Unit Financial management

Self Evaluation of Values and Experience gained from undertaking this assignment

I am now aware that the chief financial officer (CFO is a corporate officer primarily responsible for

managing the financial risks of the corporation. This officer is also responsible[1] for financial

planning and record-keeping, as well as financial reporting to higher management. In some

sectors the CFO is also responsible foranalysis of data. The title is equivalent to finance director,

a common title in the United Kingdom. The CFO typically reports to the chief executive officer and

to the board of directors, and may additionally sit on the board. The CFO supervises the finance

unit and is the chief financial spokesperson for the organization. The CFO reports directly to the

President/Chief Executive Officer (CEO) and directly assists the Chief Operating Officer (COO)

on all strategic and tactical matters as they relate to budget management, cost benefit analysis,

forecasting needs and the securing of new funding.

Need of finance

Finance, commonly referred to as economics, is the field of economics that examines the

role of the government in the economy and the economic consequences of the government's

actions. A notable exception to this definition is the study of the government's effects on the

business cycle, which is generally considered being a part of macroeconomics rather than

finance. Finance is concerned with both positive and normative economic issues. Positive

economics is the division of economics that examines the consequences of monetary actions and

thus includes the development of theory, whereas normative economics brings in value

judgments about what should be done to analyses and often gives recommendations for policy.

Normative economic issues, in fact, are discussed and debated more often in the finance
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literature than in the literatures of most other fields in economics (Thompson, 1994. 27).

As the role of the government in the economy has changed over time, the focus of the

public finance literature has similarly evolved. In the 1950s and 1960s, the emphasis of public

finance was largely on issues of taxation. Now, with the government significantly involved in many

aspects of the economy, the public finance literature has expanded its focus to include virtually all

facets of government spending, as well as taxation. Many advances have been made within the

field of public finance over the past several decades, and public finance economists have made

substantial contributions to many other fields in economics. For example, the economics of aging,

a relatively new economic subfield, has benefited greatly from public finance economists who

have provided analysis and policy recommendations for issues pertaining to government

entitlement programs for retirees.

1.1 The sources of finance available to a business

Most of the businesses begin life as proprietorships or partnerships, and if they become

successful and grow, at some point they fine it desirable to become corporations. (Fromlet, H.

2001 pp. 63–69) A business requires generating funds in order to expand its operations. These

funds can be generated by way of equity financing or debt financing. Equity financing is a way of

raising funds through the shareholder deposits or by shareholders with the purchase of shares.

Equity financing involves initial public offerings (IPOs), issuance of preference shares and rights

issue. There is no interest incurred if the funds are raised through equity financing. Debt financing

is another way of raising funds for various capital requirements that may arise in a business. Debt

financing, however, depends upon external help rather than fund raised internally as in equity

financing. The debt financing involves borrowing of money on which interest is paid (Guthrie,

1997. 24).

Pros and corns

The company do not have the direct obligation to pay back the invested amount to the

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shareholders with in a limited time period like in debt financing.

1. The share holders become the owners, and partners of the company and they share the

profit and loss of the company.

2. No fixed liability on the company, as compared to the debt financing.

3. It’s a time consuming and costly affair.

4. The involvement of the shareholders in the decision making may potentially disturb then

management of the company and its decisions.

5. The investors will require the information relating to the company affairs in order to track

and monitor company performance and it may consume the limited time available to the

management for other more productive operations.

6. The potential complication of the legal affairs of the company and it may raise different

compliance issues, as well.

2.0 Case of Investment

Tesco was first started after the First World War when a British national Jack Cohen

invested £30 on a surplus-food stall in London's East End. Cohen reached his microscopic level

success by combining forces with the T.E. Stock well due to which a company named Tesco took

place. In 1929, the first shop with "Tesco" decorated above the window was untied. Up to

1939Tesco was dealing with the hundred stores that was in operation and backed by inventive

developments in stock control and warehousing. Tesco initiated food rationing before the

government, at the beginning of the World War II (Fullan, 2001. 100). This caring capitalism may

go towards few ways, to make clear the affection that people of the working class have sustained

for the company. These all acts of the company reflect that business is most efficient and effective

when efficiency and ethics are shared for the benefit of the company. Tesco history since the

Second World War has been one of continuous expansion and success both in the UK and, more

recently, in the new EU countries, including Slovakia, Czech Republic, and Hungary (Budapest).

