Financial Decisions in Organization

This report discusses the financial decision making in organizations, including the role of accounting and finance departments, the importance of financial ratios, and the structure of financial statements. It also analyzes the financial condition of Alpha Limited through ratio calculations and interpretations.

Financial decisions in
organization

Table of Contents
Introduction-................................................................................................................................................3
Task 1-.........................................................................................................................................................3
Task -2.........................................................................................................................................................8
Conclusion-...............................................................................................................................................12
References-................................................................................................................................................12

Introduction-
This report is based on financial decision making of business. When a company has to make
decisions related to its financials then there are many financial and non-financial factors which
are needed to be analyzed. Measurement of financials is very important for company in order to
take appropriate decision. Financial analysis of company can be done by financial ratios. There
are many ratios which include liquidity, profitability, efficiency and solvency. Financial ratios
provide clear picture of the company. Financial management of the company is very important. It
is done by accounting and finance department. Accounting and finance department are
responsible for analyzing ratios. There is main role of accounting and finance in organization.
Responsibilities and duties of accounting and finance is discussed in this report. How it helps
organization in measuring financial performance is also understood. In this report, Alpha limited
is analyzed. It is a manufacturing company. It was founded in 1954. Company’s next plan is to
expand itself in various parts of UK.
Task 1-
In this task, financial management of the company is discussed. It is also discussed that how
accounting and finance department is responsible for management of financials of the company.
Accounting and finance functions, duties and responsibilities are discussed.
Accounting Department-
Accounting department is very essential for the company. It is responsible for tracking income
and expenses of the company, due bill payments, accounts receivables, Producing financial
statements and maintenance of general ledger. In simple words, management of all economic
fronts of the company is done by accounting department. There are various functions of this
department which includes tax functions, audit functions, finance and accounting functions.
Accounting function has following importance in organization-
 Accounting department is responsible for recording all the transactions within the
company. So, that income and expenses can be tracked.
 Due payments can be done with the help of accounting and process receivables can be
tracked.

 Payroll management is very important for organization. Bonus, allowance and
commissions can be analyzed.
 Filing tax is important in order to avoid penalties. Accounting management is responsible
for filing tax within specified time.
 Financial reports can be prepared like income statement, balance sheet and cash flow
statement.
 Financial control is the key of successful organization. If company is suffering from
financial losses then expenses can be controlled in order to generate profit.
 Budget preparation is very essential for organization. Preparing budget is very difficult
task as it is based on future predictions. Future is always uncertain that’s why it has less
accuracy.
 It helps in financial planning. Planning is very important for business. Planning includes
objectives and company try to meet those objectives.
Role of accounting in company-
Importance of accounting is already discussed. Role of accounting in organization is very vast.
Profit, loss, income and expenditure can be tracked. Financial accounting helps investors to
know the financial condition of the company. Company’s profitability can be measured with the
help of profitability ratios. Accounting helps in generating three types of financial statements of
organization-
Income statement- As the name suggests, total income or losses can be tracked with the help of
this statement. Strong and weak points of the company can be tracked.
Balance sheet- Balance sheet provides clear picture of the company. Assets and liabilities can be
tracked with the help of it.
Cash flow statement- It works as bridge between income statement and balance sheet. Cash
inflow and outflow can be tracked with the help of cash flow statement.
Hence, it is observed that accounting has huge role in organization in order to manage expenses.

Duties of accounting-
It is very important to understand duties of accounting in order to work efficiently. Accounting
duties are as follows-
 Reduction of spending, maximization of profit and enhancement of revenue can be done
by accounting.
 Financial accounts preparation and tax returns can be filed on time through accounting.
 Financial controls over income, expenditure and payroll management of the company is
possible.
 Financial reports are made through financial accounting. These financial reports help
investors, management and stakeholders to know the financial condition of the company.
 Forecasting and planning can be done with the help of financial reports.
 Risk management is also crucial for organization. Analysis of risk and trying to reduce
the risk is possible with the help of financial accounting.
Finance functions-
The term finance is related to money. Financial management means money management of the
company. Finance is defined as planning, controlling and directing the activities related to
finance within the organization. Money investment and fund raising is done by company with the
help of financial planning. It is done through financial statements. Needs of organization is
understood with the help of financial statements. Appropriate changes can be made for growth of
the company. Finance functions include investment functions, working capital functions,
dividend functions and financing functions.
Investment functions-
Investment is very crucial for company in order to get returns from investment. Investments
means allocation of capital into long term assets in order to get better returns. Two main things
should be analyzed before investment which is proper evaluation of investments it means
investment is profitable or not and secondly it is very important to compare the cut off rate of
new investment and prevailing investment.
Financing functions-

