Financial Decision Making Analysis

This assignment delves into the complexities of financial decision making by analyzing the interplay of psychological, social, and economic factors. It examines how individual biases, cultural norms, and market forces shape financial choices. The assignment requires students to critically evaluate relevant research studies and theories on financial decision making, drawing upon examples from diverse contexts.

Financial Decision Making

EXECUTIVE SUMMARY
The management of financial resources is significant for different organization. This is
because it assist in making allocation of the funds with greater effectiveness. Further it involves
decision making regarding the aspect relating to investment and financing. Profit and loss
statement of Tusker Plc presents that revenue earned by organization in 2015 is greater in
comparison with 2014. This is due to the reason that distribution expenses in this year were
greater which presents that organization has made huge efforts towards increasing awareness
among the individuals regarding the firm. The gross profit earned company in 2015 is greater in
comparison with 2014. This is due to the reason that in 2015 the cost of sales is less. This has
huge impact of the gross profit of the business. From capital budgeting it can be examined that
payback period of investment project is 4 years and 5 months. Therefore organization can make
decision regarding selection of option regarding expansion.
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART 1 BUSINESS PERFORMANCE ANALYSIS ....................................................................3
Interpretation of the statement of Profit and Loss.......................................................................3
Statement of Cash Flow...............................................................................................................5
Ratio Analysis..............................................................................................................................6
PART 2............................................................................................................................................7
Investment appraisal....................................................................................................................7
Non financial factors....................................................................................................................9
Sources of internal finance.........................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12
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INTRODUCTION
Financial decision making is of greater importance for every business. Decision making
within firm is a thought process that acts as an aid in making selection of logical choice from the
options available. The management of financial resources is important for different organization.
It assist in making allocation of the funds with greater effectiveness (De Martino, Kumaran,
Seymour and Dolan, 2006). Further it involves decision making regarding the aspect relating
with investment and financing. Through this operations of organization can be accomplished.
In the present report financial decision making has been discussed in context of Tusker
Plc. The company is building and home improvement merchant that carries out its operations in
highly competitive building and construction industry. The study entails to make analysis of
business performance. This is done through evaluation of its profit and loss as well as cash flow
statement. It also includes sources of internal finance for expansion plan of business into
Western Europe.
PART 1 BUSINESS PERFORMANCE ANALYSIS
Interpretation of the statement of Profit and Loss
Profit and loss is referred to as financial statement that includes summary of revenues,
costs as well as expenses borne during a particular duration of time. Through these records
information can be offered regarding the ability of the firm (Ashraf, 2009). This statement is also
referred as statement of financial results, income and expense statement as well as statement of
operations. The analysis of the profit and loss account of Tusker Plc is being carried out. This
data of two years that is 2014 and 2015 has been compared in order to gain insight to the
financial position of the company to a greater extent. The interpretation of the statement of profit
and loss has been done on the basis of variables that includes revenue, gross profit, overheads
and net profit. Such has been carried out in the manner stated below:
Revenue: It is referred to as the income which is earned by the firm. Further it assist the business
in meeting the expenditure to a significant level. The statement of Profit and Loss of Tusker Plc
reflects that the revenue of the company in the year 2015 was £316m. However in the year 2014
it was £298m. Thus it can be viewed that revenue earned by organization in 2015 is greater in
comparison with 2014. This is due to the reason that distribution expenses in this year were
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greater which presents that organization has made huge efforts towards increasing awareness
among the individuals regarding the firm (Lee and Andrade, 2011). On the other hand the
distribution expenditure in the year 2014 were lower which has resulted in decreasing the volume
of business sales to a significant level. It has been determined that the overall position of the
company is sound in the year 2015. This is due to the reason that overall revenue of Tusker Plc is
greater in this year in comparison with the other year.
Gross profit: It is effective measure that examines the profitability of the company for a
particular year. In addition to this it demonstrates the extent to which organization makes
utilization of its material, labor and manufacturing related fixed assets for the purpose of
generating profitability (Webster, 2014). The Profit and Loss statement of Tusker Plc
demonstrates that the gross profit of the business in the year 2015 was £59m. However in the
year 2014 it was £30m. Therefore it can be said that gross profit earned company in 2015 is
greater in comparison with 2014. This is due to the reason that in 2015 the cost of sales is less
that is 257. However in 2014 it was 268. This has huge impact of the gross profit of the business.
