Analysis of Financial Performance and Decision Making

This assignment involves analyzing the financial performance of ABC Consultant LLP using various ratios such as profit or loss, balance sheet, and cash flow. It also explores different segments including the US market's performance compared to UK and Australia. Additionally, it discusses investment appraisal techniques like NPV, ARR, and payback period to determine whether a project should be accepted or not. The assignment emphasizes the importance of non-financial indicators in expanding into East Asian markets.

FINANCIAL
DECISION MAKING

EXECUTIVE SUMMARY
Financial decision making helps in determining the opportunities which consist of
assessing risks and forecasting same along with legal review. This report is totally based on two
tasks in which first is for analysing its financial performance and in other part, it has elaborated
investment appraisal techniques with funding resources. The present report is giving brief
discussion about its financial performance in context of various financial statements. By
analysing its financial position, its liquidity is not performed well and it has raised expenses of
operations in the year 2017. It is describing proper analysis in context of various segments in
which it is gaining more revenue in US. On its contrary, it was not capable to generate revenue in
Australia and UK with increment in its cost of sales.

TABLE OF CONTENTS
PART 1 : BUSINESS PERFORMANCE ANALYSIS...................................................................1
Statement of Profit and loss........................................................................................................1
Statement of Financial position...................................................................................................2
Statement of Cash flows.............................................................................................................3
Segmental Analysis.....................................................................................................................5
PART 2 : INVESTMENT APPRAISAL.........................................................................................6
Management Forecast.................................................................................................................6
Investment Appraisal Techniques...............................................................................................7
Payback period...................................................................................................................7
Accounting Rate of return.................................................................................................7
Net Present value...............................................................................................................8
Sources Of Finance.....................................................................................................................9
Non Financial Factors...............................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

PART 1: BUSINESS PERFORMANCE ANALYSIS
Statement of Profit and loss
Profitability Ratio 2018 2017
Gross profit 3145 3005
Net sales 3598 3437
gross margin ratio 87.41% 87.43%
Net profit 820 887
Net sales 3598 3437
Net margin ratio 22.79% 25.81%
Operating Income 869 927
Net sales 3598 3437
Operating margin ratio 24.15% 26.97%
The above ratios have been used for analysing statement of profit and loss statement of
ABC Consulting LLP which is considered as one of the initial reports in every business entity in
context of accounting. It has major contribution for analysing financial performance by
computing various ratios (Yang and et. al., 2018). It comprises of information in a summarized
format in relation to expenses and revenue of specific duration. Generally, profit and loss
statements consist of information of yearly and quarterly as well. The main objective of this
statement is to track earnings of ABC consulting of current year as it excluded all expenses of
business entity from its earnings or revenues. This report starts with entry of total revenue of
3598 in 2018 which had been raised from 161 from year 2017. So, by excluding expenses and
disbursements, it is giving gross profit of 3145 and 3005 in 2018 and 2017 respectively.
Further, it has considered various operating expenses related to administrative and selling
or it could be justified as expenses which are raised while generating sales and directly linked to
administration of operations is also known as Earnings before Interest and tax. It has generated
earnings from operations as 869 which has been decreased from the previous year. Other
incomes and expenses which were not adjusted in previous year are included in this part such as
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taxes, interest, dividends, etc. as it would be giving profit after tax which is also known as Net
income. Generally, ABC consulting has not included Earning per share as it could be computed
by dividing net profit from total shares which are outstanding (Chen and et. al., 2018).
In the same series, it has justified gross profit, net and operating margin ratio. Gross
margin could be illustrated in percentage format which could be computed by dividing gross
profit from net sales. In the year 2017 and 2018, it has given stable outcomes. It is directly
related to the process of product creation. Every business entity keeps desire of high gross
margin if it is increasing the cost of goods which are sold at lower or it raises trade margin. It
indicates the positive effect on net profit of organization.
