Role of Accounting and Finance in Aston Martin

This report critically evaluates the role of accounting and finance within Aston Martin, a car manufacturer based in the UK. It discusses how finance and accounting functions contribute to financial statements, business strategy, legal obligations, managerial accounts, communication, performance analysis, budgeting, attracting investors, and audit. The report also calculates and comments on the performance of five ratios of Alpha Limited, a manufacturing organization based in the UK.

Financial Decision Making

Contents
INTRODUCTION...........................................................................................................................1
Critically evaluating the role of accounting and finance within Aston martin............................1
Calculating the five ratios of ALPHA LTD. and commenting on its performance by
mentioning possible causes and effects for the changes in two year’s ratio results....................5
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making is process of analysing a situation by evaluating its benefits and
demerits which are related to finance and then a suitable decision is made which can assist the
functioning of that business organisation. This process is based upon a concept which states
every business should use their data before making any decisions (Aren and DİNÇ AYDEMİR,
2014). The main aim of this report is to build an understanding regarding management
accounting techniques and main accounting ratios.
This report is divided into two sections; the first section will be focused upon analysing the
role of finance and accounting in a real life organisation which will be Aston Martin. Aston
Martin is a large scale car manufacturer which is based in United Kingdom. This company was
established in 1913 by Robert Bamford and Lionel Martin. The key operations of this company
include manufacturing and marketing of automobiles (Aston Martin, 2020). In the second section
of this report, five key ratios including return on capital employed, net profit margin, current
ratio, debtor’s collection period and creditor’s collection period are calculated of Alpha Limited.
This company is a manufacturing organisation which is also based in United Kingdom and was
established in the year of 1954. In second section, performance of Alpha Limited will be
analysed using the trend and comparative analysis.
TASK 1
Critically evaluating the role of accounting and finance within Aston martin
Accounting and finance functions are the paramount to any organisation as these functions
allows a business to manage their finances and earn a relevant amount of profit which can help
gain desired position in market. Finance is a collective term which is associated with monetary
transactions of an organisation. Finance of an organisation includes managing an organisation’s
monetary aspects which can be managerial and financial accounting (Beaudoin, Cianci and
Tsakumis, 2015). On the other hand, accounting is a sub concept of finance which is concerned
with recording of all monetary transactions and develops statements of finance. Both of these
concepts play an important role in any organisation including Aston Martin. These roles are
analysed below including real life examples of Aston Martin:
Creating financial statements:
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Financial statements are the records which are developed by an organisation at the end of
their accounting year in order to summarise all the transactions which are been done in that year.
These statements include profit and loss account, balance sheet and cash flow statement (Fraczek
and limontowicz, 2015). All these three statements are mandatory to be developed by every
company. Finance and accounting has few certain guidelines and regulations which assist in
development of these statements. These guidelines are called IFRS and are provided by IASB.
These guidelines have certain principles and regulations which ensure that the financial
statements developed by every company have a similarity of format so that these statements can
be understood easily by everyone.
Finance and accounting helps Aston Martin to develop their financial statements at the end
of the year. These statements are then published by the company for public. In absence of the
concepts of finance and accounting, the company would be unable to develop financial
statements. For example, Aston Martin is a publically traded company and following the
financial and accounting concepts, this company develop a vertical balance sheet so that it can be
universally accepted.
Development of business strategy:
Another role of accounting and finance in Aston Martin is development of their business
strategy. Every large organisation such as Aston Martin is required to develop a business strategy
on which all their organisational functions and operations are based on. This type of business
strategy is developed by considering the financial and accounting information of a company.
Financial data are used by Aston Martin’s executives and then priorities of all the operations are
determined and this collectively is known as a business strategy.
For example, Aston Martin is a high revenue generating company but due to current
market influence, the revenues of this company are continuously decreasing. In order to
overcome with this issue, the company has used their financial data to identify the reasons for the
low revenues. These low sales were the result to innovative electric vehicles by their competitors
due to which sales of Aston Martin are declining and sales of their competitors are increasing. To
fix this issue, Aston Martin has re developed their business strategy in which they are making
efforts to develop their own electric vehicles to gain high revenues.
