Northern Plc Financial Management
Executive Summary
The financial standing of the company is crucial to their business success. The financial standing defies the performance of the company in accordance to the decision making capabilities of the management of a certain business. In accordance to the performance of a company, there are traditional or conventional measures of which are based on periodic profitability indicators. The said performance measurement is mainly based on conventional accounting and market performance. With this consideration, this study evaluates the financial context of corporate governance of Northern Plc. As stated, such evaluation has significant implications for the performance of the company. Other issues such as dividend policies, financial ratios and investment capabilities are considered in this paper since these are vital tools in determining the performance of a business. Well-organized resource allocation is supported by strapping shareholder control rights, which assists investment in fresh development actions and confines the scope for corporate over-investment. Apparently, investment decisions are further linked to financial management insofar as investors prefer to invest in appropriately supervised corporations and be apt to avoid investing in ambiguous environments. In this way, the investor assurance created by sound corporate governance provisions and the security of minority shareholders encourages the financial market progress by encouraging share ownership and capable capital allocation across firms. Transparent financial reporting is necessary to sending efficient financial management and decision making.
Introduction
Businesses are developing to suffice the need of the society. In any current business organization, the progress that the company do is recorded as basis of assessing the stewardship of management and for making economic decisions. Major user groups of financial statements (FS) include investors/ shareholders, employees, lenders, suppliers, customers, government and the public. Basically, investors and shareholders are concerned on income (from dividends) and gain (from stocks price), employees on wage, salary and employment opportunities, lenders on the resources of the firm (both cash and non-cash), suppliers on financial stability of cash flow, customers on ability to supply quality goods, government on performance for the purposes of taxation and the public on employment, environmental and other social responsibility disclosures (cited in ACCA 2006). In general, firms must comply with the FS needs of these stakeholders to concede their legitimacy to exist in the society (Deegan & Rankin 1996 p. 62). Otherwise, the latter can implore aggressive or indirect actions (strikes, pull-out of investments, litigation, etc.) that can ultimately lead to corporate demise.
Listed or public companies like Northern Plc are, more than anybody else, responsible to these stakeholders and impart in protecting its legitimacy. This is because they come full contact with the public, therefore, exposed their companies to several and trickle-down effects on the public at large. As a result, other than maximization of shareholder’s wealth, corporate finance is also intended to aim objectives for other stakeholders.
PEST Analysis
Another model for analysis that can be utilized in order to analyze the corporate strategy of Northern Plc is the PEST analysis. PEST Stands for Political, Economic, Socio-cultural and technological factors that influence Northern Plc’s overall performance in the market place.
A. Political Sector
A company will not be able to gain success if they will not consider legal and political sector as part of their strategy. The Northern Plc has observed business ethics. Hence, the company considers legality in all their actions. They make sure that all their products will be useful in response to their social responsibilities. Politically, Northern Plc has tried to be helpful in the society. In fact, the company has established supports science and technological advancements.
B. Economic Sector
Economically, Northern Plc is secured by having continuous growth rate throughout the years. Through the Management for excellence strategy, the company as been able to established an economic stability to continue to serve and offer people from different agencies and sectors private or public, locally and globally.
C. Socio-cultural Sector
Culture is an important factor in understanding an industry, because for any organization to operate effectively it must for some extent have a general set of believe and assumptions on how culture will influence the productivity and the success or failure of any company. Culture environment is one of the important principles that influence the organization. Hofstede (1991) identifies that there are four dimensions that differentiate cultures at a national level (power distance, individualism-collectivism, masculinity-femininity, uncertainty avoidance), which help to understand that people arrive to organizations with their own national culture.
In Northern Plc, the management sees to it that they value the opinion of their employees no matter what is their nationality. Since, this company is competing globally; it cannot be denied that they need employees form different cultures to be in the company to help in the decision making. It is also indicated that the international managers has been able to create a positive relationship in the local managers. Moreover, the management of the company has seen to it that they would be fair in treating all their employees. As part of the strategic change imposed which is the Management for Excellence, Northern Plc has been able to allow each and every human resources regardless of their culture to voice out their opinion to further enhance the corporation’s structure (Delaney & Huselid, 1996). And on the other hand as part of the society of Northern Plc, the members of the company always ensures that they would efficiently have a facility and technology that would be able to carry out products that would eventually satisfy all their clients.
