Objectives of the Study
There are four research objectives for this study which are as follows:
- To identify the effectiveness of the current financial management systems of GBT.
- To identify existing flaws in the financial management systems of GBT.
- To determine the significance of an effective financial management system for improving profitability and ensuring sustainability.
- To recommend an effective financial management system to GBT.
What is the effectiveness of the current financial management systems of GBT?
Finance department plays an important role in the overall productivity of an organization, as this department deals with the funds management and investing the funds of the entity at the right place at right time. From the viewpoint of an organization, it is more than important to have the correct piece of working of this particular department as a whole (Dess & Lumpkin, 2007).
When it comes to the effectiveness of a financial management based system, there are certain things that needed to be defined accordingly. High expenses, low current ratio and low cash generating cycle are some of the major elements that lie under the effectiveness of the financial management system as a whole (Dess & Lumpkin, 2007).
GBT which is basically a company also has a sophisticated financial management system. When it get interviewed with different personnel of the company, a mix of reviews have been found, as the entire financial management system of the company is surrounded by different authentic strong and weak things. There are around 5 people who have been interviewed from the entire company, in order to get their views about the financial management structure of the company. Obviously, the entire interviewees relate to the finance department along with the involvement of the upper management as well. The question has been asked by assuming both income statement and balance sheet of the company (Dess & Lumpkin, 2007).
When the finance department was asked regarding the effectiveness of the financial management stance of the company, most of the interviewees got concerned over the revenue generation of the company. 3 out of 5 interviewees, which manifested a proportion of 67% were against the fact that the financial management function of GBT as far as generating and enhancing revenues is efficient, as after each year it got down by heavy percentage. According to the respondents, the sales of the company decreased for three consecutive years like (2009, 2010 and 2011) by a proportion of 2.72%, 13.78% and 2.684% respectively, which is representing that the revenue generation capability of the company is not at all efficient. The company may be under severe external pressures which would be analyzed accordingly after analyzing the financial statement a bit further, and continue the examination from the interviewees. By contrast, there are some interviewees and respondents which are totally against the fact that the company is doing a bad job, relating to generating revenues. 2 respondents out of 5, representing a total proportion of 33% have argued that it was the financial crisis, due to which the revenue of the company got down. According to the respondents, the entire world was under severe pressure due the current economic crisis and every company has recorded negative revenue and net income at that time all over the world. GBT has recently commenced its operations and it requires some time to manage the situation with crisis. According to the interviewees, the thing due to which the company had experienced negative growth in terms of sales and net income as well (Dess & Lumpkin, 2007).
There is another way to analyze the effectiveness of a company towards its financial management based functions. Analyzing the cash generation cycle is one of those elements used for this specific purpose. Obviously, high revenue doesn’t mean that the company is having the same amount of cash in their account, as most of the sales of the company depend upon credit (Dag & Von, 2007). The opinion of the interviewers against this particular question is mixed, as 50% of the interviewers are in the fact that the cash generating cycle of GBT is quite small and the company is able to generate cash through its major operations. The average cash generating cycle of the company is not as good as it should be, however 50% of the respondents argued that this particular gap can be filled a bit further, if the management takes new and stringent actions in total. It is always skeptical and preferable to have a low cash generating cycle, as it directly relates with the long term economic prosperity of an organization, and GBT has a reasonable amount of days in total. By considering these four elements and factors in analyzing the effectiveness of the financial management of the company, it can be said that the company totally got failed in 3 out of 4 elements. However, the 4th element is in the favor of the company in having reasonable days of cash generating cycle, but there is a lot of need of sophisticated strategies.
What are existing flaws in the financial management systems of GBT?
Organizations are meant to make economic profit. There are numbers of things which have to be considering by an organization in order to make economic profit and increase the residual claims. Strategies are at the heart of an organization and inevitably, no organization can drag itself under the regime of economic prosperity and enhancement without perfect and timely strategies. The entire brainchild of economic prosperity of a company lies in the fact that how effectively and impeccably, the upper management uses and interchanges the strategies.
Organizations have to make sure that the level and amount of flaws should be on a lower, especially in the financial management function, because it has a strong and direct relationship with the overall productivity of an organization. Likewise other companies, there are numbers of issues that pertain to the financial management of GBT. Interviewers of GBT have identified numbers of flaws in the financial management system of the company, and some dominating ones have been considered to describe here.
High Expense Recognition as Compared to the Total Revenue
As per the equation of net income, revenue should subtract all the provision of operating and non operating expenses. In the language of finance, net means any provision, from which all the operating and other expenses would have been subtracted. High net income is basically identification that the company is doing a reasonable and good job, as far as recognizing the net income or net profit (Dag & Von, 2007).
