(PDF) Financial Decision Making Assessment

FINANACIAL
DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
Task 2...............................................................................................................................................6
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
The financial decision making can be defined as a kind of process of decision making in
which decision is taken as per the analysis of financial reports and statements (Kim and Upneja,
2014). Eventually, the financial statements and reports are very crucial in the context of decision
making. This is so because financial statements consists all kind of information regarding to the
business transaction of companies. The finance function of a company may help the company in
evaluating various decisions related to its finance related business activities. In the absence of
proper evaluation of financial statements, it can be difficult for organisations to assess the actual
financial condition. Herein, the project report Alpha limited company is selected which is
involved in manufacturing sector. The company is located in UK and started in year 1954. The
project report consists role of accounting and finance in the respect of Alpha company. As well
as on the basis of given financial statements of above mentioned organisation, various kind of
ratios are calculated and interpreted for purpose of analysing the financial performance.
Task 1
Evaluation of role of accounting and finance within Alpha Limited:
In a business organisation, there are huge role of finance department and accounting
department as long term survivability and high profits may be earned due to these two
departments (Kliger and Gilad, 2012). The terms accounting and finance both are crucial for any
organisation, this is so because both have link with the business activities. It is essential for
companies to adopt all concept of accounting and finance so that they evaluate the effectiveness
of their activities. For understanding purpose, role and importance of terms Accounting and
finance are given in this report in context with a company named Alpha Limited, various roles
of these terms are as follows:
Accounting Function:
The term accounting can be defined as a kind of process which is related to the recording
the financial transaction of companies in a systematic manner (Tridimas, 2012). Basically, the
accounting includes various kind of concepts and principles which are must to follow by
companies. In other words, the term accounting performs the basic functions of a business
organisation that are helpful for the company which includes recording, summarising, and
analysis the various finance related transactions. The companies who want to track their financial

position in an effective manner, then it is essential for them to record their financial transactions
as per the rules. Herein, the role of accounting in an organisation shall be evaluated by
considering the importance of accounting which are mentioned as follows:
 Beneficial in keeping record: The accounting is very useful in keeping the financial
records of companies in a systematic way. Due to this companies can find out previous
year's information about their transactions. This is all helps in making important
decisions. This also help the company in evaluating and considered only monetary
transactions in performing several business operations. For recording these transactions, a
accounts department shall required to implement the double entry system of accounting
because it gives accurate results to the company like Alpha Limited.
 Decision making- Another importance of accounting is that it helps the Alpha Limited in
taking correct decisions regarding various business operations and regarding recording
the correct monetary transactions in best way (Correia, Dussault and Pontes, 2015). For
example, Alpha Limited company requires some data related to its last year operating
profit, this may help such company in taking accurate decision making related making
budget for future period for forecasting its operating profits from its future business
operations based on its past year operating profits.
 Various field of accounting: The term Accounting has various types that helps the Alpha
Limited in various business operations. Some of its types includes management
accounting and so on. For example, management accounting helps an organisation in
various aspects related to its production system such as for finding accurate cost of its
products, calculating correct profits of an organisation.
 Assist in preparing the financial statement of a company: Accounting plays a vital role in
an organisation like Alpha Limited in preparing its financial statements that includes
profit and loss account, balance sheet, cash flow statement and two other things. By the
help of accounting, a company may record its various monetary transactions related to
business that further assist in summarising these transactions in the form of ledgers and
trail balance, at last these ledgers and trial balance helps the company in preparing its
financial statements (Govindan, Sarkis and Murugesan, 2015).
Finance function:

The term finance function can be defined as a kind of activity which is related to the controlling
and managing of financial resource in a systematic way. Basically, the financial functions are the
part of financial management. The management of finance is as important as blood in human
beings. This is so because in human beings, in the absence of blood, it can be difficult to alive
same as in the business world, without finance functions and activities can not be operated. The
various roles of finance function in an organisation like Alpha Limited are as follows:
 Raising of funds: For meeting various business requirements for running its business
operations, a company has required to have some funds (monetary amount). A finance
department may help the company in raising the funds from various sources such as
equity, debt ad related sources (Montford and Goldsmith, 2016). A finance manger shall
required to maintain a good ratio between its debt and equity for raising its funds. In
other words, it may be said that for raising funds, finance manager shall use both the
sources (i.e. equity and debt) in such a ratio which provides highest benefits to an
organisation.
 Allocation of funds: After funds are raised by the company like Alpha Limited, the main
issue which is faced by the company is that it has require to allocate the such funds in
various business areas to in such a manner that provides optimum results. The finance
functions helps the company in taking effective and efficient decision making by
considering all the factors related to this such as size of firm and its growth capability,
mode by which funds are obtained and so on.
 Profit planning: It is one of the function that a company like Alpha Limited requires to
consider (Ogiela, 2013). A finance department of an organisation plays a vital role as
without profits , no company shall survival in the market in long run. Profit planning may
be defined as making plans for for usage of profits that are earned by the an organisation.
In other words, it may be said that finance department of an enterprise helps the company
in providing the various areas in which an organisation shall require to invest its money
that is earned by such firm.
 Understanding capital markets: The shares of a company like Alpha Limited are trade on
the stock exchange where continuous sale and purchase transactions are taking place.
Therefore, a finance manger of an organisation shall require to have clear cut

