Business Finance

Introduction

Over thirty-five years have passed since academics began speculating on the impact that information technology (IT) would have on organizational structure. The debate is still on-going, and both researchers and managers continue to explore the relationship between IT and organizational structure. This relationship is becoming increasingly complicated by both the rapidly changing nature of IT and the increasing environmental turbulence faced by many organizations. As organizations need to process more information under these uncertain conditions, IT is one possible way for organizations to increase their information processing capability. However, other, more organizational tools are also at their disposal for processing more information. These include task forces, lateral relationships, self-contained work groups, and slack resources. Thus, the relationship between IT and organizational structures is not a simple one (Earl 1998).

 

IT has a dramatic effect on both people’s personal and professional lives. IT is also changing the nature of organizations by providing opportunities to make fundamental changes in the way they do business. Many of the opportunities are recognized and understood. Yet a tremendous number of issues and consequences are only vaguely perceived while other questions are just now being raised (Beard 1996). The technology is changing rapidly, with computing speeds and the number of transistor equivalents available in a given area of a microprocessor chip both doubling approximately every 18 months. Organizations are acquiring more and more technology systems to assist in everything from manufacturing to the management of information to the provision and improvement of customer service. Harnessing and coordinating this computing power is the challenge. New tools and innovative perspectives with which to examine, interpret, and comprehend these rapidly evolving environments are always needed and sought (Beard 1996).

 

IT is transforming the way that business is conducted. Computers prepare invoices, issue checks, keep track of the movement of stock, and store personnel and payroll records. Word processing and personal computers are changing the patterns of office work, and the spread of information technology is affecting the efficiency and competitiveness of business, the structure of the work force, and the overall growth of economic output. This transformation in the way in which information is managed in the economy constitutes a revolution that may have economic consequences as large as those brought about by the industrial revolution (Allen & Morton 1994).  Many people believe that the primary driving force behind this information revolution is progress in microelectronic technology, particularly in the development of integrated circuits or chips. Thus, the reason that computing power that used to fill a room and cost million now stands on a desk and costs 00 or that pocket calculators that used to cost 00 now cost is that society happens to have benefited from a series of spectacularly successful inventions in the field of electronics. But fewer people understand why the introduction of information technology occurred when it did or took the path that it did, why data processing came before word processing or why computers transformed the office environment before they transformed the factory environment. Because this technology oriented view of the causes of the information revolution offers little guidance to the direction that technological developments have taken thus far, it offers little insight into the direction that they will take in the future (Allen & Morton 1994). 

 

Finance is a branch of economics concerned with providing funds to individuals, businesses, and governments. Finance allows these entities to use credit instead of cash to purchase goods and invest in projects. For example, an individual can borrow money from a bank to buy a home. An industrial firm can raise money through investors to build a new factory. Governments can issue bonds to raise money for projects (Fanelli & Medhora 2002).  Public Finance is the field of economics concerned with how governments raise money, how that money is spent, and the effects of these activities on the economy and on society. Public finance studies how governments at all levels whether national, state, and local provide the public with desired services and how they secure the financial resources to pay for these services (Lutz 1936). 

 

This paper lays emphasis on the creative use of information technology to process financial information, clear presentation and communication of ideas, and effective team-working. These skills improve self-awareness, self-confidence and viability in the job market. This paper will discuss whether the Chief Executive was justified in asserting that the performance and financial position of Laidback Leisure Group plc shows a picture of great financial strength. This paper will discuss whether any errors in the Chief Executive’s statements were found that indicate they might not have taken account of all the relevant costs of this investment project. Furthermore this paper will discuss if there any other factors that ought to be considered other than the financial data relating to the investment project. The information that will be gathered will be used in creating a proper conclusion.

 

Summary of the chief executive’s circular

In the circular the chief executive believed that the performance and financial position of the group show a picture of great strength. The last four years have seen the company’s operations become increasingly diversified, and the turnover has more than doubled a clear indication of successful management.  The share price has also more than doubled over the same period.  And since the end of the last financial year, the company has drawn up plans for building a new luxury 300-bedroom hotel in the English resort of Bournemouth.  The new hotel will certainly result in a substantial increase in shareholder value, further boosting the company’s share price.  It will be one more step towards the achievement of their corporate objective of becoming the largest hotel group in the UK within five years. The capital cost of the new hotel would be £30 million, an expenditure that would attract accelerated capital allowances on a straight-line basis at the rate of 10% per year, commencing immediately on completion of construction. Of course, since depreciation is not really a cash flow, this is not relevant for appraisal of the project. Construction will be completed, and the hotel will become operational, one year after investment of the amount of £50 million. Working capital of £1½ million will need to be invested before commencing operations, and it is expected that the same level of working capital would be sufficient for the duration of the project. In keeping with the class of the hotel, the average room charge per night would be £100 per room, whether one or more persons use the room. The main operating cost would be the annual staff costs of £4 million.  The other significant operating costs would be services such as gas, electricity, water, etc. amounting to £1.8 million per year, and maintenance and other costs of £400,000 per year. In addition to the revenue from rooms, the residents are expected to spend an average of £40 per person per day on food and drink, and £15 per person per day on other hotel facilities.  On the basis of our past experience, the profit margin on food and drink has been estimated at 40% and on other facilities at 30%.  On top of this, non-resident guests are expected to provide an annual contribution of £1 million per year.

