Financial Decision Making - Assignment

FINANCIAL DECISION
MAKING

EXECUTIVE SUMMARY
Financial decision making is responsible for decision regarding liabilities, equity and all
the decisions regarding business. It helps company in establishing financial goals and
overcoming risk by forecasting the financial statements. It is a crucial part for every company to
allocate the funds to different business activities. From the overall report it be said that
Easyflight company has increases its profits by £98 million in 2018. company has good amount
of retained earnings though its cash flow showed some ups and down because of company had
purchased property of £1462 million in 2018. Further manager of company has forecasted that
investment of the company in expansion of France. Company has also used some investment
appraisal techniques such as payback period, accounting rate of return and net present value
method which has helped company in identifying the duration of project and return on
investment. For investing in airport retail business company has taken bank loan and used its
retain earnings as a part of investment. Keeping in mind financial factors, company also
considered non-financial factors such as meeting the requirement of current and future trends,
developing capability of the business and increase the morale of staff by providing training,
reward and involve them in decision making process.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
PART 1 BUSINESS PERFORMANCE ANALYSIS.....................................................................1
1.1 statement of profit and loss...............................................................................................1
1.2 statement of the financial position ...................................................................................3
1.3 statement of cash flows....................................................................................................4
1.4 market segment analysis:-................................................................................................5
PART 2 : INVESTMENT APPRAISAL ........................................................................................6
2.1 (A)Management forecast..................................................................................................6
2.1 (B) Investment appraisal techniques................................................................................7
2.2 Sources of finance.........................................................................................................10
2.3 Non-financial factors......................................................................................................11
REFERENCES..............................................................................................................................13
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PART 1 BUSINESS PERFORMANCE ANALYSIS
1.1 statement of profit and loss
Profit and loss statement is a report which show the details of profits, loss and direct expenses. It
is one of a primary report in the system of accounting of a enterprise which plays an important
role in the analysis of financial statement of the company (Carvalho, Meier and Wang, 2016). In
the Easyflight Plc P&L report show the details of its profit and activities expenses of the firm.
on the basis of the given statement it can be analyse:-
Revenue:- on the basis of the sales of the both the years 2017 & 2018 sale is increase where the
sales of 2017 was 4462 million pounds and sale of 2018 4616 million ponds there is a difference
of 154 million where it is a indication of the companies growth with sales. Also this value show
that the service and goods provided to customers is increase also the revenue generated from non
sales is also increased.
Cost of good sold:- cost of good sold means that expanses incurred on manufacturing of good
and services sold it includes material cost, labour. It include direct cost and overhead cost of the
company. Direct cost contains material cost, purchase for resale and shipping cost. Overhead
includes labour cost, rent, equipment cost. Statement of Easyflight Plc cost of sales decline in the
year of 2018 in respect of 2017 from 1496 to 1475 but the sales is increase which shows that the

effectiveness of the firm is increased V. It is beneficial form the Easyflight Plc because it
increase it gross profit.
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Gross profit:- gross profit is the different amount of the revenue or sale and cost of good sold
where it shows that the gross profit earned by the firm. For the Easyflight Plc the gross profit is
increased because of the increase in the sales and decrease in the cost of the goods sold. It has
3031 and 3211 gross profit in year 2017 and 2018 respectively which show increase of 180
million pounds.
Gross profit ratio= gross profit*100/revenues
gross profit:- 3211
revenue:- 4616
GP ratio= 3211*100/4616 = 69.56%
Operating expenses:- operating expenses includes the selling and administrative expenses of the
organisation. Selling expenses are the expenses which are incurred for the process related to the
sales by firm it include the advertisement expenses, sales commission etc. administrative
expenses are the expenses which are related to the operating administration of the Easyflight plc
(Francis, and et.al., 2015). Operative expenses of the firm are decline which is beneficial for the
company but in the year 2017 there is a extra expense for the company which is legal claim of
245 million pounds where it is reduced to 125 million pounds in the year 2018 so that there in
decrease in the operating cost also. The difference on the cost in both the years is 28 million
pounds.
Operating income:- operating income is the difference amount of gross profit and operating
expenses. Easyflight has increase its operating income in the years 2018 from 583 to 690 million
pounds.
