Financial management is a process of preparing and analysing various financial statements in order to evaluate overall performance of a company. To assess the requirements of this project, a private limited large scale company is selected which is Tesco. Main aim of this project report is to provide an understanding about financial corporate objectives using fiscal, monetary, interest rate and exchange rate policies. Agency theory is also discussed in this file along with their limitations. Various policies are discussed which helps in achieving macro economic policy targets (Brigham and Houston, 2012).
1 Discussion on the role of management in meeting stakeholder objectives including the application of agency theory
Fundamental financial objectives:
These objectives are the goals which are vital for a business organisation. In the case of Tesco Plc, which is a large scale company and has acquired major market share. This company has a number of objectives which are required to be fulfilled by their operations. Some of these fundamental financial objectives of Tesco Plc includes revenue growth, profit margins, and&& sustainability. These objectives are related with the monetary terms and based on maximising the earnings of the company. Revenue growth is related with sales volume of the company, profit margins are related with net earnings of the company and sustainability is related maintaining reliable profit ratio of the company.
Agency theory and its significance to achieve fundamental financial objectives:
Agency theory is a concept which shows the relationship between principles and agents involved in a business. This theory helps in resolving problems which exist in these relationships in order to enable a business firm to fulfil their goals. In the case of Tesco PLC, principles are the store managers or supervisors and agents are distributors who distributes products of Tesco. This company deals in retail business, but in order to improve their profitability, they has appointed various distributors which acts as their agents. This theory helps in achieving financial fundamental objectives such as acquiring major market share which can be fulfilled by this theory. As it involves maintaining better relationships between principle and agent through which more agents can be attracted and more market can be captured.& Agency theory also impacts financial management decisions of this company and these decisions are:
- The first most financial decision influenced by agency theory is the volume of products which is required to be produced as some of those products are sold by agents.
- Another decision influenced by agency theory is investment decision. Tesco Plc analysis their agent relationships before investing in any venture as agents affect their profits and those earnings are utilised for investments.
- Price allocation is also a major decision which is taken by considering agent relationships. Prices of products which are sold by Tesco are fixed by considering agent relationships as they directly interact with customers due to which they have more knowledge about client's requirements.
Limitations of agency theory:
- Agency theory deals with relationships between agents and principles and its major drawback is the reliability of agents. As agents are external parties there are chances that they can be threat for company's image.
- Another disadvantage of agency theory is that agent charges a huge amount of commission due to profitability of Tesco is affected.
- Agents represents other distributors and end users due to which their behaviour and misconduct can be a threat to company's growth and development (Higgins, 2012).
2 Defining various policies
Macro economic objectives are the goals which are related with macro targets of a company. These objectives can include positive economic growth, maintaining full employment, satisfying balance of payments and many more. In order to fulfil these objectives, there are various policies which are used.
- Role of fiscal policy – This policy is managed by government of an economy in which authorities adjusts its spending levels and tax rates in order to monitor nation's economy. This strategy is a sister strategy of monetary policy. This policy plays an important role in maintaining positive economic growth.
- Monetary policy – These policies are regulated by governmental authorities which look after functioning of central banks. This policy ensures the liquidity of central bank in order to create economic growth.
- Exchange rate policy - &This rate of an economy affects aggregate demand as this rate is related with import and export. Exchange rate is a phenomenon which gives rate by which import and export takes place.
- Interest rate policy – This policy mentions rates of central bank of interest. Interest can be levied on customer prices, exchange rate and loans provided by central banks or other banks (Molina and Preve, 2012).
2.1 Use of various policies in achieving macro economic targets
Policies which are discussed above helps in achieving macro economic targets in various ways which are mentioned below:
- Fiscal policy provides an overview about the level of spending and ascertains volume of expenditure over earnings. This policy helps in achieving macro economic target of growth as this policy plays an important role in ascertaining what amount should be spend and what should be reserved in ultimately results in economic growth.
- Interest rate policy and exchange rate policy helps an economy to maintain rates which are levied on export, import, loans and other instruments. These policies of rates helps a nation to maintain liquidity in their economy so that in tough times funds which are kept in reserves can be utilised.
- Monetary policy provides instructions to central and commercial bank about their rates and reserves. This policy helps an economy to fulfil their macro economic objective of maintaining balance of payments from which a country can attain development (Anderson and et.al., 2011).
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From the above project report, it has been concluded that Tesco is a large-scale organisation that maintains relationships with their agents in order to ensure profitability and increased sales volume. Various policies are analysed in this report such as fiscal, monetary and interest rate which helps an economy to achieve their macro economic objectives such as full employment and positive economic growth.&