the shareholders. The conflict
cannot be eliminated but managers can be encouraged to work in the favor of stakeholders by
offering them bonuses and job security.

4.4- Evaluating significance of return on capital employed (ROCE) and other performance
measures on long term sustainability of business:

Return on capital employed (ROCE) represents the ability of the firm to earn income upon the equity
it is calculated from the following formula:

It analyzes the advantageousness of a firm. The return on capital employees should be correlated
with the expenses of advancing. It should not be less than two values of interest. If the return on
capital employed is less than any of the values of the interest than it indicates that, the firm is not
utilizing its equity in appropriate manner.
4.5- Examining the importance of earning per share as a measure of business performance:
Earnings per share (EPS)
Earnings per share is a ratio that represents the amount of profit allocated to the outstanding shares of
the company.
Earnings per share ratio are calculated by using formula as mentioned below

The greater the value of earning per share more appropriate it is which represent greater income and
the responsibility of the firm to make money. A continuous progress in value of earning per share in
different periods is symptom of regular development in the achievement of the capability of the firm.
LO5- Understanding how accountability for financial reporting and the integrity of reporting
are influenced by ethical, governance and accounting standards
5.1- Differentiating between business ethics, governance and accounting ethics as controls on
business accountability
Business ethics:
Business ethics are conventions and code of conduct with noble standards in a professional climate.
Business ethics are related to the single individual on job and the whole firm.
Corporate governance:
The set of procedures helps to supervise the business organization. It consist of regulations and
various process to increase the determination towards the firm.
Accounting conducts:
These are the ethical rules that are implemented for the counting. These conducts are educated by the
trainings and by the financial officer who is responsible to examine the accounts.
5.2- Assessing the role of accountants as guar dings of business ethics
Analysts to work with reliability during appealing in bookkeeping helps and inspecting
impressionable monetary news

Morality is significantly a legal aspect in bookkeeping. Honesty requires being trust worthy direct
and straight forward in presenting the monetary facts. Bookkeepers should set a side with private
advantage and must hold back favorable circumstances to mislead monetary data.
5.3- Analyzing the key concepts and principles of corporate governance that may affect
business decisions:
The key concepts that have impact on the business decisions are:
Guidance
The supervisor must guide to attain the goals of firms.
Competency
The panel should have knowledge, freedom and abilities to represent accountabilities effectively and
efficiently.
Responsibility
The panel should inform the stakeholders and other people with vested interest that in what ways
corporate objectives are fulfilled.
Maintenance
Panel should advice maintenance of money, allocation of resources, administration of workers are
the important principles of corporate governance.
Honesty
Management of job with honesty and communicating it with others is a key concept that must be
encouraged by the panel.
5.4- Examining the key national and international financial reporting standards relevant to
business decisions:
The key national and international reporting standards related to the decisions of the business are:
Going concern
Corporation continues to operate its business until administration decides to reimburse the
corporation or stop business dealings.
Applicability and collection
Each part of same articles must appear distinctively.
Compensation
In International Financial Reporting Standard (IFRS) does not allows ordinary compensation but for
specific models under special circumstances.
Repetitiveness of providing a detailed statement
International Financial Reporting Standard (IFRS) requires to represents a whole framework of
monetary arrangements of accounting year.
Relative figures:
IFRS needs industries to show relevance facts in accordance with prior time period for total values
presented in recent era’s monetary accounts.
Regularity of exhibition
International Financial Reporting Standard (IFRS) required the systematic arrangement of articles in
monetary account in a single time period.
 5.5- Examining the key requirements for published accounts of a public limited company:

Public limited companies are required to maintain the financial statements that represents a fair and
true picture of monetary activities. They are required to represent the information of financial
statements at Annual General Meeting (AGM). Specific criteria has to be followed for these statements
and records. Manager shave to sign the yearly statements. They attach with the authorized document,
which represents that the statements are displaying a clear picture of the financial position of the firm.

Numerical help

The projects in which group members become involved must each be justified with a business case
underpinned by firm financial evidence. So, for example, a project with an initial capital cost of
£158,000 may be expected to produce gross cash inflows over the five years of its predicted life as
follows:
Year 1 £43,000
Year 2 £50,000
Year 3 £56,000
Year 4 £59,000
Year 5 £47,000
In each year, there are cash outflows relating to running costs of £8,000. Those returns will need to
be compared with other investments that the company may make and the company investment
benchmark of a minimum 10% return on projects. Use this example within your report to
demonstrate quantitatively the financial analysis needed and to highlight other business risks in
projects that could have an influence on that financial return.
Answer:

Net present value = £33967.95

When the amount of inflows exceeds the outflows then the NPV is positive and shows that the
investment is adding value to the investor. Investor should invest when the value of net present value is
positive here in this same is the case the Net present Value is positive which the positive sign is.

Internal rate of return = 18%

Internal rate of return is the financial measure, which is used to evaluate the projected cash flows. It is
the rate of discount at which the invest makes more money in comparison to its initial or actual cost.
Net Present Value of the project is zero at this discount rate. This project has greater IRR, which is
18%. It should be accepted.

Pay Back Period:

Cumulative
cost
initial cost -
£158,000
Year 1 £43,000 -£115,000
Year 2 £50,000 £93,000
Year 3 £56,000 £106,000
Year 4 £59,000 £115,000
Year 5 £47,000 £106,000

Pay Back period = 2 + (93000/56000)

Pay Back Period = 3.66 years

Payback period is the length of the period to recover the cost of the investment. This determines
whether to undertake the project or not the longer payback period is not suitable but in this case,
payback period is appropriate. The investment could be recovered in 3.66 years.

Conclusion:

Facts and figures in the bookkeeping provide information and results that can enhance determination
for longer time. When a company needs to make a decision financial decision making have an
important role in it. This process of decision-making is not different from the other processes but the
information required for this purpose comes from the accountant internally. The managers are required
to have the basic understanding of the financial aspect of the organization so that they can choose the
best alternative. Various internal and external factors influence the financial decision-making. This
report helps to understand the key terms and layout of the financial statements so that the decision
makers can use the information provided by the accountants for decision-making.

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