Financial Decision Making Assignment Sample

Financial Decision Making

Executive Summary
In the first part various financial statements such as Profits and Loss statement, Cash
Flow Statement and Balance Sheet Statement will be analyzed. Also, Segmentation analysis will
be done on the basis of the performance of the company. In second part the investment appraisal
technique will be analyzed in which management forecasting along with various capital
budgeting techniques have been used. The various techniques are payback method, average rate
of return and net present value. The company wants to expand in retail airport so the source of
financing will be suggested. The company will also be suggested about the various non financial
factor that should be consider for the development of business.

Table of Contents
Executive Summary ........................................................................................................................2
Part 1 ...............................................................................................................................................1
1.1 Profit and Loss Statement......................................................................................................1
1.2 Financial Position Statement..................................................................................................2
1.3 Cash Flow Statement.............................................................................................................3
1.4 Analysis of Market Segments' Financial Performance..........................................................5
Part 2................................................................................................................................................6
2.1. a Management Forecast........................................................................................................6
2.1 b. Investment Appraisals Techniques....................................................................................8
2.2 Sources Of Finance................................................................................................................9
2.3 Non financial factor that has to consider in expansion of retail business in airport............11
REFERENCES..............................................................................................................................12

Part 1
1.1 Profit and Loss Statement
Meaning of Profit and Loss Statement
Profit and Loss (P&L) Statement is also known as Income Statement. It is a kind of
financial statement which is prepared by various companies at the interval basis in order to get to
know about the income, revenue, cost and expenditure structure for the whole accounting year
(Williams and Dobelman, 2017).
Ratios Related to the Profit & Loss Statement and Critical Evaluation of the financial
performance through the analysis of the P&L Statement of the company
There are three main rations which are based on the company's profit & loss account. These three
ratios are as follows in the context of EasyFlight Company -
Gross Profit Ratio – Gross Profit (GP) Ratio refers to the ratio which measure the relationship
between gross profit and net sales of the company.
Net Profit Ratio – Net Profit (NP) Ratio refers to the ratio which measure the relationship
between net profit and net sales of the company.
Operating Profit Ratio – Operating Profit (OP) refers to the ratio which measure the relationship
between operating profit and net sales of the company (Bragg, 2018).
Analysis of financial performance of EasyFlight Company
Profit and Loss Ratio Formula Year 2017 Year 2018
Gross Profit Ratio Gross Profit
Net Sales
3031 * 100
1535
= 1.97
3211 * 100
1736
= 1.84
Net Profit Ratio Net Profit
Net Sales
443 * 100
1535
= .29 (Rounded Off)
541 * 100
1736
= .31 (Rounded Off)
Operating Profit Ratio Operating Profit
Net Sales
583 * 100
1535
= .38 (Rounded Off)
690 * 100
1736
= .40 (Rounded Off)
(Net Sales = Gross Profit – Cost of Good Sold,
Year 2017, 3,031– 1,496 = 1,535
Year 2018, 3,211 – 1,475 = 1,736)
From the above ratios, it can be said that After expansion of the business towards France,
Easyflight Company's overall sales decreased and expenditures increased. This lead to increase
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in gross profit per sales pound in year 2018 but decrease in net profit per sales pound and
operating profit per sales pound in the same year. Overall company's financial performance is
good. The reasons behind the improvement in financial performance of the firm are as follows –
Sources are profitable for the company from which it generates revenue, Cost of good sold got
decrease and net income got increased.
1.2 Financial Position Statement
Meaning of Financial Position Statement
Financial Statement is also known as Balance Sheet Statement. It is a form of financial
statement which consists of the assets, liabilities, debts and capital. It is prepared by the
companies at the end of the accounting year. It is one of the most important statement in all the
financial statement (Winfree and et.al., 2018).
Ratios Related to the Financial Position Statement and Critical Evaluation of the financial
performance through the analysis of the Financial Position Statement of the company
There are three main rations which are based on the company's balance sheet. These three
ratios are as follows in the context of EasyFlight Company -
Working Capital – Working capital refers to the part of that capital which is being used by
company for day to day operations.
Current Ratio – Current ratio refers to the ratio which measure the company's ability to pay short
term obligation within the one year.
Quick Ratio – Quick ratio refers to the ratio which measure the company's ability to pay its short
term obligation with its most liquid assets within the one year (Drake, Quinn and Thornock,
2017).
