Financial Decision-Making Report: Performance Analysis of ALPHA Ltd

This report delves into the critical aspects of financial decision-making within an organization, emphasizing the roles of accounting and finance functions. It uses ALPHA Ltd as a case study, providing a critical evaluation of these functions and supporting the analysis with relevant examples. The report calculates and interprets key financial ratios, such as Return on Capital Employed, Net Profit Margin, Current Ratio, and Average Receivable/Payable Days, using ALPHA Ltd's financial statements. The analysis includes a discussion on the implications of these ratios from an investor's perspective. The main body of the report discusses the roles of accounting and finance functions, including recording, collecting, and presenting financial data, as well as activities related to financing, investing, and dividend distribution. The report highlights the importance of these functions for an organization's success and growth, while also acknowledging potential shortcomings, such as misinformation in accounting and the influence of stockholders on dividend policies.

FINANCIAL DECISION-
MAKING

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................4
MAIN BODY...................................................................................................................................4
Task-1..........................................................................................................................................4
Role of finance functions-............................................................................................................6
Task-2..........................................................................................................................................7
A) ratio calculation-.....................................................................................................................7
B) comments on the performance at ALPHA limited-................................................................9
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial decision-making refers to the process of using financial data of the organization
in order to make decisions (Rinaldi, Cho, et al. 2020) The report will be discussing role of
accounting and finance in an organization. With this regard ALPHA Ltd would be taken into
consideration. Here critical evaluation would be presented to evaluate the role of accounting and
finance functions, some examples will be used to substantiate the shared logics.
At the end of the report using financial statements of the entity financial ratios would be
calculated and on the basis of the calculations views will be deciphered citing implications of the
ratios. The views on the ratio would be presented considering rational of investors.
MAIN BODY
Task-1
Role of Accounting and finance functions-
In an organization accounting and finance functions are key aspects since the success of
an entity in this competitive age totally lies in their absolute management which is almost
impossible without proper accounting and finance functions.
Accounting refers to the practise of keeping all relevant data of the business in proper
way such as maintain books of accounts. It is getting wider with the time since now with the
progress of modern business environment the pattern is also getting changed. Now there are new
concepts of accounting such as cost accounting, management accounting in order to help the
management to make smarter decisions (Narayan and Stittle, 2018)
On the other hand financial functions stand for such functions which are directly related
to management of finance. Where a range of activities are being carried out such as financing,
investing and decision-making for dividend distribution. These all actives are very much
essential for the growth of an organization.
Role of accounting functions-
Recording, collecting and presenting in most appropriate way the financial data of the
organization which is related to its business operations is known as accounting functions.

Accounting is very much essential in order to make proper plans for the organization since the
available data paves way to make better understanding of the performance and as per
requirements forming new plans. If the accounting is being carried out absolutely then it is very
much simple for the entity to understand the requirements of making plans (Byrne and Pierce,
2018)
At the same time some negative aspects are also prevailing here, such as if there is any
misinformation pertain to accounting then there is huge possibility of making wrong and
unfeasible plans. Over the time it has been seen that the maintained accounts are varied due to
different accounting practices so it may cause severe damage to the organization.
Accounting functions are significant to fabricate budgets for the organization, for making budget
there is need to have some set of data, which can only be generated through accounting so with
this respect accounting functions are significant for the organization. If accounting information
are present then making budget for the future will be very easy for the organization.
It has been seen that the modern market is very fluctuating where it is not much helpful
relying on the collected data and fabricating budgets on the basis of them. If accounting
information are not having apex level of reliability then made budgets may be misled and
organization might get adverse repercussions.
For example- For ALPHA Ltd its profit margin for the year 2017 was 8.75% which went to
12.5% in the year 2018. So the available accounting data is playing drastic role here. The
available data for the company can be used to make budget in order to provide roadmap to the
entity (Cuckston, 2018)
Some other realms of accounting such as management accounting aids to assist management in
order to make managerial decisions. Management accounting is key for better management since
the available accounting information can not be used by managers, so here management
accounting present information in such way which can help management to make proper
decision.
For example- In ALPHA Ltd it can be seen that there have been a few changes in the
performance of the following year. In the year 2017 it was performing better but in the year 2018
there are some issues can be seen using financial information. For instance the current ratio is
0.93:1 which is not considered good, at the same time average receivable days are also hiked to