From the view of the company, it is highly desirable to have low expense recognition and high net income provision. GBT is one of those companies that recently commenced its operations and has to be aware with the total expenses, in order to increase its net profit (Dag & Von, 2007).
93% of the total interviewers are not at satisfied with the performance of the company, as far as recognizing its total expenses. According to them, it is one of the major reasons behind the low net or sometimes negative net income of the company. GBT has a quite high proportion of expense to revenue. In the year 2006, it was around 99.04% which is showing that only 0.88% have been left alone for the net income as a whole. The proportion of expense to revenue went up again in 2009, showing a total proportion of 99.25% and only 0.59% has been left over for the net income. According to 93% of the respondents, the mean operating expense to revenue proportion of GBT is 137.46% which is extremely high from the viewpoint of a company, especially from the standpoint of a new company. According to the respondents, this high amount of operating expense ruins the entire financial management system of the company, because in 4 years of operations the company has not enabled itself to mitigate its operating expense lower than that of its revenue.
Low Current Ratio
Current ratio is yet another important issue from the viewpoint of a company and GBT lacks it again. Interviewers identified that the CR of the company is quite low and has been decreasing regularly after the year 2008, which was the year of economic crisis and financial downturn. The CR of the company in the fiscal year 2008 was 2:18. 3 out of 5 respondents for a total proportion of 66.67% were in the fact that, only the year 2008 was the year in which the company didn’t sell any of its inventory, in order to meet with its short term financial obligations and promises. After 2008, the CR of the company was below the psychological level of 1, which is clearly showing that the company has to sell some of its inventories in order to meet with all of its short term financial obligations. The average CR of the company is 0.79, which has been furnished by most of the respondents of the company in total. By considering above mentioned result and having the responses of the interviewers, it can be said that the effectiveness of GBT is quite low, as far as meeting with its short term financial obligations. Inevitably, without this particular provision, the company cannot be in the ambit of economic prosperity. Mentioned below is the computation of the same:
|Year||Current Assets||Current Liabilities||Current Ratio|
According to the industry average, the current ratio of the companies should be higher than 1, because it identifies that the company is doing a good job and meets with short term financial obligations. From the above mentioned table and graph, it is found that the CR of the company in the year 2008 was 2.18, higher than the level of 1, which decreased heavily by 154 basis points in the year 2009 as compared to the CR of the fiscal year 2008. Decrease in two consecutive years has been envisaged again by 42.36 and 5.72 basis points for years (FYs) 2010 and 2011 respectively. The average CR of the company is 0.79, which clearly shows that the company is not meeting with its short term financial obligations (Dag & Von, 2007).
Retention of the Clients
From the viewpoint of an organization, it is more than important to retain the employees for a long period of time, because it has a direct relationship with the long term productivity of an organization. 83% of the respondents reveal that there is a major flaw with the company, that it has very low capability in retaining its clients, especially those clients who are their entire bread and butter (Dag & Von, 2007). Upper management professionals revealed during the interview that a major client of the company moved towards the services or products of the competitors that bough a considerable change in the net sales of the company as a whole. The sales of the company decreased by 15.88% in the year 2010, as compared to the sales of the year 2009, because of the reason mentioned just above.
High Amount of Total Expense to Total Income
One of the major flaws of GBT has been found in its total expense to total income ratio. It is extremely important from the standpoint of the companies to lower down the level of total expenses in order to ablaze the total income of the company (Dag & Von, 2007). The total expense to total income ratio of the company, revealed by almost all of the interviewers is 137.66%.
Low Current Ratio
It is more than important from the viewpoint of companies to have the current ratio of around 1, as it is an identification that the company is able to meet with short term financial promises without selling its inventories. 93% of the respondents are claiming that the amount of current asset is lower than the current liabilities of the company, which ultimately decreases the level of the current ratio. The average current ratio of the company is 0.79 and it needs to be increased atleast to a level of 1. According to the respndents, this particular average CR shows that the company has to sell some of its inventories in order to meet with its short term financial promises (Dag & Von, 2007).
Very Low Return on Asset Provision
Assets are of great interest for an organization. In fact, the entire productivity of an organization depends upon its operating assets. According to the inviewers, unfortunately, the company is unable to utilize its operational assets in a way as it should, and this is one of the major things why the company is generating economic losses year by year (Dag & Von, 2007).
90% of the interviewers revealed that the average return on asset (ROA) of GBT is -36.03% which is extremely low from the viewpoint of a company, especially from the viewpoint of a new organization like GBT (Dag & Von, 2007).
From this question, we have found that there is a number of major flaws found in the company, which is indeed not a good sign and needs to be corrected and improved accordingly, in order to be in competition with the other peer companies operating in the same industry.