Statement of Financial position
Financial Ratios 2018 2017
Liquidity ratio
Current Assets 1269 1393
Current liabilities 790 802
Current Ratio 1.61 1.74
Current Assets 1269 1393
Current liabilities 790 802
Working capital 479.00 591.00
Cash and cash equivalents 75 214
Current Liability 790 802
Cash ratio 0.09 0.27
Net profit 820 887
Total Assets 2175 1842
Return on Assets 0.38 0.48
The above ratios have been computed by considering statement of financial position of
ABC Consulting LLP. It could be justified by analysing all liabilities, equity and asset of
organization. Usually, it is framed as proper set of interval such as quarterly, half yearly or
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annually. Its basic application is to perform proper analysis which derives different actual figures
of organization's asset and liability. The main objective of balance sheet is to verify profitability
of investment perspective for any particular organization as it helps share brokers, financial
institutions, investors and investment bankers (Balance Sheet Ratios, 2013).
At the initial step it includes aggregate of liabilities and equity share capital which had
been paid. By rule, it must match total assets and in Liabilities it does not include shares which
are issued. The financial performance of ABC Consulting would be considered as good because
total assets are exceeding liabilities as it its total assets are 2175 which is greater than 1235
(liabilities). In the same series, it consists of extracting its current liabilities along with asset. It
also helps in computing return with context of asset as it has been performed in above table. It
also consists of giving major concern for patents and copyrights as it considers ratio of amount
which had been invested on its consequent returns. By considering different current assets such
as cash and trade receivables it had been represented as 1269.
With the context of statement of financial position, its liquidity could be measured
through current ratio, cash ratio. The ideal ratio is considered as 2:1 for current ratio as ABC
Consultant LLP is not meeting this standard then its liquidity on basis of current ratio is not
good. In the same series, cash ratio had been computed as it is measuring capability of ABC
Consultant for repaying its current liabilities along with cash and cash equivalents. It is
considered as very restrictive as compared to current and quick ratio due to absence of other
current assets for paying debt but on cash.
It is replicated as very important measure as inventory turnover but this is service
industry so it has lack of inventory otherwise it would be indicating ability of organization for
manufacturing products with availability of assets. In its last step, organization's features had
been analysed which consist of credit ratings, recent projects and goodwill. It would be also
evaluating activities of organization in the future.
Statement of Cash flows
Ratios of Cash flow
Operating cash flow 861
Net sales 3598
23.93%
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Operating cycle
Accounts receivable 365 / Receivables turnover
Receivables Turnover Credit sales / Average Accounts receivables
Average accounts receivables 1194 + 1179
1186.5
Net sales 3598
Accounts receivable 3.0324483776
The above table is depicting financial ratios which had been computed by considering
statement of cash flow of ABC Consultant LLP. It is considered as one of the important financial
statements as it segregates activities on basis of operation, investing and financing. Usually, it
reports cash which had been generated and applicable during specified interval which had been
presented in heading. The market value of organization which had generated huge cash as
compared to its applications. The value of shareholder had been increased by payment of huge
dividend, purchasing of similar stock which helps in decreasing debt or for process of acquisition
of other organization (Statement of Cash flow, 2018). Generally, high EBITDA is useful for
perspective of investors and along with this accounting invention had been understood for the
purpose of valuation of organization. Real cash expenses are illustrated as interest and tax which
is not represented in easy format when performance had been measured through EBITDA. In this
measure there is absence of bad loans and alterations in working capital accounts.
The statement of cash flow is initiated from operating activities and starts from net profit
of ABC Consultant as 869 with perspective of accrual to cash basis. It could be presented by
alterations with context of current asset and liability's balance in similar duration. It consists of
alteration in trade payable and receivable which is fallen by 16 and 15 respectively. In last
portion, it evaluates payment of interest and income tax for giving net cash with perspective of
operating activities.
In the same series it is justifying cash inflow and outflow with context of investing
activities which captures sales and purchase with context investment of long term, plant,
equipment and property. In simple words, it represents alteration in account of long term assets.