Analysis of financial position of EasyFlight Company
Balance Sheet Ratio Formula Year 2017 Year 2018
Working Capital Current Assets –
Current Liabilities
1382 – 576
= 806
403 - 538
= (135)
Current Ratio Current Asset
Current Liability
1382
576
= 2.40 (Rounded Off)
403
538
= .75 (Rounded Off)
Quick Ratio Quick Asset*
Current Liability
1261
576
= 2.19 (Rounded Off)
249
538
= .46 (Rounded Off)
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* Quick Asset = Cash + Investments + Accounts Receivable
From the above ratio, it can be say that After expansion, Company's financial position
went down. Company's working capital was negative in year 2018 due to a lot of spending cash
on the expansion of business in France. Company's ability to pay its short term obligation from
current and quick assets became less due to lack of cash and its related equivalents. Overall
company's financial position went down and balance sheet of the Easyflights become weak as
compared to previous year.
1.3 Cash Flow Statement
Meaning of Cash Flow Statement
Cash flow is also known as Statement of Cash Flow. It is a variety of financial statement
which tell about the cash outflow and cash inflow of the company in an accounting year
(Makanji and Jenis, 2017). Cash flow statement is classified into 3 activities -
Operating Activity – It involves all those activities of the business which is include in the
generation of cash and its related equivalents from the net income. It involves the cash inflow
and cash outflow from the purchasing and selling of products and services.
Investing Activity – It involves those activities which is related to the non current assets of the
organisation and generate cash and cash equivalents. It involves the cash inflow and cash
outflow from the purchasing and selling of the investment which is made by the organisation.
Financing Activity – It involves that activities which is related to the non current liabilities &
equities of the organisation and generate cash and cash equivalents for the organisation. It
involves the cash inflow and cash outflow from the raising long term capital & loans and give it
back to the respective parties (Ricketts, Riley and Shortridge, 2018).
Easyfilght's Cash Position Analysis
Cash position of the company has decreased due to expansion towards France market.
After the expansion, company's cash flow statement shows positive cash flow from operating
activities and financing activities but negative cash flow from investing activities. That means
company is successfully able to sell its aircraft products to the customers in trio sector –
England, Scotland and France. But due to expansion, company has to purchase so many fixed
assets which required cash. Thus, investing activities went negative. Company has required more
cash for the successful operation of their business in France which lead company to take long
term loan from the bank. This create more cash for the company. That is the reason financing
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activities of the company is positive. But company's cash outflows was more than company's
inflows which lead to impact the cash position of the company.
Calculation and Analysis of the Operating Cash Cycle (CCC)
Operating Cash Cycle (OCC) refers to the metric which shows the time period in which
Company is able to successfully convert its inventories into the cash quickly. It's another name
are cash conversion cycle or operating cycle (Osadchy and et.al., 2018).
Formula of OCC -
OCC = Day's Sales in Inventory + Average Collection Period
Day's Sales in Inventory (DSI)= 365 Days
Inventory Turnover Ratio
Average Collection Period (ACP) = 365
Accounts Receivable Turnover Ratio
Inventory Turnover Ratio (ITR) = Net Sales
Inventory
Accounts Receivable Turnover Ratio (ARTR) = Net Sales
Average Accounts Receivables
Dividend Policy of Company in year 2018
Company follows Constant Dividend Policy. Constant dividend policy refers to this
policy in which company will pay dividend to their shareholders accordance with the
profitability of the company. If company's profit increases, dividend price will also increase. But
if company's profit decreases, dividend price will also decrease (Baker and Weigand, 2015).
In the context of the EasyFlight Company,
Financial Year Profit Amount Dividend Amount
Year 2017 £443 million £100 million
Year 2018 £541 million £125 million
From the above table, it can be easily said that increase in profit lead to increase in
dividend paid by the company to its shareholders.
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Yes, Easyflight Company was right to make this decision regarding constant
dividend policy in year 2018 because company's earnings was increasing which lead company to
pay dividend accordingly. Also, it will help company to attract more shareholders.
1.4 Analysis of Market Segments' Financial Performance
Comparison and Contrast between England and France
On the basis of Gross Margin
Year England France
2017 62.45% 58.11%
2018 63.18% 67.83%
From the above table, it can be easily analysis that in year 2017, England's gross margin
per sales pound was higher than France. But in year 2018, France's Gross margin is higher than
England's gross margin.
On the basis of Net Margin
Year England France
2017 7.54% (81.08%)
2018 10.95% 33.04%
From the above table, it can be easily interpret that in year 2017, England's net margin
was better than France's net margin. But in year 2018, it got reverse which means France's net
margin increased as compared to England.
Comparison and Contrast between Scotland and France
On the basis of Gross Margin
Year Scotland France
2017 79.85% 58.11%
2018 85.08% 67.83%
From the above table, it can be easily said that Scotland's gross margin in year 2017 was
higher than France's gross margin. Same went in year 2018 too. In short, both year Segment
Scotland's gross margin was higher than France.
