Chapter 6: Introduction to Financial Information

1. Why is business finance important?

Without money a business could not exist because a business is an organization that is
orientated towards making a profit for its owners so as to maximize their wealth which
can be regarded as an entity separate from its owners.

 stakeholders are important people because they have a stake in the business.
 the primary objective of a business is to maximize wealth.
 finance is a separate function.
 the amount of finance needed by a business determines the business
structure/legal form.
 business financial strategy is central to its overall corporate strategy.
 businesses are exposed to financial risks.
2. Uses and types of financial information

2.1 Why do businesses and managers need financial information?

Broad Definition : Financial information is information about an entity’s activities

expressed in monetary terms.

Narrower Definition : Financial information is information contained in an entity’s

financial report. This includes information on the entity’s revenues, expenses, assets,
liabilities and equity.

Planning > Controlling > Recording transactions > Performance measurement >

Decision making

Planning :

Implement steps to make a strategy effective

Knowledge of available resources, possible time-scales and outcome of scenario

Controlling :

Actual performance of planning must be controlled to prevent deviation from plan.

Recording transactions :

Record each transaction for evidence in case of dispute, legal requirement (accounting),
information on production costs (assessment of profitability) and efficiency of labour.
Performance measurement :

Comparison of the actual outcome with the plan. Collecting information from costs,
revenues, time-scale, etc.

Decision making:

Information is required to make informed decisions. This completes the business

management process.

2.2 Type of information

Planning information : Planning process

Operational information : Day-to-day activities (How many workers per shift)

Tactical information : Short-term issues (Monthly variance report)

Strategic information : Long-term decision-making (Can resources be made available to

expand production?)
  Qualities of good information

8 key characteristics – ACCURATE. Second A being ‘Authoritative’.

Quality Example
Accurate Figures should add up, degree of rounding correct, no typos, correct
category, and no assumptions.
Complete Should include everything that it needs to include.
Cost-beneficial Benefit of info > Cost of obtaining info
Users do not waste time understanding what the presentation mean.
User-targeted The needs of user should be borne in mind.
Relevant Information that is not related should be omitted.
Authoritative Source should be reliable.
Timely Should be available when it is needed.
Easy to use Clearly presented, not excessively long, sent using right medium and
communication channel.

3.1 What makes information valuable?

 Its source
Authoritative source such as Reuters or BBC because it can be reliable.
 Ease of assimilation
Information can be presented with colour, graphics, sound and movement. Makes
it easier for others to understand.
 Accessibility
Can be accessed easily – through the internet.
 Relevance
Not based on scarcity because the value of information is in the eyes of the
beholder. Such as a new type of plastic may be keen of interest and value to a car
manufacturer but is not for a software house.
4. Sources of data and information

4.1 What are data and information?

Data : Pieces of information can exist in a variety of forms – numbers or text on pieces
of paper, as bits or bytes stored in electronic memory, or as facts stored in a person’s
mind.

Information : The output of whatever system is used to process data.

Database : A structured collection of records or data that is stored in a computer system.

4.2 Internal data sources

Methods of capturing data inside the organization :

 A system for collecting or measuring transactions data

 Informal communication of information between managers and staff
 Communication between managers

Sources of data inside the business :

 Accounting records (Ledgers and cash book) – Inventory control system provides
management information about speed of delivery.
 Human resources and payroll records – Holding information of people
 Machine logs and computer systems – Information about the machine
 Timesheets in service business – Accountability of workers
 Staff – Informally or through meetings, interviews or questionnaires.
4.3 External data sources

Methods of capturing data outside the business may be informal or formal.

Formal collections by gathering information about :

 Changes in tax law (by tax specialists)

 New legislation or employment regulations
 R&D Work relies on information about other R&D work being done
 Marketing managers need to know about the opinions and buying attitude of
customers.

Informal gathering of information goes on all the time because everyone learn what is
going on in the world around them – from the internet, newspapers, television reports,
etc.
5. Information processing and management

5.1 How is data/information processed?

Information processing : Data once collected is converted into information for

communicating more widely within the business.

Information processing criteria – CATIVA.

Criteria Example
Completeness Everything should be processed.
Accuracy Data remains true to its sources and no errors.
Timeliness Processing should occur in line with data availability and
information needs in real time.
Inalterability Information shall not be altered.

Verifiability Sources of the data and the trail from data through processing can
be followed through.
Assessability The effectiveness of the processing should be open to scrutiny so
that its quality can be judged.

Scrutiny : Critical observation or examination.