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Advance Finance For Decision Making In The Business

University: University of Chester

  • Unit No: 6
  • Level: Post Graduate/University
  • Pages: 20 / Words 5014
  • Paper Type: Assignment
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  • Downloads: 3293

INTRODUCTION

Finance is termed as very important for every organization whether it is small or big. It plays a huge contribution to the decision-makers in a very efficient aspect. The present report gives a brief discussion about various factors that are driving decision-making with its implications.

Section 1

1.1 Explaining Factors That Drive Business Decision Making

Every business must be able to address specific problems or requirements of every department as every decision will directly affect the objective of any organization i.e. profitability. The basic factors which should be considered for decision-making are:

Return on investments

Opportunity cost

Brand Impact

Effect on resources

  • Return on investments: It directly impacts the profitability of the business. Profitability can be measured in numerous ways but ROI is the very simplest method. It can be replicated as the amount of benefit that has been gained or loosed by undertaking various activities.
  • Opportunity cost: It can be referred to when a choice has been taken and other opportunities have been lost in the context of others. While making important decisions, proper justification should be prepared for money and resources (Bai and Sarkis, 2017).
  • Brand impact: While making decisions, the origination of the amount of advertisement and for selling at what specific prices should be charged must be justified.
  • Effect on resources: When profit has been calculated, it should be able to consider the whole effect on human resources, production, accounting, information technology, and sales.

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1.2 Significance of Financial Factors in Business Decision Making

The objective of every business is to make money as it is termed the perfect measure of profitability. There is the presence of various financial factors that help in business decision-making with significance such as:

Return on Invested capital

Net profit

Cash flow

  • Return on invested capital: It is replicated as a most fundamental formula for finance as it is helpful for measuring the level of efficiency from a business perspective. There should presence of independent analysis for framing decision in effective manner. It is for the purpose of net operating income which will exclude the aggregate of owned taxes and dividends which are paid for invested capital.
  • Net profit: It is considered a very important factor for every business whether it is small or big. It is used for justifying the financial performance of the business in its industry or market and also for framing new strategies.
  • Cash flow: In this scenario, various businesses go bankrupt due to the absence of cash flow. It should be plugged up as everything is dealt on the basis of long term credit as accounts receivable.

1.3 Features of Business Risk That Affect Financial And Business Decisions

Business risk can be referred to as the possibility of inadequate margins and losses as well because of uncertainties and events that are raised unexpectedly. In the context of features it can be elaborated into two categories:

  • Arises due to uncertainty
  • An essential part of every business

Arises due to uncertainty: The business is not able to have specific control over future activities because of uncertainty on the basis of the future. There is a presence of alterations in demand, government policies, etc as these all can be termed as examples of uncertainty that will create risk for business because future events are not known in advance (Factors influencing business decision making, 2018).

An essential part of every business: Each business is termed as one or other type of risk. It could not be avoided by any business, it can be minimised but not eliminated.

1.4 Financial Priories Which Should be Considered for Taking Decisions Regarding Finance

Financial priories for making decisions making regarding finance are classified into 4 categories such as:

Financing

Dividend policy

Investments

Asset management

  • Financing: It is very essential for every business to make decisions from long-term perspective. It is directly related to maintaining the inflow of capital in a very constant manner as savings of margin will be not allowed for continuing operations for longer aspects with appropriate support of liquidity.
  • Dividend policy: It is directly concerned with the earnings of organization which will be paid to shareholders. It is mandatory to identify earnings that are generated and reinvested in organization for improvising operations and they will be distributed among all shareholders (Clemens and Tiongson, 2017).
  • Investments: There is a requirement for having a specific market study in place and it should have objectives in clear aspect that should be met by organizations. The demand, technology, equipment, available human resources, and financing methods should be studied very properly.
  • Asset management: Meeting obligations in an adequate manner is considered a very important aspect. The existing assets should be managed in a very efficient aspect as management of current assets should be prioritized before fixed asset management.

Section 2

2.1 Comparison of accrual and cash flow approaches to accounting and financial reporting and its implications

Accrual accounting

Cash accounting

This method specifies expense or income which is recognized on the basis of specific mercantile is termed as accrual accounting.

The income and expenses are recognized when there is the presence of actual inflow and outflow of physical cash.

It is termed a very complex process.

It is termed a simple process.

It is recognized on the basis of companies' acts.

It is not recognized on the basis of the company act.