On the basis of Net Margin
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Year Scotland France
2017 33.33% (81.08%)
2018 24.49% 33.04%
From the above table, it can easily demonstrate that In year 2017, Scotland's net margin
was higher than France but in year 2018, France's net margin increased and became higher than
Scotland.
Comparison and Contrast between England and Scotland
On the basis of Gross Margin
Year England Scotland
2017 62.45% 79.85%
2018 63.18% 85.08%
From the above table, it can be highlighted that in both year, Scotland's gross margin was
higher than England's gross margin.
On the basis of Net Margin
Year England Scotland
2017 7.54% 33.33%
2018 10.95% 24.49%
From the above table, it can be analysis that in both year, Scotland's net margin was
higher than England's net margin.
Recommendations to the Easyflights' Board Team
From the above analysis of segmentation performance of the company and interpretation,
it can be recommendation given to the company's board that Every segmentation has its own
various external and internal factors which affect the business and its financial performance. In
order to see which factors affect the company's financial performance in trio segments, Firm
should focus on the more and more strategic and financial metrics & tools so that cost can be
reduce and sales volume can be increase. Also, company mainly should focus on the equal and
same financial policy in different segment so that comparison can be done easily and
improvement measurement can be taken accordingly.
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Part 2
2.1. a Management Forecast
Investment Appraisal - France expansion
YEA
R
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
£
million
£
million
£
million
£
million
£
million
£
millio
n
£
millio
n
£
millio
n
£
million
£
million
SAL
ES
100 150 300 450 585 702 842 927 1019 1121
Sales
grow
th
rate
%
50 100 50 30 20 19.94 10.09 9.92 10.00
varia
ble
cost
25 38 75 113 146 168 202 222 234 258
Vari
able
grow
th
rate
%
52 97.37 50.66 29.2 15.06 20.23 9.9 5.4 10.25
profit 75 112 225 337 439 534 640 705 785 863
profit 49.33 100.89 49.77 30.26 21.64 19.85 10.15 11.34 9.93
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YEA
R
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
grow
th
rate
Business management forecasting works as decision making tool in an organisation that
will help in budgeting, planning and estimating the futuristic growth on an organisation. On
simple terms it can be said as on basis of past activities, the attempt is made to predict the future
is done just to have the management insight. The management of Easy flight plc has forecasted
the investment appraisal for the expansion in France. The proper forecasting is done on basis if
current trends of the economy as appropriate decision making can be their in operational
activities of company to achieve the goal and objective to develop the business.
The easy flight plc has estimate the expansion in France after successful completion of
their service in United kingdom in last 20 years(Mahtani, U.S. and Garg, C.P., 2018.) . The
company has come up with the investment appraisal with the motto of serving of cheapest
service in France. There are many budget airline are previously prevailing in market of France
so it my be very difficult for Easy flight plc to handle such a large level of competitor in market.
In investment appraisal the company has proposed the estimates for next 2 upcoming year i.e.
2018 and 2019, it is attaining growth of 50%and 100% as there is majorly 2.2% and 1.2% of
growth in economy of France in which 75% is in service sector so it is impossible to predict a
futuristic growth in the expansion of easy flight plc to gain this much growth in such a
competitive market. At the time of expansion there were many political and economic instability
in France due to with there were great fluctuation in exchange of dollar and euro.
The second criticism of forecasting is that after 2 years that is 2018 and 2019, in next
following years i.e. the year of 2020 to 2026, there is steep downfall in the growth rate of
company which is practically impossible as the company is continuously have decreasing rate of
return then the company cannot survive in such a competitive environment(Mahtani, U.S. and
Garg, C.P., 2018.). This will have a large impact on profitability of company. So an the both time
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of evaluation of investment appraisals it seems to have an unrealistic approach which some
where leads to wrong productivity of company. Hence the current methods of appraisal
technique is incorrect.
2.1 b. Investment Appraisals Techniques
Payback period- this the method used in capital budgeting which helps in calculation
the time duration or period that will be taken by an investment to recover its own cost. In other
word it can be said as it estimates the length of time in which as investment can reaches its
break-even point. It also help in have a decision making process over an investment to be hold by
company. A business with a shorter cash flow are consider to be well as it help in recovering the
cost soon so that profit can be generated at increasing rate. For the current project time , cash
flow is decreasing day by day as the payback period is 7 years and 11 month approximately
which can be a little longer period. So the company have to make proper work culture to increase
the profitability and cash flow.
