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J- Company management evaluation of itself

Management of a company, which is understood here to include all key decision makers such as members of the board of directors as well as the president and its subordinates, is obviously involved in a continuing and all-consuming analysis of its current and future operations. Only general characteristics are indicated here and a full discussion can be found in textbooks on corporate finance and management strategic (although, the financial analysis component of management textbooks tends to be sketchy).

In general, it is fair to say that management of a company is concerned with everything that all others see in it. Public relations spending by companies, big and small, to enhance their image in the eyes of clients and investors, speaks to the importance that management places on what outsiders think. All financial data, as well as all major corporate decisions and events, are carefully scrutinized as to their impact on customers and investors. Thus, management judges itself through the eyes of those it serves. In addition, it will seek to present all elements in the most favorable light possible, short of outright deceit. Examples of corporate actions to affect how the company is perceived, abound. Common are cases of a company realizing some earnings on sale of assets just in the year operating profits are negative, or taking a major write-off in a prosperous year. More will said about income smoothing in Chapter 6 Section D and Chapter 13 Section A-4.


Preserving an image of stability and growth is of utmost importance because, as it has been argued repeatedly, it is also the criteria by which outsiders evaluate corporate performance. To achieve these goals of stability and growth, the overall decision making process is formally organized in the context of strategic planning. Strategic planning involves all segments of a company. It is a system to reach the most informed and efficient decisions possible. It deals with all the factors that contribute to increasing the value of the firm by striving to 1) increase sales revenues, 2) secure adequate resources, and 3) organize the most efficient use of resources for the targeted sales. While information gathering involves all departments, the decisions themselves are taken by the chief executive officer in consultation with the chairman of the board, the board of directors and several committees within the organization (such as the finance committee). The sequence of decisions is almost always the same: it runs from sales, to production requirement, to procurement of resources (i.e. raw materials as well as fixed assets and personnel), and finally to consequent needed financing. The tangible representation of these steps is embodied in - marketing strategy, - capital budgeting,
- personnel hiring and training plan, - annual budgets and pro forma statements, - departmental budgets, standard costs, operating targets and manuals, - sourcing of funds (schedule of borrowing and/or flotation of bonds and shares).

Marketing strategy is the germ of company wealth. Sales revenues are their blood line. There is nothing more important for top management than deciding on how to secure existing sales, and how to strive expanding them further. The parameters of the strategy which management must work with are product quality, price, place of sale and promotion with advertising, packaging, convenience or service after sale, and sale people. These are the elements an analyst must study to assess the wisdom of a marketing strategy. However important they are, little more will be said until Chapter 9 Section E on sales analysis, and Chapter 14 Section C on competition analysis. New products (or improvement in the quality of existing products to serve customers better) usually fall in the hands of the specialized department of research and development. Analysis of its performance is even more challenging and necessary. More important than the technical aspects of proposed new products, are customer attitudes and preferences which necessitate meticulous market research discussed in next Chapter 5 Section 5I.

Introducing new products is evaluated with capital budgeting methods described in Chapter 3 Section 3G, and must increase the value of the firm. Thus, new products are introduced, sales are expanded in a new territory or equipment is replaced by a newer equipment. As discussed in Chapter 3 Section 3G-4, NPV is the recommended method of decision analysis, with assistance of a few other techniques such as IRR.

Budgets are statements of targeted activity for a coming period (month, quarter, year or more). They must plan every necessary outlay, expense and financing. They act as motivating tools for each department concerned. They also make a control function possible. The control function allows management to verify that operations proceed according to plan, and to take remedial action if problems are encountered.

Pro forma financial statements are projected balance sheet and income statement for the coming period (quarter or year). They combine the plans presented in budgets, in a form that is comparable to results of previous years (which outsiders judged the firm by in the past). As noted above, management studies these pro forma statements through the eyes of outside investors. Consequently, the financial analysis conducted is very similar to that performed by outside financial analysts as described in chapters 8 through 15, although the volume of data available to management is obviously much larger. Availability of funding at affordable cost determines if the plans presented in the budgets are feasible, or if they have to be modified. In the latter case, the marketing strategy, the capital budgeting and the departmental budgets would all have to be resubmitted.

Management relies on a large volume of internally generated information, (as well as information received from outside, such as independent market research for instance). Management information systems must generate all the reports to keep a close eye on sales, receivables, inventories, cost of production, cash position and payments. Analysis of capital budgeting is undertaken in Chapter 10 Section E.

See review questions .

See research assignments R-4.29 and R-4.30.

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