Fulfilment of legal obligations:
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Keeping accounting records according to the IFRS regulations is a legal obligation for
every company and any disobeying this law result in crucial legal consequences which can even
seize all organisational operations (Kliger and Gilad, 2012). Accounting and finance plays a
major role in fulfilling these legal obligations and avoiding any legal problems. By using
financial concepts, the business managers of Aston Martin pay organisational taxes. These
concepts helps this company’s accounting department to identify the amount which is company
is obliged to pay as their taxation obligation and also helps in identifying the deductions which
company can procure under government rules.
Developing managerial accounts:
Another role of finance and accounting is that it helps in development of managerial
accounts. These types of accounts are not mandatory by law to be developed and there are no
certain guidelines for these accounts but still they are developed by a company to ensure internal
control on their finances. Few managerial accounts include cost account, inventory account,
performance of employee’s record, receivables account etc. which are developed by using
managerial accounting techniques. The main aim behind these management records is to ensure
effective planning, control and decision mak8ing in the organisation.
For example, Aston Martin uses FIFO and LIFO which are concepts of finance and
accounting which helps this company to maintain their record of inventory so that issue of
wastage and theft can be eliminated.
External and internal communication:
Another role of accounting and finance in Aston Martin is that it helps the company to
effectively maintain their external and internal communication with their stakeholders. External
stakeholders of Aston Martin are investors, government, creditors, debtors and public. Aston
Martin uses the financial concepts to develop an annual report which is understandable by
everyone. This annual report is then published through press release so that external
communication can be done (Kumar and Goyal, 2015). For internal communication, Aston
Martin provides quarterly aims and management accounts to their internal stakeholders such as
employees and board of directors so that internal communication can be maintained.
Both internal and external communication are maintained by Aston Martin by using the
concepts of finance and accounting as these concepts helps in developing communicated
documents and information.
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Analysing organisational performance:
Organisation’s financial performance is the measure which provides true and fair
judgement regarding performance of the company. There are various tools and techniques of
finance and accounting by which this performance is measured such as ratio analysis, vertical
analysis, horizontal analysis and many more (Lee and Andrade, 2015).
For example, internal personnel of Aston Martin calculate few ratios such as profitability
and liquidity to identify the financial performance of this company. These ratios are calculated
by using concepts and formulas of accounting.
Develops budgets and predictions:
Another role of finance and accounting is that they help in an organisation to develop
budget. Budget is a document which considers past experiences of the company and current
trend analysis. Using this information, company develop a budget in which future estimates of
revenues, expenses and profits are recorded (Mitchell and Lusardi, 2015). This document is a
base for predictions. For example, In Aston Martin accounting manager develops a budget in
every quarter by using financial concepts. This budget acts as a benchmark for the company
which states the targeted revenue and profit which must be gained by the company.
Attracts investors:
Accounting and financial functions allows an organisation to gather monetary information
and present it such a way that it can attract potential investors. Aston Martin is a publically
traded company which seeks investments from external party so that the capital requirements of
the company and their operations can be fulfilled. For example, using the accounting concepts,
year wise growth of profit and sales revenue is acquired by financial manager of Aston Martin.
This information is then converted in a presentation which presented to potential investors to
attract them. By this way capital requirements of this company are fulfilled and growth prospects
of the company enhances.
Identifies organisational position in market:
Financial and accounting concepts have various tools and techniques which help in
measuring the position of a company by comparing it with the position of its competitors (Pang,
2016). In case of Aston Martin, the tool of ratio analysis plays an important role using which
financial position of Aston Martin is compared to its direct competitors. By this comparison,
market share which is acquired by Aston Martin is calculated though which position of the
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company in market is measured. This comparative analysis also acts as a base to business
strategy in which managers of this company brainstorm to identify the reasons due to which the
competitors are growing and then those reasons are considered to be included in their business
strategy.
Base for audit:
Another role which finance and accounting function plays in Aston Martin is that it
provides a base for audit. Audit is a mandatory check of company’s financial record in order to
protect the interest of investors and shareholders (Socea, 2012). This audit provides a true and
fair opinion about the financial position of the company. This audit is conducted by an external
and independent authorised auditor who conducts audit based on the financial information
provided. This financial information must be accurate and true. In order to ensure the
truthfulness of financial information, financial functions play an important role.