The income statement will reflect higher income as compared to cash accounting.

Its income statement will reflect lower income.

It has the applicability of the matching concept.

It does not have the applicability of the matching concept.

There is a presence of revenue.

Cash is received while recognizing revenue.

There is a presence of incurring revenue.

Cash has been paid for recognition of expense.

The degree of accuracy is comparatively high.

The degree of accuracy is low.


Implications: In business decision making it has huge implications such as being useful for framing budget and the amount of money to be specified in business.  It creates the ability to track income and expenses in both methods. It will be termed as very limited for information available related to finance while making business decisions.

2.1.2 Structure of Final Accounts and Application for Business Decision Making

The profit which is earned or loss that has been incurred has to be ascertained during a specific year and along with this financial position of this specific business is also determined. Accordingly, it includes:

Trading account

Profit and loss account

Balance sheet

 

2.2 Interpreting Financial information of Marks and Spencer

  • Income statement
  • Balance sheet 
  • Statement of changes in equity  

2.3 Comparison Between Capital and Revenue Expenditure

Revenue Expenditure

Capital Expenditure

It consists of expenses incurred on the basis of regulating activities of a day-to-day specific business.

It consists of expenditure which is incurred for acquiring any capital asset for improving the capacity of any existing whose outcome is in the context of the extension of life years.

It is considered on short term aspect.

It is considered on long term aspect.

It has an absence of capitalization.

There is a presence of capitalization.

It is represented in the Income statement.

It is reflected in both the income statement and balance sheet.

Its outlay is recurring.

Its outlay is not recurring.

It gets an advantage only in the current accounting year.

It gets benefits in more than a year.

It has maintained its earning capacity.

It directly seeks to improve the capacity of earning.

It is directly matched along with receipts.

Absence of matching with capital receipts.

 

2.4 Calculating Ratios with Specific Illustrations

Profitability ratio

2016

2017

2018

Current ratio

0.69

0.73

0.72

Quick ratio

0.21

0.26

0.2

Debt/equity ratio

0.52

0.54

0.56

Efficiency ratio

 

 

 

Receivable turnover

88.15

94.38

95.86

Inventory turnover

8.05

8.39

8.64

2.5 Key Requirements for a Public Limited Company

  • It is referred to as a very complicated process as it should meet various considerations such as there should be a minimum share capital of £50000 of which the nominal value of one single quarter. In the same series, all share premiums should be fully paid up (Pruna, Polukarov, and Jennings, 2018).
  • It can be also replicated that the minimum share capital that should be paid up for a specific PLC is £12500 if any organization meets its minimum requirement of share capital then there will be an absence of share premium.
  • Minimum number of 2 directors
  • Qualified company secretary
  • The company name should end with PLC
  • Organization should apply for trading certificates before the commencement of trading.
  • General meeting and Annual general meeting

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Section 3

3.1 Differentiating Between Business Ethics, Governance, and Accounting Ethics as Controls on Business Accountability

The main difference between ethics and corporate governance is that ethics are the analytical and morally adequate set norms that an organization attempts to stand by, while corporate governance processes are means by which organization is bound to remain as ethical as possible while still making a profit. Business ethics is also known as corporate ethics as it is mandatory to follow all aspects of business conduct and is appropriate behavior of the organization to everyone in the entire organizations. Accounting ethics is basically a field of practical ethics and is part of the organization ethics, the study of manner, etiquette, morale values, and judgment as they apply to account.  It is very important to follow all two ethics and corporate governance in order to make a good industrial relation in an organization.

 

3.2 Assessing the Role of the Finance Director/Chief Financial Officer as a Guardian of Business Ethics

The finance director and CFO are the two pillars of the organization. They both act as a guardians of business ethics. It is said that the children copy their parents same as the Finance Director and CFO act in an organization. They are like a guardian.  In recent years the role of the CFO changed, earlier they used to manage all the financial records of the company but now they are not only managing the accounts of the company but also acting as a guardian of business ethics. A finance director is, first and foremost, a full board member and subject to the duties and responsibilities that fall on board members.

3.3 Analysing the Key Concepts and Principles of Corporate Governance That May Impact Business Decisions

It is a system by which organizations are directed and controlled. Board of directors are liable for their organizations. The partners or shareholders play in important role in corporate governance as they call directors and auditors to satisfy themselves that a relevant governance structure is in place (Gökgöz and Atmaca, 2017). Corporate governance includes the process through which an organizations objectives are set and can be followed in the context of the social, regulatory, and market environment. It includes all the procedures, policies, practices, etc. following are the principles of corporate governance-

1- the corporate strategies are approved by the board and are intended to build sustainable long-term value. Corporate governance overseas the CEO and senior management in operating business.