Low Working Capital Problem
Working capital means the difference between the current assets and current liabilities, it is extremely important to have positive working capital for the organizations and the same is mentioned below,
|Total current assets||4,074,908||1,990,338||793,218||634,560|
|Total current liabilities||1,865,470||3,136,958||3,761,624||4,130,032|
|Working Capital||2,209,438||- 1,146,620||- 2,968,406||- 3,495,472|
From this particular analysis and 95% of the respondents, there was only one single year in which the working capital of the company was in positive. Working capital of the company was showing negative figures for three consecutive years in 2009, 2010 and 2011 respectively. It means that the current liability’s power is on the higher side, as compared to the current assets and it needs to be increased accordingly (Dag & Von, 2007).
What is the significance of an effective financial management system for improving profitability and ensuring sustainability for GBT?
People have always referred accounting and finance department as the same, however the concept of each of these things is totally different. Though, a strong relationship lies between both of these things, but the main mantra always interchanges the things accordingly (Drury, 2007).
Accounting is a term referred as to record and interpret the financial transaction of a company, while finance is a term used to assess and utilize the equity of an organization at a place from where the likelihood of high earning potential would be on a higher side. All the departments would be in a link to each other and the productivity of the whole organization lies on the working of each separate department. Finance is a field which is a combination of accounting and economics and the entire concept of the same lies on these two things (Drury, 2007). It is extremely important from the viewpoint of a company to have a sophisticated working style of every department, and the department on which the entire productivity of an organization depends upon its finance department. Finance department is the only department that plays with the whole equity of the company and tries to invest that equity to a place from where the earning potential recognition would become high. Financial Management System (FMS) is one of the most sophisticated systems of an organization. Organizations have been assessed on the level and productivity of its FMS (Drury, 2007). In order to cope up with all of the crisis and shortage of liquidity, organizations have to ensure that its financial management department is doing a good job and all of the equity of the company is used and invested at the right place and time. The officials of the GBT have been asked what are some of the essentials that stride under a delicate and perfect FMS. According to most of the interviewers, there are around seven essential elements which a financial management system has. The names are mentioned below,
- Financial Reporting
- Accounting Records and Source Documentation
- Internal Control
- Budget Control
- Allowable Control
- Cash Management
According to the upper management and officials of GBT, all of these elements are more than important, from the viewpoint of an organization, to keep going on the momentun of the company as a whole (Drury, 2007). Among all of these elements, the first one is the financial reporting, in which an official analyzes that how effectively the company is recognizing its revenues and expenses and how well it presents its financial reports and main financial results in front of different users of the financial reports. As per interviewers, financial reporting is all about to anlayze that the company is in compliance with different regulatory standards, which predominantly are International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principle (GAAP). External auditors analyze that how efficiently and effectively the company is in compliance with different set of standards. In order to operate with perfections, organizations have to ensure that, especially the finance department that all of the compliance based material and element is in a way that all the decisions and opeartional based work have been done and completed according to the pre-defined manner (Drury, 2007).
Internal based control and budget control are two important measures which are extrmeley important from the standpoint of an organization. Finance department has to ensure that whatever they are doing, it is as the same as was predicted. Budget has been made for this particular reason and any thing above the budget would be regarded as budget deficit and any thing lower than that would be regarded as budget surplus. An effective financial management system (FMS) is the one, in which organizations perform according to the predicted scenario, because it is the only way from which an organization can do the job perfectly (Drury, 2007). Internal control relates to internal audit, in which all the decisions of the company would be analyzed first from the internal control department and then initiate it in the public or any other place. The respondents have been initiated that a great chance lies in the internal control analysis. Upper management is the argument that effective and sophisticted financial management system will always be beneficial from the viewpoint of an organization, as it leads to economic prosperity and increases the shareholders equity perfectly (Drury, 2007).
Highly sophisticated FMS is the one through which an organization can utilize its equity perfectly and in the best possible way, in order to increase the sustainbility stance of the company as a whole. Cash Management and Compliance are some of the major elements which an organization has to take into consideration, as far as sustaining in an industry is concerned. As mentioned above that the cash management cycle and cash generation cycle of a company should be on a lower side, which indicates that the company is able to generate cash more frequently than anything else. Big and multinational companies usually have low cash generation cycle, which is one of the most important aspects of thier productivity. All the companies have a cash management department at its end, in which all of the finance and cash bases activities would have been performed. It is important to have a perfect and effective FMS in order to manage all of the cash accoridngly. Likewise other companies, the stance of an effective FMS is still quite important from the standpoint of GBT as well. Though, there are numerous things and flaws which have been actually mentioned above, and every flaw is related to the organizational productivity as a whole. The inviewers of the GBT company have identified and highlighed that the relationship between effective FMS and organizational productivity is quite strong, and it is extremely important for an organization to maintain this particular relationship for a long span of time, as it is one of the major reasons and essentials of their long term growth (Dag & Von, 2007).