 

The performance of the company having financial strength

Any organization, whether public or private, has to live within financial constraints and to deliver perceived value for money to its stakeholders. The role of the finance function is to manage the financial resources of the organization, and to ensure that the financial constraints it faces are not breached. Failure to do this will lead to financial distress, and ultimately, for many organizations, to financial failure or bankruptcy. Thus, financial planning and control is an essential part of the overall management process. Establishment of precisely what the financial constraints are and how the proposed operating plans will impact upon them are a central part of the finance function. This is generally undertaken by the development of financial plans that outline the financial outcomes that are necessary for the organization to meet its commitments. Financial control can be seen as the process by which such plans are monitored and necessary corrective action proposed where significant deviations are detected (Neely 2002).

 

There are three main areas of focus for financial plans. Most basically, cash flow planning is required to ensure that the cash is available to meet the financial obligations of the organization. Failure to manage cash flows will result in technical insolvency or the inability to meet payments when they are legally required to be made. For business organizations, the second area requiring attention is profitability, or the need to acquire resources at a greater rate than using them. Although over the life of an enterprise, total net cash flow and total profit are essentially equal, this can mask the fact that in the short-term they can be very different. Indeed, one of the major causes of failure of new small business enterprises is not that they are unprofitable in the long term, but that growth in profitable activity has outstripped the cash necessary to resource it. The major difference between profit and cash flow is the time period between payments made for capital assets which will generate income in the future and the actual receipt of that income which is needed as working capital. This highlights the third area of focus, namely on assets and the provision of finance for their purchase. In accounting terms, the focus of attention is on the balance sheet, rather than the profit and loss account or the cash flow statement (Neely 2002).

 

The chief executive of Laidback Leisure Group plc made a statement saying that the performance and financial position of Laidback Leisure Group plc shows a picture of great financial strength. As shown in the financial statements of the company it can be said that the company has been doing well. The company’s profit is continuously going up during four years. The chief executive’s statement was justified in asserting that the performance and financial position of the company showed a picture of financial strength. When a company is doing well financially it means it has financial strength. The company when it is doing well financially can overcome any problems it has. It can conquer any competitors. It can gain more resources so that the services and products of the company can be the one that gives outmost satisfaction to the customers. This things show financial strength. Having financial strength increases the stature of a company; it also gives the company prestige and distinct personality against competitors. Financial strengths prepare the company for anything it might face in the future.

Errors in the statement of the chief executive

Investment projects can be classified into three categories on the basis of how they influence the investment decision process: independent projects, mutually exclusive projects and contingent projects. An independent project is one the acceptance or rejection of which does not directly eliminate other projects from consideration or affect the likelihood of their selection. For example, management may want to introduce a new product line and at the same time may want to replace a machine which is currently producing a different product. These two projects can be considered independently of each other if there are sufficient resources to adopt both, provided they meet the firm’s investment criteria. These projects can be evaluated independently and a decision made to accept or reject them depending upon whether they add value to the firm (Dayananda et al. 2002).

 

Two or more projects that cannot be pursued simultaneously are called mutually exclusive projects or the acceptance of one prevents the acceptance of the alternative proposal. Therefore, mutually exclusive projects involve either-or decisions. Alternative proposals cannot be pursued simultaneously. For example, a firm may own a block of land which is large enough to establish a shoe manufacturing business or a steel fabrication plant. If shoe manufacturing is chosen the alternative of steel fabrication is eliminated. Mutually exclusive projects can be evaluated separately to select the one which yields the highest net present value to the firm. The early identification of mutually exclusive alternatives is crucial for a logical screening of investments. Otherwise, a lot of hard work and resources can be wasted if two divisions independently investigate, develop and initiate projects which are later recognized to be mutually exclusive (Dayananda et al. 2002).

 

A contingent project is one the acceptance or rejection of which is dependent on the decision to accept or reject one or more other projects. Contingent projects may be complementary or substitutes. In contrast, substitute projects are ones where the degree of success of one project is increased by the decision to reject the other project. For example, market research indicates demand sufficient to justify two restaurants in a shopping complex and the firm is considering one Chinese and one Thai restaurant. Customers visiting this shopping complex seem to treat Chinese and Thai food as close substitutes and have a slight preference for Thai food over Chinese (Dayananda et al. 2002).

 

Consequently, if the firm establishes both restaurants, the Chinese restaurant’s cash flows are likely to be adversely affected. This may result in negative net present value for the Chinese restaurant. In this situation, the success of the Chinese restaurant project will depend on the decision to reject the Thai restaurant proposal. Since they are close substitutes, the rejection of one will definitely boost the cash flows of the other. Contingent projects should be analysed by taking into account the cash flow interactions of all the projects. (Dayananda et al. 2002).

