Qualification - Higher National Diploma in Business (RQF)
Unit Name - Financial Management
Unit Number - Unit 15
Unit Level - Level 5
Assignment Title - Financial Management
Learning Outcome 1: Apply different approaches used to support effective decision-making
Learning Outcome 2: Analyse financial management principles which are used to support effective financial strategies
Learning Outcome 3: Evaluate the role of management accountants and accounting control systems
Learning Outcome 4: Evaluate ways in which financial decision-making supports sustainable performance
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You have recently established your own management accounting practice and have been invited to make a ‘pitch' to a potential client. In your presentation, your aim is to persuade the client of the value of management accounting and management accounting techniques in informing decisions, maximising performance and helping to ensure long-term sustainable growth.
Your presentation will cover:
1. An evaluation of a range of approaches, techniques and factors which contribute to effective decision making in an organisation.
Making choices among various courses of action, which may include inactivity, is referred to as decision making. Increasing your decision-making effectiveness is an important aspect of optimising your effectiveness at work; in short, choices are made at all levels of management, with top management making crucial decisions. Managers employ a variety of ways to choose among the possibilities and make a decision. In certain circumstances, combining a number of various tactics may be the most effective way to achieve the greatest outcomes. All of the company's major decisions are made by top-level management, which is fully reliant on middle-level management. As a result, middle-level managers are in charge of tactical choices, while lower-level managers are in charge of operational tasks.(Livers,2021)
The decision-making model is a traditional method that outlines a sequence of processes that decision-makers should examine if they want to maximise benefits while minimising costs. However, this paradigm ignores non-quantifiable elements such as ethical considerations or the worth of humanity; it ignores personal sentiments, loyalties, or a sense of responsibility; and it is all based on facts, statistics, and analysis rather than intuition or wishes.In order to provide rationale and order to decision-making, this technique can help to guarantee that discipline and consistency are established into a company's decision-making process. However, because rational decision-making is impractical, managers must rely on non-rational methods to make decisions.
The non-rational decision-making model is an organisational behaviour model that describes the behaviour of institutions as organised anarchy. This model recognises that making a decision is risky and that optimal decisions are difficult to make, and it typically takes the form of satisficing, breaking the decision down into increments, or instinct.
2. Stakeholder management and the management of conflicting objectives of different stakeholder groups.
Conflicting objectives of shareholders:
Several companies are starting to pay attention to the requirements of other stakeholders. Stakeholders are defined as everyone who has an interest in a business and may affect or be impacted by it. Employees and management are classified as internal stakeholders and shareholders, while consumers are classified as external shareholders. A typical difficulty that arises when an organisation has several stakeholders is direct conflict among them, as they cannot all agree on their various self-interests. The company's board of directors or management must consider the interests of the stakeholders. (Cobb,2019)
The internal shareholder conflict involves employees, because an employee's personal goal is to have job security as well as income stability, and if a firm decides to reduce salaries and wages, it will be a contradictory option.Because business strategy is often focused on long-term decisions, which might result in reinvestment and ultimate delay of dividend payments, there is always conflict amongst shareholders. The external shareholder conflict involvesstakeholder's major interest is in goods and services that meet their needs and desires. There is a conflict of interest if the products unsatisfied the consumers and this dissatisfaction resulted from the items.They frequently donate goods and services to project execution in order for the business to continue to acquire their products. So, if the delivery is on time and the costs are reasonable, the connection will be sustainable; otherwise, friction will arise.
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3. The value of management accounting techniques in cost control and maximising shareholder value.
Management Accounting Technique in Cost Control and Maximization of Shareholder Wealth
Managerial accounting is a type of accounting that identifies, measures, analyses, and interprets accounting data to assist management in making informed decisions and effectively managing the organization's activities. It focuses on the company's internal decision-making, making it a valuable tool for internal managers. It is a very valuable strategy for cost control and minimization since it includes a number of instruments that aid in cost monitoring, analysis, and corrective action. Managers can use short-term decision-making tools such as cost-volume analysis, stock control models, budgeting, and so on, while long-term decision-making tools such as payback period, net present value method, and internal rate of return can be used to achieve goals and select appropriate projects. It allows companies to compare performance against estimates and budgets, allowing them to avoid costly mistakes and save money. (Dahal,2018) As can be seen, management accounting is concerned with the company's internal management and seeks to keep track of and control the costs incurred. The shareholders of a corporation are the company's owners. These are the people who are most concerned about a company's financial health. Stakeholders are persons or groups of people who are involved in the business in some way. A company's basic objective is to meet the requirements of its stakeholders and maximise their wealth. It is critical for a company to have a robust decision-making process and investing projects in order to facilitate the firm's functions and produce good profits. The management accounting technique aids in proper cost control, which increases an organization's income and contributes to the maximisation of shareholder wealth.
