Managing Financial Resources and Decisions Organizations and Stakehol

Question: Discuss about theManaging Financial Resources and Decisions for Organizations and Stakeholders. Answers: Introduction: Nature and Role of Finance Professional on Organizations and Stakeholders Managing financial resources and making financial decisions are the key roles of financial professionals in any given organization. Finance professionals tasked with financial control processes include finance directors, finance managers and financial accountants. Within an organization, a finance manager is responsible in providing support and financial advice to the organization and its stakeholders in order for them to make sound business decisions. Financial managers have very enormous role. In large companies such as those that make up the FTSE 250 Index, their roles are more concerned with strategic analysis while for small organizations, financial managers are responsible for collecting and preparing accounts. Generally, finance managers have the responsibility of providing and interpreting finance information; monitoring cash flows as they make predictions for future trends; analyzing changes and offering advice accordingly; formulating long-term strategic business plans; and analyzing market trends as well as the competitors (Brown, 1990). A finance director has distinct roles for the contribution of an organizations attainment of its objectives. It is the role of a financial director to provide strategic and financial guidance that ensures the organization meets its financial commitments. Finance directors also develop the necessary procedures and concepts so as to ensure sound financial control and management of the organizations business. According to Barker (2016), a finance director is an organizations finance professional who directs and controls finance staff to make sure that they are developed and motivated appropriately; provides guidance and advice on an organizations financial strategy to ensure the companys business objectives are met; develops and controls the annual operating budget for the organization in order to make sure that financial targets are met while statutory regulations are complied with; and oversees preparation of the organizations financial accounts so as to ensure that they are accuratel y and timely presented. Another important finance profession within an organization is the financial accountant. This individual collects, analyzes, investigates and reports financial data so as to support financial decision-making (Dorrance, 1969). Some of the financial accountants roles include preparing monthly statements by data collection, analysis and investigation of variances and summarizing information and trends; assembles data to prepare state quarterly as well as annual statements; complies with the countrys tax filing requirements through regulations study and collects data on annual tax fillings; responds to financial inquiries through data collection, analysis, summary and interpretation; studies operational issues, applies financial practices and principles and develops recommendations in order to provide financial advice; prepares reports after studying variances, he/she prepares budgets and develops forecasts; and accomplishing organizational and financial mission through completion of the related results. Finance professional and financial control processes impact on the organization and its stakeholders. Financial considerations and decisions are essential to all business decisions. Budgetary planning that is clear is important for both long and short terms. Every organization requires to know the financial implication of every decision before continuing. Financial processes must be carefully undertaken in line with all statutory regulations and legislations (Norby, 1980). Finance professionals are the organizations business and financial analysts. In addition, financial professionals manage budgets and make arrangements for new finance sources for the organizations debt facilities. For effective financial management within the organizations, finance professionals develop and maintain the necessary procedures, systems and policies. Evaluation of the Impact of Domestic and International Financial Domain There are many aspects in which domestic finance differs from international finance. Some of those aspects include foreign currency exposure and different political, economic, legal and taxation environment. In contrast to domestic financial management where there are less currency derivatives, international financial management involves a lot of currency derivatives. Pagliari (2014) points out that in the financial domain, the main difference between domestic and international finance is in the exchange rates. For domestic financial management, organizations aim at reducing capital cost as they try to raise funds and optimize returns from investments in creation of wealth for the stakeholders. This is the same for international finance, the organization does everything possible with the help of the finance professionals to ensure that wealth for stakeholders is maximized. Financial control processes of every organization are always exposed to foreign exchange exposure. Most areas of an organizations international business are impacted largely by the currency exposure. Some of those areas include making sales to customers, purchasing from suppliers, investment on machinery and plants and raising of funds among other areas (Williams, 2003). Whenever organizations require money, currency exposure comes into play as every business transaction requires money. In an organization is majorly involved in international business, the financial processes are exposed to different political and economic environments. Trade policies differ with countries. It is the role of the finance professionals to critically analyze policies in those countries in order to make out feasibility and profitability of the organizations business propositions. Some countries may have policies that are business friendly while others would not. The other external context of financial domain that impacts on an organization is the legal and tax environment. Tax directly impacts on the net profits and product costs of the particular organization. Finance professionals try to manage international finance by looking at the taxation structure so as to find out whether the businesses feasible in the home country would be workable in foreign countries (Pagliari, 2014). In addition, different groups of stakeholders matter in every organizations. Some of the stakeholders that are found within most organizations that make up FTSE 250 index include the suppliers, shareholders, lenders and customers. The shareholders within an organization matter since they impact the organization in a certain manner. For instance, the shareholders carry with them different cultures, values and language. When the finance organ of the organization deals with those stakeholders, it might not be aware of their dislikes and likes. The organization has an ob jective to keep all the shareholders satisfied as they are the ones that drive the business. Comparison of Finance Sources Available for an Organization There are many sources of finance to organizations. Bank lending is one key source of finance to organizations. Bank lending comes in mainly for short term or medium term financial objectives. According to Dyczkowski (2015), loans for short term go to three years where the bank sets the limit whereas a medium-term loan is given for a time span of three-ten years. Retained earnings are another source of financing in a company. That is, the amount of earnings in the business directly affects the amount of dividends. The main reason why companies use retained earnings as a source of finance is because the use of retained earnings reduces issue costs compared to using debentures or shares. When retained earnings are used the likelihood of changing control is avoided as a result of new shares. Another source of finance in companies is the use of hire purchase which is a form of installment credit. This source of finance is similar to leasing except that in hire purchase the company fully acquires assets after the paying the last installment. There are agreements when using hire purchase which are set