In the current year cost of sales is less as compared to 2014 which has resulted in increasing the
value of gross profit in that particular year. Further the firm has kept huge control over its cost
incurred in selling in 2015. Gross profit margin of Tusker Plc in the year 2015 is 18.7%. This is
lower in 2015 that is 10.1%.
Overheads: This includes all the expenses that have been incurred by Tusker Plc. From the
statement of income it has been gained that there are two overhead which includes administration
and distribution cost. The administration expense of the firm in 2015 was £19m. But in 2014 it
was £13m. This presents that this expenditure of the company in 2015 is greater as compared to
2014. In addition to this distribution expense of Tusker Plc in the year 2015 was £22m. However
this was £16m in 2014. This is due to increase in the volume of sales that has been achieved by
the organization. Enhancement in the sales volume has resulted in increasing expenses of Tusker
Plc to a greater extent.
Net profit: It is referred to as the actual profit after working expenses that is not included in the
calculation of gross profit. The income statement of Tusker Plc presents that the net profit of the
company in the year 2014 was (£9m). However in the year 2015 the net profit of the organization
is £10m. This demonstrates that the firm has attained net profit in the current year but in 2014 it
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has achieved net loss. In addition to this the net profit margin of Tusker Plc in 2014 is 0.3%.
However in 2015 it is 8.2%. This is greater in case of current year. Such presents that operating
profit and net sales of the firm in 2015 is greater in comparison with other year. This presents
that organization financial position in the current year is sound. Further it acts an aid for the firm
in meeting its expenses to a significant level (Sheen, 2005). It has been assessed that profitability
position of Tusker Plc is effective for its survival in long run course of time. Moreover it acts as
an aid for the business in gaining edge over competition.
Statement of Cash Flow
In financial accounting, cash flow statement is referred to as the financial statement that
reflects the manner in which changes in balance sheet accounts as well as income statement has
influence on the cash and cash equivalents. Further it breaks the analysis down to investing,
operating and financing activities (Figueira, Greco and Ehrgott, 2005). It is the summary of
actual or anticipated incoming and outgoings of cash within the firm over accounting period.
With cash flow statement the data is being represented in three main segments. This includes
operating activities, investing activities as well as financing activities.
From the analysis of the cash flow statement of Tusker Plc for the year 2015 it has been
examined that net cash flow from operating activities is 2. However the net cash flow from
investing activities reflects negative balance that is 98. In contrast to this the net cash flow from
financing activities is 42. Thus from the overall determination of figures it has been gained that
there is net decrease in the amount of cash and cash equivalent. Further the cash and cash
equivalent at the start of year was 7. But at the end of year it has reflected negative balance of 47.
This presents that position of the firm is unsound which indicates its ineffectiveness in meeting
its obligations for future. By carrying out evaluation of the liquidity ratio it has been examined
that current ratio of Tusker Plc in the year 2015 is 1.02. However in 2014 this was 2.23. This
presents that liquidity position of the company is not effective in fulfilling its working capital
requirement. Further by carrying out evaluation of the quick ratio it has been gained that Tusker
Plc has higher quick ratio in 2014 that is 0.90. This was 0.41 in the year 2015. Thus this indicates
that there is reduction in the ability of the organization to make payment for its current liabilities
when they come due.
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By carrying out evaluation of the efficiency ratio it has been gained that inventory days
ratio of Tusker Plc in the year 2015 is 91 days. However this was 72 days in 2014. Thus this
presents that conversion of stock into cash is done within minimal duration of time in case of
2014. Thus this represents the ability of the organization to accomplish its meet its desired
outcomes within specified duration time. From the analysis of the receivables days it has been
examined that in 2015 the receivable days is 50 days. However in 2014 the receivables days is
36 days. In contrast to this payable days in the year 2015 is 82 days. In contrast to this in 2014
this is 54 days. This presents that company has given huge time to its debtor for making
payment. In addition to this it has been provided with immense to pay its creditors with the
amount due. From the analysis of the cash flow statement this has been gained that organization
is effective in meeting its expenses to a significant level (Hilary and Hui, 2009). In addition to
this it has been assessed that for the purpose of examining the financial position of the company
the role of cash flow statement is very significant. With this firm can gain insight to the inflow
and outflow of the cash in a particular span of time. Thus this assist in attainment of business
targets within desired span of time. In addition to this it can act as an aid for the firm in keeping a
track on the expenditure of the firm to a significant level.
