Qualification - Higher National Diploma in Business
Unit Name - Financial Management
Unit Number - Unit 15
Assignment Title - Financial Management
Unit 15 Financial Management - HND in business assignments and solutions. Acquire best writers for Higher National Diploma in Business homework help
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 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.
In the report, the selected Hong Kong-based listed company is Sun Hung Kai PropertiesLtd (0016), which operates in the HKD currency. It is basically a real estate company which was founded in the year 1962. The company was founded by 3 businessmen who are native to Hong Kong. The company is the second most successful real estate business in the whole world. It is noteworthy that the financial accounting related data enables the business to keep track of all the financial transactions (Beck, Frost, and Jones 2018). As a result of this, the company leaders and investors can make informed decisions, by considering the company's financial health. The financial accounting of data generated from the annual report enables the data analysts to gain a better understanding of the past present and future financial health of the business (Ionascu, Ionascu and Sacarin 2018). Before making any major financial decision, it is highly necessary to track the financial performance along with the sales and procurement data. Data analysts usually work with the annual report, balancing sheet and cash flow. Through the use of current ratio, data analysts are able to understand the ability required to pay short-term obligations. The more is the current ratio, the better is the financial health of the company.Inthe current scenario of Sun Hung Kai Properties, the current ratiois 2.91, which much above the minimum required ratio of "1" (Investing.com 2020). Similarly, the accounts payable turnover ratio is the short term liquidity metric which evaluates the time period required for repaying bills of suppliers (Bazrafshan, Kandelousi, and Hooy 2016). Finally, the accounts receivable turnover ratio defines how quickly it company collects payment. The receivable accounts value for the given case company is 6.2 days which is a decent value in comparison to the industry value of 38.61 days (Investing.com 2020). The higher this ratio, the more is the liquidity which is available to the company for repaying short-term liabilities (Beck et al 2018). Some of the key financial ratios are highlighted in excel format in fig 1. The data illustrated in fig. 1 includes basically the financial ratios are obtained from the annual report of the company. These data provide valuable insights to the company's key performance in the past and present and help in building strategies for effective financial performance in future.
The different formal and informal approaches which are used for supporting effective decision making are:
- Knowledge based approach - It is the concept which is basically focussed on facts, quantitative and objective data from the company's annual report to make informed decisions (Maas, Schaltegger and Crutzen 2016)
- Stakeholders role in decision making - stakeholders include both the internal (employees and managers) and external (suppliers and investors). Both the internal and external stakeholders have different perspectives and interests towards the business and hence their decision-making varies as well.
- Limiting factor analysis - In this approach, the impact of various constraints which can act as barriers in the production and restrict sales or growth maximisation (Ionascu et al 2018).
- Key factor analysis - In this approach, the major internal and external factors are considered for identifying the profitability of a product or service.
2. Compare and contrast three investment appraisal techniques and evaluate their effectiveness in helping to maximise return on investment (ROI).
The three selected investment appraisal techniques which will be discussed in this report are; accounting rate of return, discounted cash flow and payback period. The accounting rate of return (ARR) analyses the expected profit under investment to that specific amount to be invested. In general, it is calculated in the form of average annual profit which is expected over the lifetime of an investment project and is compared with the average amount of capital investment. Similarly, the discounted cash flow includes a discount rate for working out the present time equivalent of the future cash flow (Maas et al 2016). Basically there are two different subsets of the discounting method of appraiser; internal rate of return and net present value. The payback period is the simplest technique for evaluating the capital expenditure related decisions. Through this approach, the rapidity is determined through which the project cost can be recovered (Ameen, Ahmed and Abd Hafez 2018).
Effectiveness of each investment appraisal technique which can increase the ROI of Sun Hung Kai Properties are as follows:
• Accounting rate of return (ARR) - The accounting rate of return is the capital budgeting metric is considered as beneficial while calculating the investment related profitability at a faster pace (Maas et al 2016). In general, Sun Hung Kai Propertiescan adopt the ARR approach for comparing multiple projects and identify the expected ROI of each project. It is also easy to understand and calculate and it considers the profit of the entire project life (Babajani and Khonaka 2018).