by the finance house where hirer is supposed to pay an amount of deposit toward a purchase price. Venture capital is another source of finance. It refers to money ventured into an enterprise and that can all be lost if an enterprise fails. An organization which gives the funds understands the gamble essential with that funding (Hassan and Leece, 2008). Venture capital organizations cannot retain their investments indefinitely for a given business. Companies may as well obtain finance from the government. The government has a way in which it finances companies directly or through cash grants as part of a way to improve the national economy. This mainly occurs in areas of unempl oyment and in high technology industries. Organizations may also obtain finances from franchising. This entails expanding businesses on capital that is lesser than the required capital. Examples of worldwide franchisors include; chicken inns, Nandos chicken and Wimpy (Lafontaine, 2014). In franchising arrangement, a franchisor is paid by the franchisee in order to acquire rights of running a local business using the trade name of the franchisor. The franchisor bears the costs of establishment, legal costs, cost of the architect, cost of marketing and other supportive services. The franchisee on the other hand bears the initially required franchise fee that covers the set-up costs. The payments that follow regularly are catered for by the franchisee. The regular payments are the percentage of the franchisees turnover. Franchises are advantageous to the franchisor because they improve the image of the business as they work to achieve the best results (Lafontaine, 2014). The capital needed to improve the business reduces substa ntially. Similarly, a franchisee benefits from a franchise because there is obtaining of ownership of a business including the premises and stock for the agreed number of years. The franchisee does not suffer from some mistakes made by small businesses because franchisors have the experience and have previously learned from past mistakes. Role of Capital Markets The most fundamental role of capital market has always been to raise the funds for Corporations, banks and governments. At the same time, the capital markets provide a platform for trading securities. Bond and stock markets regulate fundraising within the capital market. Capital market member organizations that want to raise funds issue bonds and stocks (Mrsik, J., Vukovic Trpkov, 2015). The issued bonds and stocks are then purchased by investors who wish to invest in capital markets. However, it is important that investors ensure that they understand the market trends first before they make investments in the capital market. Different market indices such as the FTSE 250 index, FTSE 100 index or FTSE 350 index are available to investors so that they reflect on the markets present performance. As capital markets aim to raise funds, each of them are monitored by the respective governance organizations and the financial regulators. Such regulation of the capital markets ensure that the investors are protected from deception and fraud. Financial regulatory bodies also play a role in issuing financial service providers with licenses, minimizing financial losses and enforcing laws that are applicable. Most countries have capital markets that are no longer confined within their nations. Most individuals and corporations are allowed by certain regulations to make investments in capital markets of any country worldwide. According to Wong (2014), foreign capital market investments have led to substantial enhancement of businesses within the international trade. Capital markets depend on the primary and secondary sub-markets. Primary markets deal with securities that have been newly issued and are responsible for generating new long-term capital. Secondary markets deal with securiti es that have been issued previously and should remain liquid naturally since most securities have been sold by investors. Capital markets with high transparency and liquidity are predicated upon secondary markets with similar qualities. Nature and Importance of Risk Management Risk management is an important process within every organization. Carvalho and Rabechini Junior (2015) define risk management as the process of identification, analysis and either mitigation or acceptance of uncertainty in investment decision-making. This process takes place every time the finance professionals or investors attempt quantifying potential for losses within investments and heads to take the necessary action given risk tolerance and investment objectives (Lundqvist, 2014). Poor risk management results in serious consequences for individuals and organizations. For instance, the recession that was experienced in 2008 by some countries was as a result of loose credit risk management by financial organizations. Basically, risk management involves two steps. The first step involves determining the risks that exist in a given investment while the second one involves handling those risks in a manner that best suits the investment objectives. It is essential for organizations to conduct risk management since lack of it means that the organization would not be able to define its future objectives. Once an organization defines objectives before considering the potential risks, there are chances that it would lose direction when risks occur. Large organizations face more risks and therefore require to make their strategies more sophisticated. Effective risk management strategies enable organizations to identify the weaknesses, threats, opportunities and strengths of projects (Lundqvist, 2014). Planning for events that are unexpected enables the organizations to be able to deal with risks once they arise. Risk management contributes to success of projects since lists of external and internal risks are established. In addition, risk management makes projects to run smoothly by ensuring that project plans are efficiently communicated to stakeholders, sponsors and team members. Impact and Relevance of Cost of Capital in Decision-Making Process Lundqvist (2014) defines cost of capital as the opportunity cost involved when making certain investments. It is described as the rate of return which would have been earned if the same capital was used in a different investment that had equal risk. Cost of capital is similar to the rate of return needed to persuade investors to be involved with certain investments. Norby (1980) refers to the cost of capital as the cost of funds that finance a business. Cost of capital depends on the type of financing used. For instance, when the business is solely financed by equity, cost of capital refers to the cost of equity. If the business is financed by debt, the cost of capital becomes cost of debt. Most organizations use a combination of equity and debt to finance their businesses. For such businesses, their overall cost of capital is results from the weighted average of all the capital sources which is then referred to as the WACC (weighted average cost of capital). Cost of capital is the hurdle rate which organizations require to overcome before generating value. Cost of capital is used extensively in the process of capital budgeting so as to determine whether the organization should go on with the project. The cost of different capital sources differs from organization to organization and depends on factors like credit worthiness, profitability and history (Williams, 2003). New organizations engaging in new businesses have limited operating histories meaning that they would have high costs of capital than the established ones that have solid track records. The main reason is because lenders and individuals providing finance sources demand high risk premiums for newer enterprises. In conclusion, each organization needs to chart out a game plan for financing their businesses at whichever stages they are at, that is when it is at an early stage or after being established. The cost of capital is a critical factor for deciding the type of financing that the organization should follow. During the early stages, companies do not have large assets that they can pledge as debt financing collateral, hence, equity financing become mode of funding for most of such companies. 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