Financial Decision Making: Alpha and Camden Ltd Analysis

This report presents a detailed analysis of financial decision-making processes, focusing on the performance of Alpha Ltd and Camden Ltd. The first section introduces Camden Ltd, examining the roles and importance of its accounting and finance departments. It explores the functions of the accounts...Read More

Financial Decision Making
1

INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
TASK 1............................................................................................................................................3
1. Introduction of the selected organization................................................................................3
2. Accounting and financial department......................................................................................4
3. Importance of accounting and financial department...............................................................4
4. Role of accounts department...................................................................................................5
5. Role of finance department......................................................................................................6
TASK 2............................................................................................................................................7
1. Calculate the ratio of Alpha Ltd..............................................................................................7
2. Analysis of financial ratios......................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
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INTRODUCTION
Financial decision making involves the structured and coordinated action in the organization
among the different alternative courses of activity in the sense of monetary operation which
effective the most (Ball, 2013). Financial decision making process is one of the essential aspects
of the organization which help the managers to evaluate overall performance and then take
decisions accordingly. The essential aim is to provide new or creative ideas to achieve business
goals, dreams and purpose. This study discusses various elements which is based on two task,
first one is about Camden Ltd where role of finance and accounts department are analysis in
organizational context. On the other side, second is based on ratio analysis of Alpha Ltd and
critically evaluate its performance and how to improve it.
MAIN BODY
TASK 1
1. Introduction of the selected organization
Patrick Lavery established Camden in 1983 as a family business. After 35
years of formation, its core values of the business remain unchanged and remain at the certain of
the business (Camden Group, 2020). Camden products are engineered for durability, maximum
effect on quality and definitely, strength and protection. They have invested heavily in uPVC
recycling and are an eco friendly business. It is possible for us to create our first 80 percent
recycled inlite profile device. It ensures that, they get the highest price and help us build the best
future when the doors and windows are from Camden. More than 35 years, Camden has also
been an industry leader and innovator in PVCu goods. CAMDEN has built a robust product line
that ideally compliments the environmental criteria of the present environment by continually
defining and enhancing our goods and processes. Camden provides healthy and sustainable
PVCu windows, as well as lightweight doors for the residential, social and trade new
construction sectors with value and creativity at the center of our market. Camden is able to
manufacture 10,000 frames a week with production facilities on 160 acres, as well as on-site
processing and extruder plants.
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2. Accounting and financial department
Accounting department: It assists the company to which it contributes with accounting
and financial assistance services. Department reported payable and receivable records, stock,
wages, fixed assets and the financial components (Jetter vand Walker, 2017). Accountants
review each department's documents to assess the financial status of the corporation and all the
adjustments necessary to operate the organization economically. The accounting division offers
management services and controls a company's finances. Its duties include documenting
accounts, payment of bills, consumer billing and monitoring of assets and expenses, payroll and
monitoring of essential tax records.
Financial department: The section that handles organizational money and other finance
related aspects consider into financing department. Usually, the corporate functions of a financial
department involve planning, coordination, and monitoring, accounting and financial
management. Generally, finance department generates financial statements of the organization.
The Department of Finance is the component of an entity that is responsible for raising funds for
company, handling funds within the organization and coordinating the spending of funds on
different assets.
3. Importance of accounting and financial department
Accounting department is important for Camden Ltd because management actions and
decision making based on it. For the management or decision-making of an entity, accounting
information is quite important. Without accurate knowledge, managers will not determine to
support that claim. It must be based on actual facts and statistics to reach a decision. Data is
essential for decision-making at all management levels. Accounting reports on the financial state
of the company such as profit and loss, expense and revenue, obligations, assets etc. This is also
why accounting is incredibly important in industry. Management of Camden Ltd relies on
objective analysis and knowledge generated by accounting for the right decision. Accounting's
main aim is to regularly document financial payments in the accounting books and to figure out a
business' profit-loss and financial status.
The key functions of Accounting are assessment of profit loss and financial position,
evaluation and review of accounts, statements, and production of accounting method,
compilation of quantitative and economic data (Lawrence, 2013). It addition, it includes creation
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of accounting principles and budgeting and performance monitoring as per plan etc. Accounting
is closely linked to finance management in the modem era.
Financing department is essential for Camden Ltd which helps them to identify adequate
funds for the necessary resources which they want as per manufacturing and it further helps the
business to achieve their goals & objectives. There are several importance such as this finance
department helps in controlling cost, proper flow of funds, maintain profitability levels etc.
