Question

Analyse and evaluate the key strategic financial statements of an organisation.

Apply and critique key corporate finance theories and techniques.

Demonstrate critical thinking and analysis in showing how the finance function can make a significant contribution to the successful strategic management of an organisation.

Answer 1

Key strategic financial statements of an organization are:

1. Balance sheet - The balance sheet will give the idea of a company's financial position at the specified point of time. It gives an overall idea about the health of a company. By analyzing the balance sheet of the company through key ratios like Debt/Equity ratio, Working capital ratio, etc. management can get key insights.

2. Income statement - Provides the Income for the period through various sources and about the cost incurred, through this management gets a lot of ideas about what how a company is performing is it making a profit or not how that profit compares YoY. etc.

3. Cash flow statement: Cash flow statement gives an idea about the cash flow for the period, It will signify if the company is actually making the cash from the business. A good cash-generating company is fundamentally very strong.

Key corporate finance theories are:

Time value of Money - Time value of money says that the money owned now is more valuable than the same amount of money owned tomorrow this difference is due to the inflation. Corporate applies this theory while calculating the present value of invested money.

Capital Budgeting - Capital Budgeting says what amount of debt and equity ratio a company should have. Capital budgeting varies from company to company and sector to sector as well as the economic environment. so there is no right or wrong way and there is no standard way in which this capital budgeting works.

Cost of capital - Cost of capital is at what rate the company raises the money and deploy it in various investment a return more than the cost of capital is desirable by the corporates. The cost of capital is derived from the cost of debt and cost of equity the mix of both determines the cost of capital.

Finance function can make a significant contribution to strategic decision making, let's take a small example of finance function IRR. IRR stands for internal rate of return if the IRR is positive and greater then the cost of capital then the company can go ahead with the project so it gives ready insights for strategic decision making.