Dividend Policy and Firm Performance

This assignment examines the connection between a company's dividend payout policy and its overall financial performance. Students are tasked with reviewing academic literature, including studies on Chinese companies and REITs, to understand how factors like working capital management, corporate governance, and energy ratio analysis influence investment decisions and profitability in relation to dividend payouts.

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................................3
TASK 1..........................................................................................................................................................3
1. SWOT analysis of the company...........................................................................................................3
2. Importance of finance and accounting department ..........................................................................4
TASK 2..........................................................................................................................................................4
Ratio analysis .........................................................................................................................................4
CONCLUSION...............................................................................................................................................9
REFERENCES................................................................................................................................................9

INTRODUCTION
Financial decision making is the decision made by finance manger of the company which
related to finance mix of the organisation. This decisions are concerned with allocating and
borrowing funds that are required to take decision on investment. The financial decision of the
company includes 2 sources in which one is about using company's own money which includes
share capital of the company, retained earnings etc. and the other source is borrowing funds from
outside the company in the form of denture, bond etc. the objective of financial decision is to
maintain efficient capital structure of the company. For this purpose the report will include
SWOT analysis of the company along with importance of financial and accounting department.
The report will also analyse different ratios of the company and will compare the years to
provide better understanding of the ratios and ways to improve it.
TASK 1
1. SWOT analysis of the company
Alpha company deals in UK which is a manufacturing industry which needs to be responsive and
adapt to changes that will occur in the market. The company needs to assess its internal
environment which will include the structure of organisation as well as resources availability,
operational costs etc. it is also important that company be aware about external factors which
includes social, economical, political aspects (Francis and et.al, 2015). The internal factors of the
company also includes staff, customers, culture etc. which are under the control of the business.
To stand out from the competitors I is must for the company to know its strength and weaknesses
along with threat and opportunities that are availing for the company. The SWOT analysis of the
company is as follows :
Strength – The strength of Alpha Ltd is its futuristic designs which attract the customers
and its good reputation among the companies as it is providing its services for more than 10
years. The another strength of the company is its increased ability to cope up with changes
means it really quickly adapts innovative techniques and procedure of the products. The other
strength of the company is its financial resources which gives it financial strength to invest in
manufacturing of other products or technologies.
Weaknesses – The weakness of the company is that its employees are not fully skilled
and their skills need to be upgraded. The other weakness is that it causes pollution to the society
which decreases the image of the company. It also has high production costs and outdated
machines as well which slower down the process (Geng, 2015).
Opportunity – The opportunity of the company is to have a training development
programme which can enhance the skills and quality of employees and can increase efficiency in
operations. The trends in increasing customer's purchasing power can also be an opportunity for
the company which can lower down the cost of production and can increase the profit of the
company.
Threats – The most important threat of the company is government regulations which
needs to follow by the company. The other threat can be that there can be entry of new

competitors as entering in the market is easy and also the trade fluctuation which includes
recession, inflation etc. can be a threat to the company.
2. Importance of finance and accounting department
Accounting department - Accounting department of the company is responsible for
recording, classifying and reporting cash flows of the company. It includes various functions
which are :
 Financial accounting – It plays a really important role in Alpha Ltd as it helps the
managers of the company in providing information to the external users. The owners of
the company communicate the financial information using balance sheet, income
statement, cash flow statement etc. to provide assessment of the company to its
shareholders. It helps the company in knowing where it stands in terms of reputation and
profitability with other competitors. It helps the company in analyzing competitors and
evaluating investment opportunities as financial accounting is governed by GAAP which
gives it standard method to analyse. It helps the company in computing financial ratios by
using financial statements and set benchmark for other companies.
 Management accounting – Management accounting is the part of accounting
department of Alpha ltd company which deals with providing internal information to the
managers of the company to make decisions related to planning, forecasting budget
preparation etc. It helps the company in making budget related decisions with the help of
historical data and marketing database ((Tschopp, 2015). This helps the company in
analyse its future performance and investments. It helps in controlling the work of all
other units of the company whether its production or marketing and make conclusion
about financial performance of the company. It also helps the company to conduct cost
analysis to determine the existing expense of the company and provide insight for future
activities.
 Tax function – It helps the company in managing strong framework for tax governance
and risk management. It helps the company in achieving tax reputation and minimising
risk of the company. It helps the company in planning tax and decision related to tax
deductions and to comply with government laws and regulations.
 Auditing function – The audit function plays an important role in the company as it
allows the company to increase its productivity by adding value to operations of the
organisations. It helps Alpha ltd in detecting frauds by assessing company’s daily audit
reports and uncover the fraud, waste of resources and money. IN alpha Ltd, the audit
takes place once in a year which helps it in have good corporate governance. It helps the
company in compliance with rules and regulations and timely reporting while collecting
data. It helps in monitoring risks of the company at multiple levels and implements the
strategies of the company efficiently.
Finance department – The finance department of the company manages all the fund of
the company. The finance functions of the finance department included planning, organising,
auditing, accounting and controlling finances of the company. This department is also

