Qualification - Higher National Diploma in Business
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.
The presentation will put light on the importance of the management accounting and how the management accounting techniques are used in informing decisions, helps in ensuring long-term sustainability and benefits in the maximization of performance of an organization.
The task will cover the techniques and approaches used for making effective decisions, the concept of stakeholder management and conflicting objectives and many more.
1. An evaluation of a range of approaches, techniques and factors which contribute to effective decision making in an organisation.
Evaluation of range of approaches for effective decision making.
There is a wide range of approaches through which the management of an organization can make effective decisions.
Strategic and Tactical Decision Making - It is a broad-based concept that is based on qualitative and quantitative factors of the management (Asmilia and Sugiyarti 2020) and contributes in reflecting the objectives and goals of the organization.
Short-run and Long-run Decision-making - It is based on specifying the objectives of the organization in short-run and long-run basis (Asmilia and Sugiyarti 2020).
The decisions are made focusing on the short-run objectives and long-run objectives and goals of the organization. Various tools are used in this approach to take such decisions.
There are various techniques that are used to make effective decisions in management accounting.
Creating values through effective resources used to evaluate the quantitative factors of management accounting the benefits in evaluating qualitative factors of effective decision making (Wicks and Harrison 2017).
Reducing waste in business resources is another technique and stage that will help in effective decision making of management accounting.
Cost and financial technique (Shariati, Talebnia and Royaee 2020) is the basic and most commonly used technique for the evaluation of the figures of important and major items that are required for observing cost and financial aspects of the organization.
Management planning and control is the technique which is used by the organization to reflect the means and ways to plan and control the operations of the management.
2. Stakeholder management and the management of conflicting objectives of different stakeholder groups.
Stakeholder management in regards to management accounting requires an understanding of the concerns and objectives (Oyewo, Ajibolade and Obazee 2019) of the relevant information of the organization.
From the viewpoint of management and techniques used for effective stakeholder management requires accurate information and behavioural learnings towards them.
Stakeholder conflicting objectives
There are many fields in regards to which stakeholder conflicts may arise.
Employees and Shareholders - The riser in the salary and wages of the workers may serve as the matter of conflict between the shareholders and employees (Wicks and Harrison 2017).
Shareholders and Finance providers - The shareholders may ask for undertaking risky strategies for getting higher returns.
Using CVaR (Gaebel et al. 2020) will help an organization to minimize shareholder conflict by reducing the level of dissatisfaction faced by the shareholders mentioned in the previous slide.
This objective helps the management of the organization to form a structure for making strategies for resolving shareholder conflicts.
The other ways to solve the stakeholder conflicts is by negotiation and expert assessment. An organization may use these ways to solve the problems of conflicts between the internal and external stakeholders with the internal management of the organization.
Negotiation and appointing expert (Dowling, Ruiz-Mercado and Zavala 2016) to come into one particular decision and stick to a mutual decision making of both the parties can be a stakeholder conflict objective for an organization.
3. The value of management accounting techniques in cost control and maximising shareholder value.
Management accounting techniques play an important role in controlling the cost of an organization. The accounting system provides proper guidance for managing and controlling the cost of the organization.
This leads towards the increase in the profitability (Ojua 2017) of the organization due to a reduction in the cost of the resources and production.
The techniques like cost and financial techniques and management planning and controlling technique aid the management of the company to make decisions efficiently.
The information and data generated while using such techniques for effective decision making in management accounting helps the organization to produce reliable reports for its users.
4. Techniques for fraud detection and prevention and the approach to ethical decision making.
The management accounting techniques are also used effectively to maximize shareholder's wealth of an organization.
The techniques create a link with the external stakeholders of the company that helps the organization to increase the number of shareholders.
Many accounting tools can measure the shareholder's value through which the management of the company gets the idea of what should be done.
The management accounting techniques use such tools efficiently to measure shareholder's wealth and identify corrective measures to make decisions.
Finding out differences between profit earned and cash available with the organization (Adali and Kizil 2017) is a technique that can be used to detect fraud if made by an organization while making decisions.
Ratio analysis (Adali and Kizil 2017) is another effective technique that can be used by the users of the report to detect fraud to take appropriate decisions.
Vertical analysis is another important technique that can be used by the users to detect any frauds or errors has occurred in the financial statements of the organization.
This is the analysis of the figures of the ledger accounts taking income statement as the base for the percentage of revenue and comparing each year-over-year.
Prevention to ethical decision making
Data Mining (Adali and Kizil 2017) is a technique to prevent fraud in the financial statements of the company. The technique is used for verifying the information used to make the financial statements and analysis the information.
Continuous Auditing is another way to prevent fraud and error in the financial statements of an organization.
Forensic Accounting is the most effective tool as per the experts. Through such the users can detect the fraud or errors in the financial statements as well as from the information provided by the management of the organization.
The proper utilization of the Code of Ethics of the company will lead the company to prepare reliable data and financial information for the users.
Approach to ethical decision making
There are different approaches to ethical decision making.