Operating profit ratio:- operating income*100/revenue
OP ratio= 690*100/4616 = 14.94%
Profit:- profit means that the deduction of the of interest and tax from the operating income.
Easyflight has increase its profit because of the increase in operating income firm has 11 and 131
million pounds interest and Tax respectively in years 2017 and net profit of 443 million where it
has 11 and 138 million pounds interest and tax respectively in the year 541 million pounds net
profit for the organisation (Bangma, and et.al., 2019). So there is increase of 98 million pounds
net profit.
Net profit ratio= profit after tax*100/revenue
revenue:- 4616
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profit after tax:- 541
net profit ratio:- 541*100/4616 = 11.72%
1.2 statement of the financial position
Financial position of the firm is calculated or asses with the overview of balance sheet of firm.
Balance sheet is snapshot of the firms financial position. It is important for company as well as
its stakeholders like investors, share holders and owners. Balance sheet sow that the how
efficient management of the business using the capital of the firm, the risk of bankruptcy and
how fast the business is growing (Lichtenberg, and et.al., 2016). For the assessment of financial
position of the Easyflight it can be evaluate the balance sheet of the firm
Current assets:- it is the important aspect of the company. It means that assets which in the
form of the cash or cash equivalent or can be covert in the cash in the period of the 12 months is
called current assets. Current assets show the liquidity of the firm. Current assets includes cash
and cash equivalent, short term investment, account receivable, inventories or stock, and prepaid
expenses. Balance sheet of Easyflight show that current assets of 1382 and 403 million pounds in
year 2017 and 2018 respectively where it shows that it decrease its current assets because if the
firm has invested in the fixed assets.
fixed assets:- assets which is used in the operations of the firm. It can be says that the assets
which is long term in nature and not converted in cash in one year (Lichtenberg, and et.al.,
2016). Company have increase its fixed assets from 3020 to 4399 in the year of 2018 where in
purchase a new property of 1390 million pounds which sounds the assets side of the balance
sheet
Current liability:- it is the amount of current expenses of the company which it have to pay in
near by future. Or it can be says that the current liability is amount which Easyflight have to pay
in the period of one year. Easyflight has current liabilities of 523 million pounds in 2017 and 538
in 2018.
Equity:- equity means that long term liabilities of the firm which have to paid. It includes the
share capital on which company have to pay dividend and long term debt on which firm have to
pay interest. More of the equity means to pay more amount of the profit (Mitchell, Hammond
and Utkus eds., 2017). Share holders are counted as owners of the company where 108 million
pounds of equity share capital and 1654 million pounds of loan in 2017 and 108 share capital and
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1676 million pounds of long term loan in 2018 which shows that company have a big amount of
the long term loan which is taking huge interest amount.
retained earning:- retain earning means that amount which is kept by the company as reserves
from the part of the profit for the future growth of the company and also for the future growth of
the firms (De Costa and Aziz, 2019). Easyflight has increased its retain earning from 1406 to
1822 million pounds which helps in the future investment of the firm.
Current ratio:- it measure that the how much liquidity company has. Standard ratio of the 2:1
for the current ratio. Formula for the calculation of the current ratio
current ratio:- current assets/current liabilities
firm has current assets- 403 million pounds
current liabilities- 538 million pounds
so
current ratio= 403/538 = 0.749 which is 0.74 : 1
which it can be says that the company has less liquidity.
1.3 statement of cash flows
Cash flow statement:- it is the statement which shows the cash flow of the company. It is a
important part of the organisation for the calculation of the flow of cash so that it can be evaluate
that their will be no deficiency of the cash in the daily regulation (Jetter and Walker, 2017).
Easyflight has opening cash balance of 1061 million pounds and net decrease in the cash and
cash equivalent in years was 1018 so it left 43 million pounds at end of the year 2018 so can be
says that the firm have very less cash left with it which affect the operations of the Easyflight due
to the absence of the cash. Where it purchase the property of 1462 million pounds which affect
the cash and cash equivalent the most.
Operating cash cycle:- it is the time of cycle which is required for a company to put its cash
into operations and return to the company cash account.