4. Techniques for fraud detection and prevention and the approach to ethical decision making.
Detection of fraud and its Prevention:
The principles of risk and materiality are two terms that auditors are familiar with and comprehend in the realm of fraud. The value of these variables is used to determine how seriously the company takes fraud prevention and detection. Since a result, all auditors must consider the risk and material of fraud in their organisation, as this will have an impact on the audit resources dedicated to fraud-related operations. As a result, both management and audit play a critical role in the prevention and detection of fraud. Management has power over the entire system, including people and records, and audit competence is required for the evaluation and construction of controls. Fraud occurs in all types of organisations, whether private or government. (Abu Amuna, 2020) As a result, fraud losses are substantial. To deal with the fraud, management, staff, and internal and external auditors may be necessary to collaborate.
Approaches to ethical decision making:
Justice approach: People should be treated equitably regardless of their socioeconomic status, and they should not be discriminated against, according to the approach to justice. It portrays ethical activities as benefiting all members of the community. The problem of this strategy is that the decision made may be biased in favour of a specific group, which the decision makers may not even be aware of. (Vakilbashi,2017)
Utilitarian Approach: The utilitarian approach examines an intervention in terms of its impact on all stakeholders. Its goal is to achieve the greatest good while inflicting the least amount of harm or avoiding pain. This ensures that the requirements of each individual are fairly weighed when a decision is made. The biggest problem of this strategy is that it is nearly difficult to measure the values of both costs and benefits.
Virtue approach: The virtue approach to ethics implies that people should strive towards specific values. Meaning that a person who has developed virtues will naturally act in a way that is consistent with moral standards. The biggest downside of this method is that it provides no guidance. (Vakilbashi,2017)
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You are to work in a group to evaluate an annual report of a listed company in Hong Kong and use the annual report to calculate appropriate ratios using Excel. You are to present your analysis of the company performance in a 2,000-word report. The report should include the following:
1. Identify how the data obtained might help to inform operational and strategic decisions for the company.
Introduction of the Chosen Company
AIA Group Limited was picked as the winner. Along with its auxiliaries, the AIA Group Limited provides insurance products and other services. It was founded in 1919, and its headquarters are located in Central, Hong Kong. The organisation has offices in China, Thailand, India, Indonesia, Australia, and other nations across the world. The company's coverage includes life insurance, liability insurance, health and serious condition insurance, and disability income insurance products. Due to its linked financial services, it has experienced enormous development throughout the years. The company's numerous financial and non-financial characteristics are the subject of the report.
Relevance of the data obtained from annual report in operational and strategic decisions of the company.
Financial reports include information that may be used to assess a company's financial health. The information gathered from these reports may be used to calculate the company's ratios, which give a detailed analysis of the company's financial status and operations. It aids in the comprehension of a company's operations and expands knowledge in order to make strategic decisions.
Net Profit Ratio (2020) = Net Profit/ Sales
= US $ 5,779 m/ US $ 35,780 m = 16.15%
The net profit ratio of the company is good indicating that the company has positive inflows and good profit margin.
Liquidity ratios - Current Ratio (2020) = Current Assets/ Current Liabilities
= US $ 11,578 m / US $ 8,143 m
= 1.42 times
The cash flow statement shows that the corporation has a healthy liquidity position. The company's cash flows from operating activities are extremely high, resulting in a cash surplus.
Efficiency Ratio -Expenses / Income Ratio = $ 43,072/ $ 33,328 = 1.29 times
The company is efficient enough to overcome its expenses. It has higher revenue to overcome its expenses.
2. Compare and contrast three investment appraisal techniques and evaluate their effectiveness in helping to maximise return on investment (ROI).
Investment Appraisal Techniques
Any company's investment decisions are big and extremely important. Investing is the process of increasing and optimising a shareholder's return on capital. Making the appropriate investment decisions is the most difficult task that management faces. Investing decisions are usually fraught with risk and uncertainty. The primary goal of the investment evaluation is to determine if the original investment will result in future cash inflows for the firm. Companies will require specific inputs in order to reach this goal. These inputs are processed through the investment appraisal procedure to get the desired outcome.