Mitigation of risk (kfknowledgebank.kaplan.co.uk 2020) in various factors will help the management to reduce the chances of taking unethical decisions regarding the business and investing in the organization by the users.
Market forces are another approach to ethical decision making for the users of the financial statements.
There is another way towards ethical decision making in management accounting.
The users can make a model which may be in the form of a questionnaire where they can ask the questions to the management of the organization to clear their thoughts and doubts (kfknowledgebank.kaplan.co.uk 2020).
This will benefit the users to understand any situation and have access to taking decisions regarding further procedures and investment.
The whole presentation was about the importance and necessity of management accounting in the decision-making process of the individuals.
The presentation helped to understand the working procedure and implication of management accounting in regards to making efficient decisions for specific purposes.
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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.
Introduction of the company and its background
Power Asset Holding Ltd is the name of the company that will be discussed in this report. This company is listed in the Hong Kong stock exchange as a public limited company. This company is mainly supplying electric and distribute electricity in households. The company is very sufficient in doing its work and the company is holding nearly 38 per cent of stake in this field. The company is working under a parent company named Cheung Kong Infrastructure Holdings. Apart from that, the company is holding the shares of other companies also. Headquarter of the Power Asset Holding Ltd is established at Hong Kong in China. The company was founded in the year of 1976. Chao Chung Tsai is the Chief Executive Officer (CEO) of the company. CK Infrastructure Holdings Limited is the prime competitor of this company. The company is holding nearly 93,570 million of US dollar as its net asset as per the statistical report of 2019 (Asia.nikkei.com 2020). The main working of the company is to generate, transmit and distribute the produce energy to its subsidiary companies. The company has made a huge investment to develop the supply channel and infrastructure of the industry. The company is now mainly distributing its produce electricity to mainland China, and other regions of China along with Australia and United Kingdom.
The report should include the following:
1. Identify how the data obtained might help to inform operational and strategic decisions for the company.
2. Compare and contrast three investment appraisal techniques and evaluate their effectiveness in helping to maximise return on investment (ROI).
3. Demonstrate the value of techniques (e.g. cash flow statements, break-even analysis) in helping to inform financial decision making.
4. Analyse how financial decision making supports long-term sustainability.
5. Make recommendations for how management accounting can be used to improve financial sustainability.
Relevance of the data obtained from annual report in operational and strategic decisions of the company
Operational decisions are made to organise the regular activities of the organisation in a batter way and to mitigate the objective of the organisation efficiently with these decisions. On the other hand, strategic decisions are completely different from the other operational decisions because it analyses the environment of the industry where the firm is operated. Proper utilisation of the resources will be done through these strategic decisions efficiently. However, both these decisions of the organisation cannot be done without analysing the financial report of the organisation. Therefore, analysing the annual financial reports of Power Asset Holding Ltd will be done here through the help of accounting ratios. Moreover, performance of the company in the last few years will be done here.
Performance of the company in the last few years
Profitability level: the company has reached to more than 19,080,000 customers directly through its operation. In the year 2018, the company had distributed nearly HK $ 7,635 million to its shareholders as a profit of the year.However, the profit percentage of the company has been diminished in the year 2019 where the shareholders have been given HK $ 7,130 million grossly. Nearly HK $ 504 million did not fetch this year. The company is distributed to the other countries also. Among those countries, result of the United Kingdom is best and China is lowest. The business of the company in the United Kingdom, Australia, Mainland China, and Hong Kong has fetched nearly 52 per cent, 21 per cent, 6 per cent, and 12 per cent to the annual net profit in the year 2019 respectively (Powerassets.com 2020). On the other hand, despite of earning fluctuation, dividend per share of the company is intact in the year 2019 as same as 2018.
Liquidity position: the organisation has invested its profit amount in many of the investment areas therefore a short of liquidity within the organisation can be observed in the financial statement of 2019. In the year 2018, the total cash in hand of the organisation was stood at HK $ 5,228 million while the amount has been reduced to HK $ 4,875 million in the year 2019.
Debt-equity ratio: total number of equity in the year of 2019 was stood at HK $ 85,491 million and it has been increased from HK $ 83,554 million in the year of 2018. Thus, the company has increased almost HK $ 1,937 million in the last year. Total debt over the company was stood at HK $ 3,437 million in the year 2018 and it has been reduced to HK $ 3,318 million in 2019. That means, more than HK $ 118 million of debt has been reduced in the last financial year. Debt to equity ratio of a rational organisation should be stood at 2:1ideally. However, the company has achieved this ratio is very high nearly to 25 times; that means, total debt of the company can be mitigated through share capital by 25 times.
From the above analysis it can be said that the company has improved the position of the business by increasing the shareholders' numbers. However, the profit percentage of the company has been fluctuated from the last year to this year. Earnings per share have been diminished also. On the other side, debt to equity ratio of the company has been improved in this year. Debt percentage has been reduced. The United Kingdom branch of this company has constituted more than 50 per cent of profit this year. Finally, this information will help the company to manage its affairs very coherently in the upcoming year. Moreover, it also helps in the managing body of the company to take correct and accurate decision in the future years.
