IT Management assignment on stakeholders
Q1. The information provided by the accountants to the various categories of stakeholders differs according to the group of stake holders and their particular stake in the company. In India the valuation of the company’s worth is done on the basis ‘free-float methodology’, this methodology excludes various factors like foreign direct investments and governments holdings and employee holding and considers basically only those shares which floated free in the market, hence it is the duty of the accountant to calculate other valuation to get to a more realistic picture. Investors-
Before investing in a particular company most of the seasoned investors do a lot of research about the financial details of the company. The best possible way for an investor is to determine the return on investment (ROI) of a particular company is to check the past financial records of the organization. Profitability is one of the major deciding factors for the same like if the company is profitable over a past number of years it is rational to the investor to invest in the company, but information about the sharing of profit is also very crucial hence net profit is of no use if profit sharing ratio (equity) is not clear. Capital growth and share of profits in capital growth is also a deciding factor. Accountants also provide a very vital analytical figure about the cost effectiveness of the capital which encourages further investments. Assets as shown in the balance sheet are also relevant as the investor would know about the liquidation status of the company (National Futures Association, 2010)Media (PR)-
The image of the company as shown to the outside world is called as public relations. And one way to build a strong PR is through media. Apart from traditional methods like promotional and CSR activities company’s financial data as presented and analyzed by the accountants is very much important. If the company is strong financially then naturally its stock prices would go up increasing more investments indirectly. The image build in the media about strong financial status affects buyers as well as sellers of the company. It increases the credit worthiness of the organization with respect to the suppliers in short a favorable goodwill is created. Various data is important in this regard like if the company is a zero debt company people would be willing to invest more readily or they will allow greater credit limit. Constant movement of shares is also noted by the media which again increases the investment prospects (Salmond et al. 2010).Customers-
In today’s world of awareness customers also require financial data to make image about a particular brand or company. The information given by accountants to the stock exchange is relevant because if the company is doing good on the stock exchange a favorable image is build in the minds of the general masses that in turn buy goods and services on brand name and value thus building a favorable impression on customer’s mind also very much relevant. The profitability of the company as shown in the financial statements speaks a lot about the brand value of the company, then debt free companies also enjoy customer attention (National Futures Association, 2010).
Suppliers-
If the company is doing great on the stock exchange it also affects the decision making on the part of the suppliers who sell raw material or to whom some part or some processes are outsourced. If the supplier is sure about the liquidity of cash in the company and the ratio of current asset and current liabilities he would be willing to give his goods or services on credit. Thus building of credit worthiness of the company through financial data is very essential as the supplier would know that the firm is making profits and does not have any major debt issues they would be satisfied to grant credit which would in turn help in the smooth functioning of the business process and would increase the productivity of the company. The cash in hand as shown in the balance sheet and liquid shares both combined prove to be a powerful tool in the process of assessing the credit worthiness of the organization (Salmond et al. 2010). Conclusion
Thus the information like liquidization , capitalization, profitability and last but not the least fair valuation of the organization helps in strengthening the investor relationship and at the same time provides a good publicity to the company which increases its sale through increased market share and also improves the productivity by better relations with suppliers and media. Internally it motivates the employees and works as a tool of retention of employees and better management of intellectual capital.
Q2. Entrepreneurs as well as managers both need financial data and statements to make important decisions. The analysis of financial statement is significant to managers, lenders, managers and other people who create judgments about the economic wealth of the organization. One broadly accepted procedure of evaluating statements of finance is analysis of ratios which utilizes data from the income statement and balance sheet for producing values which have simply interpret the financial meaning.
There are a few core financial statements which help the management to take decisions after interpreting them, like the acquisition of Zain Telecom by Bharti Airtel was a decision taken mostly on the financial parameters (The Times of India 8 June, 2010). The core financial statements speak a lot about the financial health of the organization it gives an overview about the functioning of the organization. The financial statements compel the management to take decisions and to plan ahead, it can also be used as a strategic tool for planning and analyzing that could be used as a medium for gaining competitive advantage especially as far as cost leadership is considered the role of financial reports and statements become very important (Pink et al. 2003)
The four basic financial reports which are useful for the purpose of decision making to the top and middle management are as follows;-
Balance sheet-
The first and foremost statement is the balance sheet which shows the relationship between the liabilities and assets of the company which to a great extent defines the financial health of the organization. Assets are considered as economic resources monitored by the business entity as the outcome of previous transactions and through which upcoming economic advantages may be obtained. Liabilities are considered as obligations of the entity which result from the previous transactions. They prevail mainly from the buying of services or goods on cash borrowings and credit for financing the business.