Operating Cycle = Inventory Period + Accounts Receivable Period
Operating Cycle =53+16 = 69 days
Inventory Period = Average Inventory / Cost Of Goods Sold * 365
Inventory Period = 214*365/1475 = 53 days
Accounts Receivable Period = Average Accounts Receivable / Net credit sales * 365
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Accounts Receivable Period = 203*365/4686 =16 days
Evaluation of the dividend policy of the Easyflight:- Easyflight has the highest no. of share
holders which because of its dividend policy and motivation to shareholders. Company has
policy to provide a part of profit as dividend every year. Company has sound dividend policy and
it is in the position that it can give dividend to its shareholders (Martin and Gomez-Mejia, 2016).
Company has given divided of 125 million pounds in the year 2018 from profit of 541 million
which is logical for the because it is necessary to give dividend because it helps to increase
shareholder wealth and it attract more no. of shareholders in future if company want to raise
funds. So it can be says that the decision of the giving dividend is right.
1.4 market segment analysis:-
Comparison of between England and Scotland:- there is a huge difference between the sales
of the company at England and Scotland where it has 3430 million pound sales in England and
1085 million pounds sales in Scotland where it has gross profit of 2181 in England and 952 in
Scotland. Also there is difference in the operating cost at both the countries where it has 1803
million operating cost and 678 million in Scotland (Johnston, Kassenboehmer and Shields,
2016). It shows that the gross margin difference in both the countries where it has 63.18% and
85.08% in England and Scotland respectively. Also the difference shown in the net profit of the
firm where the Scotland has 33.04% of profit in respect of the 10.95% profit at the England. So
that it can be says that Scotland is more profitable for the Easyflight.
Decision making- for the decision making the directors of firm have to focus on the cut the
operating cost of company at England where it has huge operating cost due that it decrease the
profits of the company. For the Scotland firm has law sales it try to increase sales of firm so that
it can earn more profit.
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PART 2 : INVESTMENT APPRAISAL
2.1 (A)Management forecast
From the above investment forecast by Easyflight Plc for the purpose of expansion in
France, it can be said that total investment made by managers of the company is £3000 million.
Mangers of the organisation has forecasted that in year 2017 the net debt is 100 which means
Easyflight has enough liquidity to pay off its debt and its contribution is 75 which is the earning
remaining after deducting variable cost. Is is justified that company has enough capital such as
£2172 million out of which retained earnings is £1406 million, company can pay off its debt
sufficiently. In the year 2018 company has enough liquidity amount to pay its debt i.e. £150
million and its contribution is £113 million (Tamir, et.al., 2015). In the first 2 years company
face many challenges and experience a setback in achieving all the targets. Further in the year
2019, 2020 and 2021 Easyflight managers forecast that liquidity condition will be improved and
their will be enough money remaining after deducting all the direct cost. Company will be able
to meet its requirements. Increase in airport rates affected the airport fees which has affected the
company as well. Management further forecasted that in the coming years company will perform
well and increase its profits and sustain in the market by maintaining its liquidity position so as
to pay off its debt. It is essential for company to forecast its liquidity position so that managers
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have an idea of financial stability of the company. It is used for further decision making for
leveraging the company.
2.1 (B) Investment appraisal techniques
Payback period: It is considered as the time taken to recover the investment cost. In
other words, it is said that it is the total time taken to recover the initial investment cost. The total
amount of time taken to meet the break-even point of the investment is called payback period.
The project with the lowest number of days is selected (Masri, Pérez-Gladish and Zopounidis
eds., 2018). It compares the project and determines the number of days, months or year taken by
project to complete.
Limitations:
 This investment technique does not value time which will make difficulty for Easyflight
to complete its project on time.
 It also ignores the profitability of project. It does not mean that project having small time
duration is profitable. Long duration of project may have higher return and may be
preferred against the shorter one.
Benefits:
 It is easy for company to understand this technique and use them in their business.
 It focus on risks and determine how fast the money is been recovered from investment.
Accounting rate of return: It is also called average rate of return (Harrison, 2016). It
calculates the return emerged from the net income of investment. It is calculated in percentage
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form. It is said as the average return of the company's investment. This technique does not
believe in value of time and cash flows. It is the expected rate of return on the investment.
Limitations:
 It ignores the value of time and money which is an essential for every project.
 It does not consider the terminal value of project.
Benefits:
 It calculates the net earnings after tax and deprecation which is an important element in
investment appraisal.