73 days. It shows that there is need to work on the role of management which is only possible
with strong practise of management accounting.
On the other side the darkest aspect of management accounting is that it is still a luxury for small
organization. They can not afford it due to the cost needed in order to install and practise
management accounting.
Role of finance functions-
Finance functions refer to the activities which are performed to manage the finance of an
organization. To ace success it is significant to manage finance properly then only could mange
other aspects of the organization.
The very essential role of finance function is to guide organization to arrange funds, it is also
known as financing activity. Here it is decided that how and from which sources the funds will
be collected. In any entity keeping their cost of capital lower is prime aim and with this regard it
aids a lot. To provide fund on right time, in required quantity, at cheapest cost turns out better
results to the organization.
Finance activities are considered much expensive and if there is no proper guidance then
the possibility of being deviated is higher, as it has been seen that due to sufficed availability of
finance there are high chances to misuse the funds, which ultimately cause damages to the
organization.
For instance- ALPHA Ltd was having debt of round £750000 in the year 2017 and in the year
2018 it came up to £1500000 as it is known that if you are not making sufficed profit then it is
better to go with equity funds where no need to pay fixed returns but it is surging debt funds
(Umukoro, et al. 2020)
One of the salient finance function is investment policy which not only ensure proper use
of the available funds but also paves way to restrict misuses. Here the role of finance activity is
significant for the organization since the performance in the market is not much good so there is
need to look back its practise.
But on the other hand, it can be seen that despite having good investment plan and
spending bigger amount in the activity, the company is still suffering form poor financial
performance.

One of the most essential role of finance function is to help management in deciding
dividend distribution. For an organization their success hugely depends on how they use the
funds. At one business operations are carried out then how to use those funds is very prominent.
If the funds are not being used in proper manner then there is huge possibility to misuse it and
the entity may face severe issues of financial crisis (Heinzelmann, 2018)
Which is so often to see in the modern business environment. With this regard financial
activities are very helpful they guide management to decide the way forward and how it can use
the available funds. If the entity is making higher profits then it is better to deploy the amount to
generate more at the same time if not making profit in sufficed amount then would be good to
give it back.
But there are some issues too with this financial function. The power of deciding
anything about dividend is not totally lying in the jurisdiction of the management, and they get
affected or influenced by stockholders, so if they are making pressure then there is huge
possibility, the dividend policy may revert negative or biased repercussions to the organization.
For example- as it can be seen in ALPHA Ltd whose return on capital came down form
19.60% to 14.1025% in the year 2018. On the other side the rate of return on capital employed
also went down so here the administration decided to take down its retain earning in order to
justify with the stockholders (Leuz, 2018)
So form the evaluation above it can be concluded that accounting and finance functions
in any organization are paramount. Since their role is essential to get success and managing
entity efficiently. As it has been evaluated that both accounting and finance functions are having
some shortcomings yet their importance can not be ignored, they play significant role in the
success of an organization.
Task-2
A) ratio calculation-
1) Return on capital employed-
Return on capital employed = EBIT/ Capital employed
Calculation of Capital employed= Total assets- Current liabilities

2017 2018
Total Assets of the entity 2,235 4,035
Current liabilities 322.50 1,110
Capital employed 1,912.5 2,925
EBIT
Profit after financial cost for
the company
300 262.50
Add; financial cost 75 150
EBIT 375 412.5
Return on Capital employed 375/1,912.5×100 412.5/2,925×100
19.60 14.1025
2)Net Profit margin ratio-
Net Profit margin ratio = Revenue- cost/ Total Revenue×100
2017 2018
=Revenue- cost/ Total Revenue×100 300/675×100 262.50/750×100
Net Profit margin ratio 12.5% 8.75%
3) Current ratio-
particulars 2017 2018
Current assets for the year 757.50 1,035
Current liabilities for the year 322.50 1,110
CR=CA/ CL
Current ratio 2.3488:1 0.93:1

4) Average Receivable days-
2017 2018
Net credit sales for the year 2,400 3,000
Average receivables 450 600
2,400/365 3,000/365
Average collection per day 6.5753 8.2191
450/6.5753 600/8.2191
Average receivable collection period for the years (in days) 68.43 days 73 days
5) Average Payable days-
Particulars 2017 2018
Net credit purchase for the year 1,350 2,400
Average payable for the year 285 1,050
1,350/365 2,400/365
Average payment per day 3.6986 6.5753
285/3.6986 1,050/6.575
Average payable days 77.05 days 159.68 days
B) comments on the performance at ALPHA limited-
1) Return on capital employed-
This is the ratio which defines the return an organization is making on the invested amount of
capital. For measuring the ability of utilizing funds can be perceived with the help of the ratio, it
is also known as ROCE.

