Fundamental concepts and techniques in accounting and finance - Essay Example

Research Proposal The aim of the paper shall be to present a set of fundamental concepts and techniques in accounting and finance and to do so in sufficient detail that the reader can extract usable information and develop practical skills. Every attempt shall be made to make the paper a hands-on text from which managers may draw practical knowledge to use in. the normal course of business. Similarly, readers may be expected to use this paper to develop a set of practical accounting and finance skills that may be applied to the analysis of a variety of business problems. Experience in executive development shows that the detailed treatment of major concepts and skills is preferable to an attempt to cover a very large number of topics without providing depth in any one area. Introduction The field of financial management has experienced gradual but significant change during the twentieth century. During the first two decades of the century, financial managers were concerned mostly with the legal issues surrounding the issuance of stocks and bonds. This focus of attention reflected the primitive nature of the capital markets in the early 1900s, the wave of mergers and consolidations occurring at that time, and the lack of what now is considered routine full disclosure of accounting and financial information about companies offering securities to the public. With the Depression of the 1930s, the main focus of financial management shifted to the defensive aspects of business survival (Wilson & McHugh, 1987). As we enter the twenty-first century, the most significant trend to impact successful corporate financial management will be the continuing globalization of business in general and financial management in particular. There is no major U.S. or foreign corporations that do business solely within the confines of their own country. The need to deal with multiple currencies, worldwide money and capital markets where investment capital moves across borders at an increasing pace facing fewer and fewer barriers, a wide variety of accounting systems and tax laws, and a multitude of political risk environments is now a normal part of the responsibilities of a corporate financial manager. This globalization of business does not change the fundamental theories of corporate financial management, but it does have a substantial impact on corporate financial practice and domestic financial markets. The only thing certain about the future is that finance and industry will continue to change, offering new challenges and opportunities to financial managers. The importance of competent financial management to the success and even survival of the modern business organization cannot be overemphasized. It is no accident that presidents and board chairpersons of large, successful corporations increasingly rise to their positions by coming up the "finance side of the house" (Kaplan, 1989). In smaller business, experience has shown that the early survival of a new business and prosperity in its developing stages is strongly dependent on effective financial planning and control. The most common reason cited for the high failure rate experienced by new ventures is lack of financial expertise. Similarly, financial administration is receiving increased attention by governmental units at all levels. Financial management in all types of nonprofit corporations and organizations is also benefiting from increased attention. Competent financial planning and management are critical components of success in any organization that brings people together to achieve a common goal. The impact of inflation and high interest rates has focused increased attention on the financial implications of nearly all business decisions. Knowledge of financial management principles and techniques has become even more important during our current era of economic uncertainty. Functional specialists in such diverse areas as marketing, production, and human resources management have environment in which the firm operates. A high-technology firm, for example, faces a great deal more business risk than does an electric utility. Expected future demand for electricity is significantly less difficult to predict than expected future demand for most high technology products. Financial risk is the risk imposed by the manner in which the firm is financed. In general, the more debt a firm employs, the greater the risk of insolvency (temporary or permanent) and hence the riskier the operations of the firm. A firm that is heavily debt financed may not have the financial strength to ride out a prolonged sales decline or an economic recession. The degree of debt financing employed also has important implications for the dividend policy of the firm, which also plays an important role in establishing the value of the stock. In addition to considering business risk and financial risk in isolation, management must also consider the interaction of the two forms of risk. A well-run firm must strive to maintain an appropriate balance between business and financial risk. Thus, a firm facing a relatively low level of business risk can be much more aggressive in employing debt financing than a firm facing a relatively high degree of business risk. A firm such as General Electric, which is relatively recession resistant, can safely employ a higher level of debt financing than a firm such as General Motors, which is severely impacted by the economic cycle. As in all other areas of endeavor requiring judgment, successful financial management requires a fine balance of a number of factors. There are no cut-and-dried rules or regulations that will guarantee success or unfailingly point to the one correct decision. However, it is possible to at least describe the overall objective toward which corporate financial managers should strive: maximization of earnings per share of common stock subject to considerations of business and financial risk, timing of earnings, and impact on dividend policy. All the decision-making techniques that shall be described in this paper are oriented toward the achievement