All the points which are discussed above are the points indicating role which financial and
accounting functions plays in the functioning of Aston Martin. It is important to note that most
important role of these functions is that they provide structure of financial statements and help in
applying management accounting techniques.
TASK 2
Calculating the five ratios of ALPHA LTD. and commenting on its performance by mentioning
possible causes and effects for the changes in two year’s ratio results
Alpha Limited is a manufacturing company which is based in United Kingdom. In order to
analyse the financial performance and position of this company, the technique of ratio analysis is
used. By using this technique, five ratios of Alpha Limited are calculated using financial
information of two years so that a comparison between ratios of two years can be evaluated.
These ratios along with commentary on financial position of Alpha Limited from the perspective
of investors are stated below:
(i) Return on capital employed
This financial ratio is a metric which helps in gaining the information regarding
company’s ability to use their capital employed. This ratio helps in calculating the
company’s profitability which they have gained against the capital employed in their
operations. The amount of capital employed is calculated by deducting current liabilities
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from the total assets of the company (Van Rooij, Lusardi and Alessie, 2011). ROCE is
considered as important measure for investors as higher the ROCE of a company is, higher
the company is able to utilise their investor’s capital and turn it into profits.
Formula (Operating Profit / Capital Employed) x 100
Where, Capital Employed = Total Assets – Current liabilities.
2017 = 375 / 1913 *100
= 19.60%
2018 = 412 / 2925 * 100
= 14.10%
Comment – From the above calculation of ROCE of Alpha Limited, it has been seen that
the company’s ability to utilise their employed capital is continuously decreasing. In year 2017,
ROCE was 19.60% but in 2018, this profit decreased to 14.10%. The causes of this decrease in
ROCE are the increase in current liability of this company. The total payables in 2018 for this
company have been increased due to high owed amount to transportation which was the result of
Brexit. This high value of payable resulted into high current liabilities and finally lowers ROCE.
This decline in ROCE can impact the position of this company in market as investors will prefer
to invest in a company with higher ROCE.
(ii) Net profit margin
This ratio is a financial metric which helps in analysis the percentage of earned profit
against the sales revenue of a company. This ratio helps in gaining the insights about a company
and their ability to earn profit after paying all taxes and interests. It is considered that higher the
net profit margin of a company is, the more effective the position of that company is in market. It
must also be noted that this profitability ratio only shows the profit which is earned through the
sales revenues and not through the additional capital investments.
Formula Net Profit / Sales * 100
2017 = 300/ 2400 * 100
= 12.5 %
= 262.50 / 3000 * 100
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2018 = 8.75 %
Comment – From the above ratio analysis, it is clear that the ability of Alpha limited to
earn profit from the sales revenue is continuously declining. The profit shows a declining trend
which resulted in NP margin of 12.5% in 2017 and 8.75% in 2018. The causes of this declining
trend are increase in taxation which company has to pay due to change of regulations after
Brexit. This decline in net profit will affect the overall profitability of the company which will
reduce the pace of growth of this company.
(iii) Current ratio
This financial ratio is the indicator of liquidity of the organisation. This ratio is the
difference between current assets and current liabilities of a company. For the manufacturing
industry of United Kingdom, the ideal current ratio is considered as 2:1 which implies that
company should have 2 parts of current assets to pay their 1 part of current liability (Vučijak,
Kurtagić and Silajdžić, 2016).
Formula Current Assets / Current Liabilities
2017 = 757.50 / 322.50
= 2.34
2018 = 1035 / 1110
= 0.93
Comment – The above calculation of current ratio shows a declining trend as in year
2017, current ratio is calculated as 2.34:1 which declined in 2018 as 0.93:1. The causes and
reasons of this declining trend are similar to the cases of decline of ROCE. Both ROCE and
current ratio are declining in 2018 because in this year value of payables (current liabilities) is
increased suddenly. This sudden increase in payables is the result of Brexit due to which overall
economic growth of United Kingdom has been affected. This decline in current ratio will have
various effects and the most important of them all the reduction in creditability. From an investor
perspective, a company which not able to pay their current liabilities is not viable to be invested.
(iv) Average Receivable days/ Debtors collection period
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This financial ratio shows the period of days which a company takes to recover the debt
amount from their debtors. A shorter debt collection period is considered as effective as it
represents that company is able to collect their due amount from their debtors.
