Managerial Decision Making Finance Department Always Plays

Managerial Decision Making

Finance department always plays a dominating role in the long run productivity in an organization and hence the reasons why the organizations strive try to strengthen this strategic function (Andrew, 2009). Organizations primary objective is to increase the level of surplus by taking effective strategies and mitigating the expenses.

There are numerous challenges which the organizations face during its day-to-day operations but to combat with those challenges are the actual bravery of the organization (Andrew, 2009). During the operations, an organization faces number of challenges like financial challenge, capital challenges, economical challenges, and political challenges (Bish, 2005). Appropriate strategies and tactics are more than necessary to cope up with these challenges comprehensively (Brown & Kate, 2001). For this piece of work, we have to perform the risk analysis of a chosen company. While doing this assignment, one has to consider it as an expert consultant in multinational financial management department of the company and have to jot down the challenges for the company for the next five to ten years. The two areas which have been selected to analyze are Financial Risk Management and Foreign Investment Analysis. The company which has been chosen for this piece of work is Aviva. The report has been broken down into different sections; the first section is about the introduction of the company followed by the analysis of the two areas selected. Let's stick with the first section of the report and then derive the session of the analysis comprehensively.

Corporate Background: AVIVA

Aviva Plc is basically an insurance company in fact global insurance company which has its headquartering located in the London, United Kingdom (UK). Aviva Plc is known as the sixth largest insurance company operating on the earth in terms of revenue and asset's portfolio. The company has one of the largest pools of customers comprises on around 53 million customers with its operations in more than 28 countries. Apart from the UK, the group has its large active operations in the Continental Europe, Asia and North America (Brown & Kate, 2001). Aviva was basically the formation of a proposed merger between the Norwich Union and CGU Plc. The group was name first the General Accident Group, but later on it adopted the name of Aviva. Aviva engaged in expansion after the year 2003, when it expanded its network in different countries worldwide including the United States of America (USA). Apart from that the company also expanded in Australia and acquired the Australian wealth management business which later on interchanged to National Australian Bank of 825 million AUS$.

The company's main operational activities are general and life insurance along with long-term savings and managing of funds. From the operational activities, the company becomes able to billions of dollars every year and on the behalf of this money different executions of trade would have been initialized. The company has its active operations in more than 28 countries worldwide with large financial and human portfolio comprises on around £58,401 million and 46,000 employees worldwide as of the fiscal year 2010. The company is able to earn a net income of £ 1,892 million in the same year through its remarkable operations across the globe. The company is now expanding in Australia as well as it recently acquired the wealth management business in Australia. The company is very famous among the shareholders because of high growth of dividends every year. The shares of the company are trading in London Stock Exchange (LSE) and New York Stock Exchange (NYSE) with the name of AV and have been counted as one of the best 100 companies of the world according to the constitution of Financial Times Stock Exchange (FTSE-100) result. Let's now discuss the two areas which have been selected for this particular piece of work.

Financial Risk Management & Aviva

Management is basically a synergy of four dominating things which are Planning, Organizing, Leading and Controlling (Brown & Kate, 2001). The stir of management is present in almost every walk of life (Bettley & David, 2005). The management pertains to operation called operational management and the management pertains to human resources are referred as human resources management (Chris, 2001). Likewise it, the management pertains to financial of the company is called Financial Management. As per a Chinese Proverb,

A smart man learns from his own mistakes,

A wise man learns from the mistakes of others,

And a fool never learns

The association of risk is adheres with almost everything and field (Brown & Kate, 2001). From the aftermost decade risk management is the best researched and agitate breadth in the banking industry as it elaborates how to abbreviate and avoid the hazard of accident from the portfolios of altered assets and from the operations of banking institutions. Regulators and depositors are mainly accent on the accident management, as per them accident administration is an capital additive to enhance the amount of shareholders and access their akin of confidence (Brown & Kate, 2001).

