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Managing Finance Principle Technique

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7208 Downloads I Published: 24 Aug ,2017

Role Of Financial Management

Financial management plays a very important role in managing the financial policies and strategies of the organization. In the present competent environment, effective decision making is very crucial for a company in order to be profitable. Funds are the utmost requirement to get all the relevant resources for the business. The following study helps in familiarizing with the financial principles and techniques related to the organization. For that purpose a UK based organization which functions at global level in the hospitality industry, Millennium & Copthorne PLC is taken into the context. This report helps in understanding the cost based financial data and information. It also talks about the forecasting techniques to gather the information for decision making. Apart from that it will evaluate the budgetary monitoring process adopted in the organization. At last the report will end in interpreting the financial statements and ratios of the company.

Importance of costs in the pricing strategy

Cost is the most significant factor in the pricing strategy of Millennium & Copthorne PLC. Generally the business decides the pricing of their product and services keeping in mind the cost realized in the production. An effectual pricing strategy is essential so that the firm can identify a point where they can maximize incomes & profits in order to achieve success. The company has to incur different types of costs such as direct costs, labour costs, overhead costs etc. When the production costs goes up the company likes to keep the prices higher for its services and vice-versa. While deciding the pricing strategy cost of each and every aspect is examined by the business (Banerjee, 2006). Various pricing strategy adopted by the company are cost-plus pricing, competition-based pricing, limit pricing etc. Another approach is the cost cutting which is applied by the business to increase the profit margin. In case of minor adjustments, constancy can be seen in their prices.

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For Millennium & Copthorne PLC service costing system can be designed which us used in the firm which are engaged in providing the services instead of products. For determining the prices of each service it is very essential to gather all the expenses related to it. Under this system the company can make a sheet in which all the costs concerned with the specific service can be reflected (Dayananda, 2002). All these costs are calculated on time basis. Each costs is treated as the separate units in operating costing and it includes expenses related to salary, insurance, road tax, license fee, interest on capital etc.

Improvements to the costing and pricing systems

Millennium & Copthorne PLC can adopt suitable approaches to improve their pricing and costing system. Their major costs are related to capital expenditure, room developments, staff, premises, transport, labour, raw-materials etc. Apart from that they have to incur the cost on improving their customer service. Standardization of major activities will help the firm in realizing long term opportunities in significant cost reductions. Adopting quality management process will help in checking the quality and effectiveness of the costing activities. These types of actions can be performed by evaluating the activities at regular point of time. Further they can bring the improvements by arranging the finance for the business through cheapest sources (Helfert, 2004). They can buy the raw materials from the market at time when prices are favourable for the business. Replication of actions must be avoided so that there should not be wastage of resources. The company can also remove the assets and processes which are not valuable for the business.

On the other side in order to improve the pricing system they can implement the approach of penetration. Under it they can keep the prices for their room and other services etc low as compared to their competitors. This will help them to retain the existing customers and engaging new clients for the company. Another approach is the price skimming under which they can change the prices as the demands and preferences of the people. It is considered as the temporal form of price discrimination and yield management (Vice, 2013).

Applying the forecasting techniques

Different types of forecasting techniques can be applied by the Millennium & Copthorne PLC which includes:

Qualitative forecasting – These types of forecasting approaches are subjective in nature and are based on the factors like emotions, opinions, thoughts, personal experiences etc. It does not take into account any type of statistical and mathematical computations. It includes approaches like Executive opinion, market survey, Delphi method etc.

Quantitative forecasting – These types of methods derive the results by using mathematical and statistical models and are objective in nature. Under this results and conclusions are made on the basis of mathematical computations (Elearn, 2013).

Time series analysis – This technique uses historical data to predict the future outcomes. It is a set of observations on a particular phenomenon collected over a period of time. It takes into account the information such as money supply, inventory level, money supply, exchange rates etc.

Explanatory methods – This method make use of data to determine the changes and on the basis of the existing data also project the future market conditions. It takes into consideration the terms like spending pattern, confidence indexes to derive the future performance.