It also consists of land, building, fixtures, vehicles and equipment. ABC Consultant LLP is
evaluated as 525 outflows from investing activity.
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Further it is representing cash flow with perspective of financing activity. Generally, it
had various elements such alteration in balance of liability of long term and equity of stockholder
within same duration. It might consist of note payable along with bonds, treasury stock, retained
earnings and common stock. In the cash flow of ABC consultant LLP it had observed that 475
had been out flowed which is combination of Payments to members of 551 and raise of long
term loan by 76 so net cash with perspective of financing activity as 475.
Segmental Analysis
United Kingdom: While analysing segment of UK it had been justified that from year
2016 to 2017 its revenue is increasing along with expenses and disbursements. It is not giving
major impact on net revenue because of increment in cost as well. The company had one
negative point with context of operations as it is not able to control cost of its operations as it is
raising in huge proportion which is directly impacting in earnings from operations. There has
been presence of computation of gross profit and operating margin ratio which measures
profitability of specific segment. The gross margin ratio has been maintained from year 2016 to
2017 as it could be easily viewed. On its contrary, its operation margin was 33.53% in year 2016
which got decreased to 25.63% in next year. Its main reason for decrement is due to increment in
expenses of operations were not controlled which exceeded from previous year (Jetter and
Walker, 2017).
United States: The segment of US could be analysed from year 2016 and 2017 as there
is presence of huge increment in its revenue. There is decrement in expenses and disbursements
which is impacting net revenue by approx. 50%. But on its contrary, its operating expenses are
increasing but with minor percentage. In year 2016 it was not capable to generate margin from
operations but in next year it created huge margin from its operations as 179. It is reflecting
efficiency in US segment due to profit from operations. There has been computation of Gross
margin and operating ratio. The trend of both ratio is increasing which could be easily viewed
from its segmental analysis and observing its operating profit.
Australia: Australian segment is not performing efficient in context of generating sales
as in year 2016 it was 648 but due to some reason it had fallen to 516. On the other perspective,
if there is decrement in sales but then too its expenses and disbursements are increasing which is
depicting negative impact on this particular segment. While consideration of sales and expenses,
its net revenue has major variations in negative aspect from 530 to 390. In the same series,
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organization tried to control cost of its operations as it was succeeded in this segment but
because of prior heading its operating profit had also moved backwards. There has been
computation of gross profit and operating margin ratio which are the best indicator for measuring
profitability. It had represented 70.57 in year 2016 and sudden decrement to 55.13% because of
sales and increment in expenses it was not capable to generate gross earnings. Due to decrement
of sales it gave margin from operation as 39.25% and 28.97% in 2016 and 2017 respectively.
The above segmental analysis had been performed of ABC Consultant LLP of UK, US
and Australia. It could be justified that US is moving on positive trend and rest both are going
backwards. While, consolidating all three segments are affecting whole financial in negative
aspect. Its revenue was decreasing and contrary, it expenses were increasing which is bad sign
for organization. It was not also capable to generate profit from its operations because of
Operations rather than UK which had transformed its financials in very efficient way. In its
consolidation, gross margin in not affected majorly but there was decrement of approx. 3%
which is also depicting negative picture of organization as whole (Charitou, Karamanou and
Kopita, 2017).
PART 2: INVESTMENT APPRAISAL
Management Forecast
The management forecast had been performed of US market as its initial investment of
800 million as it is increasing from year to year along with its expenses and disbursements. By
forecasting for five years its contribution is increasing which had been stated below.
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Investment Appraisal Techniques
Payback period
The above table is depicting payback period of ABC Consultant LLP as 2 years and 7
months by considering its initial investment of 800. This method is usually applicable by various
business analyst because of its simplicity, quick evaluation by considering small investment
which gives payback in short perspective (Oehler, Horn and Wedlich, 2018). It reflects
consideration of liquidity at time of decisions regarding investments. But on its contrary, it has
demerit also that it avoids time value of money as its cash inflow of project might be not regular.
