Financial Resources Management: Analysis Of Toyota Corporation

JNB159 Financial Resource Management

Definitions

Financial resources management can be defined as an effective and efficient process of managing money so that organisational goals and objective can be achieved. In simple words it could be called effective management of inflow and outflow of money in business. Various researchers have also defined financial management as collection of finances at lower cost and applying such finances for maximisation of profits. According to Dr. S. N. MaheshwariFinancial management is concerned with raising financial resources and their effective utilisation towards achieving the organisational goals(Maheshwari et.al, 2013).

Corporate sector plays very important role in development and growth of a country. It forms a financial base for a county hence it is very important to focus on financial structuring as well and operational management of such corporations. Appropriate attention and commitment toward financial resources management of an organisation can contribute substantially toward its financial performance. It is generally observed among corporations that financially viable companies are also operationally sound. A sound financial management policy also gives satisfaction to the stakeholders of a company that there money is invested properly and they can expects high returns (Brealey et.al, 2012).

Investment decisions taken by a company also affects its market price through company’s dividend policies. A corporation with sound investment policy will be able to provide better returns to the shareholders in form of dividend which will indirectly increase market price of the company. More money can be retained by a company through effective financial management which will increase future growth prospective of the company (Arnold, 2013).

In this project we will analyse various aspects of financial resources management with the help of an organisation working in business environment. We have chosen Toyota Motor Corporation for the purpose of our study. Toyota Corporation is Japanese multinational automobile company which is ninth largest company in terms of revenue. We will analyse company on the basis of its latest financial statements i.e. year ending 31^st march 2017. 

Current financial statement Toyota Corporation is very effective as they are prepared by the company on basis of US generally acceptable accounting principles. As it is a Japanese company all the figures are presented in Yen. Segment reporting of the company is very effective as sales and business is divided into four major regions i.e. north America, Europe, Asia and others.

Total number of vehicle sale in 2017 has increased by 157. Hence we can expect increase of 200 vehicles in 2018 especially in Asia, North America and Japan. In 2017 sales revenue of the company has decreased from 28403 billion Yen to 27597 billion yen in 2017 with a percentage decrease of 2.8%. We can expect a decrease of 3.1 % in 2018 (Chandra, 2011). 

Part 1

The above forecasted date is based on following assumptions-

1. All the conditions in 2018 remain same as in 2017.
2. There is no change in economy of japan.
3. Operational capacity of Toyota remains constant.
4. No contingent event takes place in 2018.

Budgeting can be referred as blueprint of an action plan which an organization should follow for achievement for such goals and objectives (Gervais, 2010). It is an estimation of financial activities to be taken by an organization in monetary terms. Some of the budgets which are prepared by Toyota Corporation are sales budget, selling and distribution cost budget, production budget, production cost budget, material budget, purchase budget etc.    

Following are some of the recommendations for improvement in financial forecasting-

1. Cut back in indirect expenses of the company.
2. Operational wastage management in manufacturing.
3. Adaptation according to technology developments.
4. Introduction of new vehicles in the market.
5. Keeping eye on the strategies of competitors in the market.
6. Adopting employee’s satisfaction and motivation to increase their efficiency.

Out of total capital of the company 48% is represents debt component whereas other 52% represents equity shareholders. Hence we can say that there is an appropriate balance between debt and equity financing of the company. This balance is important as if debt component is greater than company has to incur extra cost in fixed interest and if equity is greater than management of the company may be affectedFrank&Goyal, 2009. Total of the asset side of the company’s balance sheet is 47,427,597 million Yen. Current return on asset of company is 3.79%.   

Following are the responsibilities of management regarding financial reporting-

1. Preparation and compilation books of accounts of the company.
2. Preparing financial statements from above mentioned books of accounts.
3. Financial statements should include balance sheet, cash flow statement and profit and loss account.
4. Getting these financial accounts audited.

Primary responsibility of internal risk evaluation and management lies with the management of the company (Brigham & Houston, 2012). 

According to financial statement of the company for the year ending March 2017, financial position of the company is sound. We have already evaluated that the number of vehicle sold has increased and gross revenue of company during the year has decreased as compared to previous year.This decrease was due to the decrease in operating income of the company by 30.1%. Net income of the company has also decreased by 481.5 billion yen.

Financial decision taken by the company in year 2017 has resulted into decrease in Net income instead of increase in number of vehicle sold by the company. Company should focus on reducing the indirect expenditure in coming year. It can also improve its performance by reducing wastage in manufacturing.

 (Amount in billion yen)

From the above trend we can expect a decrease in sales, operating profit and net income of the company.  

Company should prepare a long term and short term finance requirement plan. Short should be of one year whereas long term plan should be of 5 years. With the help of these plans company will be able to evaluate best available sources if finance. It can also negotiate with the current financial lenders like debtors, raw material suppliers, banks and financial institutions.     

Existing Financial System

All the available should be allocated by company among following branches of the company-

1. Advertisement and publicity
2. Manufacturing
3. Research and development
4. Sales department
5. Testing department (Jakovljevic, 2013).

Company should maintain a proper record of all the new sources of finance with their cost and rate of interest. The allocation of these resources should also be recorded on a regular basis so for effective financial resource management.

For an effective financial management System, company should focus on following three types of management system-

1. Financial accounting system for recording of data.
2. Managerial accounting for making strategic decisions.
3. Corporate financing for financial decision (Kerzner, 2013).