Ratio Analysis
Ratio analysis is referred to as the analysis as well as interpretation of the figures that are
prevailing in the financial statements such as profit and loss account, balance sheet and fund flow
statement. It is procedure of comparing one figure against another. In addition to this it enables
the users such as shareholders, investors, creditors and government in gaining better
understanding in relation to financial statements (Michalski, 2007). Ratio analysis is considered
as most powerful tool that is used for the purpose of measuring the performance of the firm. It
involves steps relating with gathering relevant accounting data from the financial statements.
There are several advantages as well as disadvantage of using ratio analysis by Tusker Plc.
Advantages of ratio analysis
The major advantages of ratio analysis is relating with forecasting and planning. The
trends within cost, sales, profits as well as other facts can be determined through the computation
of relevant ratio from the accounting figures of last years. Through such trend analysis by using
ratio can assist in forecasting as well as planning future business activities of Tusker Plc.
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Another major advantage is related with budgeting. Budget is regarded as the estimate of future
activities based upon the past experience (Saaty, 2008). Through accounting ratios firm can
make determination of budgeted figures.
Disadvantages of ratio analysis
The disadvantage of the ratio analysis presents that it offers historical information. This
implies that it does not reflect the current conditions. Thus it is not effective in making prediction
of future. Further another major limitation of ratio analysis relates with lack of standard of
comparison. No fixed standard can be set up for ideal ratios (Platt and Huettel, 2008). For
instance, current ratio can be considered ideal in situation when current asset is twice of current
liabilities. Another major demerit relating with analysis of ratio is the quantitative analysis. It is
the tool that makes quantitative analysis only. However it ignores the qualitative factors while
making computation of the ratios. There is another limitation to ratio computation that
demonstrates different accounting policies (Advantages and limitations of Ratio analysis, 2016).
Several policies of accounting with respect to valuation of inventories, charging depreciation
makes accounting data as well as accounting ratios of the two business non comparable.
PART 2
Investment appraisal
It is referred to as the collection of tool that can utilized for the purpose of determining
the attractiveness of a particular investment. In other words it includes evaluating attractiveness
of investment proposal through the techniques such as average rate of return, net present value,
internal rate of return as well as pay back period (Gilad and Kliger, 2008). It is integral part of
capital budgeting which is applied to the areas where the returns cannot be quantified with
greater ease like personnel, training as well as marketing. The technique of investment appraisal
have been enumerated in the manner below: Management forecast: It is referred to as planning tool that assist the management of the
business in its attempt to cope with the uncertainty that can occur in future course of
time. It majorly relies on the data that relates from the past and present and analyze the
trends in an effective manner. Management forecast begins with some assumption that
relates with management experience, knowledge and judgment. The major advantage of
this tool is that acts as an aid in making forecast of the future risks in advance. However
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its major demerit is that the estimated outcomes from the forecasting might not result in
attaining accurate resultant. For the analysis of management forecast from the scenario of
Tusker Plc it has been examined that the trend of contribution from first to fifth year in
increasing to a greater extent (Bossaerts, 2009). This presents that it would be beneficial
for the organization if it makes investment in the proposal of expansion within western
European markets. Payback period: It is referred to as the time in which the initial cash outflow of an
investment can be recovered from cash inflow that is being generated through the
investment. It is regarded as one of the simplest technique of capital budgeting. In case
when any investment proposal possess shorter payback period then such can be selected
by the business. However option that has longer payback needs to be rejected as such
would yield return within maximum duration of time. The major advantage related with
this capital budgeting technique is that it can easily calculated thus decision making
becomes much easier (Kramer and Weber, 2012). In contrast to this it possess major
limitation that presents that it does not takes into consideration time value money that can
results in leading to wrong decision. Here in the present scenario of Tusker Plc it has
been examined that payback period of investment project is 4 years and 5 months. Thus
organization can make decision regarding selection of option regarding expansion. As
such it would yield return within minimum duration of time. Accounting rate of return: It is another capital budgeting tool that calculates accounting
profit of the project to average investment made within the project. The decision on the
basis of ARR is taken based on the assumption that in case the project plan results in
greater accounting rate of return then this can be selected by the business (Fonseca,
Mullen, Zamarro and Zissimopoulos, 2012). This is because it is effective in yielding
maximum amount of profitability in an effective manner. However rejected of the
investment option with lower ARR needs to be done. Here in the present scenario of
Tusker Plc it has been determined that accounting rate of return of investment project is
9%. Thus organization can make decision regarding selection of option regarding
expansion. As such it would yield greater amount of return. One of the major merit of this
technique is that as it based on accounting profit thus it makes calculation of profitability
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of investment in an effective way. However its demerit is that it ignores time value of
money.