One of the department's main functions is to recognize relevant financial information
before it is conveyed to management and decision makers in order to make informed assessments
and decisions. Finances also use to generate financial statements and reports for the use and
reporting purposes of managers.
4. Role of accounts department
In the organization, accounts department plays several roles to manage Camden Ltd’s
records. Some of the roles are mentioned below:
Financial accounting: It is the specialized field of accounting and it monitoring the
business transactions of an entity. Using standard rules, payments such as a balance sheet or an
income statement are reported, listed and summarized in a financial statement. In the Camden
Ltd, accountant perform this role to produce financial report which further helps managers to
made essential decisions on the basis of available figures and facts.
Management accounting: This is an activity in which managers can define, calculate,
access, analyze and distribute financial information in support of the objectives of an
organization. The aim of management accounting is to support participants in the making of
appropriate business decisions within the organization (Graham, Harvey and Puri, 2015). It
differs with financial accounting. With the help of it, managers of Camden Ltd able to take
managerial decisions to improve their operational efficiency as well as effectiveness. Camden
managers use this accounting to improve quality of available data which delivered to
management to analyse operational matrix
Auditing function: In order to make sure that expenditures relating to the reporting year
are recorded, classified and outlined in compliance with the accounting standards adopted by the
Camden Ltd. the internal employees conduct the internal audit of large organizations (Mio,
2016). It also helps the management to verify whether it follows or not all the
accounting instructions given. This role of accounts department makes sure that accountant
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follow the accounting principles such as GAAP and it further helps in identifying actual financial
position of Camden Ltd.
Above mention role of accounts department help the Camden Ltd to perform their
activities which required managing business transaction or making decisions appropriately to
achieve business goals & objectives. Accountant of Camden have to review accounts and make
sure that accounting principles are properly implemented because it can affect the business if
government will interfere for auditing company’s accounts. Financial or management
accounting helps in producing financial reports and further made strategic decisions to achieve
business goals & objectives.
5. Role of finance department
Investment function: Investments are a direct function of interest rates while saving is an
indirect function of interest rates. A rate increase contributes to a balance in the money market.
Investment is made in a society so certain returns are produced. Through calculating the average
productivity of investment, they can see the return on investment. In addition to overall
production, it refers to an improvement in capital stock by one element. It is one of the important
roles of financing department for Camden Ltd because here finance manager decided to invest in
order to increase their returns and other earnings. Investment related decisions are made by them
after evaluating profitability of any project and actual return of any portfolio.
Financial function: Finance is a financial planning component of the business. The
financial role includes the collection and use of the funds required to operate efficiently. Without
capital, stuff will not work smoothly is the lifeblood of business (Palepu and Healy, 2013). In the
finance department of Camden Ltd, accountant identifies the need of funds and also fined the
sources from where they can fulfil their operational needs. This function play essential role in
the department as well as in the business to achieve monetary requirement for the success of
organization.
Dividend function: In this function, dividend is the term which is used to save money from
the company’s profit and further they distributed among the shareholders. It is a kind of
compensation to the investors who invested in the organizations to fulfil their needs related to
finance. In relation to Camden, company also distributed dividend top their shareholders and in
the financing department it play essential role because help the managers to decide the amount or
rate which they have to pay.
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In the context of Camden Ltd, role of finance department is to distribute dividend, invest in
profitable projects and done other various financial functions to manage company’s funds. With
the help of this division, Camden’s managers able to make financial decisions or strategies which
help the organization to maximise their revenue as well as profit.