Risk administration is the appraisal of risks to mitigate, adviser and ascendancy the anticipation or appulse on ambiguous events (Brown & Kate, 2001). Accident administration methods and attributes vary from industry to industry like it can't be aforementioned for activity management, automated action and banking portfolios (Brown & Kate, 2001). As an administration appearance point Accident administration is an important apparatus which is use in accommodation authoritative because it is analytical and able-bodied structured. For bigger appliance of accident administration in management's decisions, accident analyst's letters charge be based on the latest and best accessible information (Brown & Kate, 2001). The account abaft the advertence of the Chinese adage aloft is that accident administration is the alone apparatus which differentiates an acceptable administration with a bad one. Specifically the risk associating with the management of financials are referred as Financial Risk Management (FRM). In this section, we have to analyze the FRM association with the chosen company (AVIVA). Under the name of FRM, there are different categorizes of risk which are, market/economical risk, credit risk and operational risk. Let's now discuss each one subsequently by implementing it on Aviva.

Market/Economical Risk with Aviva

The association of market and economical risk is very important from the standpoint of an organization (Donald & Waters, 1999). Market risk association is merely for the financial institutions and insurance companies and Aviva is an insurance company, so the association of market risk is surely with it (Derek & Waller, 2003). It is one of the basic forms of the subject of the risk management which is widely researched in the current economic scenario (Brown & Kate, 2001). After the current economic downturn, this particular area has become the major point of emphasize of the organizations to manage the exposure of risk from its operations.

Market risk arises when there is a heavy fluctuation among the price of securities (Derek & Waller, 2003). Insurance companies usually make money by investing the premiums at a place from the likelihood of earning is high (David, 2008). The business is quite productive in those countries wherein the financial and capital markets are in a good node like the United States (U.S.), UK and Australia. From the analysis, it has been found that Aviva invested 75% of its portfolio in the risky assets like corporate shares, bonds and debentures to earn high profit and invested 25% of the portfolio in risk free assets like Mutual Funds and Treasury Bills. Aviva is among those companies that received serious jolts during the current economic downturn because of the shaky confidence of the consumers from the insurance and capital markets (Cinnamon & Larsen, 2006). The clouds of the economic crisis are still shadowing in Europe, so the probability of losing the money is very bright for Aviva. Aviva has to integrate its portfolio by effectively diversifying it (Jae & Joel, 1999). Diversification in a sense that large proportion should be invested in risk free securities like treasury bills, bonds and notes which although subject to lower economic profit for the company as a whole but also bring the consumers of the company under the net of low risk exposure (Leopard & Bernstein, 2004). The company has to use the techniques of Value at Risk (VAR) by which the maximum loss on a portfolio in a given day can be computed. VAR is curved by what are estimated to be accustomed market altitude and by the time aeon beneath consideration. It is affected that for an accustomed set of bazaar condition, the best the time aeon or horizon, (termed as Holding Period), the greater the amount at risk. This ad-measurement of accident is been more acclimated by armamentarium managers, banking institutions as able-bodied as accumulated treasurers as an arbitrary ad-measurement of the absolute accident of a portfolio. Let's now discuss the second category of FRM which is Credit Risk association.

Credit Risk and Aviva

Credit risk arises when your counterparty does not pay you the owed amount. Banks, financial institutions and insurance companies usually faced this type of risk exorbitantly because there is always a probability that the borrower will default (Leopard & Bernstein, 2004). Unfortunately there is no framework has been designed yet which can compute the probability of default of a borrower (Brown & Kate, 2001). Credit risk is not only associated with the borrower but with the creditors as well (Brown & Kate, 2001). The companies which give their products on credit usually faced this problem during their operations. Delays in payment from the suppliers and customers are also some dominating forms of the credit risk.