 Net present value: It is one of the significant tool of capital budgeting that is being used
for evaluating capital projects. The technique of NPV examines present value of the
project's projected future income. In case the investment option results in positive and
higher net present value then decision regarding selection of such option can be done by
the business. However investment proposal with negative and lower net present value
needs to be rejected as they might not yield maximum profits in future course of time
(Carr and Steele, 2010). Major merit of this is that it acts as an aid in making easy
comparison of the potential investment. However its limitation is that it might not result
in offering accurate outcomes. Here in accordance with the case scenario of Tusker Plc it
has been determined that net present value of investment project is 4. Thus organization
can make decision regarding selection of option regarding expansion as it has positive
NPV. In addition to this it would yield in offering greater amount of return.
Non financial factors
There is presence of several non financial factors that needs to be considered by Tusker
Plc for its expansion in Western Europe. This include analysis of the market and capability of the
firm. Such have been enumerated in the manner stated below: Market analysis: It is regarded as one of the most essential non financial factor that needs
to be taken into account by the organization like Tusker Plc before its expansion in
Western Europe. Through market analysis organization can make determination of the
demands for the product in the market (Couzin, Krause, Franks and Levin, 2005). Further
it can gain insight to the extent to which the products and services would be acceptable in
greater ease. With this factor target market for the existing product in new demographic
can be analyzed with greater effectiveness.
 Capability: This considered as another major non financial factor that needs to be taken
into consideration before carrying out expansion plan. Under this it is essential for Tusker
Plc to examine whether the people, skills, technologies and processes possessed by the
business are effective in fulfilling the financial requirements of the organization. It is
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important that company needs to possess sound resources that can assist it in
accomplishing its needs for future to a greater extent.
Sources of internal finance
In accordance with the scenario the company Tusker Plc is planning for its expansion.
For this requires funds that can assist it in meeting the needs of the firm to a greater extent
(Wallenius and et.al., 2008). It has been provided that expansion plan of company in western
European market through long term sources of finance has been assessed. However the firm
needs to determine the internal sources of finance that can assist Tusker Plc in financing short
term needs that can facilitate in situation of cash flow. Internal sources of finance are those that
are present within the business. The three internal financial sources have been enumerated in the
manner below: Sale of unproductive asset: It is regarded as one of the major internal source of finance.
Under this Tusker Plc can make sell of its assets that are non productive in nature or have
become obsolete. It is effective in generating the cash internally in order to finance the
capital needs. The major advantage of using such source is that act as an aid in generation
of funds internally. However they is not present in case of new business concern. Retained earning: It is another source of finance for the business that can be referred to as
the part of profit which is kept aside with the aim to meet the future uncertainties
(Arbuckle, 2016). It is effective source as under this firm like Tusker Plc need not to
make any payment of interest for the use of such amount. In contrast to this the firm
losses control over the amount and losses the opportunity to make use of the funds in next
best alternative for future course of time.
 Reduction or controlling of working capital: It is also one of the major source that assist
in fulfilling the organizational requirements. Working capital is comprised of the
components that includes current assets as well as current liabilities. Tusker Plc need
funds for its expansion plan. Thus by reducing the working capital either through
speeding up the cycle of account receivable or by lengthening the account payable cycle.
Thus such would lead to reduction of working capital that assist business in fulfilling its
business requirement to a greater extent.
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CONCLUSION
It can be concluded from the study that role of financial decision making is crucial in
attainment of desired targets by the business to a significant level. In addition to this it is
effective in enhancing survival of the organization in the market for long run course of time. It
has been inferred from the analysis of the financial statement that position of the company in
2015 is sound in comparison with 2014. This reflects that company has keep a track on the
business activities that has resulted in increasing its revenue to a greater extent. In addition to
this it can be concluded from the report that there is presence of several internal financial sources
that can be used by Tusker Plc in order to meet the needs for expansion plan in western Europe.
This includes sales of asset, retained earning as well as reduction in the working capital of the
organization.
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