3.4 Key National and International Financial Reporting Standards That Are Relevant to Business Decision

International finance reporting standards are the predefined norms or set standards for accounting transactions. IFRS is issued by the International Accounting Standard Board (IASB).IFRS is made to know how an accountant is going to prepare the accounting transaction. They are a sort of language that can be understood from company to company or country to country.

Decision making should depend upon the elite quality of a source appropriate for guiding organizations toward achieving long-term goals and objectives. These IFRS are the quality standards that enhance accounting performance and hence help in achieving the goals and objectives of organizations of the business firms (Cesaratto, 2017).

Section 4

4.1 Comparison Between Long Term Financing and Working Capital

Working capital

Long term financing

It refers to personal or business loans that represent time span of short term average for repaying the loan in more than one year or less.

It directly refers to a personal or business loan which represents long term span for repaying a loan in more than one year.

It has a lower floatation cost as it does not include premium risk at maturity.

It has a higher floatation cost and includes premium risk at maturity.

It is not used for acquiring fixed assets such as land, buildings, plant machinery, etc. as it is used for raising the level of current assets and for the basis of working capital.

This fund has been raised from sources of long term and it is used for finance on kind of assets such as current or fixed assets.

 

4.2 Comparison Between Sources of Long-Term and Working Capital Finance

Working capital

Long term financing

Overdraft agreement

Long-term loan from a bank

Accounts receivable financing

Retain profits

Customer advances

Issue equities

Selling goods on installment

Issue debentures

 

4.3 Access to Working Capital is Critical For Business Continuity

If there is the absence of enough working capital to cover its obligations then financial insolvency will lead to outcomes such as legal troubles, asset liquidation, and potential bankruptcy (Sources of Short-Term and Long-Term Financing for Working Capital, 2018). It is mandatory for every organization to have sufficient management of working capital. If there is a presence of access to working capital then it signifies that organization is not able to utilise its current assets toward liabilities. If it is effective form then it will be boosting its earnings along with covering financial obligations and it will be an essential step for a business to continue its operations.

4.4 Techniques Required For Managing Cash Flows With Its Impact on Business Decisions

There is the presence of various techniques for managing cash flow because it will directly impact business decisions in a very effective manner. In the same series, the break-even point should be determined to know the level of profit as it will impact cash flow for reaching profit. Cash flow management should be focused but not on margin. There should be proper maintenance of cash reserves and along with this cash flow worksheet should be applicable. In the same context, receivables should be collected as soon as possible because it will be a delegating task. In the last, it should be able to use technology for benefits such as a cash flow spreadsheet in Dropbox or One Drive so it can be accessed from anywhere with proper security. If cash flows remain positive then specific business will survive and projected future cash flow will be directly based on past series and financial data will be on sound purpose (Visinescu, Jones, and Sidorova, 2017).

4.5 Methods For Making Capital/Investment Decisions With Examples

  • Net present value: It can be replicated by the difference between the present value of cash outflow and inflow of a specific period. It is applicable for capital budgeting for analyzing the profitability of predicted investments or any specific project.
  • Payback period: It is replicated as the straight straightforward decision regarding capital budgeting, and investment. It specifies the amount of time that is taken by the project to recover its initial cost.
  • Internal rate of return: It is represented as a discount rate which makes the NPV of the project 0. It can be simplified as the expected rate of return will be earned for a project or investment (Zhao and van Wijnbergen, 2017).

 4.6 Merits And Demerits of Off-Balance Sheet Financing

  • Risk: It does not include any item on the balance sheet due to the absence of assets and liability as well. In the context of liability, a business has to repay money to an external party. The item off the balance sheet is not indicated as a liability so it will be considered as a risk to organization. The business will be transforming the product into nonliability by extracting a renewable lease rather than a loan that has to be paid off or it should be transferring risk to an individual entity (Johnson and Garvin, 2017).
  • Capacity of borrowing: if the business has taken a loan then it will raise the debt burden. While using an off-balance sheet, there will be obtaining of funds by a business which are required and it will not affect debt burden as well.

