This document provides an analysis of financial management. It discusses understanding financial markets and the types of risks involved, including market, credit, liquidity, and political risks. It also examines how external factors like the political, economic, social, and tax environments can affect a company's financial performance. Finally, it stresses the importance of reliable, relevant, and objective accounting information and avoiding unethical practices like faking numbers or window dressing to provide stakeholders an accurate view of a company's financial situation.
This document provides an analysis of financial management. It discusses understanding financial markets and the types of risks involved, including market, credit, liquidity, and political risks. It also examines how external factors like the political, economic, social, and tax environments can affect a company's financial performance. Finally, it stresses the importance of reliable, relevant, and objective accounting information and avoiding unethical practices like faking numbers or window dressing to provide stakeholders an accurate view of a company's financial situation.
This document provides an analysis of financial management. It discusses understanding financial markets and the types of risks involved, including market, credit, liquidity, and political risks. It also examines how external factors like the political, economic, social, and tax environments can affect a company's financial performance. Finally, it stresses the importance of reliable, relevant, and objective accounting information and avoiding unethical practices like faking numbers or window dressing to provide stakeholders an accurate view of a company's financial situation.
This document provides an analysis of financial management. It discusses understanding financial markets and the types of risks involved, including market, credit, liquidity, and political risks. It also examines how external factors like the political, economic, social, and tax environments can affect a company's financial performance. Finally, it stresses the importance of reliable, relevant, and objective accounting information and avoiding unethical practices like faking numbers or window dressing to provide stakeholders an accurate view of a company's financial situation.
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FINANCIAL
MANAGEMENT ANALYSIS Submitted To: Wasim ZOha Submitted By: Nashrah LONDON SCHOOL OF Alam, 0004WAMWAM0220 COMMERCE Table of Contents 1.1 Introduction 2 Task 1 2 1.2 Understanding the financial markets 2 1.3 Types of risks in the financial markets 2 2.1Task: 2 Political Environment 2.2 Political Factors 3 2.3 Economic Factors……………………………………………………………………………………………………………………………….3
2.4 Social factors…………………………………………………………………………………………………………………………………..…4
1 1.1 Introduction The aim of this report is to gain an understanding of financial markets, as well as the risks and implications, as well as suggestions of how to solve those problems. This report also discusses the inevitable and unknown factors that affect the market. It examines in depth how corporate reporting on legal, social, and environmental issues reflects corporate success in the health care sector as my chosen example.
Task: 1 1.2 Understanding the financial markets Financial markets, in general, refer to any marketplace where shares are traded, including the stock market, bond market, forex market, and derivatives market, etc. Financial claims are bundled into compelling financial institutions such as securities, bonds, deposits, and insurance plans. The financial system connects savers and lenders by harnessing funds from savers to borrowers and providing savers with claims on borrowers' potential earnings. This transition is accomplished by the financial system through the creation of financial techniques, which are assets for savers and liabilities for borrowers. The banking sector creates mechanisms for funds to be moved from people and families that have saved money to people and groups who want to borrow money. For example: Loaning my car is an asset to the bank and a liability for me. Financial firms act as an intermediaries by maintaining a portfolio of assets and making claims to savers based on that portfolio. (Business Standard, 2013) In the economy, bond and stock markets are vital. These markets facilitate the transfer of funds from borrowers to lenders, resulting in increased economic efficiency. Market activity has an impact on personal wealth, commercial practices, and the economy as a whole. Borrowers in this market issue a security called a bond that guarantees timely payment of interest and principal over a set period of time. The cost of borrowing is implied by the interest rate. [ CITATION Mik16 \l 1033 ]
The recent pandemic known as COVID 19 had a severe effect on financial markets, resulting in significant economic instability around the globe. Both major financial markets across the globe crashed in the last year of February 2020, leaving investors traumatized. [ CITATION Meh14 \l 1033 ]
1.3 Types of risks in the financial markets:
Risk management identifies the strategies & procedures that must be followed in order to avoid or reduce damages caused by current risks (Wild, 2006). Financial risk is a high-priority risk as it is related with every business. (Kobeissi, 2013). Market risk: It occurs due to the drive in prices of financial instruments. It can be divided into two risks; Directional Risk & Non Directional Risk. Directional risk occurs
2 when there’s an increase in stock price, interest rate and contributing to other factors and non-directional risk arises from market volatility exposure (Gregory, 2010). Credit risk: One of the most important risks for both the banking sector & operations. It arises when one fails to upholds one’s commitments to one’s lenders. Sovereign risk and settlement risk are two types of credit risk. Foreign exchange policy difficulties are typically the source of sovereign risk. Whereas, settlement risk occurs when one party makes a payment whilst the other fails to meet their obligations. For example: In 2009, Dubai experienced a credit crisis. In 2010, Europe's sovereign debt crisis exploded. During these crises, investors suffered massive losses (Dash Wu, Olson & Birge, 2011). Liquidity risk: The inability to carry out transactions causes this form of risk. Asset Liquidity Risk and Funding Liquidity Risk are two types of liquidity risk. Asset liquidity risk occurs when there are limited buyers or sellers to fulfill sale or purchase orders, accordingly (Gregory, 2010). Political risk: This risk refers to the possibility that an investment's returns may be harmed as a result of political uncertainty or changes in a region. A change of government, legislative bodies, other international representatives, or military control may all lead to this form of danger. As an investment's time period gets longer, the risk, also known as geopolitical risk, becomes more of a concern [ CITATION Jam20 \l 1033 ]
2.1 Task: 2 Political Environment:
There are always many external environmental elements that can affect a company’s financial performance. The goal is to always make better decisions so that the firm can progress. The political climate refers to factors and problems arising from government policy decisions that have the potential to change the anticipated result and value of a given economic action by altering the likelihood of achieving business objectives (Ibeto, 2011). For example: The plastic producing companies of Bangladesh suffered financially when the government passed regulation banning the use of single use plastics.