An error in the chief executive’s statement is it being so complacent without any contingency measures on what to do when problems arise. The statement well explained the plans and goals for the next years and what can happen during the next few years but the statement did not contain any contingency plans when problems arise. Problems that a company might face include financial losses, insufficient supplies, personnel disputes, economic problems affecting the company and many others. The company cannot be sure that the plan will go on in the next year; hindrances mentioned above may disrupt the plan and give the company problems than benefits. The chief executive was so complacent that nothing will go wrong with the plan that no contingency measures were addressed.

 

Other factors that ought to be considered

Other things that should be considered other than the financial data relating to the investment project are the popularity of the company towards the clients, the situation in the internal and external environments, and the future business possibilities. A thing that should be considered is the popularity of the company. Other than financial data the thing that should be considered is how known the company is to the clients. The client is one of the reasons for the company’s existence and nothing done by the company will be successful if there is no support by the clients. Another thing that the company should consider is the internal and external environments. The internal environments include the employees and their problems, machine defects, the strength and weakness of the company. The internal environment show how strong the company’s structure is from the inside, it shows why the company acts in a limited way.  On the other hand the external environment composes of the political and economic problems of the company as well as the competitors it has. The external environment is the things that give the company difficult scenarios, it causes some events to prevent the company’s achievement of goal. Lastly one thing that should be considered is the future business possibilities. Nothing can give a definite and concrete prediction of the future. By considering future problems and using plans the company cannot be sidetracked by any events.

 

Capital Asset Pricing Model

William Sharpe derived the Capital Asset Pricing Model (CAPM) based on Markowitz’s portfolio theory. For example, a key assumption of the CAPM is that investors hold highly diversified portfolios and thus can eliminate a significant proportion of total risk. The CAPM was a breakthrough in modern finance because for the first time a model became available which enabled academics, financiers and investors to link the risk and return for an asset together, and which explained the underlying mechanism of asset pricing in capital markets (Mcmenamin 1999). For anyone making an investment decision and trying to determine what return they should require for assuming a given level of risk the CAPM seemed to have come up with the answer. The CAPM demonstrated how risk and return could be linked together and specified the nature of the risk-return relationship for any security or asset. The impact of the CAPM has been immense and it is one of the most influential financial concepts in recent financial management history. It is the basic theory which links together relevant risk and expected return for any security. Although Sharpe originally developed the CAPM in the context of pricing ordinary shares in the stock market, the model has been subsequently extended and applied to evaluate the decisions by firms to invest in corporate assets. Indeed, one way of viewing the firm is as a portfolio of tangible assets and investment projects.  All financial decisions contain a risk element and a return element and that there is always a trade-off between these two elements: the higher the perceived risk, the higher will be the required return and vice versa. The CAPM was the first method of formally expressing this risk-return relationship: it brought together systematic risk and return for all assets (Mcmenamin 1999). 

 

Conclusion

IT has a dramatic effect on both people’s personal and professional lives. IT is also changing the nature of organizations by providing opportunities to make fundamental changes in the way they do business. One of these changes is applied to finance. Finance allows different entities to use credit instead of cash to purchase goods and invest in projects. The chief executive’s statement was justified in asserting that the performance and financial position of the company showed a picture of financial strength.The chief executive was so complacent that nothing will go wrong with the plan that no contingency measures were addressed. Other things that should be considered other than the financial data relating to the investment project are the popularity of the company towards the clients, the situation in the internal and external environments, and the future business possibilities.

 

Information Technology can assist in the investment project the chief executive wants to accomplish. Through the use of the information technology the performance of the company can be improved, the errors can be fixed, and the other factors ought to be considered can be given attention. Added with the use of the capital asset pricing model the project can be a success and with lesser problems in the future. The company may be doing well in its finances but no one can tell what might happen in the future. Through the contingency measures events can be prevented, and problems can be given solutions. Through the other things that should be considered other than the financial data a better future for the company can be made.

 

Recommendations

The chief executive should be wary of the methods he use to asses the company’s performance. The chief executive should take a look at other factors before saying that the investment project will be a successful one. The other factors mentioned should be given attention to assess what problems the company might encounter. Through combining techniques in information technology and methods in finance nothing will go wrong for the company and the company will gain the best stature in the market.

References

Allen, TJ & Morton, MS (eds.) 1994, Information technology

and the corporation of the 1990s: research studies, Oxford University Press, New York.

 

Beard, JW (ed.) 1996, Impression management and information

technology, Quorum Books, Westport, CT.

 

Dayananda, D, Harrison, S, Herbohn, J, Irons, R & Rowland,

P 2002, Financial appraisal of investment projects,

Cambridge University Press, Cambridge, England.

 

Earl, MJ (ed.) 1998, Information management: the

organizational dimension, Oxford University Press, Oxford.

 

Fanelli, JM & Medhora, R (eds.) 2002, Finance and competitiveness in developing countries, Routledge, 

London.

 

Lutz, HL 1936, Public finance, D. Appleton-Century, New

York.

 

Mcmenamin, J 1999, Financial management: an introduction,

Routledge, London.

 

Neely, A (ed.) 2002, Business performance measurement:

theory and practice, Cambridge University Press, Cambridge,

England.

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