Tesco is now Britain's largest food retailer, employ over 240,000 people worldwide and has net

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yearly profits of over £1 billion. Its website is one of the most popular in the UK, with over one

million registered users. Possibly guiding an individual to decide when a convenient time to buy

and sell stocks.

Market value is a specified number that cannot be calculated using any computation

methods but, by simply observing the trades that are performed. Since sentiment and sometimes

indirectly related news can influence a market value, this figure may be far away from the book

value at a certain time. This is the indicator that was mentioned previously. Market value may also

lead the book value in some situations (Enrich, 1995. 101). This may be observed in scenarios of

planned business transactions being announced before the transactions are completed and

recorded in the books.

2009 2008 2007

Book value per share 1.64 1.5 1.32

Market value per share 14.23 23.6 26.25

PB ratio 8.68 15.73 19.89

The above prices are taken from the financial statements of a UK listed company TESCO.

The PB ratio provides investors with a price tag by comparing the book (original) value of

an organization's assets to the market (trading) value of an organization's assets. The actual

ratio is calculated by dividing market capitalization (or stock price) by the book value of equity on

the firm's balance sheet (per share if compared against stock price).

Interpretation

Stocks or firms that trade at a PB of less than one are considered undervalued. Investors

also believe that book value is equivalent to liquidation value. Accrual accounting, there is often a

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discrepancy between market value and book value, which increases the risk. Here, the PB ratio is

more than one over three years which means that the value of the company is excessive with

less possible risks.

2.1 Risks

Investing in "low-PB" companies can potentially expose investors to additional market

risk. Low PB stocks have a higher degree of volatility and typically have more debt compared to

capital. Here, the TESCO has high-PB ratios that mean that investing in TESCO has low risks.

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2.1.1 Significance and importance of financial planning

It is a process in which the required capital is estimated, and the identification of

resources to meet these requirements is done also planning to achieve these goals of capital

acquisition.

Objectives

The importance of financial planning and few notable objectives of financial planning are

as follows Establishing capital requirements – both short term and the long term capital

requirements are identified.

1. Establishing capital structure – the composition and proposition of capital is formulated.

2. Structuring of financial policies – regarding cash control borrowing, lending’s etc.

3. Efficient and effective use of the available resources

4. Financial planning helps smoothing the future capital requirements of the company and

hence ensures the effective anticipation of the future growth and capital requirement of

the company. Assessment of information for decision makers

The proper and critical analysis of information for making "financial" making is of pretty vital

importance. The management must look in to the variables and different factors ratios such as

liquidity ratio, activity ratios, profitability ratios, market ratios, debt ratios, and capital budgeting

ratios. (Robinson, J. 2006 pp. 28–29)The proper interpretation of other information and values

such as EBIT (earning before interest and tax), COGS (cost of good sold), and NPV (net present

value). Based on the perfect interpretation and correct execution of the information is very

important and the financial planning. There is completely dependant on these factors, ratios and

values (Steffy, 2001. 19).

3.1 Investment Decision

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 Budgeting is a part of the financial planning which is structured to feature projections on

income and expenses of the company both short-term and long-term. Budgets include the

thorough budgeted balance sheet, a cash flow budget which features the flow of company

expenses on monthly, quarterly, semi annually and on annually basis. A financial budget mainly

covers the period of at least one financial year. At the same time, different companies and

organizations follows different range of financial periods from 1 to 5 years. The budgeting is

done in Travelex is very comprehensive and it prepares its financial budget on monthly and

annually basis as well. (Olsen, R. 1998 pp. 10–18)

The budget analysis of the company provides with the targets and constraints of the

company and the accurate interpretation of the budget is vital in decision making. Keeping in view

the budget of the Company the administration determines the future requirement of the capital

and they formulate the strategies such as what percent of capital is required in terms of liquidity,

to meet daily operation of the Travelex. The current budget analysis of the company indicates the

future growth of the company and capital requirements to meet growth. The Group expects to

maintain the momentum of the first half for the remainder of the year despite the economic

recovery remaining fragile in many of the Group’s key markets, particularly in North America.

Typically the Group’s EBITDA is weighted towards the second half of the financial year.

Management remains focused on growth while carefully managing the cost base with selective

investment opportunities being pursued. The Group continues to maintain a good level of

headroom on both cash generation against cash outflow requirements and against financial

covenants (Ducote, 2004. 7).

