The Importance Of Financial Information And Evaluation In Business Strategy

Role of Financial Information in Business Strategy

This report has been prepared to evaluate the importance of financial statement and evaluation in an organization. Financial statement assist the companies to make a better conclusion about the strategies, polices, changes and the profitability level of the company. It makes it easy for all the stakeholders and the employees of the company to analyze the performance of the company. And at the same time, financial statement also makes it easy for the company to evaluate the cash position of the company. Financial information is quite compulsory for the company to make better strategies and the policies for the company.

For this report, financial information which is required by the business to maintain the performance has been evaluated firstly. Further, the business risk of the company has been identified and it has been evaluated that how it make an impact on the financial position of the company. In addition, it has been evaluated that how financial information is important in making the strategic business decision.

More, the financial accounts of Unilever plc have been identified to evaluate the importance, structure, purpose, and content of financial accounts through evaluating the ratio analysis study. In activity 3, long term and short term funds have been evaluated which are required by the business to maintain the performance and the capital structure of the business. It also explains about the cash flow position of the company. Lastly, activity 44 explains about the corporate governance and investment appraisal method.

Financial information requirement:

Financial information could be collected by an organization through its financial statements. Financial information is useful for the creditors, financial analyst, investors, managers, suppliers etc of the company to interpret the financial performance of the company and make a better conclusion about the company. Financial information is mainly required by the company for the following reasons:

Financial condition:

Financial condition of an organization could be evaluated and analyzed through the financial information’s only. Financial condition makes to easy for all the related parties of the company to evaluate the safety and profitability and make conclusion about the company. Financial condition is also important for the company to evaluate the investment position of the company (Higgins, 2012).

Operating results:

Further, operating results of an organization could be evaluated and analyzed through the financial information and financial statement of the company. Operating results makes it easy for the management and the stakeholders of the company to analyze the financial position, condition, turnover, revenue etc of the company. Operating results is also important for the company to evaluate the uncertainties of cash flow in the company.

Published Financial Statements

Cash flows:

More, cash flows of an organization presents about the liquidity position and the profitability position of the company. This evaluation could be done only with the help of financial statement of the company (Garrison, Noreen, Brewer and McGowan, 2010). Cash flows makes to easy for the management of the company to evaluate the liquid position and make better decision.

Shareholder’s equity:

Lastly, shareholder equity could also be evaluated through preparing the balance sheet of the company. It makes it easy for the company to figure the total cost and the risk of the company.

Business risk identification:

Business risk of an organization could be of any type. Business risk is a possibility for the company that the company could lower the anticipated profits or face loss in the market. There are various factors which impact on the business risk of a company such as input cost, unit price per unit, competition, government regulations, economic climate etc.  Financial information and financial statement plays an important role in identifying and evaluating the business risk (Davies and Crawford, 2011).

Financial statement and information assist the company to evaluate the systematic and unsystematic risk of the company and at the same time, it makes a direct impact on the financial decision and performance of the company. Such as, in case of investment analysis, business risk assist the company to evaluate the required rate of return and thus it becomes easy for them to identify the performance of the company. Further, business risk evaluation become important as they considers the stock position, financial position, liquidity level and other position which could occur the position of risk and loss in the organization (Damodaran, 2011). Following are some examples which assist that how the business risks assist the company in financial decisions:

Name of Company	$m invested	Beta
Fire	$2	0.85
Water	$3	1.25
Air	$5	1.6
TOTAL	$10
Calculation of cost of equity (CAPM)
	Fire	Water
RF	4.00%	4.00%
RM	12.00%	12.00%
Beta	0.85	1.25
Required rate of return	10.80%	14.00%

(Bromwich and Bhimani, 2005)

The above table assist the company to evaluate that which project proposal is best in terms of risk ad return. Thus, financial information is quite useful for the company to evaluate the performance and the position.

Financial decisions are crucial for every business. A better financial decision could be planned and made by a company after evaluating and solving the perfect strategies and policies of the company. Strategic decisions are quite major conclusion which is usually taken by the higher management level to administer the performance and the position of the company. Basically, for preparing the strategies for business decision and the performance of the company, financial information is required by a business such as the profitability level of the company, competitor’s position in the market, financial strength of the company, capital structure of the company, financial risk and return of the company, costly financial fund of the company etc. (Arnold, 2013).  

Assessing and Financing Various Activities

Profitability level of the company assists the management to evaluate the exact position of the company and thus while making the strategies they could consider the future performance of the company and make a better policy according to that. At the same time, risk and return of the company helps the managers to make strategy about the investment proposal (Ackert and Deaves, 2009). Capital structure is concerned by the chief financial officer of the company to make strategies about the financial funds. On the other hand, financial accounts are analyzed by the strategies manager while evaluating the new strategies for the company.