TASK 2
1. Calculate the ratio of Alpha Ltd
Ratio Formula 2017 (£’000) 2018 (£’000)
Return On Capital
Employed (ROCE)
= (Operating Profit
/Capital Employed)
*100
= 375 / 1,912.50 *100
= 19.60 %
= 412 / 2,925 * 100
= 14.10 %
Net Profit Margin = Net Profit / Revenue
* 100
= 300/ 2400 * 100
= 12.5 %
= 262.50 / 3000 * 100
= 8.75 %
Current Ratio = Current Assets /
Current Liability
= 757.50 / 322.50
= 2.34 Times
= 1035 / 1110
= 0.93 Times
Debtor Collection
Period
= Receivable / Sales
*365
= 450 / 2400 * 365
= 68.43
= 68 Days
= 600 / 3000 * 365
= 73 Days
Creditor Collection
Period
= Payable / Purchase
* 365
= 285 / 1350 * 365
= 77.05
= 77 Days
= 1050 / 2400 * 365
= 159.68
= 160 Days
2. Analysis of financial ratios
Financial ratios give companies a method of measuring the success of their firms and
comparing it with other similar companies in their industry. The connection between
several Financial Statement components measures ratios. It is most easily used when tests are
evaluated over many periods (Petersen, Kushwaha and Kumar, 2015). It helps define risks and
consequences, measures productivity, uses efficiency and the role of solvency. It helps to analyze
patterns produced by these over one-year ratios. Ratio analysis offers comprehensiveness in
evaluating financial statements in all aspects. It is very straightforward for organisations to assess
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the impact of current issues and recognise contingent difficulties by evaluating the various
financial ratios. It also encourages early resolution of them for achieving sustainability in
outcomes and development. Analyzing financial ratios is important for stakeholders and
stakeholders to make fast spending decisions. Following points defines the success of ALPHA
LTD on the bases of ratio analysis:
Return on Capital Employed: This is a financial ratio which helps to measure the
effectiveness of the utilization of resources and production by companies for profit (Chiang,
Nouri and Samanta, 2014). The profitability ratio is applied to most efficient investment by the
stakeholder during the screening. From the above calculation, this ratio required two key items
such as EBIT and Net employed capital. In this case, EBIT applies to earnings before the tax and
interest balance is deducted. It is referred to as operating income. The capital employed is
determined by extracting from the value of total assets the balance of all current liabilities.
Formula:
ROCE = (Operating Profit /Capital Employed) *100
From the above ratio calculation, it has been analysed that net profit of ALPHA LTD
according to income statement is £375000 in 2017 and £412000 in 2018. That is determined by
subtracting from gross profit and find operating expenses. The company's capital invested
is £2925000 in 2018 and £1912500 in 2017. Return on investments employed by the company is
14.10 per cent and 19.60 per cent respectively in 2018 and 2017. The decrease in this ratio
suggesting a decrease in the efficiency of income generation from invested capital. By improving
its operating income, accountant required to control its operating expenses and raising the capital
employed than the company will increase this ratio performance.
Net profit margin: After all running expenses such as interest, taxation and preferred
stock dividends is excluded than remaining value is called revenue (Seshan and Yang, 2014). In
order to assess net profit margin, most of these components are excluded from total company
revenue. This is the net profit-to-income ratio for the company. In percentage form net profit
margin is expressed but can also be interpreted in decimal form for ease. It shows how much
more of every pound of profits a business raises turns into profit. This is one of the main factors
in the financial health of the organization. By keeping a track of growth and decline in net
income business may determine whether strategies provide any benefits or not.
Formula:
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Net Profit Margin = Net Profit / Revenue * 100
While calculating net profit margin, it has been analysed that Alpha Ltd represent its
share in 2018 which declined from 2017 which is a bad sign for the company. Net profit margin
was 12.5 percent in 2017 while it had 8.75 percent in 2018. Alpha Ltd could increase its net
profit margin by eliminating extra costs not included in core operations, by eliminating goods
and services that fail to deliver, by increasing sales, consumer interest and resources and at times
raising prices which may be tough but are important for business survival.
Current ratio: The liquidity ratio tests the capacity of the company with its current
assets to cover short term obligations. This is a significant measure, because it decides the
liability of corporations in the next year. It warns the company that its current short liabilities
will be covered with enough liquidity (Tang, Chen and Lin, 2016). The current measurement of
properties such as cash, cash equivalents and marketable securities are based on their rapid
transformation into cash. Companies with significant current asset base would be able to
comfortably repay current liabilities with no need to sell substantial long-term assets. It's a basic
measure, computed by the division of existing liabilities. Optimal current ratio is 2:1 which every
organization has to maintain. More the current liquidity ratio would be more beneficial to the
company. It is assume that ratio is 3:1 ratio which mean current assets are three times liquid to
current liabilities.
Formula:
Current ratio = Current Assets / Current liability
In relation to Alpha Ltd, calculation shows that current ratio of 2.34 times in 2017 and
0.93 in 2018, indicating that in 2017 it had more liquidity and that it was extremely illiquid in
2018. Alpha Ltd, The current ratio can be strengthened by taking steps to speed up debtors or
accounts receivable, by clearing existing loans, cutting outperforming assets, boosting
shareholders' capital to meet their debt liabilities and lastly, by clearing pending transactions..
Debtor collection period:
This is a ratio by which the debtors are expected to pay business by time or days. This
ratio will effectively ensure adequacy of cash to meet current obligations (Carvalho, Meier and
Wang, 2016). This helps to know that debtors will be bankrupt in the near future. Business can
track its amount of bed loans and questionable provisions by detecting potential insolvent
debtors at an early stage. Managers can easily develop credit policies in a company by using
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debtor collation ratio. Organization needs to determine this ratio in order to operate on a regular
basis. The total amount to be obtained from commercial accounts receivable or the balance of
debtors is determined by the division of credit sales. The sum collected is multiplied by the
maximum number of days in order to produce results.