responsible for making company’s financial statements. This department includes function as
investment function, financing function, dividend function and working capital function.
 Investment function – The most important decision of the company is the decision
related to investment. While making investment decisions the company needs to take care
of the risk factors associated with it. If the risk is high the return would be high but if the
investment declines the company will has to pay big price therefore the risk need to be
assesses carefully (Tschopp, 2015). The other aspect is funding and involves large
amount of funds which make it easy for the company to plan investments. It helps in
reducing cost of the company as investment gives return to the company which can be
further invested. Investment also increases profitability of the company and provide
company with additional capital which can be used for product expansion etc.
 Financing function – It is the heart of the company which involves acquiring and
utilising funds with efficient planning of financial resources. It is the only source from
which a company can run and can acquire money. It helps the Alpha ltd company in
taking investment decisions which include where to put the funds in or investment
decisions related to management of mergers, leasing of assets of the company etc. it helps
the company in taking decision related raising of funds from equity or borrowing. It also
helps the company in taking dividend decisions which helps the company in knowing that
how much fund the company have and can dividend be declared from that fund. At last it
shows the company, its ability to pay the debts which means liquidity position of the
company.
 Dividend function – The other function id dividend function which deals with paying
dividend to the shareholders or not. In Alpha Ltd when company earns high profit on its
sales and investment after deducting taxes, it announces the dividend (Omokhomion,
2018). The dividend plays an important role in the company as if shareholders will not
get dividends then they will not be happy and satisfied which will lead to deduction in the
share price of the company whereas if shareholders of the company will be distributed
yearly then the share price of the company will remain high.
 Working capital function – This function tells about the ability of the company to pay
for its short term requirements. Most of the transactions in Alpha Ltd are in cash which
shows that the company need to have proper working capital requirement. It also shows
that company has enough assets or not to turn it into cash to pay off upcoming liabilities.
The company to meet its working capital requirement can either have loan or can have
enough retained earnings or can issue shares to raise capital.
TASK 2
Ratio analysis
1. Return on capital employed
Particulars Formula 2017 2018
Operating profit 300 262.5

Capital employed 1162.5 1425
Return on capital employed
Operating profit / capital
employed * 100 25.81% 18.42%
Interpretation - Return on capital employed is a type of profitability ratio which
measures the capacity of company to generate profits by comparing company's net operating
profit to the capital employed. It effectively shows the company that how the assets of the
company are performing through long term financing. Net profit of the company is known as
EBIT which means earning before interest and tax. It clearly shows profit that company
generated from its operations. Capital employed on the other hand refers to total assets that the
company held less total liabilities. It is also known as shareholder’s equity fund less long term
liabilities (Iskandar, 2017).
It indicates company's performance by taking into account that how company use its
capital effectively by examine net profit with relation to use of its capital. It simply shows how
company is generating profit from the use of its capital. In year 2017 the company's return on
capital employed was 25. 81 % which means that company used its capital efficiently from
managing its operations and operating profit whereas in 2018 the return on capital employed
decreased to 18.42 % as the capital from the shareholders were not fully utilised.
In 2017 the ratio was high as the core financial strategies of the company was efficient
and investment of the company was effective which helped it in achieving higher return on
capital employed to the investors whereas in 2018, the strategy of the company was inefficient
and capital invested was not at appropriate place and the planning was not up to the mark which
lead to decrease in return on capital employed.
The Alpha Ltd improve its return on capital employed can use promotional techniques to
increase its sales and reducing its cost. The other way can be that the company can sell its
unprofitable assets.
2. Net profit margin
Particulars Formula 2017 2018
Net profit 300 262.5
Sales revenue 2400 3000
Net profit margin Net profit / sales * 100 12.50% 8.75%
Interpretation – Net profit margin is the percentage of revenue left after all the expenses
which has been deducted from sales. It shows that how much profit does the company generated
from its sales. It can be expressed in percentage terms as well as decimal terms. Net profit
margin includes total revenue of the company, outgoing cash flow of the company, income from
investments and debt payments including payment of interest.

