Financial Decision Making: Importance of Accounting and Finance, Different Sources of Finance, and Performance Evaluation through Ratio Calculation

This report discusses the importance of accounting and finance, different sources of finance, and performance evaluation through ratio calculation in financial decision making. It also evaluates Panini Ltd.'s financial statements and their interpretation. The report includes a table of contents, introduction, main body with two tasks, and a conclusion with references.

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................2
TASK 1............................................................................................................................................2
Importance of accounting and finance.........................................................................................2
Different sources of finance.........................................................................................................4
TASK 2............................................................................................................................................6
Ratio Calculation.........................................................................................................................6
Performance Evaluation...............................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
1

INTRODUCTION
Financial Decision Making is an integral part for the meeting of financial and accounting
purposes of every organisation and involves several practices of investing decision making,
balancing equity and debt etc. (Waqas and Md-Rus, 2018). This report will evaluate the
importance of Accounting and Finance functions and various sources of finance. The financial
statements of Panini Ltd. will also be evaluated through ratio calculation along with their
interpretation regarding performance.
MAIN BODY
TASK 1
Importance of accounting and finance
Both accounting and finance departments are crucial in the development and maintaining of
appropriate budgets, recording transactions and distribution of financial resources in the
organisation. In Panini Ltd. as well, accounting and finance aspects have a set of functions which
are crucial for any organisation. These are:
 Tracking Business Performance: Evaluating and measuring the performance of
businesses in context of both, profitability as well as ranking in the industry are important
functions of accounting and finance departments. Panini ltd. compares the revenue
generation in regards to the financial objectives that were set by the firm and then checks
the degree up to which they were achieved (Krikorian and et.al., 2020). Business
performance measurement is critical in tracking the progress of the company and also
monitoring the directions in which company is moving. The strategic decisions taken by
the company are also monitored and decisions related to expansion, investment, credits
and liabilities etc. are evaluated accordingly.
 Fulfilling Statutory Requirements: Developing correct and transparent financial
statements which depict correct position of the company and its relevant profitability is
one of the key aspects of statutory compliance for any organisation. Compliance of
accounting standards, obtaining and presenting accurate figures, creating proper and
comprehensive accounts books are some key factors and all of these are covered in the
finance and accounts related functions of book- keeping (Cockcroft and Russell, 2018).
Management of Panini ltd. is able to focus on the targets developed and also present true
2

image before the engaged stakeholders. All these factors pertain to the relevant statutory
compliance and ensuring that company does not compromise on legal basis.
 Encouraging External Communication: Since the major accounting and finance related
functions are associated with the development of financial statements, these are then
presented before the external stakeholders which are informed regularly about the
progress made. Whether Panini ltd. engages with government for instance in case of
licensing etc. or whether they seek loans, IPO’s etc. all are based on the financial
statements of the company (Cao, 2021). Clients, investors, shareholders etc. everyone is
involved with the company through these statements. Hence, it can be said that these also
contribute to the overall presentation of company’s growth in the external market.
Along with these, there are various roles and duties as well which both accounting and
finance departments of Panini Ltd. have to comply with. These can be highlighted through
following points:
 Preparing Financial Statements: It is the duty of both finance and accounts departments
to update the financial statements regularly by recording the recent transactions.
Management of Panini ltd is required to prepare financial recorded regularly and the
timescale can be according the internal management’s decision. While book keeping
practices are the forte of accounts department, the finance department is mainly engaged
in the preparation of correct and accurate statements depicting true image (Garefalakis,
2022). It is their duty to record all the aspects and illustrate them appropriately i.e. in
footnotes, in director’s message etc. so that every key information is presented before the
external stakeholders involved in the company.
 Advising on Project Funding: For any organisation, expansion and growth are inherent
aspects that need to be achieved for the progress and improvement in performance. From
time to time, the financial managers need to evaluate different funding or expansion
options as per the requirement of Panini ltd and suggest appropriate sources of funds of
ways of expansion that can be adopted by the company (Morshed, 2020). Hence,
evaluation of fund sources and then developing a smooth transition process of those
funds is another key aspect of duty compliance. Capital budgeting decisions, suppliers
and dealers’ contracts, investment evaluations etc. are some of the key aspects that are
covered in the duties and roles of finance as well as accounts manager.
3