Thus, through the above study, it has been evaluated that the financial information and accounts are crucial for every business as it assist the company to evaluate all the related factors and make better decision about the position of the company. A better financial decision could be planned and made by a company after evaluating and solving the perfect strategies and policies of the company.

In this activity, the financial accounts of Unilever plc have been identified to evaluate the importance, structure, purpose, and content of financial accounts through evaluating the ratio analysis study. The information about the financial statement, its purpose, content, structure, information, interpretation, ratios etc are as follows:

Company leaders and the managers make the financial statements and evaluate them for keeping the information in a systematic manner and make a better conclusion about various financial problems. Basically, companies prepare the financial statement monthly, quarterly or annual basis. Financial statements include income statement, balance sheet, changes in equity and cash flow statement (Baker and Nofsinger, 2010).

Main purpose of income statement is to offer the information about the total turnover, cost of goods sold, operating expenses and net profit of the company in a systematic way. On the other hand, balance sheet assists the management and stakeholders of the company to evaluate about the long term resources of the company, operation cycle of the company, capital structure of the company etc. In addition, the cash flow statement and the changes in equity statement is prepared by the companies to measure the liquidity level and the funds of the company. Mainly, these financial documents allow the managers and the company to evaluate the current situation of the company and make changes.

Further, the content and the structure of the financial statement are as follows:

Income Statement	Balance sheet	Cash flow statement
Revenue	Assets	Cash Flows From Operating Activities
Gross profit	Current assets	Net income
Operating expenses	Cash	Depreciation & amortization
Operating income	Cash and cash equivalents	Deferred income taxes
Interest Expense	Short-term investments	Stock based compensation
Other income (expense)	Total cash	Change in working capital
Income before taxes	Receivables	Inventory
Provision for income taxes	Inventories	Other working capital
Net income from continuing operations	Deferred income taxes	Other non-cash items
Other	Other current assets	Net cash provided by operating activities
Net income	Total current assets	Cash Flows From Investing Activities
Net income available to common shareholders	Non-current assets	Investments in property, plant, and equipment
Earnings per share	Property, plant and equipment	Property, plant, and equipment reductions
Basic	Gross property, plant and equipment	Acquisitions, net
Diluted	Accumulated Depreciation	Purchases of investments
Weighted average shares outstanding	Net property, plant and equipment	Sales/Maturities of investments
Basic	Equity and other investments	Purchases of intangibles
Diluted	Goodwill	Other investing activities
EBITDA	Intangible assets	Net cash used for investing activities
	Deferred income taxes	Cash Flows From Financing Activities
	Prepaid pension benefit	Debt repayment
	Other long-term assets	Dividend paid
	Total non-current assets	Other financing activities
	Total assets	Net cash provided by (used for) financing activities
	Liabilities and stockholders’ equity	Effect of exchange rate changes
	Liabilities	Net change in cash
	Current liabilities	Cash at beginning of period
	Short-term debt	Cash at end of period
	Capital leases	Free Cash Flow
	Accounts payable	Operating cash flow
	Taxes payable	Capital expenditure
	Accrued liabilities	Free cash flow
	Other current liabilities
	Total current liabilities
	Non-current liabilities
	Long-term debt
	Capital leases
	Deferred taxes liabilities
	Accrued liabilities
	Pensions and other benefits
	Minority interest
	Other long-term liabilities
	Total non-current liabilities
	Total liabilities
	Stockholders’ equity
	Common stock
	Additional paid-in capital
	Retained earnings
	Accumulated other comprehensive income
	Total stockholders’ equity
	Total liabilities and stockholders’ equity

(Besley and Brigham, 2008)

Issues Related to Expansion

Further, the interpretation of financial accounts has been done to analyze the financial information from them. The income statement of an organization offers the information about the total turnover, cost of goods sold, operating expenses and net profit of the company in a systematic way. On the other hand, balance sheet offers the information to management and stakeholders of the company about the long term resources of the company, operation cycle of the company, capital structure of the company etc. In addition, the cash flow statement and the changes in equity statement is prepared by the companies to measure the liquidity level and the funds of the company (Bierman, 2010).

Financial ratios:

Following is the calculations of financial ratios of Unilever plc:

Description	Formula	Unilever plc
		2017	2016	2015
Profitability
Return on equity	Net profit/revenues	9.83%	9.21%	10.68%
Return on assets	Net profit/Equity	31.70%	31.80%	37.88%
Profit margin	Net profit / Sales	9.83%	9.21%	10.68%
Asset turnover	total assets / total sales *365	390.73	358.33	361.92
Price earnings ratio	Market value per share / Earnings per share	37.59
Liquidity
Cash ratio	cash equivalents + cash / current liabilities	0.675	0.634	0.629
Capital intensity ratio	Total assets /sales	1.07	0.98	0.99
Quick Ratio	Current assets-Inventory/current liabilities	(0.04)	0.17	0.17
Solvency
Times interest earned	EBIT / Interest expenses	92.80	93.79	85.27
Long term debt ratio	Long term debt/ total assets	0.19	0.21	0.23
Equity multiplier	Total assets / stockholder’s equity	3.45	3.39	3.52

(Brealey, Myers and Marcus, 2007)

These ratios express about the financial position such as liquidity level, solvency level, efficiency level, debt level, profitability level etc of the company. Through the evaluation on the financial data of the company, it has been found that the profitability level of the company expresses about the competitive position of the company and explains that the performance of the company would be better in next few years. The position of the company has been lowered in 2016 due to some economical changes (Brewer, Garrison and Noreen, 2005).