Generally, investments on basis of long term which helps in continuing to produce income after
payback of prior start-up capital. In the same series, it also emphasis liquidity instead of
profitability. It only considers cash return within duration which had been specified.
Accounting Rate of return
The above table is justifying Accounting rate of return of 5 years of ABC Consulting
with the forecast of management. It could be justified that its ARR is 100% which reflects that it
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would be attaining its return in expected way. By considering its merits, it is considered as very
easy for calculating and to understand as well. Usually it evolves total savings and profits over
full duration of economic life of specific project. It also considers concept of net earnings as it is
very vital factor for purpose of proposal of investment. The current performance of organization
had been measured with this method. In the same series, it includes various concept of
accounting related to profit for evaluating rate of return (Alkaraan, 2017).
There is also presence of various limitations in context of Accounting rate of return as its
outcomes are for justifying ROI and it also frames issues with context of decisions. It also
ignores time value of money as its initial weakness with context of this specific method for
selecting its applications of fund on alternative aspect. It also does not evaluate external factors
as it is directly impacting profitability of specific project.If investment project id taken in parts
then this method would not be applicable.
Net Present value
The above table is indicating net present value of ABC LLP by considering cash flow
from management forecast as its initial investment is of 800 million. The discounting factor had
been taken by its cost of capital as 15% as its criteria is of 100% but as per its computation it had
exceeded its target so it should accept this specific proposal. By considering its outcome it
should also imply its merits and demerits. It is directly based with context of time value of
money. It is very easy for finding comparison within various projects as highest value is accepted
for process of implementation. It could also imply to cash flow which is even or uneven pattern.
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In the same series, it must also consider its disadvantages as it does not represent it
expected rate of return which could be earned (Li and Trutnevyte, 2017). While ranking various
projects it could give contradictory answers because not presence of complications in project. If
there is requirement of investment along with various economic life of specific projects then it
might fail to provide appropriate outcome. There is presence of difficulty for identifying proper
discount rate. Its usage could not be required for gaining knowledge of rate of its cost of capital.
It could not be used if there is absence of cost of capital.
Sources of Finance
ABC consulting LLP is moving with context of expansion with investment in market of
Eastern European for year 2019 of 500 million. There is presence of different sources of finance
could be used such as:
 Bank Loans
 Equity financing
 Government grants and subsidiaries
 Business incubators
Bank loan and equity financing could be used by ABC consulting LLP as they are very
effective but it should consider its drawbacks and benefits as well as it might affect there process
of investment decision making.
Bank Loan: It is considered as very easy source for availing fund. It is referred as an
extension for credit with context of bank to business or consumer as it should be paid with
interest. It is replicated as finance for short term perspective. The most special feature could be
elaborated as it might be unsecured or secured which totally depend on circumstances. The
interest which had been charged through bank on specific loan might be variable or fixed.
Merits: It is very flexible in nature if proper instalments are paid on time. It is considered
as benefit over the overdrafts because they should be paid fully. With context of interest rate,
bank loan is considered as very effective and cheapest option as compared to credit cards and
overdrafts. It also provides benefits with reference to tax. If interest had been paid which is
known as expense as of tax deductible (Gordon and et. al., 2017).
Demerits: With the context of bank loan, there is always need of collateral, if business is
existing or start up then it would face difficulty for approval of loan application. Along with this
if borrowers opt for loans which are unsecured then they would face huge rate of interest rate. As
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per rule, periodic payments should be given to bank and if rule had been broken then there is
huge probability of seizing assets. It could be referred as repayment burden.
Equity Financing: It is one the most popular sources for raising fund or capital in
context of sale of shares related to business. Fund could be raised by selling stock of
organization to its investors. While raising fund, it should consider merits and demerits as well.
Merits: It is directly committed to specific business for projects which are intended. If
business is performing very well then only investment had been realised. There is no requirement
of cost for servicing bank loans or debt finance which helps in allowing application of capital
related to activity of business. In the same series, outside investors expect for delivering value of
business for exploring and executing ideas in context of growth. Along with all these, it could
assist for strategy and process of decision making (Equity Financing, 2018). There are various
investors which help in providing follow up financing along with the growth of business.