 Tax Reporting: Amongst all the duties, tax return filing and compliance are one of the
crucial aspects that have to be completed accurately. Identification of accurate tax
liability after correct identification of deductions and adjustments is a key area of duty
and compliance (Roy, 2019). It is their duty to ensure that entire process is completed
correctly and there are no loopholes. Also, avoiding any kind of tax penalties is a part of
this role as it affects the reputation of an organisation in a negative manner. Depicting
true tax return figures will help in improving CSR duties and goodwill of Panini Ltd.
Therefore, above points helps in summarizing some key aspects of functions, duty and roles
that accounting and finance department play in the smooth functioning of Panini Ltd.
Different sources of finance
In order to expand and grow, there are some limited options that are available for the
expansion of small and medium organisations. For Panini ltd as well, there are certain options for
funding sources that can be utilised by them:
 Small Business Loans: There are number of banks who provide loans solely to small
businesses so that it becomes easier for such businesses to obtain finance. When
businesses cannot obtain funds through normal channels which are otherwise available to
stable businesses, then they can gain loans through such financial organisations (Gopal
and Schnabl, 2020). These finance organisation bodies usually provide money loans only
and the terms and conditions for obtaining such loans are extremely reasonable for such
small businesses. These help in increasing the flexibility of the organisations and also
simplify the overall process for raising loans through external sources.
 Trade Credit: This form of funding arises in the form of suppliers selling goods on credit.
The suppliers provide either raw materials, manufactured parts to be assembled etc. to the
organisations on a credit i.e. they do not charge any amount at the time of providing these
materials (Farag and Johan, 2021). This is a common form of obtaining funds for a short
term period and the credit period usually ranges from one month to three months. This
method can be easily identified as a cheap source of raising finance for the small
businesses which in turn helps in working capital management of such small and medium
organisations.
 Venture Capital Firms: These are those private equity firms which provides funding only
to those companies which are in the early stages of their business. Those small businesses
4

which are emerging to be business ideas having a high growth potential are the ones that
are selected by venture capitalists. In exchange for funds, such venture capitalists usually
seek either equity or ownership stake in the companies (Lynn and Rosati, 2021). Small
businesses receive a regular series of financing rounds from these venture capitalists.
Although this method of obtaining finance is usually a bit more complex and time
consuming because the idea of business should be engaging and interesting, however,
once the funds are raised though this source then, the goodwill of such businesses is
raised automatically.
 Crowdfunding: This is comparatively a recent method of raising finance. Here, company
can borrow a small fund from relatively a larger crowd i.e. a larger group of people.
When a large number of people invest small amounts, then collectively, firms are able to
raise a huge amount easily (Kraemer-Eis and et.al., 2019). The increased flexibility of
proposals depending on organisation’s requirements is biggest advantage of this method.
Companies can either offer equity in return or simply take money on loan similar to
regular loans taken. Social media platforms are the best means for facilitating fund
raising through this method because of wider reach to the potential investors.
 Personal Loans: It is a common scenario that for small or medium businesses, it is
difficult to raise bank or business loans because of lack of adequate security being
provided. Hence, personal loan is also an option where against mortgaging some personal
assets such as land or property, jewellery, any expensive art pieces etc., the organisation
can raise loan (Brown, Rocha and Cowling, 2020). However, it is imperative that the
goodwill of that firm or its owner in particular should be well established so that such
personal loans can be raised easily. Despite the simplicity of raising loan through this
method, it is not recommended because of usually higher rate of interest being charged
and the rigidity of this method.
Hence, as evaluated above, there are a variety of options available with Panini ltd for raising
finance. However, it can be recommended that the best source of funding would either be
through venture capitalism or through crowdfunding where the flexibility lies with the company
and they can present proposals as per their convenience. Also the option to choose what to give
in return also presents an added benefit to Panini ltd. in selecting these options.
5

TASK 2
Ratio Calculation
Particulars Formula 2018 2019
Revenue from sales 10000 11500
Gross profit 3500 3265
Gross profit margin Gross profit /
Revenue from sales *
100
3500 / 10000 * 100
=
3265 / 11500 * 100
=
Operating profit 2765 2305
Revenue from Sales 10000 11500
Operating profit
margin
Operating profit /
Revenue from sales *
100
2765 / 10000 * 100
=
2305 / 11500 * 100
=
Operating Profit 2765 2305
Total Assets 9725 10723
Current liabilities 970 512
Capital employed Total assets – Current
Liabilities
8755 10211
Return on Capital
employed
Operating profit /
Capital employed *
100
2765 / 8755 * 100
= 31.58%
2305 / 10211 * 100
= 22.57%
Current Assets 1175 2110
Current liabilities 970 512
6

