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Why financial information is required in formulating business strategy?
It is absolutely necessary to take into account financial information while making business strategies. Data like account balances, credit information and financial statements are cater in the field of financial information. Balance sheets, Income statements and Cash flow statements are very important and they play a vital role in formulating business strategies. While making business strategy first step the organizations do is to look up at financial information whether they have that much resources to implement this strategy or not. They analyze financial information before making any business strategy. These financial data then provide significant information to the top management team who then can easily decide business strategy. For example if a marketing manager is making a new strategy he has to look up at the financial side whether he has that much resource or not. Similarly if an operational manager decides a strategy and this strategy requires a bigger plant for manufacturing bottles of the organization, he need to analyze cash position of the company. This cash information only comes from financial data and this data then help top management team to decide business plans that are profitable for the company. (Katarina & Lajos, 2006)
If an organization do not take into account financial information and announce a strategy it will likely end up making a bad publicity for the organization. As this organization does not have that many resources to actually set up the strategy, it will make bad image of the organization. (Katarina & Lajos, 2006).
The major risks involved in business strategy?
Risks means possibility of losing something that consists of monetary value. It includes probability of losing all investment that the organization has made .Risk can also be considered as “uncertainty”. The following are the risks involved in business strategy:
Business Risk: It is the risk that the company will achieve its desired objectives or not. If a person has just started a business, likelihood that the business will succeed or not is caters in business risk. As the business grow and enters in growth and maturity period business risk will be reduced. The company has succeeded and performing very well so its business risk is reduced. And when it reached the declining phase it has the lowest business risk, company has failed in achieving its objectives. While making business strategy mangers have to take into account business risk. They need to know that in which stage the organization is currently working and whether it has achieved its desired objectives or not. (Ruth & Keith, 2002)
Financial Risk: It is the uncertainty that the organization will be unable to meet its financial obligations. The company does not have required resources to pay off its debt holders. If the organization is in startup and growing phase its financial risk is very low as most of the financing is done through equity. When it enters maturity and decline stage it increases and in declining phase it has the highest financial risk as all financing is coming from debt. While formulating business strategy managers should take into account financial risk as well whether company have that much resources to actually implement the strategy. Its financial condition need to be considered before making any business strategy. (Ruth & Keith, 2002)
Operational Risk: It is the risk that the company will be unable to operate in specific area or industry. The managers have made specific business strategy but the organization lack in its operating knowledge, it does not have required knowledge that how to operate this strategy resulting in failing of business operations. It covers inadequate strategies that results in financial loss for the company and make bad reputation of the company. (Rouse, 2013)
The key financial information required when strategic decisions are made?
One of the most important responsibilities of managers in any company is to make decisions. They have to make decisions that are practical and can benefit the company. While making strategic decisions they look at financial position of the company in order to have complete image of the current financial situation. They need to know the amount of cash that must be put in order to implement this strategy and whether this strategy will be able to cover the cost and gives profits to the company. If a company decides a strategy for any particular project, has done every paper work and all management team thinks that this strategy is best for the company but lacks financial resources it will likely end up not implementing the strategy. So financial information need to be considered by managers in every strategic decision making in order to launch a strategy that is beneficial for the company. In financial information area management team must look at balance sheets, income statements, cash flow statements, statements of owners’ equity, accounts receivables and accounts payables balances. All these statement and accounts gives cash information of the company and through this information manager can decide strategies. In strategic decisions managers make long term plans of the organization and they have a very high impact on the organization. These are the decisions that set the direction of the company and for setting the direction they need huge amount of financial resources of the organization. (Nooraie, 2012)
Cash position of the company comes from by analyzing different financial statement and credit balances. Through analyzing balance sheets managers can find out the costs that are associated with implementing the strategy and the profits it can generate if this strategy works out for the company. Similarly income statement and cash flow statements gives financial information of the company and help managers to make strategies that are beneficial for the organization as a whole. (Oz, 1995), So top management team must look at all financial statements and account balances before making any strategic decisions. They should have complete financial information and decide strategies in light of available resources of the company. (Nooraie, 2012).