understanding of the such market and accordingly take decisions for the benefits of the
company's future business processes.
Task 2.
Calculation of ratios as per the given information about Alpha limited.
(i)Return on capital employed- This can be defined as a kind of ratio which is being calculated to
measure the efficiency level of company to generate the profits (Gal, Stewart and Hanne, 2013).
The return on capital employed ration is being calculated by this formula which is: Operating
profit/ Capital employed*100. Below this ratio is calculated for year 2017 and 18 as per the
given information of Alpha limited company:
Return on capital employed: Operating profit/ capital employed*100
For year 2017= 375000/1912500*100
=19.60%.
For year 2018= 412500/2925000*100
= 14.10%
Working Note:
Calculation of operating profit:
Particulars 2017 2018
Gross profit
Less- Operating expenditures
675000
(300000)
750000
(337500)
Operating profit 375000 412500
Calculation of capital employed:
Particulars 2017 2018
Total assets
Less- Current liabilities
2235000
322500
4035000
1110000
Capital employed 1912500 2925000

(ii)Net profit margin- It can be defined as a kind of ratio which shows about the net profit of a
company during a particular time period (Johnston, Kassenboehmer and Shields, 2016). In this
ratio, net income of an organisation at the end of year is presented in form of percentage. This
ratio is calculated by this formula which is as follows: Net profit/ sales*100. Below net profit
ratio of Alpha limited company is mentioned such as:
Net profit ratio= Net profit/ sales*100
For year 2017= 300000/2400000*100
=12.5%
For year 2018= 2625000/3000000*100
=8.75%
(iii) Current ratio- It can be defined as a kind of ratio which is related to assessing the liquidity
position of company (Veprauskaitė and Adams, 2013). Eventually, this ratio stats about
availability of current assets to pay day to day expenses. The ideal current ratio is 2:1 which
means companies should have 2% current assets to pay 1% current liabilities. As well as it is
calculated by a formula which is: current assets/ current liabilities. Below current ratio of two
years of Alpha company is mentioned below:
Current ratio= Current assets/ current liabilities
For year 2017= 7575000/3225000
= 2.34 times
For year 2018= 1035000/1110000
= 0.93 times
(iv) Debtors collection period- This can be defined as a kind of ratio that stats about total time
taken to collect payment from the debtors (Opstrup and Villadsen, 2015). It is very useful for
those organisation who makes transaction on credit basis. As well as this ratio is calculated in
terms of days and calculated by formula which is: Average receivables/ sales* 365 days. Below
in the context of Alpha company, this ratio is calculated for two years:

Debtors collection period= Average receivables/ sales*365 days
For year 2017= 450000/ 2400000*365 days
= 68 days
For year 2018= 600000/3000000*365 days
= 73 days
(v) Creditors payment period- This can be defined as a kind of ratio that stats about total time
taken in payment of the creditors (Finke, 2013). It is very useful for those organisation who
makes transaction on credit basis. As well as this ratio is calculated in terms of days and
calculated by formula which is: Average payable/ purchase* 365 days. Below in the context of
Alpha company, this ratio is calculated for two years:
Creditors payment period= Average payables/ purchase*365 days
For year 2017= 285000/1350000*365 days
= 77 days
For year 2018= 1050000/2400000*365 days
= 160 days
Comment on performance-
In the above part of project report various kind of ratios are calculated for two years 2017
and 2018 of Alpha limited company. Basically, these ratios are very important because it leads to
analysing about performance of organisations. Due to this companies can find out about issues
and benefits (Frias‐Aceituno, Rodríguez‐Ariza and Garcia‐Sánchez, 2014). Below Alpha
company's financial ratio for two years are interpreted with an aim to comment on performance
as well as to compare both years performance:
 Return on capital employed- The objective of this ratio is to assessing about company's
capacity of earning profit on their capital (Li, 2014). In the context of Alpha limited
company's return on capital ratio, it can be analysed that their ratio is of 19.06% in year
2017 which significantly decreased and became of 14.10%. In comparison of both years,