• Payback period - The payback period approach allows to identify the specific time required to achieve the desired ROI. It is to be noted that in the process of financial analysis of Sun Hung Kai Properties, and calculate the return on investment (ROI), it is necessary for the company to evaluate the payback period at the first phase. The ROI of the given case company is found to be 3.56% (TTM) and 6.42% (5-year average) (Investing.com 2020).
• Discounted cash flow - It is the approach for estimating the value of investment based on future cash flow. Hence, it enables Sun Hung Kai Properties Ltdto determine its future ROI based on an investment (Maas et al 2016).
The key financial management principles to ensure successful business management:
• Organising - the foremost principle for achieving financial success is organising the financial sources which can be easily tracked, irrespective of its size. These financial sources include bank accounts, loan details, and credit cards. Budgeting software can be used for data organising and tracking purposes (Martin 2020).
• Limiting Debt - The primary principle for financial management is to restrict the amount of debt. It is always advisable to spend money or apply for a loan, unless it is highly necessary.
• Understanding risk - It is evident that the more one is open towards risk, the better is the chance of gaining maximum return (???? 2020).
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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.
Financial analysis techniques are helpful in evaluating the organisation performance which can help in making effective financial decisions. The important source of prudential analysis includes the cash flow statement and break-even analysis. These are the two basic financial tools which Sun Hung Kai Properties Ltdcan use for understanding their financial health in the present and future. The objective of the cash flow statement is to highlight the specific point where cash is produced and where it is spent within a specific range of time Maas. The cash flow statement is of high importance for evaluating liquidity as well as long-term solvency for a business. The cash flow forecast enables to estimate the amount which can be spent at present without running out of cash. The cash flow statement of Sun Hung Kai PropertiesLtdcan be used in two different ways; (i) short term planning, (ii) long-term planning Maas. The short term planning allows identifying and making decisions for the point where more cash is required than usual in a particular month. Similarly, the long-term planning or business planning is helpful in identifying the point where the cash flow can break the business. This situation usually occurs when the business plans to expand. Hence, it can be said that the cash flow statement acts as a major part for the decision-making in the company's financial stability and visibility (Le, Chuc and Taghizadeh-Hesary 2019). Using the cash flow statement of theSun Hung Kai PropertiesLtd, the cash from operating activities, investing activities, and financing activities are 24617 million HKD, -50529 million HKD, and 26535 million HKD respectively for the year 2019 (Investing.com 2020).It is evident that success and survival of Sun Hung Kai PropertiesLtdis dependent on its capability to create acquired cash. While making important decisions, it is important to consider data regarding the income and disbursements of thegivencompany, when preparing the cash flow statement. According to Maas et al (2016), it is recommended to predict the future deficit of cash for making a successful financial decision beforehand. Sun Hung Kai PropertiesLtdshould focus its decision-making criteria on improving its capability to generate cash for itself, and from other sources.
Similarly, break even analysis is also a major element in the financial decision making. It enables Sun Hung Kai PropertiesLtdto identify the cost structure along with the number of units which are required to be sold or making a significant amount of profit. In particular, in a business setting, the break-even analysis is of high importance for pricing and promotion purposes, in addition to the cost control aspect. The break-even analysis answers several questions like; minimum level of sales required to avoid financial loss, sensitivity of break-even sales volume with respect to the change in cost. While determining the break-even point, the analyser of the given company determines the fixed and variable cost costs which are necessary during the financial decision making process. In addition to this, the break-even point also helps in targeting a profit goal. In accordance to that profit goal, the decision can be taken to determine the sales required to reach that target (Garg and Kumar 2019).
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4. Analyse how financial decision making supports long-term sustainability.