Section 5

5.1 Financial Implications Of Various Business Ownership Structures

There is the presence of two business structures which are termed:

  • Sole proprietorship
  • Partnership

Sole proprietorship: There is the absence of separation with limited liability from a legal basis. If there is a presence of any obligation then one should be personally liable which is rising from operations of any specific business.

Partnership: In many ways, it is similar to sole proprietorship but here is the presence of a contract with working with one or more partners. It should produce financial statement which should be according to size and type of partnership. The return of tax must include slips of every partner which will allocate income to everyone.

5.2 Corporate Governance, Legal and Regulatory Environment of Different Structures

Corporations are termed as legal persons in the context of laws and regulations of specific jurisdictions. It does not possess any legal distinction between owner and business. It should be registered with GST/HST and payroll taxes should be registered for having employees. In the context of partnership, company and business are termed as separate entities. If there is any loss then the individual is not liable for that. Along with all forms, it should be also registered with GST/HST or payroll taxes. Capital can be borrowed by banks and other lenders must be able to lend to one person or to its partners on a collective basis (Utama and et.al., 2018).

5.3 Comparison Of Stakeholders Interest Of Owners And , Managers

The stakeholder interest of owners and managers varies from each other, as owners find the sources of funds such as bank loans, shares capital, equity, and many more but on the contrary, managers perform the allocation of funds in such a manner that it should be effectively utilised with an appropriate return. In simple words, it can be termed that owners find sources of funds but managers allocate that funds to their departments. In the same series both have one specific and mutual goal is to earn profit with brand image.

5.4 Significance Of Return On Capital Employed For Long Term Perspective Of Sustainability Of Businesses

It essential to measure the financial health of organization than ROE as it will consider debt contribution while reflecting the return of organization. The success of business in the context of generating profit on capital which is invested on long term perspective. It should be higher than investment which is prepared via debt and shareholders equity in the long run for the sustainability of the business. 

5.5 Importance of EPS

It is net loss or profit that is accruing for equity holders as per outstanding share. It is termed a very popular measure of a company's performance and a factor for valuing shares. The purpose of earning is the specific amount over equity where the claim will be by equity holders. It provides an estimate of the amount that how much is for per share earned if they buy in a specific organization (Utama and et.al., 2018).

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CONCLUSION

From the above study, it can be concluded that Finance plays a very important role in making decisions in the context of profit and creating a brand image. It is shown that EPS is termed as a very important measure for financial position and stability as well.

You may also like: Financial Information for Business Decisions

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REFERENCES

  • Bai, C. and Sarkis, J., 2017. Improving green flexibility through advanced manufacturing technology investment: Modeling the decision process. International Journal of Production Economics. 188. pp.86-104.
  • Cesaratto, S., 2017. Initial and final finance in the monetary circuit and the theory of effective demand. Metroeconomica. 68(2). pp.228-258.
  • Clemens, M. A. and Tiongson, E. R., 2017. Split decisions: Household finance when a policy discontinuity allocates overseas work. Review of Economics and Statistics. 99(3). pp.531-543.
  • Gökgöz, F. and Atmaca, M. E., 2017. An Optimal Asset Allocation in Electricity Generation Market for the Policy Makers and Stakeholders. In Handbook of Research on Managerial Solutions in Non-Profit Organizations (pp. 448-482). IGI Global.
  • Johnson, J. E. and Garvin, W. S., 2017. Advanced practice nurses: Developing a business plan for an independent ambulatory clinical practice. Nursing Economics. 35(3). p.126.
  • Khrennikova, P., 2017. Modeling behavior of decision makers with the aid of algebra of qubit creation-annihilation operators. Journal of Mathematical Psychology. 78. pp.76-85.
  • Pruna, R. T., Polukarov, M. and Jennings, N. R., 2018. Avoiding regret in an agent-based asset pricing model. Finance Research Letters. 24. pp.273-277.
  • Utama, W. P. and et.al., 2018. Making international expansion decision for construction enterprises with multiple criteria: a literature review approach. International Journal of Construction Management. 18(3). pp.221-231.
  • Visinescu, L. L., Jones, M. C. and Sidorova, A., 2017. Improving decision quality: the role of business intelligence. Journal of Computer Information Systems. 57(1). pp.58-66.
  • Zhao, L. and van Wijnbergen, S., 2017. Decision-making in incomplete markets with ambiguity—a case study of a gas field acquisition. Quantitative Finance. 17(11). pp.1759-1782.
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