Demerits: It could be termed as very time consuming, expensive and demanding. It has
huge requirement of statutory compliances along with other cost such as underwriting fees,
brokerage and fees related to merchant banker. Dividends which are paid to shareholder does not
consider as tax deductible expense but cost related to interest has eligibility for gaining tax
benefits. The investors would be gaining comprehensive information with context of their
background. While dependency on investor, specific amount would be loose for taking decision
with context of management. There is requirement for investing appropriate management time
for giving regular information for monitoring process. It also leads to provide dilution of control
aspect. As fund had been raised through equity then control of existing shareholder is diluted.
Non-Financial Factors
ABC Consulting LLP must expand its Eastern European market by considering various
non-financial factors which could be described as below:
 It should be capable for accomplishing requirements for legislation of present and future
as well.
 The organization must be able to match with the standards of its specific industry and for
appropriate practice.
 Staff morale must be improved as it tends easier for retaining and recruiting employees.
 Supplier and customer relationship must be improved.
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 In the same series, there is requirement of improving business relationship and reputation
along with local community.
 The capabilities in context of business must be developed such as experience and
building skills in new areas where system of management could be easily strengthened.
 They must be capable for dealing or anticipating with future threats like protection of
intellectual property but not in favour of specific competition (Zietlow and et. al., 2018).
CONCLUSION
From the above report, it can be concluded that decision making is an important process
regarding finance. It can be articulated from the above report that statement of profit or loss,
balance sheet and cash flow helps in major contribution for knowing financial performance and
stability of ABC Consultant LLP in an efficient manner. Further, it has analysed through various
segments in which US market is performing well by comparing it with UK and Australia. Also, it
has elaborated techniques of investment appraisal such as NPV, ARR and payback period which
shows that project could be accepted. Moreover, it articulated that non-financial indicators are
important for the purpose of expansion in East Asian markets.
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REFERENCES
Books and Journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. In Advances
in Mergers and Acquisitions (pp. 67-82). Emerald Publishing Limited.
Charitou, A., Karamanou, I. and Kopita, A., 2017. The determinants and valuation effects of
classification choice on the statement of cash flows. Accounting and Business Research,
pp.1-38.
Chen, C. W. and et. al., 2018. Financial statement comparability and the efficiency of acquisition
decisions. Contemporary Accounting Research. 35(1). pp.164-202.
Gordon, E. A. and et. al., 2017. Flexibility in cash-flow classification under IFRS: determinants
and consequences. Review of Accounting Studies. 22(2). pp.839-872.
Jetter, M. and Walker, J. K., 2017. Anchoring in financial decision-making: Evidence from
Jeopardy!. Journal of Economic Behavior & Organization. 141. pp.164-176.
Li, F. G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal
pathways for the UK electricity sector transition to 2050. Applied energy, 189, pp.89-109.
Oehler, A., Horn, M. and Wedlich, F., 2018. Young adults’ subjective and objective risk attitude
in financial decision making: Evidence from the lab and the field. Review of Behavioral
Finance. 10(3). pp.274-294.
Yang, W. and et. al., 2018. Good news or bad news, which do you want first? The importance of
the sequence and organization of information for financial decision-making: A neuro-
electrical imaging study. Frontiers in Human Neuroscience. 12. p.294.
Zietlow, J. and et. al., 2018. Financial management for nonprofit organizations: Policies and
practices. John Wiley & Sons.
Online
Balance Sheet Ratios. 2013. [Online] Available through:
<https://accountingexplained.com/financial/ratios/balance-sheet-ratios>.
Equity Financing. 2018. [Online] Available through: <https://efinancemanagement.com/sources-
of-finance/benefits-and-disadvantages-of-equity-finance>.
Statement of Cash flow. 2018. [Online] Available through:
<https://www.accountingcoach.com/financial-ratios/explanation/4>.
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