Advantage - there is easy comparison between the assets or companies by calculation
of time period to recover the cost. It helps in calculating the economic feasibility of project as
company has invested 3000 £ million and the pay back period is almost 8 years of project.
Disadvantage- the disadvantage of this method is that it doesn't count the time value of
money.
Accounting Rate Of Return- the accounting rate of return is also known as average rate
of return which refers to the calculation of financial ratio is capital budgeting. The rate of return
actually calculate the expected profitability from any investment(Trisakti, 2018.). The rate of
profitability that is expected by this investment is about 11.4 % which is too be increased as to
expand in market.
Advantage – there is the easy understanding as it is an accounting information and no
other special reports are required.
Disadvantage- it is ignore the cash flow and time value of money at certain period.
Net Present Value
In calculation of net present value the difference between the present cash inflow and
cash outflow is calculated over a period of time. The NPV is one of method in calculation in
capital budgeting and planning of investment as to analysis the profitability of projected project.
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In this calculation there is high priority is given to time value of money along with profitability
and risk. The calculation of NPV in this project 28% with cost of capital of 3%.
Advantage – the main advantage of this method is that it calculate the present value of
cash invested in business.
Disadvantage - there is inappropriateness in calculation and turn out to have difficulty in
understanding due to difference in discounting rate of return.
2.2 Sources Of Finance
The company wants to investment further in the field of airport retail business with the
amount of £ 2 million. The airport retailing is actually driven by consumers that are passengers .
There is availability of wide range of products(Zhang, 2015) . So the easy flight plc want to
expand in retail business. The company want to enter into range of non aviation business as the
scope of airport retail is very wide. So the company want to decide between various sources of
finance i.e. equity financing and debt financing. The choice between the sources of finance
depends on the availability of cash and the control of board of directors in organisation. There
are many advantage and disadvantage of each sources of finance in company.
Equity financing
The equity financing refers to raising the capital for the development of further business through
he issue of shares in business . The company have to issue shares in market in which the
investors invest money in company in exchange of ownership(Panigrahi, 2019). There can be
angel investors and venture capitalist at the start-up age and its cash out as the high growth is
achieved with establishment of business.
Advantage
The advantage of the equity financing as there is no burden or loan for the repayment. There is
no monthly repayment of loan. as the investor who are contributing in company is provide there
valuable experience, technical skills along with credibility to business(Ferrell and Fraedrich,
2015). The investor who have already invested in development of company will always be ready
to have additional investment as to have great progress in company. There is no credit issue if the
firm isd using the eqauity financing foe the development of business.
Disadvantage
As investor invest in company is due to exchange of ownership. So the management of company
has to share profit with investor along with control ans ownership in there businesses there is
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investor expect a piece of profits. There may be disadvantage of personal relationship if the
business fails. There is the requirement of investor who are ready to have investment on regular
basis in company.
Debt financing
it is the type of financing in business which is term as loan required to paid time to time along
with interest. The main sources of debt financing are government agencies and
banks(Suhardjanto and Ajibroto, 2017.). With the help of debt financing there is tax advantage ,
as interest paid on loan is deductible. Due to repayment of loan the company comes under
obligation which limit the scope of business.
Advantage
As in debt financing the company never loose control over decision making in company as there
is no exchange of ownership at time of investment. There is no profit sharing with lender of loan
as they are just fixed with exchange rate. The interest in investment the company get with tax
benefit.
Disadvantage
The debt financing has the disadvantage as foe a new company it became very difficult to repay
the loan because of irregular cash flow. There is worse impact on business if there is hike in rate
of interest due to economic turnaround. There is increased level of risk along with amount of
debt in business.
So both debt and equity financing is an important ways for the development of business in an
organisation as it depends on long and short term goals of company and level of control of
management(Dinçer, Hacıoğlu and Yüksel, 2017). So the board of directors of easy flight plc
should use the combination of both equity and debt to achieve the commercially acceptable ratio
known as debt to equity ratio as to have successful business. Mainly the debt to equity ratio of
any firm use to be 1:1 or 1:2.
2.3 Non financial factor that has to consider in expansion of retail business in airport.
There are many factors that has to consider before the development of retail sector in
airport that is considers other than the financial factor are-
Location strategy- the company should understand which will be the most attractive place for
the development of business at airport and that is the capacities in understanding different
language as to attract more and more customers.
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Merchandise strategy-there should be depth and quality of service that is to be offered to
customers so that the brand of firm can be valued.
Logistical and security procedure- there should be central security checkpoint for the tenant
and have the specific procedures to get product. Security is major concern at airport. There
should be better understanding of all lease provision along with rules and regulation.
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