Current ratio Current Assets /
Current Liabilities
1175 / 970 = 1.21
times
2110 / 512 = 4.12
times
Current Assets 1175 2110
Inventories 350 674
Quick Assets Current assets –
Inventories
825 1436
Current liabilities 970 512
Quick ratio Quick Assets /
Current Liabilities
825 / 970 = 0.85 times 1436 / 512 = 2.8 times
Inventory 350 674
Cost of Sales 6500 8235
Inventory Turnover
days
Inventory / Cost of
Goods sold * 365
350 / 6500 * 365
= 19.65 or 20 days
674 / 8235 * 365
= 29.87 or 30 days
Accounts receivables 760 1340
Net Sales revenue 10000 11500
Receivables
Collection Period
Accounts Receivables
/ Net Sales revenue *
365
760 / 10000 * 365
= 27.74 or 28 days
1340 / 11500 * 365
= 42.53 or 43 days
Accounts Payables 920 495
Cost of Sales 6500 8235
Payables Payment
Period
Accounts Payables /
Cost of Sales * 365
920 / 6500 * 365
= 51.66 or 52 days
495 / 8235 * 365
= 21.94 or 22 days
7

Performance Evaluation Gross Profit Margin- GPM refers to the amount of profit that is available to cover
operational and non-operational expenses of your business. In the case of Panini ltd the
GPM in 2018 was 35% but in 2019 it toppled to 28.39%. The causes behind this downfall
are lower generation of gross profit in the current year since the revenue from sales is
higher in 2019 (Evmenchik, 2021) but might have occurred more cost for production and
that may have caused downfall to the gross profit generation. Operating Profit Margin- It indicates how much profit a company makes after paying for
variable costs of production such as wages, raw materials, etc. It reflects the efficiency of
a company controlling the cost associated with business operations. In 2018, it was
27.65% but it came down to 20.04% in 2019. It reflects that the cost of operations in
2019 has been higher relatively. Potential causes consist rise in price of row material,
hiking labour rate, mismanagement of costs controlling etc. Return On Capital Employed- It shown the amount of a company is generating per 1
euro of capital employed. In 2018, it was 31.58% and slipped down to 22.57% in the year
2019 (Wahyudi and Hanri, 2021.) For Panini Ltd the amount of capital employed was
hiked in 2019 but the returns did not get hiked in the same proportion which caused this
topples. There may be the potential reasons are decrease in EBIT which reflects poor
operational performance of the entity. It had underperformed in the current year
relatively. Current liability in 2019 had been dropped it shows frequent payment of
current liabilities which hiked the amount of capital employed. Current Ratio- For the company the current ratio was just 1.21 times in 2018 but in 2019
it surged up to 4.12 times. It shows that the company is having sufficient amount of short
term assets to repay the short term debts. But the higher rate of current ratio is a threat
since the short terms may be misused. The possible reasons may be higher surge in
current assets and a sharp downfall in current liabilities. Higher current ratio may lead the
management over use of short term fund which may be catastrophic in the future. Quick Ratio- For Panini Ltd it was 0.85 times in 2018 and 2.8 times in 2019. This
abnormal and sharp upward move is due to the amount of Inventories. In previous year
the inventory amount was almost half but in following year it is almost double which
8