of this objective. Organization and Structure of the Paper The paper shall be divided into six parts. An introductory section along with a section concerning the tax environment of business, constitute Part I. Part II shall be composed of three section dealing with the fundamentals of financial accounting. The first two, section 3 and 4, deal with the organization and interpretation of financial statements and the fundamental tenets of accounting regarding the use of financial statements as a financial information system. Section 5 shall provide separate treatment of a number of key accounting topics that have important implications for financial managers. Part III shall be dealing with financial analysis. Section 6 will provide the fundamental tools and techniques of financial statement analysis. A case study, drawn from the experiences of different people with an actual company, illustrates the application of these techniques. In Section 7, techniques for forecasting the future financial condition of the firm shall be presented and illustrated with another case study. Fundamentals of breakeven analysis will be presented in Section 8. Part IV covers the important topic of working capital management. Section 9 will deal with working capital policy and Section 10 will explore the major techniques of working capital management. Part V deals with the analysis of long-term investment decisions. Section 11 will cover the mathematics of compound interest. Sections 12 and 13 will deal with capital budgeting techniques, the cost of capital, and the application of capital budgeting techniques to a variety of practical problems. Part VI covers long-term financing decisions. Section 14 shall be exploring the major sources and forms of long-term financing. Section 15 shall be deal with the process by which financial assets are valued in the marketplace. Section 16 will discusses the theory and practice of valuing closely held businesses and presents a business valuation case study. Discussion Competent financial management is critical to the success and survival of a wide variety of organizations. In the business community, selecting the chief financial officer for advancement to chief executive officer has become increasingly common. For non-financial executives and managers, an understanding of the basics of financial management has become even more important during the current era of economic uncertainty. The goal of business financial management is to maximize the value of the firm. Successful financial management requires a balance of a number of factors, and there are no simple rules or solution algorithms that will guarantee financial success under all circumstances (Brealey & Myers, 1991). The overall goal toward which corporate financial managers should strive is the maximization of earnings per share subject to considerations of business and financial risk, timing of earnings, and dividend policy. All the principles and techniques of this paper shall be oriented toward that objective. Although the paper will be oriented toward business financial management for uniformity of illustration, most of the underlying principles are equally applicable to nonprofit organizations and governmental units. Such concepts as the fundamental principles of accounting, analytical techniques for interpretation of financial data, basic budgeting concepts, financial planning and control, and the analysis of long-term investment opportunities are applicable to many different types of organizations. Financial managers in business, government, and the nonprofit sector can profitably harness the principles and techniques that will be offered in this paper to manage the financial resources of their organizations effectively. Conclusion Although this paper shall be strongly oriented toward financial management of corporations, it is important to note that most of the principles are equally applicable to nonprofit corporations and organizations and to governmental units. In particular, fundamental principles of accounting are similar across a broad spectrum of organizations. Similarly, analytical techniques for interpretation of financial data and basic budgeting concepts are of interest to a wide variety of organizational units. Control of the long-term financial course of the organization is also a vital area of concern for most organizations. In a similar vein, it should be noted that most of the areas that will be treated in this paper will be of as much interest to small businesses as to large businesses. In fact, the detailed case studies that shall be presented in this paper will be set against the background of small, growing businesses. Although financial management in the small firm often confronts a somewhat different set of problems and opportunities from those confronted by a large corporation, many financial decision problems facing the small firm are actually quite similar to those faced by larger corporations. For example, it is fairly obvious that small firms do not normally have the opportunity to publicly sell issues of stocks or bonds to raise funds. However, the analysis required for a long-term investment decision such as the purchase of heavy equipment, or the evaluation of lease-buy alternatives, is essentially the same regardless of the size of the firm. Once the decision is made, the financing alternatives available to the firm may be radically different, but the decision process will be generally similar. In any event, the principles and techniques that will be discussed are only the beginning. This paper shall provide suggestions, techniques, and guidelines for successful financial management, which -- when tempered with individual experience and the unique requirements of a particular industry -- may be expected to enhance one's ability to effectively manage the financial resources of an organization. Reference: Brealey R. A. and Myers S., 1991. Principles of Corporate Finance Fourth Edition, McGraw-Hill, Inc. Kaplan R., 1989. Advanced Management Accounting, Prentice Hall International. Wilson R. M. S. and McHugh G., 1987. Financial Analysis - A Managerial Introduction, Cassell. Read More