Term Paper on "Financial Management Is an Important Managerial Function"

Term Paper 5 pages (1730 words) Sources: 5

[EXCERPT] . . . .

Financial management is an important managerial function that deals with the monetary resources of the company. Financial management helps to handle the funds of investors in order to give returns to them. In order to do proper financial management, it is important to understand financial ratios, what they mean and their importance. This paper deals with the most common financial ratios and how they affect investors' decisions for Google and Microsoft.

Core business and leading products of Microsoft

The company is involved in the development of software and creative solutions for business and for personal use. The company has eight divisions. The first division is the online services division which deals with Bing search, the MSN portal, advertising services as well as other personal communication services. The second division is the server and business tools division which deals with software such as SQL server, System Center, Visual Studio, Windows Server and Windows Azure Platform. The third division is Microsoft business solutions division which handles the Microsoft Dynamics products and Microsoft Health Solutions. Microsoft Office Division is the fourth division which handles productivity products such a MS office, Visio, Project, and Exchange. The fifth division is the Interactive Entertainment Business which is composed of products such as the Xbox 360, Xbox Live, Zune players and Mediaroom. Windows Phone Division is the sixth division which deals with software and services for phones. Windows and Windows live division is the seventh division which deals with Windows, MS Internet Explorer and Windows Live. The last division is the Skype Division which deals with Skype software which is used worldwide to chat and call online Microsoft, 2011()

Core business and leading products of Google

Google's core business is internet-based services. The first is its search business which is on Google.com. Google is the most widely used search engine in the whole world. The second of its products is the Android operating system which is strong in terms of market share and is climbing in popularity. The third is Google Chrome which is the web browser that was recently released by the company. There is also the Google Chrome Operating System which is pegged to be used in Netbooks. Google TV is also one of the company's products that is peged for release which will be internet TV. There are also Google's advertising products -- Google Adsense for websites who publish the advertisements and Adwords for advertisers. There is also Google Apps which is Google's online suite of collaboration and communication tools for businesses. Google recently purchased Motorola Mobility which produces phones and other IT hardware. Another of Google's products is the Google Plus social network which is growing in popularity and as at January 2012 had 90 million users Kirby, 2009()

Microsoft and Google's management or leadership style

Both Microsoft and Google have leadership styles that are based on valuing teamwork and delegation. Each of the two companies inspires their employees to work as teams without any boundaries in their enthusiasm and motivation. Eric Schmidt, Google CEO has been known to energize the workforce at Google to empower them and inspire them to work hard. So has Steve Ballmer, the CEO of Microsoft.

The style of leadership at Google and Microsoft is one of democracy. The employees of the organization respect and honor the leaders or managers. They feel valued at the organization since their opinion is usually considered in determining the final decision.

Innovation track record of Google

Google have had many successes and failures in their innovations. There are many innovations that have become successes. One is Google Chrome web browser which has become extremely popular and recently took the second place as the world's most widely used browser. As of February 2012, Chrome is used by about 36.3% of all web users and it is second to Firefox which is used by 36.6% W3Schools, 2012.

Another innovation that has been a huge success is the Android mobile operating system which is currently at about 50% of all smartphones worldwide Swallow, 2011()

There have also been some innovations that have failed. Notable are Orkut which was a social network to compete with Facebook but was soon forgotten as it dwindled in terms of users. Google Video also died off when Google purchased YouTube in 2007. Google Wave was supposed to be a real-time communication platform but it died when the company announced it was shutting down the project Cowan, 2009()

Innovation track record of Microsoft

Microsoft has also had a good innovation track record with some innovations being a success and some not so much successful. Some experts in the Software industry argue that Microsoft has never had a major innovation. They posit that Microsoft's products are only advancements of previous products. This can be seen to be true for example for Windows. All versions of Windows are simply improvements of the previous products. The experts assert that even the new products that Microsoft has developed are simply copies of other existing products such as Bing which is a copy of Google's search product. MSN is a copy of Yahoo!'s portal Lee, 2010()

Withstanding a major recession

Looking at the financial ratios of the two companies, Microsoft and Google, specifically the liquidity current ratio, it can be seen that the current ratio of Microsoft is 2.9 while for Google is 5.9. Therefore Google is more likely to withstand a major recession. The liquidity current ratio is the ratio of the current assets of the organization vs. The current liabilities. During a recession, the company's profitability ratio is decreasing therefore the company has to tap into its cash reserves and also to liquidate other assets in order to be able to pay its creditors Davis & Peles, 1993.

Therefore the company with the higher liquidity ratio is more likely to survive a major recession.

Profitability ratios

The profitability ratios give measures of the success of the company in terms of generating profits. There are three major profitability ratios. These are the return on assets, return on equity and return on capital. The first two are the more important ones. The return on assets (ROA) is a measure of the effectiveness of the firm to generate profits. The return on equity (ROE) is the measure of the profit that is earned for each dollar that is invested by shareholders Choi & Wang, 2009()

Looking at the profitability ratios of the two companies, we can see that Google has a ROA of 11.73% while Microsoft's is at 16.75% and the ROE of Google is at 18.66% while that of Microsoft is at 46.88%. Therefore, we can see that for every dollar that investors invest in Google, they reap 18.66% in profit while for Microsoft, they reap 46.88% Google Inc., 2012(; Microsoft Corporation, 2011)

. Additionally, Microsoft is more profitable than Google as can be seen in the ROA. Therefore investors are more likely to invest in Microsoft than in Google since Microsoft is more profitable.

Primary financial-based guidelines that are used to choose which of the two companies to invest in The first primary financial guideline for choosing which company to invest in is the financial ratios. The financial ratios of any organization give information of how the company is performing and how profitable the company is. They also help to see the overall changes and trends in the performance of the company based on their past performance.

The second financial-based guideline is the share price and market trends of the company or organization. By looking at the changes in the share price for the organization, the investor can be able to know how the share price of the company is foreseen to change over time and how thus be able to determine the best time to buy the shares and the best time to sell in order to make a gain interms of a profit Benhabib & Spiegel, 2000()

The third guideline is identifying and understanding the risks of the business. This involves analyzing the financial ratios of the company as well as other factors such as industry and market trends as well as trends for the business itself Allen, 1993()

Conclusion

Both Google and Microsoft are multibillion companies operating as multinationals. However, when it comes to making the decision on which of the two companies to invest in, the investors will need to look at the financial ratios of the companies. The investors will find that Microsoft does provide a better return on their investment based on its profitability ratio and earnings per share.

References

Allen, F. (1993). Strategic Management and Financial Markets. Strategic Management Journal, 14(ArticleType: research-article / Issue Title: Special Issue: Organizations, Decision Making and Strategy / Full publication date: Winter, 1993 / Copyright © 1993 John Wiley & Sons), 11-22.

Benhabib, J., & Spiegel, M.M. (2000). The Role of Financial Development in Growth and Investment. Journal of Economic Growth, 5(4), 341-360.

Choi, J., & Wang, H. (2009). Stakeholder Relations and the Persistence of Corporate Financial Performance. Strategic Management Journal, 30(8), 895-907.… READ MORE

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