Financial Decision Making : Assignment

Financial
Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Evaluation of the role of accounting and finance:.......................................................................3
Critical Analysis:.........................................................................................................................6
TASK 2............................................................................................................................................6
Calculation of the ratios to analyse company performance:........................................................6
Interpretation and analysis of financial ratios:.............................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Decision-making which mainly concerned with financial aspects of business enterprises
is generally termed as financial decision making. It is core factor of organisation's success and
sustainable growth. It majorly cover procurement of funds, identification of key fiscal resources
and ultimately efficient use of funds. The whole process of fiscal decision-making is carried out
out by owners and managing personnels. Financial decision-making is focused on accessible
economic and fiscal data on results and performance of corporation. This process draws on
estimate analyses, investment alternatives, as well as number of fiscal reports including cash-
flow statements, income statements, and statements of profit and loss (Carvalho, Meier and
Wang, 2016).
In this context the study covers discussion on basic structure and terms concerned with
financial statement, usage of techniques of managerial accounting in organisational planning,
controls and decision-making functions in Devanet UK Ltd, an UK based manufacturer of Belts ,
Buckles, Quality Leather goods. Furthermore the study contain assessment of ratios, its
relevance of users and, role and significance of accounting and finance in decision-making and
reporting of accounts in relation to Alpha Ltd.
TASK 1
Evaluation of the role of accounting and finance:
Overview of company: Company Devnanet is providing exclusive range of customised products
produced in factory which is situated at Cheshire. Company engaged in manufacturing of belt
buckle, bag buckle, shoe buckle, clothing buckle, metal components, complimented by complete
range of pan-tone well-matched leather and also with printed webbing. Company's other
supporting activities includes Cad drawings, CNC milling, Casting in brass, pewter, bronze,
silver and gold. Customised and quality products are core reason for company's increasing
popularity. This extensive and devoted service is special to company's clients with matching
quality, which is considered by some other of well-known brands in world. Devanét and it's
partners are continuously improving company's product variety and reach so that clients can
create fresh markets (About Devanet. 2019). Company also provides 3D scan printing services,
edge belt stitching, rotary engraving, leather embossing, sublimation printing etc.

Role of management accounting techniques:
Management accounting is structured internal process which covers all financial and non-
financial tasks to generate informations for corporation that assist in take decisions. In current
scenario complexities are increasing day by day, so need of adoption of processes and techniques
of management accounting is increasing rapidly. Complexities in business can lead to decline in
business fiscal results and performance. It is duty of management team to implement structure
according to requirements of management techniques. Further different strategies and
operational frameworks are developed and designed according to outcomes of various
techniques. Management's operations are dedicated towards effective implementation of
management accounting structure as it help in managing and funding resources as per business
requirements with aim to achieve cost effectiveness. Managing different organisational activities
is tuff task for managers so they always tries to integrate these activities with different
management accounting techniques (Epstein, Buhovac and Yuthas, 2015). In Devanét company,
management team have adopted management accounting framework and techniques to resolve
difficult problems within corporation. In this regard following are techniques of managerial
accounting and their role in corporation's controlling, planning and decision-making tasks, as
follows:
 Analysing financial statements: This is most core technique which help to define
existing business position and performance of corporation within industry. Every
company conduct a thorough analysis of it's financial reports and statements which also
help them to find out any new change or alternation in corporation's strategies and
policies. In company Devanét this analysis is primarily undertaken by managing teams
on periodical basis. They review business's prime financial statements, reports and
accounting process involved in preparation of such reports within context of use and
relevancy of accounting standards and other fundamental assumptions. In process of
analysis of balance-sheet's items and accounts, consideration of factors like identification,
evaluation and categorization are important (Graham, Harvey and Puri, 2015). The
analysis facilitates identification of factors and potential issues which may affect
company's planning process and decision-making structure. Further it also help to
improve controlling over fiscal and monetary operations by identifying any loopholes in
these operations.