3.2 Impact of Finance on Financial Statements

Timely and precise preparation of financial statements is the key to failure and success of

any company. Financial statement of the company is formal documentation of the financial

activities of a firm, business, person or an entity. (Fromlet, 2001. 63)The impact of finance on

financial statements is very important and they determine the basis on which the financial

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decisions of the company are based. The primary objective of the financial statement is to provide

with insight of the current financial standing of the company. This insight provide with the

information which is necessary to make future planning of the company’s financial matters.

Financial statements must be reliable, easy to understand, and comparable. (Fromlet, 2001. 63)

Liabilities, equity, assets, and other relevant expenses to the business are mentioned in it. The

overlook of the financial statement provides a snapshot of the company’s performance to the

user.

3.3 Formats of financial statements for different types of businesses

Different formats are used for the preparation of financial statements for example A sole

proprietor or a trader would prefer and prepare a simple profit and loss account compared to a

public limited firm or company which will have to prepare its financial statements with respect to

the international accounting standards such as GAAP and IFRS. (Robinson, J. 2006 pp. 28–

29) When financial statements are not prepared for global standards they are difficult to be

compared with other companies. They vary with respect to the nature of the businesses.

Suppose, the result is the same irrespective of the formats used. There is no pre-

determined format of the income statements. The company selects the presentation of its

expense either by their function and work.

This can either be as encouraged, on the front of the income statement; or in the notes

section. There are formal accounting standards which are accepted globally such as international

financial reporting standards (IFRS) and generally accepted accounting principles

(GAAP). Travelex being a company which is operating at global levels there fore it is required to

follow global accounting standards in order make sure the clarity in its accounting systems and

lower the complexity in its financial accounts.

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3.4 Interpretation of financial statements

The liquidity ratio of the Travelex in the year 2009 was 4.11 million ₤ as reported.

(Berliner, 1996. 34) In the first half of the year 2010 the group has performed pretty well and

witnessed growth. Revenues for the six months to 30 June 2010 were 16% up compared to the

prior year, driven by growth across all businesses and regions. A significant expansion in new

geographies, contract wins and infrastructure investment depressed EBITDA¹ due to their start up

costs, leaving EBITDA down 3% compared to last year. We expect these initiatives to contribute

to growth in the second half. (Olsen, R. 1998 pp. 10–18)Whilst first-half revenues were

impacted by the Icelandic volcano, the global nature and diversified products of our business

ensured that we were not significantly affected. The Group continue to generate strong cash flows

and operates well within its financial covenants.

3.5 Financial risk

Wards consulting being a service oriented company have its operations throughout the

globe. Therefore the company has been facing different financial risks since its inception. (David

2003, 25)Few prominent and major financial risks faced by the company are like under:

3.5.1 Currency risk

Ward Consultation manages currency risks both at an operating and strategy level. At a

strategic level medium and long term, foreign exchange risks are controlled and managed by

natural hedging, in other words by increasing the volume of local production or increasing

purchases denominated in foreign currency. For operating purposes short and medium term,

currency risks are hedged on the financial markets Hedging transactions are entered into only

with financial partners that have a good credit standing. Counterparty risk management

procedures are carried out continuously to monitor credit worthiness. The relevant procedures are

set out in mandatory work instructions.

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3.5.2 Interest rate risk

Interest-rate risks are managed by raising refinancing funds with matching maturities and

by employing derivative financial instruments. Interest-rate risks are measured and limits both at

country and Group level on the basis of a value-at-risk approach. Limits are measured and

interest rate risks assessed on the basis of the risk-bearing concept, combined with targets

defined in conjunction with the benchmark approach. (Gonzalez 2007, 3)The interest rate

return is measured and monitor by the company on a regular basis using different simulated

computations and with the implementation of present value based interest rate management and

controlling system. The use of sensitivity analysis by the company, which contains different stress

testing analysis such as factor push analysis, measures the impact on the interest rates and their

relevance to the earnings of the company.

3.5.3 Liquidity risk

Ward Consultation manages the liquidity risk by ensuring diversification of refinancing of

funds. The company use a wide range of capital market instruments has been successful,

particularly in the present condition of the economic recession. The company has gained

resourceful financial information with the current economic crises and incorporated the learning in

to its operations such as "target liquidity concept". (Bauwens 2006, 18)The company has a policy

of monitoring liquidity risk continuously. The company has implemented a forecasting system in

order to anticipate future requirement of liquidity. The company enjoys a good reputation in the

market which enables access to funds in a comparatively easy manner.