D. Technology Sector
The complexities of achieving business success through increased efficiency, effectiveness and competitiveness, combined with innovative applications of modern technology, has heightened the awareness of both Technology and business managers towards more strategically oriented approaches for planning and management of any industry (Luftman et al, 1993). As mentioned earlier, the company establishes a research and development department which is responsible for the maintenance of the quality of the product of the company, innovativeness, and ensures technological advancement for all the activities of the company.
Financial Evaluation
In finance, the balance sheets of company reports conform to the financial ratios. This means that financial ratios should be considered by the Northern Plc. to determine if their performance is improving or declining. As stated by Riahi-Belkaoui, 1998, the purpose of ratios is to find out how profitable the company is. This reflects to the idea that is it possible to calculate if Northern Plc has enough liquid resources to pay its creditors, employees and finance charges. It is a useful to shareholders to find out their value of shares. Ratios are most powerful and simplest tool to evaluate company’s performance and its validity (Riahi-Belkaoui, 1998). Apparently Dividend policies are also vital to the progress of business. This means that Northern Plc. should consider dividends in business decision making.
Dividends
The three principal theories of dividend policy are dividend irrelevance, bird-in-the-hand, and tax preference (Grant, 2001). In dividend irrelevance, the investors don’t care about payout. They don’t even care about dividends and retention-generated capital gains. The investors can manipulate easily the dividends policy since they can create their own. They can sell stock, if they wanted cash. On the other hand, if they don’t want cash, they can use dividends to buy stock. Apparently, the bird-in-the-hand theory illustrates that the investors prefer a high payout (Grant, 2001). In this theory, the investors think dividends are less chancy than potential future capital gains, hence they prefer dividends. Finally, tax preference makes the investors prefer a low payout. Retained earnings lead to long-term capital gains, which are taxed at lower rates than dividends. Capital gains taxes are also deferred (Grant, 2001).
Basically, in low payouts in Northern Plc, the dividends received are taxed. The capital gains are also taxed at lower rates. The tax on capital gain is also postponed until the stock is sold. With regards to flotation costs in a payouts case, it would be expensive for a firm to payout and then issue new shares to raise money to finance their investment. There were also dividend restrictions. For example, a common feature of a bond agreement is a treaty barring dividend payments above some intensity. In addition, a Northern Plc. may be proscribed by state law from paying dividend if the dividend amount goes beyond the firm’s retained earnings.
With regards to the case of high payouts in Northern Plc, retired individuals and others living on fixed income may want current income. For investors, a significant tax break on dividends occurs when a business owns stocks in another conglomerate. Apparently, tax-exempt Investors such as pension funds and trust funds have a fiduciary responsibility to invest the money cautiously. It has been considered irresponsible in courts of law to buy stock in companies with no customary dividend documentation
From previous discussions, we cannot conclude which theory, if any, is correct. It is the ability of the manager of Northern Plc. to set up his judgment. Thus, the importance of judgment and creative decision-making of the manager should be considered in setting a policy. Analysis of appropriateness of decision should be used but it must be applied with judgment. Accordingly, decision making process is a knowledge-intensive process which can be considered as an important part of having successful strategic management (Grant, 2001). It is a fact that Northern Plc. must make decisions in its everyday operations; hence, in order to make sure that the decisions are made successfully, decision making process is important. In addition, it is considered as a central factor for having successful strategic management because it provides the company the assurance that each and every operations and activities made by the organizations adheres to a common goal which is set in the decision making plans.
In strategic decision makings there are barriers and enablers which are attributed as the main factors for the success of the decisions made. Barriers may include different factors which may negatively affect the decision making team and as well as the decision making process. Decision making is a difficult process because of different factors. Such factors may include, environmental, cultural and the cognitive thinking of the one who will make the decision (Sims, RR, 1994).
Financial Ratios
On the other hand, Atril & Mclaney (2004) mentioned that by calculating a relatively small number of ratios, it is often possible to build up a reasonably good picture of the position and performance of a business. Similar to the impact of dividend policies, financial ratios also help to highlight the financial strengths and weaknesses of a business, but they can not, by themselves, explain why certain strengths or weaknesses exist, or why certain changes occurred. However, this tool can still be used to determine the current position of the company. Just by details investigation will find the reasons. Ratios can be grouped into certain categories; each of them identifies a particular aspect of financial performance or, position. Financial ratios are important to them because they are the ones that give political as well as resource support for the project. In addition, financial report provides information that indicates the health of the company. For example, what’s the cash flow, what’s on the balance sheet, debts, assets etc. In addition to this, it is also important for employees of Northern plc to know whether they have a stable job, or if they should be looking elsewhere. In Northern plc, employee can see how much his business unit is making compare to others. If management might decide to sell off or disassemble an unprofitable unit.