 Budgetary Control: It is major aspect and technique of management accounting. It is
method of monitoring budgets of an corporation by periodically comparing fiscal data of
how much funds it spends, earns and requires, and afterwards, if required, changing to
budget. It is a method of creating departmental budgets pertaining executive duties to the
demands of policies and the ongoing comparison of present outcomes with planned
outcomes, either to ensure the goals of that strategy by collective action or to give a
strong base for its modification. The main aim of budgetary control is to assist managers
in comprehensive scheduling and regulating the company's activities. In Devanét,
managing officials has implemented budgetary control techniques to monitor and control
movement of funds and making plan for effective use of different sources' funds. For
long term funding decision and capital budgeting this also help company's managers to
frame and implement decisions.
 Financial Planning: Financial planning is task of ascertaining how well a corporation
can attain its tactical targets and objectives. A corporation typically helps to create a
Fiscal Blueprint promptly after unique vision and goals are set. The Fiscal Plan outlines
each operations, assets, materials and equipment required to reach these goals, and within
timelines determined. The enterprise financial planning mechanism is intended to
predicting future fiscal outcomes and ascertain how effectively to use economic and
fiscal resources of the corporation in pursuit of short and long-term targets of
organization. Since planning consists searching into future excellently, it is both a
incredibly creative and technical thought process (Hernes and Sobieska-Karpińska,
2016). In Devanét, financial planner and other key personnels conduct tasks of financial
planning to effectively plan and control all major fiscal and monetary tasks and arrange
them as per corporation's goals and pre determined targets.
 Standard Costing: Standard costing is a procedure that utilizes expenditure and income
standards via variation assessment for monitoring purposes. Standards are predefined
quantifiable values set under specified circumstances that could be compared with actual
results, generally for a job, procedure or activities component. Its primary aim is to
provide foundation for monitoring by means of variation accounting for inventory and
work-in-progress measurement and, in several instances, sale price fixation. Standard
costing includes establishing predefined estimated costs to have a foundation for

comparing with actual expenses. Widely recognized as an efficient tool for controlling
costs in businesses is standard costing. The organisation accomplishes the goals in a
scheduled and structured way by applying standard costing. In this context, Devanét is
applying standard costing to asses their performance and fiscal outcomes as compare to
set standards which ultimately assist in developing control over whole organisational
functions and making plan for future performance (Jetter and Walker, 2017).
Critical Analysis:
Main aim of above discussed techniques is to support corporation's managerial activities
like controlling, decision-making and controlling. As standard costing helps to determine
effectiveness of plan and business decisions by assessment of actual performance in comparison
of standards determined. For effective plan and control related to financial tasks company can
rely on financial planning. Budgetary controls within organisation ensures proper and
appropriate control over all financial activities, effective decisions and appropriate planning.
Analysis and evaluation of financial statements also boost the reliability of controlling and
planning structure along with companies key decisions. Management accounting in organisation
like Devanét adopted to improve entire managing framework with aim to attain predefined
objectives and targets. Companies can apply combination of different methods to for overall
effectiveness in whole managerial and organisational structure (Kabir, Sadiq and Tesfamariam,
2014).
TASK 2
Calculation of the ratios to analyse company performance:
Ratios 2018 2017
ROCE or Return On Capital
Employed :
= (Operating Profit /Capital
Employed) *100
here, Capital Employed = Total
Assets – External liabilities.
= 412 / 2925 * 100
= 14.10%
= 375 / 1912.50 *100
= 19.60%

Net Profit Margin:
= Net Profit / Sale * 100
= 262.50 / 3000 * 100
= 8.75 %
= 300/ 2400 * 100
= 12.5 %
Current Ratio:
= Current Assets / Current
Liability
= 1035 / 1110
= 0.93
= 757.50 / 322.50
= 2.34
Debtor Collection Period:
= Receivable / Sales *365
= 600 / 3000 * 365
= 73 Days
= 450 / 2400 * 365
= 68.43
= 68 Days
Creditor Collection Period:
= Payable / Purchase * 365
= 1050 / 2400 * 365
= 159.68
= 160 Days
= 285 / 1350 * 365
= 77.05
= 77 Days
Interpretation and analysis of financial ratios:
Ratios make it possible to summarize and simplify wide range of accounting information.
They function as the company's effectiveness index. These represent as management control tool.
Ratios are helpful instruments in management's as well as other stakeholders ' hands in order to
assess the company's efficiency over time-period by comparing current ratio with past-figures. In
this context following discussed are major ratios' interpretation of ALPHA Ltd, as follows:
1. Return on Capital Employed: This is most effective measurement to asses returns which an
corporation is attaining though aggregate funds or capital engaged in company, normally stated
as a percentage from. Here in ratio computation operating profit and amount of capital employed
is used. A corporation's capital employed includes it's net equity amount or shareholder's funds
which is derived though deducting company's external liabilities from company's total assets'
value. Operating profit implies to net income derived though subtracting operating expenses
form total revenue of corporation (Lichtenberg, Ficker and Rahman-Filipiak, 2016). The return
achieved by capital engaged in business could be a helpful guide to its strategic capabilities, as
well as whether top management is interested primarily in enriching itself or investors.
Calculating the returns on capital employed is very easy and that's why it is primarily used to
evaluate enterprise or investment venture efficiency. A greater return on employed capital is
beneficial, as it states that corporation yields more profits on per dollar of capital engaged in
operations. A reduced ROCE value shows reduced profitability.