Financing of the company can be done by two ways which is equity and debt. If company wants
to raise fund from equity then it needs to get listed on stock exchange. Through bonds and loans
company can raise fund and it is considered as debt on company. Company needs to maintain its
debt to equity ratio. Debt and equity mixture is known as capital structure. Increase in market
value of company also increases wealth of shareholders. If company uses its debts then it may
increase the risk of shareholders.
Dividend functions-
Dividend policy is decided by financial manager. He decides whether to distribut all the profits
or profits should be retained. Optimum dividend policy is obtained by financial manager.
Market value can be increased through dividend policy.
Working capital functions-
Working capital management should be done in an efficient manner so that company can
generate profit. If management is done in proper manner then investment decisions can be
expanded. Company needs to utilize its resources properly.
Role of finance-
It helps in management of money of the organization. Financial managers of the company can
have idea about the needs of the organization. It includes need of money, investment decisions
and requirement of financing in the company. Organization of money should be done in proper
manner in order to meet the objectives of company.
Duties of finance-
 Recording daily financial activities to know the expense and income of the company.
Analysis of financial activities is necessary for company.
 Cash flow management is not an easy task. It is very important to keep a record of inflow
and out flow of cash flow. It is also needed to be tracked that there is enough cash flow or
not in the company in meeting its daily requirements.
 Budgeting and forecasting can be done on the basis of past trends of the company. There
is less accuracy in budgeting and forecasting as it is based on future predictions.

 Before investment, it is very important to analyze the profitability of investment.
Financial managers use capital budgeting methods before investing project. It includes
NPV, IRR, ARR and payback period.
Structure of financial statements-
Financial statements are of three types-
Income statement- Income statement gives information about profitability of the company.
Financial condition can be tracked. It is very important for organization to know its financial
performance. Income statement consists of gross profit, operating profit and net profit. Net profit
is net income earned by company. Gross profit is profit earned by company after subtracting
production cost. Operating profit is that profit earned by company after deducting all the
operating expenses. Net profit deducts all the additional expenses such as taxes in order to know
net income of the company.
Balance sheet-
It tells about the balance of assets and liabilities in the company. It is good sign if company has
more assets than liabilities. Liabilities are all the debts on the company. Assets are the things
which are owned by company such as plant, machinery, land, building and other intangible
assets such as goodwill.
Cash flow statement-
Cash flow statement works as mediator between income statement and balance sheet. Any
changes in balance sheet and income statement directly affect the profit and loss statement and
balance sheet. Inflow and outflow of cash by three activities are mainly focused-
 Cash flow from operations
 Cash flow from financing
 Cash flow from investing
Cash generation capacity and cash position of the company can be measured for paying its
expenses and funding of operating expenses can be done by it.

Accounting techniques-
There are many accounting techniques company is using to make its work efficient. Some of
techniques are as follows-
 Extra benefits and cost from same activity is measured by company by using marginal
costing.
 Capital budgeting techniques are utilized by company. It helps company in taking
investment decisions. Different projects can be compared in terms of profitability. It also
includes purchase decision of machinery or land. There are various methods by
profitability of the project can be measured such as NPV, IRR or payback period.
 Forecasting and budgeting is very essential for company. Forecasting can be done by
historical financial statements of the company. It can be calculated by averaging the last
year data.
 Budgeting is always based on prediction so it has less accuracy.
Role of accountant in the organization-
 Financial planning can be of long term and short term. Accountant of the company is
responsible for all the long term and short term planning.
 Preparation of MIS reports is also done by accountant. It includes data analysis and
producing reports on the basis of data.
 Controlling the finance is also done by accountant. Cash flow analysis and fund flow
analysis is very important. It gives information about inflow and outflow about cash or
fund.
Task -2
In this task, ratios are calculated and analysis of ratios is done in order to know the financial
condition of the Alpha limited.
Ratio calculation-
Calculation of ratio is done in following way-

ALPHA LIMITED
2017 2018
EBIT 300 262.5
Capital Employed 1912.5 2925
Return on capital employed 15.68627451 8.97436
Net Profit 300 262.5
Net sales 2400 3000
Net Profit Margin 12.5 8.75
Current Assets 757.5 1035
Current Liabilities 322.5 1110
Current Ratio 2.348837209 0.93243
Debtors 450 600
Net sales 2400 3000
Debtors collection period =
Debtors/Net sales*365 68.4375 73
Payables 285 1050
Net Purchase 1350 2400
Creditor collection period =
Creditors/Net Purchase*365 77.05555556 159.688
Ratio Interpretation-
ROCE Ratio-
It is profitability ratio to check whether company is profitable or not.It is measure of profit
making capability of company by allocating money in long term assets or short term assets. This
ratio is very popular among management of the company, investors and stakeholders to know the
performance of the company. This ratio is used by investors before investing in the company.
ROCE ratio can be calculated by dividing EBIT by capital employed. EBIT it earnings of the
company before paying interest and taxes. Capital employed can be calculated by subtracting
total assets from current liabilities.