Formula Average Receivable / Sales *365
2017 = 450 / 2400 * 365
= 68.43
= 68 Days
2018 = 600 / 3000 * 365
= 73 Days
Comment – From the above analysis, it has been seen that debtor’s collection period of
Alpha Limited is increased as in 2017; the collection period was 68 days which increased to 73
days in 2018. This reason behind this increase in collection period is the higher amount of
receivables which is due to the company to be received. The effect of this increasing period will
be that it will attract investors as by their perspective Alpha Limited will be company who gives
credit but it capable to recover that credit in low time as well.
(v) Average Payable days/ Creditors collection period
This ratio shows the period which organisation takes to return their due amount
suppliers. This ratio is presented in number of days and is calculated by dividing total
payables of the company from average purchase which a company has done in a year
(Wright, 2016).
Formula Payable / Purchase * 365
2017 = 285 / 1,725* 365
= 60.03
= 60 Days
2018
= 1050 / 2,250* 365
= 170.33
= 170 Days
Comment – From the above ratio analysis of this company, it has been seen that
creditors collection period of Alpha Limited has been increased immensely as this ratio was only
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60 days in 2017 but it increased to 170 days in 2018. The causes of this high ratio are the high
payables amount which company needs to pay back to their suppliers which they are unable to
pay due to low money transactions in entire economy of United Kingdom due to Brexit. From
the perspective of investor, this high ratio is an indicator low credibility due to which prospect
investors can lose their interest in this company.
CONCLUSION
From the above report, it has been concluded that financial decision making is a procedure
which helps an organisation use their financial data and then make relevant decision which can
ensure effective functioning of the organisation. From this report it has also concluded that Aston
Martin is a large organisation in which most important role which accounting and financing
concepts plays are defining the structure of financial statements and implying management
accounting techniques. From the second section of this report, it has been concluded that
financial performance of Alpha Limited has been declined in 2018 and the reason behind this is
the overall economy of United Kingdom which has been impacted due to Brexit.
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REFERENCES
Books and Journals
Aren, S. and DİNÇ AYDEMİR, S., 2014. A literature review on financial literacy.
Beaudoin, C. A., Cianci, A. M. and Tsakumis, G. T., 2015. The impact of CFOs’ incentives and
earnings management ethics on their financial reporting decisions: The mediating role
of moral disengagement. Journal of business ethics. 128(3). pp.505-518.
Fraczek, B. and Klimontowicz, M., 2015. Financial literacy and its influence on young
customers’ decision factors. Journal of Innovation Management. 3(1). pp.62-84.
Kliger, D. and Gilad, D., 2012. Red light, green light: Color priming in financial decisions. The
Journal of Socio-Economics. 41(5). pp.738-745.
Kumar, S. and Goyal, N., 2015. Behavioural biases in investment decision making–a systematic
literature review. Qualitative Research in financial markets.
Lee, C.J. and Andrade, E.B., 2015. Fear, excitement, and financial risk-taking. Cognition and
Emotion. 29(1). pp.178-187.
Mitchell, O.S. and Lusardi, A., 2015. Financial literacy and economic outcomes: Evidence and
policy implications. The journal of retirement. 3(1). pp.107-114.
Pang, M. F., 2016. Enhancing the financial literacy of young people: a conceptual approach
based on the variation theory of learning. In International Handbook of Financial
Literacy(pp. 587-602). Springer, Singapore.
Socea, A.D., 2012. Managerial decision-making and financial accounting information. Procedia-
Social and Behavioral Sciences. 58. pp.47-55.
Van Rooij, M., Lusardi, A. and Alessie, R., 2011. Financial literacy and stock market
participation. Journal of Financial Economics. 101(2). pp.449-472.
Vučijak, B., Kurtagić, S. M. and Silajdžić, I., 2016. Multicriteria decision making in selecting
best solid waste management scenario: a municipal case study from Bosnia and
Herzegovina. Journal of Cleaner Production. 130. pp.166-174.
Wright, D. J., 2016. Superstitious behavior in financial decision-making. Available at SSRN
2811965.
Online
Aston Martin. 2020. [Online]. Available through: <https://www.astonmartin.com/welcome>
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