Net profit margin helps in analysing the performance of the company as it shows
financial health of the company to the investors. By tracking increase and decrease in the profit
margin, a company can assess that the current practices of company are forecasting profits based
on revenues or not. It helps the investors in knowing that the company is able to generate enough
profits from its sales or not while considering operating and overhead cost. A high net profit
margin depicts that the company is able to control its cost and sale its goods and services at
higher cost in comparison with the cost incurred in producing it (Walmsley, and et.al 2018).
In 2017, the net profit margin of Alpha Ltd was higher than compared to 2018 which was
8.75 % as in 2017 the management of the company was efficient and its labours were more
skilled and motivated which increase the sales of the company, however in 2018 the company
faced high labour turnover due to which the production of the company suffered and net profit
margin declined.
The net profit of the company in year 2017 was 300 whereas the profit on sales was 2400
which gave the net profit margin of 12.50 percent, whereas in 2018 the net profit was 262.5 and
revenue on sales was higher than in 2017, yet, it gave net profit margin of 8.75 as the cost of
production in 2018 was high and high cost incurred on manufacturing products.
The Alpha Ltd can improve net profit margin by increasing the price of its products and
can adopt various advertisement strategy which will help the company in generating more sales.
3. Current ratio
Particulars Formula 2017 2018
Current assets 757.5 1035
Current liabilities 322.5 1110
Current ratio CA / CL 2.35 0.93
Interpretation – Current ratio shows company's proportion to current assets and
liabilities. It is known as liquidity ratio and the larger the current ratio is considered to be better.
It simply measures company's ability to pay debts and liabilities by comparing current assets and
liabilities. Current ratio need to be in the ratio of 2:1 for maintaining balance between asset and
liabilities (Kanwal, 2017).
It helps the company in measuring its short term solvency and liquidity (Sharma, 2017).
The company with less than 1 current ratio is considered as the company does not have ability to
meet its financial obligations in the short run. The company with more than 1 current ratio
depicts that the company has all the financial resources to meet its financial obligation.
The current ratio of year 2017 of Alpha Ltd was 2.35 which shows that company has
efficient management of working capital and was efficiently managing the payment on short
term debt and liabilities. However, the current ratio of company declined in year 2018 which

means that working capital of the company was not managed efficiently or the liability of the
company was increased.
To improve current ratio the company can improve its current assets by rising its
shareholder's funds. The company can pay off its current liabilities to maintain efficient current
ratio. The company needs to sale its useless assets so that the liquidity of Alpha Ltd increases
and also it need to control it's overhead expenses.
4. Average receivable days/ Debtor's collection period
Particulars Formula 2017 2018
Receivables 450 600
Sales 2400 3000
Average Receivable days/
Debtors collection period
Average accounts
receivable / sales revenue *
365 68 73

Interpretation- Debtors are the people that owe money to the business. Debtor collection
period is the average amount of days that a business takes to receive its money which it owes to
its customers. The sooner the debtor pays the better the business run therefore short debtor
collection period is good. The debtor collection period can be calculated by money owed to the
debtors divided by sales turnover of the company (Epstein, 2015).
Debtor's collection period tells about company's performance is that if its low then it
means that Alpha company has managed to collect money from its debtors and can invest the
amount and can gain profits, whereas if the company's collection period is high then the
company's operations will get ineffective and it will not have enough money to invest in
machines, promotion etc. which will decline sales of the company.
In 2017, the debtor collection period was 68 as the company has strict policies and had
effective account receivable reports which used to manage money own to debtors of the
company effectively and segregated the report in 30 days, 60 days and 90 days which kind of
made the cycle small whereas in 2018, it went to 73 as the policies got loosen up and company
started selling their product on credit which increased its debtors.
The company to improve its Debtor's collection period can charge late fee from the
customers if they do not pay on time. The company can move its system online and can have the
track and record if its debtors which will reduce the time and cost of the company.
5.Average payable days/ Creditor's collection period
Particulars Formula 2017 2018
Payables 285 1050
Cost of goods sold 1725 2250
Average Payable days/ Creditors
collection period ratio
Average accounts payable /
COGS * 365 60 170
Interpretation - Creditor's collection period refers to the period in which it shows that in
how much time the business will repay to its creditors. Creditor days estimates the average time
it takes a business to settle its debts with suppliers. This ratio is useful indicator when it comes to
assessing the liquidity position of the company. It needs to be high in days as it enables the
company in maintaining its cash flows which means higher the period better the utilisation of
cash.
It helps the company to measure the average time it takes to pay the suppliers which if is
high than the company is utilising its funds and is taking full utilisation of trade credit available
which help the company maintaining its cash flow. However, if the period is low then it means
that company is not efficiently utilizing the fund and will likely to have cash deficit.
In 2017, the average payable day of company was less in which company paid the
suppliers within 60 days which means that company was unable to utilise the funds and was

unable to invest and increase liquidity but on the positive side it kept the goodwill of the
company high among suppliers. On the other hand in 2018, the average payable period was 170,
in which the company efficiently maintain the liquidity of the company but lost the goodwill
among suppliers.
It can be improved by the company by maintaining timely invoices of the company and
by negotiating with the suppliers. The company can also change the payment terms and can have
external credit control to maintain the reputation of the company as well as Creditor's collection
period.
CONCLUSION
The report concluded the importance of accounting and financial department in the
company to carry on smooth operations. However, it stated different parts of accounting
department which includes financial, management accounting etc. whereas the finance
department includes functions like investment function, financing decision etc. The report
summarized the use of various ratios in the company along with their assessment. The company's
current ratio was decreasing which was due to inefficient management of working capital. It
showed the recommendation to improve its return on capital employed by using promotional
techniques to increase its sales and reducing its cost. The report summarized the use and
assessment along with recommendation of all the other ratios to be improved in the company.

REFERENCES
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Online
Importance of working capital 2018. [Online]. Available through : <
https://courses.lumenlearning.com/boundless-finance/chapter/working-capital/>