Why the Published Financial Statement is structured in that way?
The organization which I selected for this paper is Pak Electron Limited (PEL). It was established in 1956 and mainly provides refrigerators, splits, motor machines, transformers and generators. PEL is listed on stock exchanges and its share is publicly traded.
Financial statement of PEL is organized in such a way in order to give maximum information to the reader. Through this information people can access the performance of the company. There are complete guidelines and rules set by Securities and Exchange Commission of Pakistan (SECP) that how to make financial statements and PEL have to structure statements according to the rules. Financial data provides value information of the company and this data help mangers in making strategic decision. These data aid managers in making decisions quickly and accurately. Because of it managers does not have to look at all details, they just look at the numbers and make decisions. All information is incorporated in financial statements and these statements are made according to SECP polices.
The main stakeholders who would use the published information and for what purpose
Stake holder is the people who have interest in the business. These are the people that are directly affected by the performance of the company. If the organization is growing it means that all stakeholders will be happy and if it’s not performing up to the mark it will likely affect the stakeholder interest.
These are the people that are most affected by companies policies and objectives. Every organization tries to satisfy the stakeholders in order to have smooth flow of the organization. Stakeholders could either be customers, employees, government, shareholders, creditors and suppliers. These are the people that have the most interest in the organization.
All stakeholders use published information in making decision. Main stakeholder would be shareholders. They look at the financial side and stock prices of the organization. If the company is in declines stage people would avoid buying shares of the company. Whereas if the company is making profits more people will buy share and ask for dividends as well. Similarly banks also look at financial data in order to know the performance and value of the company. They look at balance sheets before granting any loan. Banks make sure that the organization has the required amount of resource in order to back up the loan. Government also uses financial statements for incorporating tax issue on the organization. Tax brackets will be change when company is raising its resources. Mainly all stakeholders use financial statements as they provide detailed information and helps people in making decisions. (Fremond, 2000)
An explanation of where both long-term and short-term finance has been raised and used
Finances are the most important criteria for running any business. Most important reason of the downfall of the company is that company does not have adequate resources. They don’t have enough cash to operate the organization and as a result has to shut down the business. PEL raises its finance from public and also by exporting its machinery. They are operating on all stock exchanges of Pakistan and through they raise enough cash. People buy share of it and this will lead in the incensement of the resources. PEL exports its products to Middle East side. In Saudi Arabia there is a great opportunity for market to grow and that’s why they export its products there. It also sends its products to Afghanistan and people love its machinery. Pak Electron Limited also uses different banks to finance its projects. Main banks are NIB Bank, National Bank of Pakistan, Soneri Bank and Standard chartered bank. All banks aid PEL in operating by giving them required amount of finances. And PEL use these resources in order to run the entire organization. (PEL Annual Report, 2012)
Calculations on the key financial ratios, including cash flow analysis, and a comment on the findings
Financial ratios are the most widely used analysis techniques. In this purpose is to find out the aspects of the company operations. There are many financial ratios like liquidity ratio, profitability ratio and leverage ratio. All financial ratios are expressed in percentage. Some of the main ratios are discussed below:
Current Assets- Current Liability (2011) = 9219422-9622413= (402991)
Current Assets- Current Liability (2012) = 10,688,770- 9,697,922=990848
Company was having losses in year 2011 but in 2012 it got profits and that’s why working capital was improved in 2012.
Current Ratio: It measures company ability to pay off its short term obligations.
Current Assets/Current Liability (2011) = 9219422/9622413= 0.96= 1
Current Assets/Current Liability (2012) = 10,688,770/ 9,697,922=1.10
Debt Ratio: It measures the finances that are financed from the outsider’s money.
Debt Ratio (2011) = Total liability/Total Assets*100= 16222525/25530139= 63.54%
Debt Ratio (2012) = Total liability/Total Assets*100= 21148345/24,887,203=84.9%
The more the debt ratio it means more amount of resources is taken from outsiders. And PEL has increased its finances from the outsiders.