3.6 Exchange rate risk faced by (Ward Consultation)

The exchange rate risk is a big threat for the company due to it is across the border

operations. There are several techniques used by the company in order to control the exchange

rate risks are us under By entering in to future/forward contract

3.6.1 Forward Contracts

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 A forward contract involves an exchange with a delayed settlement. Traders set down

contract conditions (specifically the date of settlement and the price) upon signature of the

contract, and the exchange is actually settled at a future, predetermined date. A forward contract

might pertain to a currency exchange rate (on maturity, the traders sell each other one form of

currency for another on the basis of an exchange rate set when the contract is drawn up),a

financial asset, or an interest rate. (Christine 2005, 17)If the price is fixed % then the contract is

made and remains unchanged until settlement, any potential fluctuations in the quotation on

exchange rates, interest rates, or the financial asset in question do not affect the two parties, so

both are covered. Of course, when listed prices rise above the negotiated price level of the

forward contract, the buyer is at an advantage; the reverse will occur if the listing falls below the

agreed-on price level.

3.7 Interpretation of Ratios

Liquidity ratios

Liquidity ratios enable the organizational management to analyze their position to meet

the day-to-day requirements of the organization and to pay off its short-term debts.

3.7.1 Current ratio

The current is 2.16 this shows that current assets are 2.16 times then of current liabilities.

This shows that the company has more current assets than current liabilities. This represents that

the company is in a good position to meet its short term requirements.

Quick Ratios

The quick ratio is the 2nd tool of gauging the liquidity of the company; quick ratio does

not include the account receivable and Inventory. As this is the service-oriented organization,

therefore, it has no inventory. The quick ratio for the organization is 1.6; this shows that it has

more assets which are more quickly convertible into cash.

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Profitability ratio

Profitability ratios explain the performance of an organization in terms of the profit it

earns. They include return on assets, return on equity, profit margin and gross margin

Debt to equity

Debt to equity ratio is 0.5; this shows that the company has fewer debts than their equity.

This means that the company can pay its debts from their equity.

Return on Sales

Return on sales identifies that what is the contribution of revenue in the net profit. The

company has 0.27; this shows that the net profit is 0.27 of the total sales.

Return on Assets

The return on Assets calculates what is the contribution of the total assets is in the net

profit. The return on assets of the ward consultation is 0.111, which shows that the total assets

have the 0.111 contribution in the net profit.

Efficiency Ratio

As this is the service oriented organization therefore it has no efficiency ratios. Because it

has no inventory, and other particular items which contribute in the calculation of the efficiency

ratio. On the other side, the dividend information is given; therefore, the investment ratio is not

possible to calculate.

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4. 0 References

Augenblick, J. , Myers, J. & Anderson, A. (1997). Equity And Adequacy In School Funding The

Future of Children: Financing Schools vol. 7 no. (3) pp. 63–78

Berliner, D. & Biddle, B. (1996). The manufactured crisis: Myths, fraud, and the attack on

America's schools. Boulder, CO: Perseus: pp. 34-42

Ducote, R. (2004). Providing funds to construct schools. Arizona Daily Star pp. 1-7

English, F. & Steffy, B. (2001). Deep curriculum alignment: Creating a level playing field for all

children on tests of educational accountability. Lanham, MD: Scarecrow Education Press:

pp. 13-19

English, F. (1996). Curriculum management for schools, colleges, and business. Worthington,

OH: Charles C Thomas. pp. 89-95

Enrich, P. (1995). Leaving equality behind: New directions in school finance reform. Vanderbilt

Law Review vol. 48 no. (1): pp. 101–194

Fullan, M. (2001). Leading in a culture of change. San Francisco: Jossey-Bass: pp. 100-107

Guthrie, J. (1997). School finance: Fifty years of expansion. The Future of Children: Financing

Schools vol. 7 no. (3) pp. 24–38

Miles, K. & Rothstein, R. (1995). Where has the money gone? Understanding the growth in public

school spending. Education Week: pp. 44-36

Thompson, D. , Wood, R. , & Honeyman, D. (1994). Fiscal leadership for schools: Concepts and

practices. New York: Longman: pp. 21-27

Wholey, J. (1979). Zero base budgeting: Budgeting and program evaluation. Lexington, MA:

Lexington Books: pp. 89-96

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