 It helps to measure the current performance of the company.
Net present value: It determines the difference between the value of present cash inflow
and value of present cash outflow (Mitchell, Hammond and Utkus eds., 2017). It is used in
investment panning to forecast the profitability of projected project investment. It depends on
time interval between now and the flow of cash.
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Limitations:
 It involves forecasting of future cash flow and computation of cost of capital which may
not be accurate.
 It is challenging to compare the projects which have different life spans.
Benefits:
 It considers the time value of money and measure the profitability.
 It considers all the cash flows and maximize wealth.
From the above interpretation all the three investment appraisal technique is suitable for
the Easyflight company. It is viable for company to use payback period because it is beneficial
for company in forecasting the risks and time taken to complete the project (Johnston,
Kassenboehmer and Shields, 2016). Accounting rate of return is also viable for company as it
measures the current performance of the business. Yes company was right to proceed based on
the techniques, it will benefit company in identifying the particular amount of time taken for
complete the project and forecast the return on investment. Net present value is also a viable
method because it helps company in determining the current cash inflow and outflow of the
company.
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2.2 Sources of finance
As Easyflight company want to invest in airport retail business of £2000 million in 2019,
company need finance to start its business. There are many sources of finance available to the
company through which organisation may raise funds. Sources of finance for company are debts,
equity, debentures, term loans, letter of credit, retained earnings, working capital loan and
venture funding etc. Easyflight company may take bank loan or take money from venture
capitalist or angle investors.
Bank loan:
It is a specific amount borrowed from the bank for a specific period of time on an agreed
repayment schedule. The repayment of the borrowed funds depends on the duration and size of
loan and interest rates (Martin and Gomez-Mejia, 2016). Many companies prefer taking bank
loans from their suitable financial institutions on the basis of their financial structures. Bank loan
is very beneficial for the growing and developing firms, it is easily available to companies. The
reason behind giving loans to developing firm is risk, bank grant loans to companies who have a
continuous record of generating profits which makes it easy to repay the funds with interest. It is
one of the easiest source of raising funds until company is not bearing loss. It refers to the
extension of credit to customer by the bank, which customers need to pay back with interest.
Advantages
 Keep control over business: Bank grant loan to business on the basis of its value and
ability to pay back the amount with interest. Regardless to when a company issue shares ,
it distributes its ownership also but if bank grant loan to business it does not mean that
bank will have ownership in the business (Tamir, et.al., 2015). They do not have any
rights to involve in the business. Full control of management is with the company only
and there is no external interference.
 Interest is deductible: Company need to pay interest to bank which is deductible from
tax. It is more beneficial to company when there is a fixes rate of interest means there
will be no change in the interest rate during the life of loan. It will help company in
estimating the budgets and plan the business activity accordingly.
Disadvantages
 High interest rates: High rate of interest may stop business to take loans from bank as
they may not fulfil their needs (Johnston, Kassenboehmer and Shields, 2016). Banks
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providing high interest rates will make difficult for business to take money because
funding is not sufficient to expand the business and it is difficult to repay the loan with
interest rates.
 Difficult to qualify: It is very difficult for the company to qualify in granting bank loan.
Bank track records of all the financials of the company and if organisation is unable to
meet the expected standard than bank will not grant loan to companies.
Venture capitalist:
Venture capitalist provides capital to companies who have potential to grow high in their
industry. They take risk and invest in the company because they want to earn return on their
investment. Sometimes they face a high rates failure because of uncertainty. They are
responsible of identifying the business and invest in them in the hope of getting high rate of
return.
Advantages
 They finance new and unique ideas which provide profitability for longer period.
 They provide valuable information, technical assistance and resources to companies to
make them successful.
Disadvantages
 They become the new owners of the company so company does not have full control over
the business.
 Company need to reorganize its structure, they need appropriate issue of shares etc.
Easyflight company need to take bank loan because company also has good amount of
retained earnings which may be helpful for company to start airport retail business (Carvalho,
Meier and Wang, 2016). Company can borrow some amount of money from bank and remaining
it can use its retained earnings. By doing so company will have full ownership on the business
and perform better to earn higher profitability.