In ALPHA Ltd, reported figures of operating profit in year 2017 and 2018 are £ 375,000
and £ 412,000 respectively. Figure of capital employed are £ 2925,000 and £ 1912,500. Based
upon these figures company's ROCE is 19.60% and 14.10% in year 2017 and 2018 respectively.
The assessed percentage of ratio shows that company's efficiencies to generate return on engaged
capital in business has been declined. Company should improve their operating profits to
increase this ratio. A decline in this ratio reflects company's efficiency to attain appropriate
benchmark of operating profit.
2. Net profit margin: It is significant ratio which demonstrate company's profitability level
during different periods. Here net profit is key element of this ratio which simply shows how
much amount company ultimately earned after providing its all indirect business expenses and
direct business expenses. Another element of this ratio is company's turnover over a particular
period. In this ratio relation among corporation's revenue and net profit is evaluated to ascertain
company's productivity in profitability terms. At a glance this ratio points out that whether
corporation is capable to attain profitability level (Palepu and Healy, 2013).
ALPHA Ltd's net profit was £ 300,000 in year 2017 which has been declined to £
262,500. While company's overall turnover was increased from £ 2400,000 to £ 3000,000 during
year 2017 to 2018. On the basis of amounts of net profit and turnover corporation's net-profit
margins are 8.75 % and 12.5% in year 2018 and 2017 respectively. Which simply shows that
there was decline in net-profit margin of company. This decline reflect that company's
effectiveness in operations which contributes in net-profit has been declined.
3. Current ratio: This is popular liquidity ratio which demonstrates corporation's actual position
in liquidity terms. The current ratio is used to evaluate the company's capacity to reimburse its
present obligations. This ratio takes into account company's current assets that include cash and
highly liquid assets compared to current liabilities of business. The current ratio is regarded as
“current” because for shortened time period it includes all current obligations and assets. A
greater current ratio is regarded as more beneficial than smaller current ratio since it
demonstrates that present debt payments could be made more readily by the business (Petersen,
Kushwaha and Kumar, 2015). If a firm is required to sell its fixed assets to payout its current
liabilities, then it generally implies that the business does not make sufficient operations in order
to support organisational activities. It simple words it points out that business is going to lose
cash or funds. This is often the consequence of bad collections of debts receivable or receivable

accounts. Preferably, current ratio must be higher than or equitable to 1, which means it can
settle its existing liabilities.
ALPHA's current liabilities in year 2018 is £ 322,500 which has been increased to
£1110000 in year 2017 and current assets of company in year 2018 and 2017 are £1035000 and
£757500 respectively showing an increase. Based on company's current assets and liabilities,
current ratio of company is 0.93 and 2.34 in year 2018 and 2017 respectively. Which
demonstrate that company's efficiencies to make payment of current obligations by applying
current assets has been declined. Company needed to improve this ratio by increasing current
assets as it reflects corporation's actual liquidity situation.
4. Debtor Collection Period: For business corporation on time payment by its clients or
customers is crucial variable of business's success. Debtors or account receivables required to be
gathered at predefined time-frame if corporation wishes to stay solvent and profitability position.
A balance in account receivable becoming aged, there is increased possibility that account may
be bad-debts. Furthermore, capital and collection costs increases as the age of accounts
receivable increases. Computation of average days of collection and evaluation is key task by
which managers can assess the corporation's efficiency to manage debts. It is a real measure of
efficacy of the loan as well as collection strategy of a business, compared to previous experience
and businesses in same sector (Richard, Kirby and Chadwick, 2013). This period refers to time
period between occurrence of debt and it payment of debt. The greater long-standing
indebtedness and longer exceptional debts, reduced effectiveness of loan collection unit of
company, it is essential that the ageing plan is applied, because it allows management to
understand the magnitude and amount of recovery and also to make the liquidity situation of d
better understood and suspiciousness of recovery.
In company ALPHA Ltd, reported balance of receivables in year 2017 is £ 450,000
which has been increased to £600,000 in year 2018 along with company revenue. Company's
average days of collection is 73 days in year 2018 and 68 days in year 2017. Which indicates that
company's chances of bad debt in company has been increased and also that efficiencies to
recover or collect amount from debtors has been decreased. Company required to control this
ratio as higher days reflects chances and probability of insolvency of debtors and bad-debts.
5. Creditor Collection Period: This ratio compute the period in days which company is taking
for payment of lenders and creditors. It is most effective ratio that hows company's short-term

