Financial Decision Making Process - Doc

FINANCIAL
DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
TASK - 1 .........................................................................................................................................3
Role of the accounting / finance or management accounting system in planning, controlling
and decision making process..................................................................................................3
TASK 2............................................................................................................................................6
(a) Calculation of ratios..........................................................................................................6
(b) Comment on performance of Alpha limited company on the basis of ratio calculation.. 7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
The financial decision making may be defined as a process of taking decision regarding
to various aspect of finance such as about liabilities, stakeholders, assets etc. In addition, these
decisions should be taken by companies in an effective manner because any wrong decision can
lead to loss (Opstrup and Villadsen, 2015). The aim of project report is to define about role of
finance and accounting in aspect of companies. In the project report, some management
accounting techniques such as financial planning, standard costing, marginal costing etc. are
defined. The role of these accounting techniques is not limited till management of financial
aspect but also for non financial aspects too. Basically, there are various kind of finance and
accounting functions that leads to success of organisation. It depends on companies that how
well they implement their accounting functions.
For better understanding of above mentioned accounting techniques, a company is
selected that is Wm Morrisons. This company is being considered as fourth largest supermarket
in United Kingdom. Its headquarter is in Bradford, West Yorkshire, England. Company has large
portfolio of products that consists a wide range of items such as food products, health &
medicines, clothings, households and many more. The company was founded in year 1899 by
William Morrisons in United Kingdom. As per the financial year of 2018, companies' revenue
was of 1726.2 crores GBP (About Morrisons company, 2019). The company's key practices
related to management accounting techniques are that they use these in various kind of
operations and activities. As well as it helps them in order management of all financial and non
financial aspects. Basically, the role of accounting techniques for them is essential for better
decision-making and assessment of financial performance.
MAIN BODY
TASK - 1
Role of the accounting / finance or management accounting system in planning, controlling and
decision making process.
There are various kind of management accounting systems and each of them play a
significant role in the context of management of companies financial and non financial
performance (Aprea and Wuttke, 2016). As well as, it depends on companies that they should

implement these accounting techniques in an effective manner because these are helpful for
better planning, controlling and decision-making. Herein, below some types of management
accounting techniques are mentioned that are as follows:
 Standard costing- It can be defined as a kind of costing method that is related with
projection of future possible expenditures of various operations which becomes as a
standard for companies. On the basis of it, companies can compare actual level of cost
with these standard costs. Due to this, entities can assess the areas in which they need to
improve. Herein, the aspect of above Morrisons company, they use this technique of
management accounting in order to evaluate the difference between actual cost and
estimated cost.
 Budgetary control- This is a kind of technique in which various kind of budgets are
prepared in order to compare the actual result with budgeted information (Marchetti,
Castelli, Massaro and Valle, 2016). This is almost similar as standard costing but
difference is that under it income and expenditures both are compared with budgeted
results. Like in the context of above chosen Morrisons company, they apply this
technique for effectively management of income and expenses.
 Analysis of financial statement- It is essential for companies to analyse their financial
statements so that they can assess actual financial performance (Goldmann, 2017). By use
of this management accounting technique, companies can analyse various kind of
financial statements such as income statement, cash flows etc. for controlling their
financial performance. Herein, the aspect of above company they use this technique for
proper analysis of their financial statements.
 Cash flow statement- It may be defined as a kind of statement that is related with
recording activities regarding to flow of cash in an organisation. This is prepared by
operating, financing and investing activities. In this cash inflow indicates the excess of
cash receivables while cash outflow shows the negative cash position (Zeng, Chen,
2016). For example in above selected Morrisons company, they prepare this statement
that helps them in proper assessment of cash position.
So these are example of management accounting techniques which have their significant impact
on companies performance as well as in growth.