2.3 Non-financial factors
Non-financial factors such as meeting the requirement of customers, meeting demand of
future and current legislation, filling the industry standards and enhancing morale of staff,
recruiting and retaining employees etc. these factors need to be considered while expanding the
business. Easyflight company also need to consider these factors.
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 Meet the demand of current and future trends: Airports are now becoming more
attractive for retailers. Easyflight need to consider this factor and invest in retail business.
In the beginning, airports were just warehouse but as the time changes there was addition
of food and beverages. It has been noticed that there is increase in the expectations,
demographics and demand of customers. Airport retail business is becoming an
important element of ecosystem (Lichtenberg, and et.al., 2016). Thus Easyflight company
need to recognize the importance and start its retail business by making suitable business
strategies.
 Developing capability: Easyflight company need to build capabilities for business by
increasing skills, knowledge and experience in new markets. Company need to do market
research in order to find new skills, knowledge and strategies in order to conduct the
business successfully. It will be beneficial for company to strengthen its management
system (Mitchell, Hammond and Utkus eds., 2017). By doing this company is able to
identify its strengths and weakness and work upon it so that it performs better and
compete in the markets.
 Intellectual property: It is one of the most essential element to be considered while
expanding the business. It is the responsibility of company to protects the rights of
intellectual property (Carvalho, Meier and Wang, 2016). It is beneficial for Easyflight
company to protects its right by using tools of intellectual property such as trademarks,
patents and copyrights so as to gain competitive advantage and compete against
competitors.
 Improving morale of staff: It is necessary for company to protect the interest of its staff
so that they perform better. Easyflight company need to provide training session to
improve the skills and knowledge of the employees (Francis, and et.al., 2015). They will
feel motivated and their engagement in the company will also increase. Employee need to
be given reward for their hard work so that they feel valued and their morale is increased.
Company need to involve staff in decision making process and need to consider their
point of view in ordr to generate interest in the organisation.
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REFERENCES
Books and journals(Carvalho, Meier and Wang, 2016)
Bangma, D. F., and et.al., 2019. Financial decision-making in adults with ADHD.
Neuropsychology.
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.
De Costa, M. F. S. and Aziz, N. A., 2019. DOES BRAND ATTITUDE AFFECT THE
FINANCIAL DECISION-MAKING BEHAVIOUR OF MALAYSIAN MILLENNIALS
IN PURCHASING SHARIAH-COMPLIANT STOCKS?. International Journal of
Accounting. 4(19). pp.98-107.
Francis, B., and et.al., 2015. Gender differences in financial reporting decision making:
Evidence from accounting conservatism. Contemporary Accounting Research.32(3).
pp.1285-1318.
Harrison, T. ed., 2016. Financial literacy and the limits of financial decision-making. Springer.
Jetter, M. and Walker, J. K., 2017. Anchoring in financial decision-making: Evidence from
Jeopardy!. Journal of Economic Behavior & Organization. 141. pp.164-176.
Johnston, D. W., Kassenboehmer, S. C. and Shields, M. A., 2016. Financial decision-making in
the household: Exploring the importance of survey respondent, health, cognitive ability and
personality. Journal of Economic Behavior & Organization. 132. pp.42-61.
Lichtenberg, P. A., and et.al., 2016. The Lichtenberg Financial Decision Screening Scale
(LFDSS): A new tool for assessing financial decision making and preventing financial
exploitation. Journal of elder abuse & neglect. 28(3). pp.134-151.
Martin, G. and Gomez-Mejia, L., 2016. The relationship between socioemotional and financial
wealth: Re-visiting family firm decision making. Management Research: Journal of the
Iberoamerican Academy of Management. 14(3). pp.215-233.
Masri, H., Pérez-Gladish, B. and Zopounidis, C. eds., 2018. Financial Decision Aid Using
Multiple Criteria: Recent Models and Applications. Springer.
Mitchell, O. S., Hammond, P. B. and Utkus, S. P. eds., 2017. Financial Decision Making and
Retirement Security in an Aging World. Oxford University Press.
Razumovskaia, E., and et.al., 2016. Financial decision-making by the population: Process
modeling and trends.
Tamir, M., et.al., 2015. An expectancy-value model of emotion regulation: Implications for
motivation, emotional experience, and decision making. Emotion. 15(1). p.90.
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