2.2 Economic factors
Economic factors are primarily concerned with the economy's various aspects and how the perspective can affect a company. Economic growth, interest rates, exchange rates, inflation, and unemployment rates are only a few examples. Bangladesh, for example, contributes a significant portion of the GDP (28.5 percent), and textiles are the country's most important industry. Despite the fact that the industry contributes greatly to the economy, one of the most important problems it faces is the wide gap between consumer demand and real cotton supply [ CITATION Pom08 \l 1033 ].
2.3 Social factors
3 These factors considerate the elements which are related to societal cultures and demographic fashions. Consumer behavior is strongly influenced by social challenges and demands. For example: recently, young adults are very much tech savvy and like to keep up with the trends by using apps like tiktok & tinder to be more connected with the virtual world. In business environment it’s crucial to do the market research on social & culture changes that take place. Friends, family, colleagues, neighbors, and media these elements influences consumer/customers approach, thoughts & interests. Thus it has an impact on the sales & revenues earned. For example: people's attitudes toward diet and health are shifting in the United Kingdom. As a result, several improvements are happening in UK companies. Fitness clubs are becoming more popular. There is also a significant increase in demand for organic food[ CITATION Bro21 \l 1033 ]. Therefore the businesses who are running fitness centers and providing health conscious food are performing well financially.
2.4 Tax Environment:
In many developing-country companies are reported to report higher book income to shareholders while reporting lower taxable income to taxation authorities over the same reporting period. This states that few firms perform this action in order to avoid tax payments. However, manipulating tax can often affect a company’s financial performance and the company’s reputation overall [ CITATION Nit20 \l 1033 ] For example: Coca-Cola has declared perpetual losses in Vietnam since its entry in 1994, and it only broke even in 2013, despite its high annual double-digit revenue growth. The corporation was excluded from paying taxes because it announced its losses on a regular basis. Later, the corporation was accused of evading taxes by transfer pricing and was subjected to a heavy penalty for inaccurate tax return filing.
Task 3 3.1 Reliable, relevant & objective accounting information The aim of making financial statements credible & relevant is to provide the client with correct financial details to use when making financial decisions. An investor needs to know that the recorded net income accurately reflects the company's operations during the time. Financial reports are used by investors to determine whether or not to sell their shares and the price at which they will do so. Being ethical, reliable & relevant are the key principles of accounting. Hence financial information must be relevant in order to be useful to auditors, administrators, and stakeholders. Anything that can be considered useful, meaningful, timely, and understandable for decision making - both internally and externally - is considered relevant information [ CITATION Ahm13 \l 1033 ]
3.2 Ethical issues
Ethical issues are a very important topic that can be seen in many areas of daily life. These conditions can be analyzed using a variety of divisions and grids of analysis, both modern and
4 traditional. The below examples is an insight to how a company’s financial report can be manipulated if the business does not follow the ethical issues. Faking numbers: If an organization’s financial condition is not well documented, a reporter will feel pressure to provide an estimate which may or may not be correct. Incorrect estimates may lead to fraudulent figure that can give rise to legal issues. For example: the health care industry heavily relies on investors for large purchases including hospital campuses, new and enhanced therapies, equipment and so on. If the organization’s report shows fake numbers it would not be able to provide the necessary care needed. [ CITATION Car04 \l 1033 ]
Asset misappropriation: A hospital nurse, for example, can use hospital commodities to care for a loved one at home. As ethical as this might sound, it is detrimental to the organization's financial statements. [ CITATION Car04 \l 1033 ]
Disclosure concerns: A company that is dishonest in its documentation can lose more than one investors at a time. This results in less support for the entity and, in many cases, a lack of treatment for patients.
Executive focusing: Many times, an organization's executive has been granted too many powers, putting pressure on the accountant to fake figures and not reveal specific details in order to attract investors and demonstrate an increase in revenue and control.
No direct chain of command: In order to achieve the right financial reporting & review, every business must have a proper command chain. If an employee finds a mistake in a company’s reporting, it should be reported & this chain should be maintained strictly in the future. Furthermore, a company without a chain of command makes it impossible for patients who want to report.
Agency theory: To comprehend the relationships between agents and principals, agency theory is applied. In a specific business transaction, the agent represents the principal and is supposed to represent the principal's best interests without regard for self-interest. [ CITATION Jim19 \l 1033 ]
Conclusion Financial markets provide the necessary bridge between entities who require money & entities who have money. It is for this reason that world’s economy relies on the efficient performance of those markets. Several factors such as politics culture, tax affect the financial performance of entities, and in turn the financial markets. It is in the best interest of all stake holders to ensure the ethical & reliable disclosure of financial reports as it will give them the proper means for sound decision making.
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