It is important for customers because customers would like to do business with companies who will stick around to provide on going support and services. However, normal stakeholders are people that are influenced by any business decisions – they include stockholders but are not limited to just that. They also include employees, surrounding businesses, competing businesses, neighborhoods of the business, customers, etc. When that business makes important decisions, including bad ones – everyone is affected by it. Thus, from this we may say that stakeholder typically refers to anyone who has a direct financial stake in a company, therefore financial report are important for them. This does include shareholders if the company issues stock, any other owner/partner and employees. Although it is argued that the vendors servicing a business and even the competing business have a financial stake in the company, these entities are beyond the scope of the definition.
In accordance to this, we may also argue that, financial reports give important information to the stakeholders that need to know about the business they are dealing with. Financial reports are statements that indicate the results of operations of the business, employees are interested in knowing these information so that when they will know the current stance of their company. Financial reports are statements showing the status of the business which means if it has much debts than what they own. Consumers as well would like to know which company will last for long time and will want to patronize base on their status in the economy.
Portfolio Framework for Investment Decisions
In investment decisions of Northern Plc, a portfolio Framework serves different kinds of purpose. The portfolio framework helps in determining what should be considered before making any investment decisions. The next figure will show the portfolio framework.
The portfolio framework describes that when investment opportunities come, decisions should not be hastily made. Different considerations have to be analyzed. One consideration is the profitability of the investment. When one wants to engage in an investment, there should be assurance that the investment will be profitable so that investment will not be put into waste. Another consideration is the change in financial climate. The financial sector might be doing well in one instance but some other time it may be having some difficulties. Investing during a time of financial problems can cause a company or any individual lost opportunity. A consideration should be the longevity of the investment.
Using Historical Data on Stock Market Returns
Investors can make use of historical data on international stock market returns as a means to predict the outcome of the stock market return. Through the historical data the different trends in the stock market can be observed and then the possible outcome can be predicted. The historical data on stock market can also help in observing what causes the changes in the stock market and how often the said changes happen. The historical data on international stock market can help in analyzing specific information on the data such as the causes of the changes and the frequency of increase or decrease or stock market returns. Moreover the historical data on international stock market helps in determining the level of decrease or increase of the stock market returns.
Conclusion
From the previous presentation, a major factor involved in the improvement of Northern Plc involves the establishment and utilization of company performance measures or indicators that in turn measure their customer’s satisfaction. These measures or indicators are measurable characteristics of products and services that the company typically utilizes in order to study and improve company performance. The indicators that will be chosen should be able to represent the essential factors that are crucial to the improvement of operational and financial performance. Through the analysis of accurate information brought about by the tracking processes, the measures or indicators themselves can possibly be analyzed and improved to support such goals.
Bibliography:
ACCA Global 2009, viewed on 14 April 2009, <www.accaglobal.com>
Atrill, P & McLaney, E 2004, Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.
Deegan, C & Rankin, M 1996, “Do Australian companies report environmental news objectively? An analysis of environmental disclosures by firms prosecuted successfully by the Environmental Protection Authority”, Accounting, Auditing and Accountability Journal, vol. 9. no. 2. pp. 50-67.
Delaney, JT and Huselid, MA 1996, “The Impact of Human Resource Management Practices on Perceptions of Organisational Performance.” Academy of Management Journal. Vol. 39, pp949-69.
Grant RM 2001, Contemporary strategy analysis : concepts, techniques, applications (4th ed ed.). Blackwell Publishers: Malden, MA
Hofstede, G 1991, “Culture and Organisation. Software of the mind.” New York: McGraw-Hall Book Company.
Luftman, JN Lewis, PR Oldach, SH 1993, “Transforming the Enterprise:The Alignment of Business and Information Technology Strategies.” IBM Systems Journal 32(1): 198-221.
Riahi-Belkaoui, A 1998, Financial Analysis and the Predictability of Important Economic Events, Quorum Books, Westport, Connecticut.
Sims, RR 1994, Ethics and Organisational Decision Making: A Call for Renewal. Westport, CT: Quorum Books.
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