Formula:
Debtor Collection Period =Receivable / Sales *365
It has been interpreted that, Alpha Ltd has receivables of 450000 in 2017 and 600000 in
2018. Company's sales are 2400000 in 2017 and 3000000 in 2018; now in estimation of the ratio
overall sales are considered to be credit revenues. The average collection period for the Alpha
Ltd in 2018 is 73 days and in 2017 was 68 days. Here is reported a reduction in the average
collection period pointing out that efficacy of Alpha Ltd's business required to recover amounts
from its debtors has decreased and the business may face insufficient liquid cash to conduct its
operations in the immediate future. By minimizing credit sales and maximizing the credit
duration provided to its lenders than company can increase this ratio.
Creditor collection period: The Company evaluate financial ratio to pay its creditors and
accounts payable (Zeff, Van der Wel and Camfferman, 2016). Creditors here include retailers,
suppliers and other short term credit providers. The ratio is measured every quarterly or yearly
basis which indicates the way where organization handles its money outflows. This requires
more time for the Firm with higher creditors to pay its multiple bills. It shows the firm's liquidity
efficiency which means the productivity declines or that the investors are unable to pay. Credit
term often influenced by this ratio results given by creditors.
Formula:
Creditor collection period = Payable / Purchase * 365
From the ratio calculation it has been concluded that, in 2017 and 2018 Alpha
Ltd's registered trade payables amounts is 285000 and 1050000 respectively. The purchasing
amount of the company in the years 2018 and 2017 is 2400000 and 1350000 separately. All
transactions here are presumed to be on loan. The cumulative payable period for the company in
2018 is 160 days and 77 days in 2017. There is a rise reported in the average payable duration
suggesting that it has reduced the capacity of the company to make payments to its various
payable customers.
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Overall analysis of Alpha Ltd’s performance, it is evaluated that Camden Ltd not
granting loan because overall performance of the company reduces from 2017 to 2018. ROCE,
net profit margin or current ratio all are decreases which is not sign for Camden to invest in this
company that’s performance is reduces over the year.
CONCLUSION
From the above analysis, it has been concluded that financial decisions making is very much
essential for organization to make strategies and it was totally based on company’s financial
information. In relation to take effective decisions, accounts and finance department plays
important role to produce financial report. It further helps managers to build strategies on the
basis of collected data. Financial ratio is another best tool to evaluate company’s performance.
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REFERENCES
Books & Journals
Ball, R., 2013. Accounting informs investors and earnings management is rife: Two
questionable beliefs. Accounting Horizons. 27(4). pp.847-853.
Carvalho, L.S., Meier, S. and Wang, S.W., 2016. Poverty and economic decision-making:
Evidence from changes in financial resources at payday. American Economic
Review. 106(2). pp. 260-84.
Chiang, B., Nouri, H. and Samanta, S., 2014. The effects of different teaching approaches in
introductory financial accounting. Accounting Education. 23(1). pp.42-53.
Graham, J.R., Harvey, C.R. and Puri, M., 2015. Capital allocation and delegation of decision-
making authority within firms. Journal of Financial Economics. 115(3). pp. 449-470.
Jetter, M. and Walker, J .K., 2017. Anchoring in financial decision-making: Evidence from
Jeopardy!.Journal of Economic Behavior & Organization. 141. pp. 164-176.
Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and
Economics. 56(1). pp.130-147.
Mio, C. ed., 2016. Integrated reporting: A new accounting disclosure. Springer.
Palepu, K. G. and Healy, P. M., 2013. Business analysis and valuation: Using financial
statements, text and cases.
Petersen, J.A., Kushwaha, T. and Kumar, V., 2015. Marketing communication strategies and
consumer financial decision making: The role of national culture. Journal of Marketing.
79(1). pp. 44-63.
Seshan, G. and Yang, D., 2014. Motivating migrants: A field experiment on financial decision-
making in transnational households. Journal of Development Economics.108. pp. 119-
127.
Tang, Q., Chen, H. and Lin, Z., 2016. How to measure country-level financial reporting quality?.
Journal of Financial Reporting and Accounting. 14(2). pp.230-265.
Zeff, S. A., Van der Wel, F. and Camfferman, C., 2016. Company financial reporting: A
historical and comparative study of the Dutch regulatory process. Routledge.
Online
Camden Group. 2020. [Online]. Available Through:
<https://www.camdengroup.co.uk/about>
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