Investment appraisal technique
Investment appraisal is a technique where the decision of the firm regarding investment will be analysed with proper evidences. Calculating the net present value of the investment, internal rate of return, payback period and other data is being treated as investment appraisal technique. In this segment, the need of these analyses has been explained with a detailed format.
Net present value: net present value is a crucial concept of financial management. Generally, it is used for validating the current investment proposals with the help of discounting forces. Net earnings from the investment in the future years can be calculated in this present scenario with the help of net present value analysis. Use of discounting forces is done in this calculation of net present value. Further, time value of investment in the future can be known through this method. However, sometimes, the future scenarios cannot be calculated accurately in the present time because a lot of uncertainties are involved there. For instance, profit percentage of Power Asset Holding Ltd in the year 2019 has been reduced from 2018. There is no single cause is involved in this case rather is an accumulated effect. Thus, future values of income sometimes differ from the actual scenario.
Internal rate of return: like the NPV analysis, internal rate of return (IRR) estimates the potentiality of the investment in the present scenario. In particular, the discounting factor in the calculation of net present value is considered as internal rate of return. IRR predicts future growth and tells the organisation about its future investment modules. IRR also helps in calculating capital budgeting analysis and annual rate of return comprehensively. IRR is using the same formula of NPV with little modification. In the context of Power Asset Holding Ltd, major investment has been done in UK power networks and Northern Gas Network from the company that accounts nearly 40 per cent and 41 percent of share of Power Asset Holding Ltd respectively. However, these investments are fetching good returns thus it can be considered that risk elements are very little there.
Payback period: recovery period of investment is considered as payback period. For instance, if an investment proposal of USD 1 million will return to the company after 2 years from this date then these two years will be counted as payback period. This payback method is used to validate the investment proposals. Power Asset Holding Ltd has invested in diverse subjects thus there is a little difference among the payback periods could be observed.
Value of techniques and its importance in decision-making process
Decision making process should be very opened and elaborative because the firm is involved in many activities here. Analysing the financial reports of the organisation can be helped the organisation to adopt some constructive. Various financial reports including the cash flow statement of Power Asset Holding Ltd has been discussed here to show its importance in decision making process.
Cash flow statement: Power Asset Holding Ltd has shown the amount of HK $ 1840 million as its net cash generated from operating activities. The amount of net cash generated from operating activities has been decreased by nearly HK $ 700 million from the last financial year that is 2018. A drastic change in cash generated from operation has been seen in the cash flow statement of the company. In the year 2018, the company has recorded HK $ 1,160 million as cash generated from operation where the amount has reached to HK $ 547 million in the year 2019 in the same ledger (Powerassets.com 2020). This change has shown in the total calculation of cash flow from operating activities. On the other side, net cash generated from investing activities has been increased in 2019 to HK $ 2,130 million from HK $ 583 million in 2018. Interestingly, net cash used in financing activity is also reduced from the last year. However, the actual cash and cash equivalents as at 31 December of 2019 is amounted to HK $ 3,239 million that is reduced by nearly HK $ 1,990 million from the last year. Finally, cash flow statement gives an insight about the financial condition of the company in a compact format where every detail of cash input and output is stated coherently.
Consolidated profit and loss statement: the net operating profit from operation is accounted to HK $ 1,761 million in the year 2019 that has been increased from the last year by HK $ 232 million which indicated the profitability of the organisation is a growing stage (Powerassets.com 2020). However, some losses had happened in the company that reduced the profit percentage before taxation. Net profit of the year 2019 is stood at HK $ 7,130 million that is distributed among the shares coherently and earnings per share are amounted to HK $ 3.3. On the other side, the company has improved its relations with its subsidiaries very efficiently in this financial year thus goodwill of the company has increased rapidly in the same period coherently.
Financial decision making in long term sustainability
Financial sustainability is a coherent concept where the business is adopting some policies regarding its future investment to obtain long term financial benefits from the operation. Debt raising capabilities of the organisation would be reduced by achieving financial stability. Power Asset Holding Ltd has generated 4,606 mega watts of energy from coal and oil fired and nearly 3,697 mega watts capacity of energy from gas fired. Oil and gas pipe length of the company is 112,300 kilometre and it is rapidly expanding. The company has invested majorly of its amount for the development of its gas pipelines because the demand of clean energy is rapidly growing all over the world. Generating clean energy is very much import for environment and it is also important for the company because long term financial sustainability is very much depending upon this. Therefore, the company has invested in the UK business for the development of infrastructure for producing clean energy from gas.
Recommendations as to how management accounting can be used to improve financial sustainability
The main task of management accounting is to produce the financial reports of the organisation and to present them before the managing authority. On the other hand, management accounting also guides the organisations to achieve long term and short term goals. This segment is about recommendation where the managers of Power Asset Holding Ltd would take some changes in their operations to cultivate rational accounting management.
• Analysing the internal and external financial information separately would help to clear the obstacles from the accounting process.
• Maintaining transparency in the accounting process would fetch many positive results for the organisation.
• Proper unitising all resources of the organisation including tangible and intangible will help the managers to obtaining financial sustainability for the organisation.