Before the arrival of the current credit crunch, granting loans to the customers especially to its existing customers for marriage and education are very common for Aviva because of the surplus of money in the company's treasury (Leopard & Bernstein, 2004). The company usually charged higher interest rates from the consumers and accelerated its economic profit but after the current economic downturn, the entire story has been changed (Leopard & Bernstein, 2004). After the year later of the current economic crisis tsunami, the company lost 200 million $ of money due to the loan granted and the consumers had defaulted. According to estimation, more than 2 million of the customers of the company took loan from the company both for small and big reasons. According to the financial statement of the company around 500,000 people had repaid their loans only while others had defaulted, which not only hurt the organization severely but also pushed it hard towards the verge of the bankruptcy like the American Insurance Group (AIG) (Lewis & Slack, 2005). The company has to stop this activity for at least two to three years or has to enhance its credit policies and have to be stringent while granting the loan to any one. Apart from that, Aviva has to abrogate the idea of pledging its assets if Banks and other financial institutions on the behalf of loan to avoid any kind of mishap.

Operational Risk & Aviva

The risk which has been arising from the mistake of the employees is referred as operational risk and this particular risk is very common within the premises of the organizations (Romanda, 2007). Aviva is the 6th largest insurance group of the world with employees over 46,000. The company had recently hit by the current economic downturn and not in a position to face any kind of operational mistake from any employee. Aviva is among those companies, who facilitated its employees with large amount of salaries, perks and other benefits like stock options and medical facility. The Chief Executive Officer (CEO) of Aviva "Richard Harvey" has been given a net salary of £925,000, per year apart from the benefits he receives.

Inevitably it's about being so mean but the company has to be little stringent while take out work from their employees (Brown & Kate, 2001). Aviva has to restrict its employees to double check their work before submitting. Operational Management department can play its role in directing the performance of the employees for the sake of the organizational health. Internal audit department must be strengthening accordingly to inform the company regarding any mishap before its actual initialization (Vernimmen, 2000). The company had faced a lot of disarrays during the economic crisis. The company's portfolio decreased drastically during the current economic downturn due to the mistakes rendered by its employees in those years. All of these things can be overcome easily, if certain things like internal audit and double checking the work would be implemented effectively, and then there is cent percent chance that the company will completely eradicate these instances from its operations.

Foreign Investment Analysis

Foreign Investment (FI) means foreign direct investment (FDI) which is one of the most significant elements as far as an organization is concerned (Brown & Kate, 2001). As clear with the name foreign investment, means the investment park usually by the foreigners in the company's stocks and treasury to earn dividend income. Foreign advance has been an arch agent of accepted budgetary change in contemporary time (Brown & Kate, 2001). Both urbanized and developing countries accept reaped abundant gains (Brown & Kate, 2001). The advance offers allegation accumulation to abundance countries, including job accumulation and bigger tax revenue. In addition, it helps ability countries, i.e., those area bunch firms are based, by acceptance these firms to attempt and acquire profits abroad (Brown & Kate, 2001). Advance is additionally important to the across-the-board bargain as a way to accounts absolute annual imbalances. The words FI and FDI have been used interchangeably in the rest of the heading (Vernimmen, 2000).

The stocks or shares of the company (Aviva) are very attractive among the investors specifically like to invest in the UK and U.S.'S financial market. Before the arrival of the current economic downturn thousands of investors around the globe were actively investing in the company directly to earn high dividend income but the essence of investment got squeezed during the economic crunch. The Indian and all-around markets are accepting volatile. Balance bedding of companies are beneath pressure. Basic availability is accepting tighter beyond the world. With the accepted adopted advance limit, there is a burden on the Indian apostle to accompany 74 per cent allotment of the new basic beverage that is appropriate to advance the fast advance of the activity allowance business (Vernimmen, 2000). With the beam not actuality aloft to 49 per cent, there is an accident that the industry will face a basic crisis which could arrest the advance of the activity allowance companies. The European subsidy of the company has earned the largest proportion of the company's overall financial portfolio which was £m 761 followed by the UK subsidy of £m 672 in the year 2009.