Financial decision can help Sun Hung Kai PropertiesLtd inmaking responsible and delivery judgements related to the liabilities and equities of the stakeholders in the organisation. Making effective financial decisions is of high significance for achieving long-term sustainability in the businessfor the given case company. The major aspects of making financial decisionsof the company are related to investments, financial working capital and dividend management. According to Babajani et al (2018), decision-making leaders use the available resources for attending organisational objectives, until the minimum expected financial performance level is attained.The total revenue as identified in the Sun Hung Kai PropertiesLtdis 38711 million HKD in 2019, which is possible due to effective decision making approach by the company leaders (Investing.com 2020).It is noteworthy that for making financial decisions, it is necessary to have a Financial management framework of Sun Hung Kai PropertiesLtdthat can help it with an analytical approach. As per the report by Maas et al (2016), there are four major types of decision: (i) long term investment decision, (ii) capital structure decision, (iii) dividend decision, and (iii) working capital management decision. According to Garg et al (2019), each and every company is required to take the three major financial decisions, which include; investment decision, and financing decision. Additionally, the author has also included dividend decision as a major financial decision making criteria for the company. In this frame of reference, decision is related to the type of investment the company is planning for different assets. This type of investment can be either short-term or long term investment. Similarly, the financing decision is based on the amount of finance or find out which is required to be raised for different long-term sources like debentures, equity shares, difference shares and bank loans (Morente-Molinera, Kou, and Samuylov 2019). In short, the financing decision is also called as the decision taken for designing capital structure of the company. Finally, the dividend decision is based on planning on how much the profit earned by the company to be distributed among the shareholders and the quantity of profit to be stored for future contingencies. In this context, dividend is that part of the given company's profit which is to be distributed among the shareholders.
The term financial sustainability is defined as the ability of public administrations to operate in the present and future policies without continuously increasing the debt. Hence, making analytical decisions on the basis of robust financial information is considered as the key point to achieve long-term financial sustainability, which is also true in case of Sun Hung Kai PropertiesLtd. In accordance with the report by Maas et al (2016), it is to be noted that proper financial decision-making allows to predict and forecast and interpret the financial data into the givencompany's success or failure in future. In general, data analysts in Sun Hung Kai PropertiesLtdevaluate the findings of the company's financial performance and financial position through its income statement. In accordance with the report generated by McKinsey, the companies having fast and efficient decision-making approach are found to have twice as likely in reporting the financial return in result of the current decisions (Ameen et al 2018).
5. Make recommendations for how management accounting can be used to improve financial sustainability.
It is noteworthy that in decision-making is an essential criterion for management skills, which is responsible for driving and impeding the organisation's financial performance. Hence, Sun Hung Kai PropertiesLtdisrecommended to adopt the following strategies in the decision-making process for achieving improved financial sustainability.
• Perform financial statement analysis - Financial statements are considered the most important asset at the disposal when it comes to the time of decision making. The business leaders should not only know to read this information but a better understanding and knowledge to interpret and analyse the data. It is important to have understanding and constant monitoring of the balance sheet of Sun Hung Kai PropertiesLtdwhich can help to establish its current financial position. The balance sheet of Sun Hung Kai PropertiesLtdstates that the total current assets of the company in 2019 is 245888 million HKD (Investing.com 2020).This decision making process should follow a hierarchical top-down approach from CEO to senior management team to junior managers (Babajani et al 2018).
• Estimation of financial impact of the project - For effective management of the team and departmentof the given company, it is necessary to identify and decide the specific projects which are worth pursuing. It is recommended to calculate the expected ROI for a specific project as it can help in identifying the specific profit which it is likely to develop to achieve the success. It can help in identifying the approach taken by the organisation for allocating tasks and funds to achieve the future endeavours (Babajani et al 2018). In this frame of reference, it is also recommended for the company to conduct a cost benefit analysis which can help in using the available resource and thereby making a better financial decision. According to Morente-Molinera et al (2019), data driven decisions are much more successful in terms of achieving business efficiency.
• Tracking financial performance - It is evident that having knowledge of past and present financial performance is of high importance for a sound business decision making. In this context, the management accountants of Sun Hung Kai PropertiesLtdshould keep track of major financial KPIs like working capital, gross profit margin and return on equity to gain a detailed understanding regarding the financial health of the organisation and make strategic decisions accordingly (Babajani et al 2018).