Main financial stakeholders, their power and influence in a business
Stakeholders refer to people affected or have an interest in the objectives and operations of the business. The business has a variety of stakeholder segments, which have been broadly categorized as follows:
The classification of stakeholders varies in terms of interests to the activities of the business and their power to influence key decisions. The fact is that key stakeholders do not enjoy equality in terms of their influence and power. This is evident across all business sectors. Senior managers tend to have more influence compared to mere environmental activists (Schaltegger & Burritt, 2010). The table below defines the main financial stakeholders and their impact on the business:
Main financial stakeholders
Impact on the Business
Dividends, share price growth and profit growth
Election of directors
Banks & other Lenders
Principal and interest to be repaid maintain a credit rating (Schaltegger & Burritt, 2010).
Can withdraw banking facilities
Can enforce loan covenants
Jobs, tax receipts, operate legally
Subsidies, planning, taxation, regulation
Local impact, local jobs, environment
Indirect through opinion leaders and local planning
Value for money, reliable quality, customer service, product availability
Repeat business, word of mouth recommendation
Prompt payment, long-term contracts, growth of purchasing
Quality, pricing, product availability
Wages and salaries, job motivation and satisfaction, job security (Schaltegger & Burritt, 2010).
Industrial action, staff turnover, service quality (Lewis & Trevitt, 2013).
Directors and managers
Status, job satisfaction, share option, salary
Have detailed information and makes decisions
Accounting and finance information needed to monitor this business
The finance division of the business will generate a variety of financial and accounting information useful for making key decisions, among them:
I. Profit and loss accounts giving information about whether the company is making efficient use of its financial resources
II. Balance sheet information giving details of company liabilities, assets and liquidity of the business
III. Purchases and sales information outlining types of trading and accounts with some suppliers and customers
IV. Information regarding the purchase of liabilities and assets
V. Details about the wages paid by the company
VI. Cash flow statement: Details about business cost (Schaltegger & Burritt, 2010)
By providing an up-to-date and steady flow of information, the business will be able to settle on appropriate decisions about:
I. How it can increase sales
II. How it can reduce costs
III. How it can increase profitability
IV. The best finance sources and V. When to make new purchases (Cowton & Haase, 2008)
Budgets are essential in the planning of a company's future. Managers will be able to monitor the budgets to identify variances and make progressive adjustments to business plans. Financial and accounting statements like the profit, balance sheet, Income statement and Cash flow statement always provide details about past performance. They will be compared with the results attained from other companies in the industry to locate areas of improvement (Stimpson & Smith, 2011). For instance, if the business spots that its costs of sales are higher than those of the rival firms, it will shift to alternative suppliers or embrace alternative actions like reducing costs. Financial and accounting statements will give all the valuable evidence and statistics on which the business will make informed plans and decisions.
The principal goal of financial and accounting practices is to offer information useful for the purpose of decision-making. The business emphasizes that accounting is not the end but rather the means to the end. Balance sheet information leads to enhanced decisions through the use of that information. This occurs regardless of whether the decisions are made by creditors, managers, governmental regulatory bodies, business owners or labor unions (Lewis & Trevitt, 2013).
Figure 1: Accounting is an Information System
In creating its Cash flow statement and Income statement, the business will also need to be concerned with creating a sound internal control system. Internal control refers to the process of providing reasonable assurance that the business will produce reliable Balance sheet reports, adheres to the applicable regulations and laws and conducts its operations in an effective and efficient manner. The board of directors and management must monitor and develop internal controls (Lewis & Trevitt, 2013). Internal control is composed of five elements namely; monitoring, information and communication, control activities, risk assessment and control environment.
The control environment of the business is the basis for all the other internal control elements. This is because it sets the overall tone for the business (Cowton & Haase, 2008). There are numerous factors likely to affect the business control environment:
I. The ethical, integrity values and competence of the organization's personnel
II. Operating style and management's philosophy
III. Management's assignment of responsibility and authority
IV. Processes for recruiting and training personnel and V. Oversight by the board of directors (Lewis & Trevitt, 2013).
The control setting is particularly vital because fraudulent financial reporting leads to the ineffective control environment.
Risk assessment is characterized by steps like identification, analyzing and managing the risks posing threats to the attainment of the company's objectives. For instance, the business will assess the risks that might prevent it from preparing reliable accounting and financial reports. Hence, the business will take necessary steps to minimize the risks (Cowton & Haase, 2008).
Control activities include procedures and policies that the business implements to address the risks identified in the course of risk assessment. Examples include authorizations, approvals, reconciliations, verifications, physical protection of assets, segregation of duties and reviewing operating performance (Stimpson & Smith, 2011).
Information and communication entail the creation of information systems to communicate and capture financial, operational and compliance related information crucial for running the business. Effective information frameworks will capture both external and internal information. Additionally, an effective control system will be designed to facilitate the flow of information down the stream and upstream, as well (Schaltegger & Burritt, 2010). The business will ensure that employees are supplied with messages important and relevant even to the top management. Similarly, employees will have to understand their role within the internal control system and other people's roles.
The business will need to monitor its internal control system. Monitoring will enable it to evaluate the effectiveness of the internal control mechanism over time. Monitoring will be done through continuous supervisory and management activities, coupled by periodic independent evaluations of internal control system (Lewis & Trevitt, 2013).
Both breakeven analysis and investment appraisal techniques help business planning
Investment opportunities differ considerably in nature. Breakeven analysis and investment appraisal techniques are required to assist the business select the best opportunities and make sound decisions.
The essence of both breakeven analysis and investment appraisal techniques is the assessment of the value of proposals that require financial and economic resource commitments. This is possible through taking into consideration their costs and benefits. For the business, poor investment decisions will lead to poor financial and economic performance. Furthermore, it limits future growth, results in loss of opportunities to attract investors and leads to dissatisfied shareholders and stakeholders (Zelman, 2012). Investment appraisal technique is an aspect of the broader process of making financial decisions. Decisions of investment are vital as they determine the total amount of assets held by the business. It also identifies the composition of the assets and the business risks as perceived by investors. Therefore, the future viability of the business will depend on its present investment decisions. The decisions also outline the context in which the dividend and financial decisions are made (Vohra, 2007).
On the other hand, the breakeven analysis technique is also useful as it helps to study the relationship between returns, variables and fixed assets. A breakeven point describes when a business investment is likely to produce positive results and may be determined graphically. The breakeven analysis technique records the production volume at a given price required to cover costs (Dayananda, 2012). To understand how the breakeven analysis technique works, it is imperative to define cost items. First, fixed costs incurred when the decision to participate in a business activity is made does not relate directly to the production level. Fixed costs include interest on costs, depreciation on equipment, taxes and overhead expenses. The sum of the fixed costs makes up total fixed costs (Vohra, 2007).
Variable costs are likely to change in direct connection to the volume of output. They include production expenses or costs of goods sold like power costs, labor, veterinary, fuel, irrigation, as well as other expenses directly connected with investment in a capital asset or the production of a commodity (Zelman, 2012). Total variable costs refer to the total variable costs for the specified level of output or production. Average variable costs refer to the variable costs per an output unit. Total fixed costs assume the Brocken horizontal line, of the break-even analysis graph shown in figure 2. Total fixed costs are not likely to change with the increase in the level of production. Total variable costs of production are represented by the broken…