Sources of funds

Millennium & Copthorne PLC can arrange finance from many sources in order to do expansion for its business:

Retained earnings – Company can raise the money from the portion of their net income called retained earnings. Business retains these earnings despite of distributing them among the shareholders as dividends.

Grant – The Company can take loan from the UK government as it is a British PLC. Granting finance from the government will be a easier process for the company.

Issue of shares – They can also issue shares in the market among the public for general subscriptions. The funds generated from issues of shares will be utilized in the expansion of the business.

Investors – They can also invite group of investors to make the large amount of the funds for the company (Vice, 2013).

Evaluation of the Master budget

Master budget can be evaluated by the variance between actual and budgeted performance. According to the master budget pre-planned budgeted figures of the revenue and receivables of the hotel are £600 million and expenses and payables are £370 million. After completion of the all operational activities of the organization the actual cash inflow of the company is £570 million and Cash outflow of the company is £390 million. These are high difference between actual and budgeted performance. Evaluation of these figures show that company has negative variance, such as difference between actual and budgeted income is £30million variation among budgeted and actual expenses is £20 million. Thus, this variance is not favourable for the company. Budgeted profit of the company is £230 million and actual performance of the profit is £180 million. In the actual performance company is generating profit but it is lower budgeted performance (Grieve, 2013).

Budget Monitoring Process

Budget monitoring process reflects that how strictly hotel meets its financial objectives and goals. This process includes the regular comparison of the actual and budgeted expenditures and incomes. Variance report is the suitable methods for monitoring budget. After analysis the variances now company requires to adjusting budget, expectations or goals to overcome these variances. Thus, for this step the suitable action is redefining the each goal of the hotel. Thus budget monitoring process helps to increase the performance of the Millennium hotel. Budgetary monitoring process of the Millennium hotel’s master budget includes the actual and budgeted performance of the organization.

Cost reduction process

Proposed budget of Millennium requires reducing the prices for their products due to current trade and industry circumstances affecting its customers spending power and net profit of the company (Keller, 2013). Cost reduction process is used by Millennium for reduce their cost of the products and increases the profit on the basis of the Millennium’s product and services and activities of the each production process. It mainly focuses on the reduction of total cost of the all operations and ravage of the product and improve the efficiency of the resource consumption.
Process of the cost reduction includes the five steps:

  • Evaluate the current position of the cost and expenditure of the hotel
  • Identify the immediate opportunities and scope
  • Quantify the outcomes of the cost cutting
  • Consider the overall impact on the organization
  • Simplify operations

There are different cost reduction tools and techniques for cost cutting, but following techniques are majorly used by the companies for this process:

  • Just in time (JIT) system
  • Target Costing
  • Supply chain management
  • Bench marketing
  • Activity based costing (ABC)
  • Life cycle costing
  • Kaizen costing
  • Total quality management

After evaluation of this entire method final conclusion is that Activity Based Costing is most suitable method for the Millennium hotel (Nga and Yien, 2013).

Activity Based Costing (ABC)

Activity Based Costing is a most important method of cost reduction. This method categorizes the each activity of the complete production system, allocate the right resources at the right place and consign cost for each activity. Main objective of this method is identified and eliminate those deeds which are ineffective for the production.

Prospective use of ABC for Millennium are describing below:

  • ABC technique recognizes inefficient and useless departments, product and activities of Millennium and helps to recover the exercise of the cost.
  • ABC helps in finest allocation of resources.
  • ABC provides enhanced cost information in the financial decision making process of the company’s management system. Millennium can use this information for cost reduction efforts (Vice, 2013).
  • ABC is helpful for superior cost management for the hotel and improves the quality of the product.

Thus Activity based costing method is very effective cost reduction method for Millennium hotel.

Capital Budgeting techniques

An investment appraisal decision is a crucial task for the business organization. Enterprise puts in money into certain project with a view to earn sufficient return in the future. There are various capital budgeting tools available to judge the feasibility of project into consideration (Weil, 2012). Millennium & Copthorne plc has also two investment options available for the expansion purpose.

Payback period method: This method emphasizes on duration in which the future cash flow is able to cover the initial investment of the company.