this ratio is decreased by 5% in year 2018. This condition shows that company is not able
to earn return on the invested capital in an effective manner. As well as main reason of
decreasing in this ratio is that above company's operating profit is decreasing in relation
to the capital employed. In other words company is investing the capital but not earning
expected return. So overall the Alpha limited company is required to focus to increase the
operating profit in relation to the capital employed. Along with they should further invest
capital further only if operating profit is increasing, otherwise they should chose any
another alternative to get profit. In short their performance is weak in terms of return on
capital invested.
 Net profit ratio- This ratio shows the ability of a company in generating the net profit
over sales. As well as in this ratio total net income is presented in terms of percentage. If
net profit ratio is high then it is considered that company's financial performance is
strong. In the context of above Alpha limited company, their net profit ratio is of 12.5%
and 8.75% for year 2017 and 2018 respectively. It indicates that company's net profit
capability is weak. This is so because their ratio is decreasing in year 2018 in compare to
year 2017. This situation of company, indicates that their operating expenditures and
fixed costs are increasing in compare to sales. While on the other hand, their sales
revenue is increasing by 20% in compare to previous year 2017 but still the net profit is
decreasing. This is so because of higher cost of production and increasing of other
expenses. So overall, the above company should focus on minimising the total
expenditures as much as possible because their sales revenue is increasing and only
reason of decreasing the net profit is higher cost of production.
 Current ratio- The current ratio stats about liquidity position as well as it defines about
availability of current assets to pay the day to day expenditures (Schniederjans and
Schniederjans, 2013). In the context of Alpha limited company, their current ratio is of
2.34 times in year 2017 which means company has enough current assets to pay the short
term liabilities. As well as in this year company is meeting the criteria of idea ratio which
is of 2:1. Apart from it, in year 2018 this ratio decreased by 60.25% and became of just
0.93 which is too low for payment of current liabilities. So in year 2018, the company's
liquidity position is weak. The reason of this decrease in current ratio is increasing in
current liabilities because in year 2017 the current liabilities were just of £322500 which

raised by 244% and became of £1110000. Though, their current assets are also increasing
but not as the current liabilities. Hence, the company's performance is not in good
condition in year 2018. So the managers of above company should focus on decreasing in
current liabilities as much as possible because this is main reason of weak liquidity
position in year 2018.
 Debtors collection period- This ratio is being calculated by companies to evaluate about
number of days taken by debtors to pay the credit amount. As well as with the use of this
ratio companies can analyse about debtors who are going to be insolvent in future. In the
aspect of above Alpha limited company, their debtors collection period is of 68 days in
year 2017 which increased in year 2018 and became of 73 days. This difference of 5 days
during these years shows that company's capacity of collecting from debtors has been
decreased. In this ratio, it is important to know that if there is less number of days in
collection period then it will be beneficial for companies. So the managers of Alpha
limited company are being recommended that they should find out those debtors who
makes delay in payment and try to recover amount from those debtors in less time.
 Creditors payment period- This ratio is also known by the average payable days. With
the use of it, companies can evaluate about their efficiency to pay their creditors. As well
as by this ratio organisations can assess about their payment system which impact to
reputation. Less number of days indicates that company is able to pay their creditors in
less time while maximum number of days shows negative aspect of company for
payment of creditors. In the context of Alpha limited company, their creditors payment
period is of 77 days in year 2017 which increase by huge margin in next year. In year
2018, their average payable days are of 160 days which is double from previous year.
This is indicating that company 's ability to pay their creditors is decreasing in relation to
previous year 2017. In this context the company should focus on their ability to pay their
creditors in less time. As well as they should keep in mind that if company will pay their
creditors late then it can effect to their goodwill.
CONCLUSION
From the above report, it may be concluded that two department which accounting
related and the other is finance departments play a vital role within an organisation for its

survivability and sustainability. These two terms help an organisation in various manner in
performing various business functions to enhance its profitability and evaluating its financial
performances. It is further concluded that company has required to calculates various types of
financial ratios that helps the company in evaluating the company's financial performances that
are showed by its financial statements. Profitability related ratios helps the company in
evaluating its profits along with various other factors also considered in such evaluation. A
company shall require to have requisite qualifications in its finance manager and its accounting
department head, this is mandatory as this provides the way an organisation shall perform its
operations to enhance its profitability and this organisation may survive easily in adverse
condition also.

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