Cash Flow position of PEL is strong and company is making huge profits. In 2011 company has incur losses but in 2012 company again retained its position and got revenues. The main reason of profits is that company has made opened different projects that benefit the company as a whole. So financial position of PEL is strong and it is growing rapidly. (PEL Annual Report, 2012)
An explanation of the different methods that could be used for appraising capital projects and the strengths of each
Manager of the finance department has the responsibility of investing in the project. He has to make sure that the resource he is putting in the project is good for the company or not. He analyzed cost benefit of the investment before making any decision. Manager makes sure that there are adequate amount of return as compared to the costs associated with the project.
Capital appraising projects are long term plans and they need huge amount of resources. Capital budgeting is a process through which managers make decision that affect the long term plans. Managers look at new possible plans in which the organization can operate efficiently and effectively. They find more profitable investments for the organization and this will help organization in creating a good image. Companies can have competitive edge by investing in a project and can give tough time to competitors as well. Managers also look at the company size and its ability to grow. If there is a demand for the product managers make polices to expand the business and satisfy the customers. In this way company can have more sales and profit of the company will be increased. Before making and deciding any strategy first mangers analyze the investment. If its returns are greater than cost associated with the project it will launch the investment otherwise not. Managers also use Payback techniques. It means that the amount of time that will be needed for returning the original investment. In how much time profits cover the cost associated with the project. All these techniques can be used by mangers for appraising capital projects.
An indication of the weaknesses of published financial information?
If the financial statement is publicly available but it’s not reader friendly it will create bad image of the organization in the readers mind. This financial information is of no use for general public and people cannot make accurate decision by reading the financial data. Financial information must be properly organized and structured in the best way. It should completely indicate the performance and value of the company. Information that is publicly available must be reliable as the main reader of this information is public. That is why government take actively responsibility and has made polices that organization fulfill before disclosing any financial data. Financial information should not have information that is not relevant. It should completely focus on the objectives and financial data of the company. (Vaishnav, 2010)
Compares the differences in corporate governance, legal and regulatory requirements between the organizations
In private sector organizations are privately held by owners and there is no role of government involved in it. While in public organization government takes all the responsibilities of operating the organization. Government owned the business in public sector. There are many differences between the top organization in terms of legal and regulatory requirement. For operating private organization most and all resources comes from private owners where as in public organization resources are taken from general public. That’s why they have different regulatory requirements. Government makes strict laws in public organization. Its main aim is take to safe guard the money of general public. Government make sure that public organization never go bankrupt as the money involved in the business is of general public. Stocks of public organizations can only be traded on stock exchanges and organizations have to make financial statements publicly available. This is the most important regulatory requirement of public organization in order to be listed on stock exchange. The company has to deal with strict laws once it listed on stock exchanges. Whereas in private sectors laws are internally made by the owners and they do not have to go through strict laws set by the government.
Compares and contrasts the accountability for and roles of managers in making business decisions.
In every organization managers play a vital role in the development of the company. They manage the organization and make sure that organization run smoothly.
In private sector main aim of managers is to maximize the shareholder wealth. They invest in such budgets that generate maximum profits for the company. Major decisions are made by top executives and that’s why decision making is a smooth process. Mangers completely analyze the decisions before reaching at any plan. After that they make sure that these decisions are properly implemented and benefit the company. Budgets are completely analyzed by managers in private organization. They oversee all the activities in order to run business profitably. They organized meetings of shareholders in which they discuss major issues of the company and tell them about the financial performance of the company.
On the other hand in public sector budgets are favorably designed and negotiated. Government has active part in every decision so managers cannot make decisions by themselves. They have to make that budgets that government think is good for general public. As safeguard the money of public is the main aim of public sector. That’s why government cannot leave decisions entirely on management. Managers just have to make sure that polices are implemented properly that are set by the government. Manager’s role is limited in making strategic decisions. Public sector managers have to make sure that all polices set by the government is properly implemented and organization is fulfilling these requirements. They also have to cope with polices of different stock exchanges and make financial statements available to general public. (Nut, 2005)
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