Critical analysis- As per the above description of management accounting techniques, this can
be find out that all these techniques are useful for companies in aspect of planning and decision-
making. This is so because all techniques of management accounting are linked with companies
operations and activities which results in better planning and decision-making. In the aspect of
above chosen Morrisons company, they are using various kind of management accounting
techniques and their importance for them are mentioned below which are as follows:
 Role in planning- It is essential for companies to plan their activities and functions in
future so that all resources can be managed (Carpenter and et. Al, 2017). This is being
considered as one of crucial step in organisations because basis of success depends on it.
In this context, the management accounting techniques and functions play a vital role.
This is so because in these techniques both kind of information: monetary and non
monetary are included which leads to better planning for companies. In addition any
wrong step in making planning can be resulted as wastage of resources and loss. In the
aspect of above chosen company, Morrisons plc they make planning of their financial and
non financial resources by help of management accounting techniques. Such as by help of
standard costing method, they compare their actual results with budgeted results and on
the basis of it make planning of allocation of financial resources into various kind of
activities.
 Role for controlling- In addition, the management accounting techniques and its various
functions are useful for controlling organisational activities (Govindan, Rajendran,
Sarkis and Murugesan, 2015). Basically, it is important for companies to make an
effective control over expenditures. Otherwise in the absence of it, losses can be increase
continuously. In this case, the management accounting techniques are very crucial
because these have a systematic framework for effectively arrangement of all financial
resources. For example in above selected company, Morrisons plc they use this
accounting technique for controlling additional cost of operations. This becomes possible
only because of implementation of accounting techniques such as cost controlling
activities which help in minimising the expenses as much as possible. On the other hand,
in absence of these accounting techniques companies may face several issues such as lack
of control over higher expenses and many more.

 Importance for decision-making- In companies, decision-making is one of the crucial
process which is needed to be done in a better sense (Birt, Muthusamy and Bir, 2017).
As well as this is being done by managers of companies. For this they need quantitative
and qualitative information which is being provided on required moment by help of
management accounting techniques and systems. Basically, in the absence of complete
information this can be difficult to organisations and managers to make right decisions as
per need of organisation. In the aspect of above chosen company, Morrisons plc their
managers take decisions on many crucial situations with help of management accounting
techniques. In addition by help of some accounting reports such as stock management
report etc. they take decisions for further operations.
So as per the analysis of above role of management accounting and its techniques, this
can be stated that these are necessary for companies to implement in a better manner.
TASK 2
(a) Calculation of ratios.
Ratios 2018 2017
1. ROCE or Return On Capital
Employed :
= (Operating Profit /Capital
Employed) x 100
here, Capital Employed = Total
Assets – External liabilities.
= 412 / 2925 x 100
= 14.10 %
= 375 / 1912.50 x 100
= 19.60 %
2. Net Profit Margin :
= Net Profit / Sale x 100
= 262.50 / 3000 * 100
= 8.75 %
= 300/ 2400 x 100
= 12.5 %
3. Current Ratio :
= Current Assets / Current
Liability
= 1035 / 1110
= 0.93
= 757.50 / 322.50
= 2.34
4. Debtor Collection Period : = 600 / 3000 x 365 days = 450 / 2400 x 365 days

= Receivable / Sales x 365 = 73 Days = 68.43
= 68 Days (Approximately)
5. Creditor Payment Period :
= Payable / Purchase x 365
= 1050 / 2400 * 365 days
= 159.68
=160 Days (Approximately)
= 285 / 1350 * 365 days
= 77.05
= 77 Days (Approximately)
(b) Comment on performance of Alpha limited company on the basis of ratio calculation.
 Return on capital employed ratio – This is important for companies to assess efficiency
of getting return on invested capital and it is done by calculation of return on capital
employed ratio (Pang, 2016). The formula of calculating this ratio is as : (Operating
Profit /Capital Employed) *100. In the perspective of return, this ratio is very crucial for
both to internal and external stakeholders. It is so because by calculating this ratio
external stakeholders can aware about companies financial position in terms of providing
return on employed capital. Hence , most of companies try to keep this ratio higher as
much as possible. In the context of above respective company , Alpha limited they are
computing this ratio for year 2017 and 2018 that is of 19.60 % & 14.10 % in both years.
Herein , this can be articulated that their ratio is decreasing in year 2018 as compare to
year 2017. Difference in this ratio between both of year is of 5.50 %. As per their
financial statements , it can be stated that the reason of this variation in year 2018 is
higher amount of expenses such as operational cost , fixed cost and many more. In this
situation , it is important for them to minimise the expenditures by effective management
and allocation of funds.
 Net profit margin – In most of companies , calculation and analysis of this ratio is
almost compulsory (Keller, 2018). Basically , it is computed at the end of a financial year
with an objective of assessing actual financial position or outcome of different kind of
activities. The calculation of this ratio is done by dividing net profit of year by net sales
and multiplying by 100. It is measured in terms of percentage and financial position is
considered higher if this ratio is higher. In the aspect of above respective company ,
Alpha limited it is of 12.5 % in year 2017 and 8.75 % in year 2018. Same as above ratio ,
this ratio is decreasing in year 2018 as compare to year 2017. Difference in this ratio