liquidity position. This ratio reflects corporation's capabilities to repay their short-term creditors.
Company should assess this ratio to maintain company's creditors collection days as it
determines corporation's liquidity situation. It represents gap timeline between company's credit
purchases and payments to creditors and supplier. Since trade payables or creditors balance is
related to credit purchases so amount of credit purchases is mainly used in computation of this
ratio. But amount of credit purchases is generally not separately shown in company's income
statement so in this case company's total purchases can be utilized to assess days (Seshan and
Yang, 2014). A increased average credit period suggest that business has extremely good
relationships with its creditors or suppliers, but it generally indicates otherwise, that there is no
payment of trade payables since unavailability of adequate funds. Thus, it may reflect company's
financial distress.
ALPHA Ltd's creditors has been increased with higher difference i.e. from £ 285,000 in
2017 to £ 1050,000 in year 2018. While the creditors' collection period has been increased from
77 days (In year 2017) to 160 days in year 2018. Which exhibits unavailability of funds to meet
creditors obligations. Company is required to minimise their period as increase period indicates
that business's efficiencies and capabilities to make payment of suppliers and creditors has been
decreased.
CONCLUSION
From above discussed study it has been articulated that in existing dynamic trade
environment corporations should adopt different tools and methods to enhance effectiveness of
financial decision-making processes. Companies should adopt and implement techniques which
are linked with processes of management accounting for effective decision-making. As use of
these techniques help to implement control and planning structure which is essential for fiscal
decision-making. Further use of outcomes of different financial ratios in analysis and evaluation
of performance of corporation helps in efficient decision-making. Each ratio have its different
use and significance for business since each ratio defines different aspects of corporation's
performance.

REFERENCES
Books and Journals:
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.
Epstein, M .J., Buhovac, A. R. and Yuthas, K., 2015. Managing social, environmental and
financial performance simultaneously. Long range planning. 48(1). pp.35-45.
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.
Hernes, M. and Sobieska-Karpińska, J., 2016. Application of the consensus method in a
multiagent financial decision support system. Information Systems and e-Business
Management. 14(1). pp.167-185.
Jetter, M. and Walker, J .K., 2017. Anchoring in financial decision-making: Evidence from
Jeopardy!.Journal of Economic Behavior & Organization. 141. pp. 164-176.
Kabir, G., Sadiq, R. and Tesfamariam, S., 2014. A review of multi-criteria decision-making
methods for infrastructure management. Structure and Infrastructure Engineering.
10(9). pp. 1176-1210.
Lichtenberg, P.A., Ficker, L.J. and Rahman-Filipiak, A., 2016. Financial decision-making
abilities and financial exploitation in older African Americans: Preliminary validity
evidence for the Lichtenberg Financial Decision Rating Scale (LFDRS). Journal of
elder abuse & neglect. 28(1). pp. 14-33.
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.
Richard, O .C., Kirby, S .L. and Chadwick, K., 2013. The impact of racial and gender diversity
in management on financial performance: How participative strategy making features
can unleash a diversity advantage. The International Journal of Human Resource
Management. 24(13). pp. 2571-2582.
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.
Online
About Devanet. 2019. [Online] Available Through:
<https://devanetbelts.co.uk/aboutus.html>