Company should prepare following budgets for financial management-

1. Operational budget
2. Cash flow budget
3. Manufacturing budget
4. Sales unit and value budget
5. Indirect cost budget

At the end of the financial year the budget should be compared with the actual data and variance should be recorded (Barr & McClellan, 2010).

1. Automation of budgeting process
2. Focus on material items
3. Assumptions should be logical
4. Proper variance analysis
5. Implementation of required improvements

Financial risk factors are the factors which can affect financial performance of a company directly or indirectly. These factors can be divided into two categories i.e. external factors and internal factors. Following are some of these factors–

1. Economic risk- These risk factors are not in control of an organisation as they depend upon the financial position of economy of particular country.
2. Performance risk- these are the internal factors which are related to failure in efficient performance of the company.
3. Legal risk- in this type of risk government regulation can have a negative impact on the financial performance of an organisation example increase in taxes (Chapman, 2012).

For effective financial risk management an organisation should adopt following steps in their procedure-

1. Identification of risk factors
2. Analysis of identifies risk- each of the risk should be analyses on the basis of threats and opportunities of the risk factors. There are certain risk factors which represents opportunity for organisation. Such risks should not be ignored or eliminated.
3. Ranking of the risk in accordance with their threat level
4. Evaluate best measures which have to mitigate or bring these risks to a tolerable level.
5. Regular monitoring of risk factors and immediate treatment (Rejda, 2011)

Following procedures can be adopted by Toyota Corporation for regular review of risk factors-

1. Formation of a risk management with professional internal auditors and risk assessors.
2. Forming an effective risk management plan and regular updating such plan.
3. Making required changes in accordance with changing business environment and technology.
4. Regularly evaluating the risk factors which could be faced by organisation and their financial impact on company.
5. Conducting regular statutory audit, internal audit, IS audit and special purpose audit by independent auditors (Altamuro & Beatty, 2010).

Deviation from budget is calculated at the end financial year by comparing budgeting figures with actual figures. In case of Toyota corporation major deviation form budget prepared for 2017 in 2016 was in sales budget of the company. There was a decrease in sales of the company in 2017 as compared to 2016. This was due to lower sales in North America where profit margin of the company is higher as compared to other regions (Arnold, 2013).   

Plans should be prepared by Toyota for tackling with these variances. Such plan should include following procedures-

1. The assumptions made in budgeting should be based on the logical reasons for more accuracy.
2. Budgets should be prepared by analysing the trend of previous 5 to 10 years of financial data. It should not be less than 5 years.
3. The percentage of variance of each year should be recorded for future improvements (DRURY, 2013).

The main purpose of the budgets should in line with the overall goals and objective of an organisation. The main objective of Toyota Corporation is providing customer satisfaction and gaining profits for the shareholders. While preparing budgets company gives special consideration to testing expenditure so that quality product can be provided to customers.

Revision of current budgeting policies of the company is very important as in current year the sales of the company has decreased even the number of units sols are increased in 2017. A strict direct and indirect expenditure budget should be prepared and it should be compared with actual results on monthly basis.

In case of Toyota corporation special consideration must be given to direct and indirect cost as there has been decrease in both operational profit and net income in 2017. Company can adopt various cost cutting procedures such as terminating ineffective employees, selling unused fixed assets, selling inoperative investments etc.

Financial Forecasting

Conclusion

We can say that prudent and sound financial resource management is key factor behind success and growth of a business organisation. With the help of financial management an organisation can set its goals and objective very clearly and work effectively for achievement of such goals. It helps in maximum utilization of financial resources which effect positively on financial results of the company.In this project report we have discussed various aspects of financial resource management. We have analysed the financial management of a large scale automotive company with the help of financial statements of Toyota Corporation. In this report our main focus was financial projections, trend analysis and budgeting. We have evaluated that companies financial results are decreased as compared to previous year. We have recommended that with the help of requisite changes in budgeting process it can be increased in coming financial year. If no step is taken by the company than it is expected that financial position of company will decrease in 2018 also. We have also discussed the external and internal risks factors which can affect financial positions of the company. We have also presented some recommendations to deal with such risk factors.

References

Altamuro, J., & Beatty, A. (2010). How does internal control regulation affect financial reporting?. Journal of accounting and Economics, 49(1), 58-74.

Arnold, G. (2013). Corporate financial management. Pearson Higher Ed.

Arnold, G. (2013). Corporate financial management. Pearson Higher Ed.

Barr, M. J., & McClellan, G. S. (2010). Budgets and financial management in higher education. John Wiley & Sons.  

Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. Tata McGraw-Hill Education.

Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.

Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.

Chapman, R. J. (2012). Operational Risk Management (pp. 267-308). John Wiley & Sons, Ltd..

Drury, C. M. (2013). Management and cost accounting. Springer.

Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: which factors are reliably important?. Financial management, 38(1), 1-37.

Gervais, S. (2010). Capital budgeting and other investment decisions. Behavioral finance: Investors, corporations, and markets, 413-434.

Jakovljevic, M. B. (2013). Resource allocation strategies in Southeastern European health policy.

Kerzner, H. (2013). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.

Maheshwari, S. N., Maheshwari, S. K., & Maheswari, S. K. (2013). An Introduction to Accountancy. Vikas Publishing House.

Rejda, G. E. (2011). Principles of risk management and insurance. Pearson Education India.

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