Further, the calculation of financial ratio on liquidity position of the company explains that the cash position and working capital position of the company is way better but the short term debt obligation of the company is required to be better. So, it is suggested to the company to improve the current asset’s level.

More, the solvency ratios explain that the working capital turnover and cash turnover of the company is quite similar in last 3 years. But the industry level suggests the company to reduce the cash turnover days so that the less working capital is required by the company to manage the performance of the company.

Long term and short term financial requirement:

A company is always required some sources through which it could enhance the short term as well as long term funds. Short term financial funds are required by the company to manage the operations and the daily activities of the company. These funds could be generated by the company through overdraft agreement, customer advances, receivable financing and selling goods on instalment. These funds are important for the company to evaluate on the basis of its needs and the requirements (Brigham and Ehrhardt, 2013).

Business Risk Evaluation

At the same time, long term financial funds are required by the company to invest into the long term projects and the resources of the company. These funds could be generated by the company through long term loan from banks, retained earnings, debenture issues, equity issues, government grants etc. These funds are important for the company to evaluate on the basis of its needs and the requirements. Thus, it explains that the organization is firstly required to evaluate that why the funds are required and for how much time it is required. Then they should enhance the funds through the important and significant funds (Hillier, Grinblatt and Titman, 2011).

Cash flow is one of the important financial statements of a business. It explains about the cash position of the company. Cash flow statement briefs that how much cash flow has been occurred due to operational activities, investing activities and financial activities of the business. Though, this statement only brief about the cash position but the organization is required to follow some techniques through which the cash flow position of the company could be managed. Few techniques of managing the cash flow position of a company are as follows:

1. Keep track on the activities of the company
2. Cut out the inefficiencies of the business
3. Invest into the people and resources continuously
4. Speed up the level of the payments (Horngren et al, 2015)
5. Use the invoice financing

These are few techniques which could be used by the business to manage the cash flow position of the company. Further, it has been evaluated that the cash flow of a business is quite crucial to be managed. Following are few of the importance of cash flow management:

1. Cash ensures the flexibility of the business.
2. It assists the company to improve the performance in the market.
3. Cash helps the company to grow up faster.
4. Cash is the most crucial element of a business.
5. Cash helps the company to strategies the new policies and achieve the goals.

Thus, it has been evaluated that the cash flow management must be done by every business in an efficiency way to manage and administer the performance of the company.

This activity explains about the organizational structure, corporate governance, legal requirements, regulatory requirements and investment appraisal method.

Corporate governance:

Ownership structure	Corporate governance	Legal requirements	Regulatory requirements
Sole proprietorship	In sole proprietorship, the owner is the one who handles all the activities of the company.	Sole proprietor is not required to manage the legal obligations.	There is no regulatory requirement for sole proprietor.
Partnership	In partnership, patterns are the managers and the handles all the activities of the company.	Partners are required to register their firm according to the partnership act.	They are required to follow the partnership act rules.
Limited partnership	In limited partnership, patterns are the managers and the handles all the activities of the company.	Partners are required to register their firm according to the partnership act.	They are required to follow the partnership act rules.
Limited liability company	A set of people handles the activities and operations of the company.	Company is required to register itself according to the company’s act (Kaplan and Atkinson, 2015).	Company’s act rules and regulations are required to be followed.
Corporation	A set of people handles the activities and operations of the company.	Company is required to register itself according to the company’s act.	Company’s act rules and regulations are required to be followed.
Non profit corporation	Trust handles the activities (Jiashu, 2009).	Company is required to register itself according to the company’s act.	Government set the rules and assign non executive directors.
Cooperative	Members of the firm manage the functions of the company.	Company is required to register itself according to the company’s act.	Company’s act rules and regulations are required to be followed (Kinsky, 2011).

An organization always invests its funds into new projects and the operations to enhance the level of the fund. Various opportunities are always available for a company and for the better opportunity, capita; investment appraisal techniques are used by the companies. These techniques takes the concern of project cash outflows, cash inflows, time etc and explains the company that which opportunity is better for the company and why (Madhura, 2011).

Conclusion:

The above study explains that the financial skills and information is quite required by an organization to manage the performance and make better and quick decision about the financial activities of the company. It explains that every company must adopt and manage the financial accounts so that the activities and operations of the company could be easier.

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