ALPHA Ltd for whom the rations are calculated, so on the basis of the ratios it can be said that
the entity is not performing much good when it comes to its ability to reflect returns on the
amount employed. ROCE has been 19.60% for the year 2017 but in the year 2018 it came down
to 14.10% (Perszyk, et al. 2021)
It is showing their poor performance in the market. Earlier it has been £375 which went to
£412.5 in the following year yet there was no improvement in term of ROCE. Capital employed
for the year 2017 was £1912.5 and in the year 2018 it had been £2925 it is clear evidence that
they hiked the amount.
Some key potential reasons which had toppled the ROCE, would be lower sales, and higher
prices the entity might have charged, increasing cost of production etc. these all aspects are
having potential to take down the rate of return and efficiency of the deployed funds (Sutarno, et
al. 2019)
As an investor it will not be a right decision to make investment in such organization who is
already struggling in term of its ROCE and not able to revert better or at least higher than the
average market rate of return. Then there is no sense to make investments in short-while. On the
other hands if in such avenue any investment is made then it comes up with higher amount of
risk and may drive losses to the investors.
2) Net profit margin ratio-
Net profit margin ratio is used to know the proportion between earned revenues and part of net
profit in that. So with the ratio it can be understood, how much is being retained as net profit out
of collected revenues.
For ALPHA Ltd Net Profit market ratio was calculated, it shows that in they year 2017 it was
12.5% which came down to 8.75% in the following year. It shows that if out of hundred euros
the entity is able to keep just 8.75% as net profit. If this ratio in not performing good then it is
evidence of higher costs and poor revenues in the entity (Liang, Zhao and Hong, 2019)
There may be a number of reasons such as higher cost of production and operations, generating
the least amount form sales, low selling due to a some external factors etc.
Here it can be concluded that for the year 2017 the net revenue had been £300 which came down
to £262.50 in the following year. It was not a positive sign, on the other hand the cost of
production was also lower, but in the year 2018 purchase price went up which was one of the
salient reason of this fall-down in the margin of profit (Haralayya, 2022)

As an investor it is not a safe thing to make investments in such organization whose margin is
very low or not being improved over the time. The returns of an investor hugely depends on how
its margin rate is going and what types of trends are there in the organization then only may get
higher returns in reciprocation.
3) Current ratio-
Current ratio of an entity depicts picture of liquidity position. It deciphers that how much short
term funds are available to pay short term debts. It is supposed that it must be around 1.5:1 then
it is considered to be safe. Otherwise, organization may face peril of being in debt and unable to
make short term payments.
For ALPHA Ltd it was 2.34:1 for the year 2017, which came down to 0.93:1 for the year 2018.
This is living testimony that the organization had been not much good at managing its liquidity.
They are making some glitches across the period. In the year 2017 it was higher, which was not a
good symbol since it shows that there is no proper funds management, and if the liquidity is
higher than there is high possibilities of misusing the funds. On the other hands for the year 2018
it came down to even 1, it depicts that the entity is not having sufficient amount to make
payment of its short term debt (Subalakshmi, et al. 2018)
There may be a number of reasons such as faster payments to short term creditors, improper
management of funds, using short term funds for paying long term creditors, raising higher short
term liberalities etc.
As an investor the current situations of the organization are not looking much in favour since if
any investment is made now then there is huge possibility of being in loss. The organization is
not having sufficient funds to pay its short-term debts. So if now creditors ask to pay their
amount then it may go wordless. From the viewpoints of an investor it is fair to say that keeping
prevailing situation of the organization into consideration there is not rational in making
investments.
4) Average receivable collection period-
Average receivable collection period is the ratio which is calculated to eluate how faster the
entity is collecting its dues form the market. If the ratio is depicting fewer days it deciphers that
the efficiency for collecting funds is higher and on the other hands if the days are higher than
there may be issue to collect dues form the market.