In the above calculation there is decrease can be seen in ROCE ratio. It can be interpreted that
Company is not efficiently generating profit from its investment when it is compared to previous
year. In 2017 ROCE ratio was 15.68 and in 2018 it is 8.97. ROCE ratio must be between 10% to
20%. Company worked very efficiently in 2017.
ROCE ratio can be increased by selling unused assets of the company. It helps in paying off the
liabilities on time and ROCE ratio can be improved.
Net profit margin-
Company always wants to measure its profit in terms of percentage. It helps in knowing
percentage change in net profit or loss. When company earns net profit/loss after eliminating
spending then it is known as net income. Net profit margin is the profit generation capacity of the
company from its sales. Net profit is also recognized as net income. It can be calculated by
dividing net profit of the company by its revenue.
If company is earning 5% profit then it is considered as poor. On the other hand 10% and 20%
considered as average and good. In the above table it is seen that in 2017 profit margin was
12.5% and in 2018 it is 8.75%. There is 4% profit margin decrease. Net sales of the company is
higher in 2018 but profit generation is less. There can be many reasons behind it. Production cost
and operating cost of the company can be biggest reasons behind low profit margin. Company
needs to focus on cost cutting. Marketing and advertising expenses should be less in order to
generate the profit. Price of the product should be higher to increase the net income.
Current ratio-
Liquidity position of the company is measured with the help of current ratio. Current ratio is the
ratio between current assets and current liabilities. It can be calculated by dividing current assets
by current liabilities. Current assets includes all the assets of the company which can be liquidate
within 6 months or year and current liabilities are short terms debts which are needed to paid
within short time of span. According to investors, current ratio should be 2:1. It means assets of
the company must always be higher than liabilities.
In case of company, current ratio of company is 2.34 and in 2018 it is only 0.93. It is clearly
showing that there is fall in current ratio from 2017 to 2018. There is less assets in 2018 and

more liabilities. It is problematic situation for company. It may face problems in meeting its
short term liabilities
current ratio is improved by by fast conversion cycle of account receivables. Unproductive assets
within organization should sell off. Current assets can be increased by increasing shareholders
fund. By improving current assets company can pay its debts easily.
Accounts receivables-
It is used to measure time period taken by customers in payments. Time taken by company in
collecting its credit sales is known as debtor collection period or accounts receivables. Debtor
collection should be less in order to improve liquidity of the company. If free credit of two
months is given then it should be collected within 45 days. If company is not efficiently
collecting its money then it may face problems related to operations.
Alpha ltd. has an increase in account receivables from 68.4 to 73 days. It means company is
collecting its money less efficiently when compared to 2018. Company can improve its account
receivables period by providing discounts to debtors for early payment and payment terms can be
negotiated.
Creditor collection period-
Creditor collection period is time period taken by company in paying its debt to its creditors.
Company should efficiently pay its debts in order to main its goodwill or reputation. If company
is not paying debts on time then it is not considered as trustworthy and will face difficulties in
getting borrowings in future.
In the above table, creditor collection period of company in 2017 is 77 days and in 2018 it is 159
days. It clearly means that company is taking double time in paying debts.
Company can improve its creditor collection period by paying debts on time. Company can pay
when creditor is offering discount to company. Stocks should be controlled and negotiation
should be done with supplier.

Overall, it can be analyzed that company’s performance is poor. Company needs to maintain its
expenses. There are high spending that’s why it is affecting profitability and liquidity of
company. Company should focus on cost cutting and increasing current assets.
Conclusion-
It is concluded that finance and accounting departments are key to organization. Finance and
accounting department generates various types of financial records and statements which further
helps manager to produce financial reports. These reports are very essential for organization in
order to know the financial condition of the company. Financial measurement of company is
possible through financial statements. Company’s liquidity, profitability and efficiency is
checked with the help of financial ratios. It is found out that financial condition of company is
not good in comparison of previous year. Thus, it can be said that company’s financial
performance can be improve by taking appropriate financial decisions.
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