Strategic Investment decision

The company has two investment alternatives one in public sector and other in private sector enterprises. Although, both projects provides company with suitable opportunity to expand its operations justification on financial grounds helps in taking appropriate decision. As per the financial analysis investment in public sector will prove to be profitable. The project is comparatively more viable that investment in private sector. As per the payback period method; project is enabling the organization to avail benefit of approximately one year. The Internal rate of return suggest that project is deriving return of 21.59% that is double the return earned on private sector. On the basis of net present value method, the project with public sector is generating net present value of £254.66. The amount is approximately double the net present value of investment with private sector. The figures henceforth indicates that investment in public sector is comparatively profitable in nature.

Appropriateness of decision

The decision taken as per through the application of investment appraisal techniques is viable. The investment with public sector is also viable on the grounds that government organizations are highly accountable and responsible. Also, proper monitoring and controlling in public sector undertakings ensures security of money invested. The capital budgeting methods suggests the investment in project held under public. The decision taken on part of organization while deciding suitable option for investment purpose is based on following reasons:

  • The investment with public sector has lower payback period hence the amount will be recovered in low duration.
  • It has high Net present value indicating more earnings.
  • Internal rate of return is also higher in the project signifying comparatively more return.

As an effect of investment in project with public sector; the business unit will be able to gain higher profitability. The project is proved to be viable on the grounds of investment appraisal techniques. The investment decision will help in gaining positive cash flows for the business unit. As per the posit audit evaluation; the organization would have higher amount of cash flows. This in turn increases business profitability and have positive impact on operations. The project will support business activities through inflow of cash and smooth flow of liquid funds in the organization.

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Analysis of financial statements

Income statement shows that there is reduction in company’s revenue, cost of sales and profit for the year. This indicates that decline in the growth of hotel group or downturn in the industry or economy at whole (Peterson and Fabozzi, 2012).

Balance sheet shows the increase in current and noncurrent assets signifying the investment on the part of hotel. Long term liabilities of the enterprise have reduced showing the settlement of outsiders’ obligation. Short term liabilities on contrary have increased by £78.6 million. This implies the company has raised the fund through debt and short term borrowings (Conesa and Martínez, 2004).

Analysis of financial information

  • Profitability ratios indicate operational efficiency of the organization. The company has high percentage of gross profit ratio signifying good return on sales. Net profit ratio is also sufficient for the group. The difference between two ratios is high; this signifies high indirect expenses. It should reduce the administrative expenses so as to increase Net profit Margin (Ahrendsen and Katchova, 2012).
  • Liquidity ratios are above 1 hence showing the good liquid position of the enterprise. Although, it will not face any problem in paying off its short term obligations the company does not make optimum utilization of its resources. Hence, it should try to make more investment so as to generate more returns with efficient employment of its possessions.
  • Efficiency ratios are significantly low indicating organization’s inefficiency in making use of its fixed and total assets. The company should adopt mechanism to achieve economies of scale thereby generating more sales through current value of assets (Warren, 2013).

Conclusion

Millennium & Copthorne hotels plc is one of the leading hotel groups having sound financial position. Through company has good profitable position it is suggested that company should reduce its indirect expenses and works on the utilization of resources.

References

  • Gitman, J. L., 2013. Personal Financial Planning. Cengage Learning publication.
  • Grieve, I.,2013. Microsoft Dynamics GP 2013 Financial Management.Packt Publishing Ltd.
  • Helfert, A. E., 2004. Techniques of Financial Analysis. Tata McGraw-Hill Education
  • Katchova, A. L. and Ahrendsen, B. L., 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review.
  • Keller, A., 2013. Finance & Financial Management.GRIN Verlag. Publication.
  • Marchant, T. Bennouna, K. And Meredith, G. G., 2010. Improved capital budgeting decision making: evidence from Canada.Management Decision.
  • Martínez, E. O. and Conesa, I. M., 2004. International financial analysis and the handicap of accounting diversity. European Business Review.
  • Nga, H. K. J. and Yien, K. L., 2013. The influence of personality trait and demographics on financial decision making among Generation Y.Young Consumers: Insight and Ideas for Responsible Marketers.
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