Knowledge of liquid assets (which could be readily converted into cash) is also very essential meeting the short term liabilities. Because in case of insufficient funds the company would have to sell its assets to meet the same. Balance sheet is a powerful tool to analyze the debt rating of the company and the management can build its credit policy on the basis of analysis of past trends in the balance sheet. Knowledge of balance sheet to the creditors also increases the company’s worth as a credit worthy company because creditors consider share holders equity as a protective cushion (Pink et al. 2003)
The Income Statement-
The statement of income shows the net income generated from business activities income is another word for profit while a layman uses the term profit an accountant prefers to use more technical terms like net profit or gross profit. The income statement gives a clear view to the management about the net expenses and net revenue earned during one financial period. It differentiates between different costs and hence helps in recognizing cost centers and pinpoints obsolete cost centers which would in turn be strategically advantageous to the organization. Since this statement mentions the sales and purchases it is important for making transactional operational decisions for example if a competitor reduces the price then the company would also be forced to do the same. This statement is also studied by the investors to judge whether the company is able to sell its products or not. (Gill, Chatton & Osgood, 2009).
The Statement of Retained Earning-
Like the statement of income, retained earnings statement is also for the particular point of time. The retained earnings statement reflects the path that the categorization of the dividends and the net income impacted the financial position of the Company throughout the period of accounting. Net Income made throughout the year enhances the balances of the retained earnings. Retained earnings or Reinvestment of the earnings is considered as significant source of the financing. It is very clear that creditors follow the retained earnings statement of the firm because the policy of the firm on the payment of the dividend to its stakeholders impacts its capability for repaying its debts. Every rupee is paid to the shareholders as the dividend and it is not used in giving back its debts to the creditors. Investor shows interest in the retained earnings for determining whether the organization is spending an adequate part of the earnings for supporting the future growth. (Gill, Chatton & Osgood, 2009).
The Cash Flow Statement-
Since sales figure as shown in the income statement is not exact as credit sales are also done within an organization, in the same way the purchase is also done on the credit basis hence exact flow of cash cannot be recorded. For this purpose the cash flow statement is made to show the exact cash flow from the different operations. The most important being the financing activity which is very much crucial for the purpose of decision making. To cut the cost analyzing the operating activities is also very important the management makes decision on how to reduce costs over various operations and to manage more efficiently (Gill, Chatton & Osgood, 2009).
Various analysts think that the statement of cash flow is specifically helpful for estimating upcoming cash flows which might be accessible for the payment of the debt to creditors and payment of the dividend to the investors. The industry of banking refers the activities of operating to be significant because it reflects the ability of the Company for generating cash from the sales to fulfill its current needs of the cash. Liquid cash might be utilized for repaying the liquid obligations of the Company. Investors shall invest in the Company if they think that it shall create more cash from the operations than it utilizes so that the cash shall become accessible for paying dividends. The activities of Investing reflect that Vincor has done huge investments in new unit of manufacturing and a good symbol if the demand continues to enhance. The section of financing activities reflects the robust financial position of the organization and its capability to shareholders (Pink et at. 2003).
Q3. Human resource management team has evolved from the former role of just playing the administrative roles to be a more strategic partner. Earlier the presence of human resource was assumed to be that of cost centers, now the whole equation is changing into that of investment into human capital thus it could be said that finance and human resource should be closely integrated to each other.
The financial data is required by the human resource team who are working as a strategic partners with the rest of the management, they require financial data for a number of reasons few of the could be categorized under the following headers.
Training-
Training of employees for developmental process requires budgeting for the same and at the end it requires ROI on the training program. How much the organization has gained value addition and what are the financial gains from the training program. Thus it could be seen as that both finance and HR teams would have to work in close synchronization with each other to accomplish effective training programs and to calculate the returns from the same.
Recruitment-
One of the most primary functions of the HR management is to recruit new employees which also increases cost hence the HR management needs budgeting for the same also. The process of recruitment requires expenses hence HR dept. has to plan effectively which path to follow and how to avoid excess cost. One of the hidden cost which arise after recruitment and selection process is that the employee is performing below the expectations which in turn would need a plan of action from the HR team in term of performance appraisals and other motivational exercises, all these exercises involve cost and finance management have to decide whether it would bring monetary gains to the organization other than value addition.
Retention-
The most expensive of all the functions is to retain an employee into the organization as discussed earlier recruitment, training etc involve cost and if the HR management fails to retain the talent it has recruited and developed over a period of time it cannot justify the cost involved and as observed that evolution from cost centers to investment perspective is based upon time to calculate return on investment and if the employees leaves in the middle of his term the cost incurred could not be justified. Another reason why retention is so important is that there is a loss of intellectual property in this. And since the baton of intellectual capital management is in the hands of the HR department this even though does show immediate financial loses but it the long run it affects the financial health of the organization(Mashahiro & Takeo, 2004).
Conclusion-
Thus it could be concluded that HR management cannot work without the finance department and the data provided by it is very important for HR planning. The financial data is required by the human resource team who are working as strategic partners with the rest of the management. One of the most primary functions of the HR management is to recruit new employees which also increases cost hence the HR management needs budgeting for the same also. Entrepreneurs and managers both need financial data and statements to make important decisions. The four basic financial reports useful for the purpose of decision making to the top and middle management are Balance Sheet, Income Statement, Retained Earnings Statement and Cash Flow Statement. The most important being the financing activity which is very much crucial for the purpose of decision making. It is the duty of the accountant to calculate other valuation to get to a more realistic picture. The core financial statements speak a lot about the financial health of the organization it gives an overview about the functioning of the organization. In fact the support of HR is important for the financial department in terms of training, motivation etc.
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