shows poor selling performance of the entity (Rambe, chandra Batubara and Anisah,
2022,) There may be so many causes behind but the most possible are mismanagement of
production management, over production, weak response from the market and may be
hindered selling functions. This surge is not good since if the share of inventory is higher
in overall current assets then it would create problem in paying the short term debt. Inventory Turnover Days- It was around 20 days in 2018 whereas it was around 30 days
in 2019. Higher the ratio better it is. In this case for Panini Ltd it is almost one and half
time more in the following year. It shows that the entity is performing better in term of
their selling ability. The potential reasons behind this change is efficiency of the selling
department and there may be better response from the market too. The higher inventory
turnover indicates the organization is rapidly selling its inventory and the dead stock of
unmoving stock is lower. Receivables Collection Period- For the company it was earlier 28 days and in following
year it was 43 days which shows that earlier the entity was more efficiently converting its
debtors into cash but in 2019 it got worse and now it was 43 days. It shows poor ability of
recollection of debtors. It may create threat to the entity in repaying their creditors since
if they will not receive their dues on right time then how will they pay to their own
creditors. Payable Payment Period- Panini Ltd has notched up its payable payment period 52 days
in 2018 and in 2019 it was 22 days (Chathurika, 2019.) Which shows that the entity is
repaying its dues on time. Here the company is paying to its creditors rapidly which
indicates the financial stability of the company. There may be various causes behind this
change but the most possible one is higher availability of liquidity in the hands of the
entity which made them pay faster to their creditors. But such fast payments may induce
the problems like shortage of short term fund or the entity may use such short term funds
for further opportunity.
CONCLUSION
The analysis done in the report above helps in concluding that there are several aspects such
as statutory and tax compliance, budgeting decisions etc. that get influenced by accounting and
finance departments. The ratios were calculated for Panini ltd and the overall performance of the
company was evaluated based on such ratios.
9

REFERENCES
Books and Journal
Brown, R., Rocha, A. and Cowling, M., 2020. Financing entrepreneurship in times of crisis:
exploring the impact of COVID-19 on the market for entrepreneurial finance in the
United Kingdom. International Small Business Journal. 38(5). pp.380-390.
Cao, Y., 2021, May. Innovation and reform of accounting professional training model based on
the artificial intelligence. In Journal of Physics: Conference Series (Vol. 1915, No. 4, p.
042023). IOP Publishing.
Cockcroft, S. and Russell, M., 2018. Big data opportunities for accounting and finance practice
and research. Australian Accounting Review. 28(3). pp.323-333.
D M Chathurika, M., 2019. The Impact of Receivable Management on the Profitability of Listed
Companies in the Manufacturing Sector in Sri Lanka (Doctoral dissertation, Faculty of
Commerce & Management).
Evmenchik, O. S., 2021. The Role of Gross Profit and Margin Contribution in Decision Making.
In Socio-economic Systems: Paradigms for the Future (pp. 1393-1404). Springer, Cham.
Farag, H. and Johan, S., 2021. How alternative finance informs central themes in corporate
finance. Journal of Corporate Finance. 67. p.101879.
Garefalakis, A., 2022. Eco-efficiency, sustainable development and environmental accounting in
the tourism industry during a crisis. Corporate Board: Role, Duties & Composition.
Gopal, M. and Schnabl, P., 2020. The rise of finance companies and fintech lenders in small
business lending. NYU Stern School of Business.
Kraemer-Eis, H., and et.al., 2019. European Small Business Finance Outlook: June 2019 (No.
2019/57). EIF Working Paper.
Krikorian, K.M., and et.al., 2020. Student perceptions of skills and attributes required in
accounting careers. Journal of Accounting and Finance. 20(3). pp.86-100.
Lynn, T. and Rosati, P., 2021. New sources of entrepreneurial finance. Digital Entrepreneurship,
p.209.
Morshed, A., 2020. Role of working capital management in profitability considering the
connection between accounting and finance. Asian Journal of Accounting Research.
Rambe, M. F., chandra Batubara, H. and Anisah, N., 2022, March. CURRENT RATIO, QUICK
RATIO, DEBT TO ASET RASIO AND DEBT TO EQUITY RATIO TO RETUR ON
10

EQUITY IN FOOD AND BEVERAGE COMPANIES LISTED ON THE INDONESIA
STOCK EXCHANGE. In Proceeding International Seminar of Islamic Studies (Vol. 3,
No. 1, pp. 522-540).
Roy, S., 2019. Accounting and Finance.
Wahyudi, D. and Hanri, M., 2021. Return to Education Estimation on Self-Employment
Entrepreneurs and Their Comparison with Workers in Indonesia. In Proceedings of The
International Conference on Data Science and Official Statistics (Vol. 2021, No. 1, pp.
550-558).
Waqas, H. and Md-Rus, R., 2018. Predicting financial distress: Importance of accounting and
firm-specific market variables for Pakistan’s listed firms. Cogent Economics &
Finance. 6(1). p.1545739.
11