between both of year is of 3.75 % and reason of it , is increased amount of expenditures
in last year. In this aspect , it is essential for above company that they should try to focus
on those activities which are occurring in higher expenses. In addition , it is essential to
them that they should keep it higher so that stakeholders can make interest in investing
more funds. If they will do so then automatically their ratio will be higher and financial
position will be improved.
 Current ratio – This ratio shows relation between current assets and current liabilities
and companies calculate it for assessing liquidity position. The ideal range of current
ratio is 2 : 1 and businesses focus to maintain this criteria (Vučijak, Kurtagić and
Silajdžić, 2016). The formula of calculation of this ratio is as : current assets / current
liabilities. To keep this ratio higher companies should focus to minimise their short-term
debts. This ratio is one of the important ratio in liquidity ratio. Like in the aspect of above
respective company , Alpha limited their current ratio is of 2.34 times in year 2017 which
decreased and became of 0.93 times in next year 2018. Again as per the previous ratios ,
this company's financial position is weak in year 2018 as compare to year 2017. The
reason of this difference is higher amount of current liabilities in year 2018 as compare to
year 2017. As well as amount of current assets are also decreasing in year 2018. In this
case , the above company should try to increase their current assets so that they can
become able for making payment of short-term debts. In addition , if this ratio will higher
then it will become easy for them to meet the criteria of ideal ratio and they will be able
to make payment of their short term debts and liabilities.
 Debtors collection period – It is being calculated to evaluating the number of days taken
in order to receive debt amount by various kind of debtors. This ratio is also known by
receivable turnover ratio (Beaudoin, Cianci and Tsakumis, 2015). For businesses ,
debtors can be customers or others who make credit transaction and promise to pay on
future date. The formula of calculating this ratio is as follows: Receivable / Sales *365
days. Basically , this is essential for companies to recover their debt amount in less time
so that they can get enough amount of fund to operate various kind of activities and
operations. Like in the aspect of above chosen company , Alpha limited their finance
department is taking time period of 68 days in process of collecting debt amount in year
2017. While in year 2018 , they are taking 73 days. So this can be stated that their ability

to collecting debt amount is decreasing in year 2018. On the basis of given balance sheet ,
it can be find out that the reason of this difference is higher amount of debtors in year
2018 as compare to year 2017. In this aspect , it is important for above company that they
should focus to make credit transactions only with those who have good track record of
repayment.
 Creditors payment period - It can be defined as a type of ratio that is associated with
process of assessing time taken by a company for making payment to creditors (Thuong
and Hong, 2017). For a business entity creditors can be suppliers , financial entities by
whom they make credit transaction or borrow the fund. The formula of calculating this
ratio is as : Payable / Purchase * 365 days. Same as the above ratio , this is also measured
in terms of days. If a company takes more days in process of making payment then it is
not considered good because this may lead to decreasing in goodwill of company in
market. While if a company , takes less time in paying their debts then their goodwill
increase among different stakeholders. Such as in the aspect of above selected Alpha
limited company , they are taking time of 77 days in making payment to their creditors.
On the other hand , in year 2018 they are taking almost double days to make payment of
credits which is of 160 days. It is indicating that their ability to make payment to their
creditors is decreasing and this may impact to their reputation in market in terms of
making payment to their stakeholders by whom they owns the money.
So on the basis of above interpretation of five ratio of Alpha limited company , this can
be commented to their performance that in current year 2018 their performance is weak as
compare to last year 2017. Thus , it is important for them to minimise their fixed and variable
expenses as well as should try to avoid credit transactions so that their financial position can be
improve.
CONCLUSION
On the basis of above project report it has been concluded that financial decision-making
is one of the crucial process for companies. It is so because any wrong decision can be cause of
financial crises to entities. Under the project report importance of various kind of management
accounting techniques such as standard costing, budgetary control, cash-flow statements etc. In
addition the role of these accounting techniques for planning, controlling and decision-making is
also concluded. In addition, all the importance of these accounting techniques are described in

relation to selected company Morrisons plc. Apart from it , various kind of ratios such as current
ratio , return on capital employed ratio and many more are calculated as per the given data of
Alpha limited. As well as these ratios are interpreted in order to make comment on company's
financial position and it can be concluded that their current performance is weak as compare to
previous year 2017.

REFERENCES
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Carpenter, J .P., Huet-Vaughn, E., Matthews, P. H., Robbett, A., Beckett, D. and Jamison, J.C.,
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Online:
About Morrisons company, 2019. [online]. Available through:
<https://groceries.morrisons.com/webshop/startWebshop.do>