For ALPHA Ltd for the year 2017 it was 68.43 days, which got up and surged to 73 days for the
year 2018. It shows that the entity did not perform well in the year, they have lost their capacity
to get due funds faster (Winckelmann, Nowak, 2021)
There may be a number of reasons but the most affecting reason might be improper
communication which might have led it to higher days in turning dues into cash, at the same time
other causes such as ineffective policy of giving credit facility, not offering better scheme to get
the dues back etc.
5) Average payable days-
Average payable days is the ratio which shows the days an entity has taken in order to pay its
debts in the market. If the days are higher it shows that there have been good use of the debt
funds but it must not be much higher. At the same time lower the ratio shows that the entity is
paying due on time.
For ALPHA Ltd it was 77.05 days for the year 2017 but in the year 2018 surged to 159.68 days.
It can be concluded that the entity was not able to pay its dues on time in the year. Even this
surge is very horrendous cause the figures of the year 2018 are more than double as compare to
the year 2017 (Yarmolenko, 2020)
There may be some reasons but the most appropriate one is liquidity issues the entity was facing.
As it can be easily seen by making normal observation of the books of accounts that for the both
years the current ratio was not well-managed, on the other hands improper budgeting may be
another trouble maker.
So form the viewpoints of a potential investor it can be concluded that keeping performance of
ALPHA Ltd into focus it can be concluded that the entity is not performing good, even for the
year 2018 the performance got worse so here it would be better to not make any investments.
The calculated ratios are shoeing poor performance and at the same time the trends are going in
adverse direction.
CONCLUSION
Form the report above it can be concluded that the role of accounting and finance are
essential in the successful operation of an organization. With this regard the report presented a
broad evaluation of both accounting and finance functions and some of their critical points too,
here examples form ALPHA limited were presented in order to substantiate the presented views.

The report some ratios were calculated for ALPHA Ltd using their financial statements
both profit and loss accounts, balance sheet. On the basis of the ratios it was described that
weather it was performing good or not. At the same time potential reason and causes behind
comparative ratios was articulated.
At the end of the report all calculated ratios were evaluated from the view points of an
investor and how it could affect its investment making decisions considering the performance
using rations for two consecutive years.

REFERENCES
Books and Journals-
Byrne, S. and Pierce, B., 2018. Exploring management accountants’ role conflicts and
ambiguities and how they cope with them. Qualitative Research in Accounting &
Management.
Cuckston, T., 2018. Making accounting for biodiversity research a force for conservation. Social
and Environmental Accountability Journal. 38(3). pp.218-226.
Haralayya, B., 2022. Impact of Ratio Analysis on Financial Performance in Royal Enfield
(Bhavani Motors) Bidar. Iconic Research And Engineering Journals. 5(9). pp.207-222.
Heinzelmann, R., 2018. Occupational identities of management accountants: the role of the IT
system. Journal of Applied Accounting Research.
Leuz, C., 2018. Evidence-based policymaking: promise, challenges and opportunities for
accounting and financial markets research. Accounting and Business Research. 48(5).
pp.582-608.
Liang, W., Zhao, G. and Hong, C., 2019. Selecting the optimal mining method with extended
multi-objective optimization by ratio analysis plus the full multiplicative form
(MULTIMOORA) approach. Neural Computing and Applications. 31(10). pp.5871-
5886.
Narayan, A. and Stittle, J., 2018. The role of accounting in transforming public tertiary
institutions in New Zealand. Accounting, Auditing & Accountability Journal.
Perszyk, R. E., et al. 2021. Three-dimensional missense tolerance ratio analysis. Genome
Research. 31(8). pp.1447-1461.
Rinaldi, L., Cho, et al. 2020, July. Accounting in times of the COVID-19 pandemic: a forum for
academic research. In Accounting Forum (Vol. 44, No. 3, pp. 180-183). Routledge.
Subalakshmi, S., et al. 2018. Financial Ratio Analysis of SBI [2009-2016]. ICTACT Journal on
Management studies. 4(01). pp.2395-1664.
Sutarno, S., et al. 2019, December. Implementation of Multi-Objective Optimazation on the
Base of Ratio Analysis (MOORA) in Improving Support for Decision on Sales Location
Determination. In Journal of Physics: Conference Series (Vol. 1424, No. 1, p. 012019).
IOP Publishing.
Umukoro, O., et al. 2020. Nollywood accounting and financial performance: Evidence from
Nigerian cinemas. International Journal of Financial Research. 11(2). pp.271-280.
Winckelmann, A., Nowak, S., 2021. High-resolution atomic absorption spectrometry combined
with machine learning data processing for isotope amount ratio analysis of
lithium. Analytical Chemistry. 93(29). pp.10022-10030.
Yarmolenko, M. V., 2020. Intrinsic diffusivities ratio analysis in the Al-Cu system. Physics and
Chemistry of Solid State. 21(4). pp.720-726.