Logic And Practice Of Financial Management Essay

Question:

Discuss about the Logic and Practice of Financial Management.

Answer:

Introduction:

Based on the calculation done in part a, it can be said that JG has performed well in 2017. An increasing trend is been notice in all the market value ratios calculated. Taking about EPS, it has been increased over the year to 1.64 cents from 1.50 cents. This is due to the increase in the earnings of the company as well as in its number of shares. It implies that company has made more earnings for its shareholders. The P/E ratio of JG has also increased in year 2017 due to the upsurge in market price of the share and EPS. Along with this, M/B ratio and book value ratio also rises in the same year. Increase in all these indicates that the profitability position of JG has improved along with its performance (Weil, Schipper and Francis, 2013).

TATR is basically a financial ratio which is used for measuring the efficiency of a firm in respect of generating revenue from its assets. It shows how well a company manages its assets so that more revenue can be generated. So it is very important for the company to always improve its TATR because a high turnover ratio will reflect better position of the business. Also it gives insights to the investors and creditors about the internal management of the firm. Thus, value of total asset turnover ratio do helps the firm in managing its activities and resources (Bragg, 2012).

The Cash Conversion cycle of the firm is 45 days. Following are the ways of reducing the conversion cycle:

  • Reducing the inventory days can help in reducing the CCC. By using Inventory optimization technologies, a firm can improve and manage its inventory so that less amount of cash will get tied up in them (Platt, 2010).
  • Increasing the payment period also reduces the CCC. Having a longer debt repayment period will allow the firm to have more cash in hand (Ehrhardt and Brigham, 2016).
  • The cost of giving up the cash discount for supplier A is 29.80% and for supplier B is 9.22%. The decision regarding taking or giving up the cash discount is directly depends upon the firm’s cost of borrowing. The company’s cost of borrowing from the bank is 12% which is less very much less than cost of giving up the cash discount with supplier A. So the firm should take the cash discount from supplier A. talking about supplier B, the company should give up the cash discount because the cost of this action is 9.22% which is less than the cost of borrowing (Reider and Heyler, 2003).
  • Risk and return trade-off is basically a principle which states that the potential return rises with the increase in the risk. They mainly include the risk of illiquidity which every firm wants to avoid by investing in large cash and marketable securities. Investments in them will give more returns as compare to other investments. However, huge funding in these assets will reduce the return on the investments. Therefore, increase in liquidity must be traded off against reduced returns (Keown, 2003).
  • Credit monitoring basically deals with the monitoring of accounts receivables. Among various techniques, one is credit scoring. This method differentiate between the good and bad debtors on the basis of their past payments and a credit score is been given to each and every customer. Another technique used in cost benefit analysis of collection expenses. By incurring more cost on debt collection, a firm can avoid the chances of bad debts.

Slow payments made by customers can create illiquidity in the firm. If the debtors do not pay timely, the firm will lack cash which ultimately affects its day to day operations. It is costly for the firm as the cash is been locked up in form of debtors, additional administrative and financial costs, and hampered cash flows and reduced efficiency.

In context of a firm, the agency problem refers to the conflict of interest between the management and stockholders of the company (Madura, 2011). The agency problem causes the misuse of firm’s resources and increase in the agency costs. As a result of which, the stock depresses and the situation of takeover arises. This threat of taking over enable the firm to restructure its management, operations and financing activities. The threat continuously motivates the management to work with full efficiency and in the best interest of the shareholders. This is how threat of takeover minimizes the agency problem (Hill, Jones and Schilling, 2014).

Another method used is the shareholders activism. It is basically a way in which shareholders can influence the management’s activities by using their rights as partial owners. When management works in its own interest instead of its owners, then there is a need for the shareholders to monitor the firm’s activity. By becoming an activist, problem of conflict of interest can be reduced.

References

Bragg, S.M., (2012). Financial analysis: a controller's guide. 2nd ed. New Jersey: John Wiley & Sons.

Ehrhardt, M.C. and Brigham, E.F., (2016). Corporate finance: A focused approach. 3rd ed. USA: Cengage learning.

Hill, C.W., Jones, G.R. and Schilling, M.A., (2014). Strategic management: theory: an integrated approach. 10th ed. USA: Cengage Learning.

Keown, A.J., (2003). Foundations of finance: The logic and practice of financial management. Pearson Education.

Madura, J., (2011). International financial management. 9th ed. USA: Cengage Learning.

Platt, H.D., (2010). Lead with cash: Cash flow for corporate renewal. London: Imperial College Press.

Reider, R. and Heyler, P.B., (2003). Managing cash flow: An operational focus. New Jersey: John Wiley & Sons.

Weil, R.L., Schipper, K. and Francis, J., (2013). Financial accounting: an introduction to concepts, methods and uses. 13th ed. USA: Cengage Learning.

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