Net Present Value - The approach of calculating net cash inflows from an investment project is known as net present value. The discounted cash flows are subtracted from the original cash outflows to arrive at this figure. The most essential feature of this approach is that it takes into account the time value of money, which is based on the idea that the value of money decreases over time owing to variables such as inflation. (Burgos,2020)
Internal Rate of return -It aids in determining the return on any investment. The project's Net Present Value is zero at this moment. It establishes a standard for project acceptance or rejection. If the company's real cost of capital, or discount rate, is higher than the internal rate of return, the Net Present Value is likely to fall and should not be accepted.
Pay-back Period- It is a strategy that focuses on the time frame in which the project's original investments are recouped. Companies are more likely to approve an investment project if the money invested is repaid during the project's lifespan. This method is commonly used when a corporation has to preserve liquidity and must select between a number of initiatives. (Burgos,2020)
Techniques by AIA Group
When analysing investment decisions, the corporation employs all of the strategies listed above. When determining the Net Present Worth of a project, the time value of money is taken into account, as well as inflation and foreign exchange changes. The corporation also employs the IRR method, preferring assets with greater IRRs than its weighted average cost of capital of 4.64 percent. As a result, an investment assessment approach aids in the evaluation of project effectiveness.
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3. Demonstrate the value of techniques (e.g. cash flow statements, break-even analysis) in helping to inform financial decision making.
Value of techniques and its importance in decision-making process
» Cash Flow Statements - It keeps track of a company's cash inflows and outflows and indicates the company's liquidity situation. The firm must plan its earnings and expenses for the cash flow statement, and it is critical to forecast the period's balance so that future cash flows may be forecasted.
Recommendation on AIA Group financial performance
The cash flow statement is prepared by AIA Group. The corporation had 2146 cash and cash equivalents at the end of the year, according to the annual report for 2018. When compared to the previous year, cash flows rose in 2018. Despite the fact that investment and financing operations grew in 2018, cash flows improved due to an increase in cash flows from operational activities. As a result, cash flows give a thorough view of the company's cash availability.
» Budgeting - Budgeting's goal is to paint a picture of how the organisation will operate if certain rules, actions, and goals are executed. It aids business owners in concentrating on cash flow, cutting expenses, increasing profitability, and increasing returns on investment. It is the foundation of any company's success. It aids in the financial planning and administration of the organisation
Recommendation on AIA Group financial performance
In comparison to 2017, it appears that the company's costs have decreased in 2018. It is achievable thanks to the company's budgeting and budgetary control techniques.
4. Analyse how financial decision making supports long-term sustainability.
Financial Decision Making in Long term Sustainability
Financial decision-making is the process of making decisions on various sources of funding, stakeholder equity, debts, business operations, and so on in order to ensure the long-term viability and growth of a company. Financial decisions are the most important decisions for every business, and its success or failure is totally dependent on them. Long-term sustainability is a method of long-term value creation that considers how an organisation operates in an ecological, social, and economic context. The concept behind sustainability is that the adoption of such initiatives supports the long-term viability of businesses.To carry out its operations, a company requires capital. A corporation that wants to endure for a long time must get long-term funding from sources such as stock, debt, and long-term financial institutions.In order to preserve long-term viability, the corporation must manage its profitability. (Schoenmaker,2018)
ESG (Environmental, Social, and Governance) is a critical component of AIA's business strategy. The ESG is used to guide the investing strategy. As a result, AIA is aware of their broader influence in promoting advances in ESG disclosure and knowledge across the area. The organisation makes investments that will assure a constant return and revenue in order to preserve long-term sustainability and growth. In addition, their devotion to ESG standards helps to prevent government interference and gives the company new vitality.
5. Make recommendations for how management accounting can be used to improve financial sustainability.
Recommendations as to how management accounting can be used to improve financial sustainability.
Managerial accounting is a type of accounting that gives both quantitative and qualitative data about a company's operations and finances. Management, owners, and workers utilise it to make choices internally. It's a tool for continuous improvement that makes use of improved measurement and improvement methodologies. It consists of numerous instruments such as cost management and quality management that are always focused on reducing costs and regulating the quality of the company's goods and services. As a result, it will assure corporate expansion and growth, which will aid in financial sustainability.