Financial Decision Making in Manufacturing Companies

This document discusses the role of accounting and finance in the development of manufacturing companies. It explores how accounting and finance help in making financial decisions and improving liquidity, profitability, and efficiency. The document also provides recommendations and conclusions.

Running Head: Financial decision making 1
Financial decision making

Financial decision making 2
Table of Contents
TASK 1.......................................................................................................................................................3
Role of Accounting and Finance in the Manufacturing companies.............................................................3
TASK 2.......................................................................................................................................................4
Liquidity..................................................................................................................................................4
Profitability..............................................................................................................................................5
Efficiency................................................................................................................................................5
Recommendation and Conclusion...............................................................................................................6
References...................................................................................................................................................7

Financial decision making 3
TASK 1
Role of Accounting and Finance in the Manufacturing companies
Accounting and finance are assumed to be a basic job in the administration of any business.
Organizations work on cash, and if the cash is not kept at the hand of the controlled manner,
there are high chance that the business is going to suffer. By appropriately representing your
organization's money and costs, organization like ALPHA LIMITED can deal with the
progression of cash and along these lines direct the course of your business (Saeidi. et al 2015).
In the present scenario the accounting and the finance both plays a crucial role in the
development of the manufacturing sector. This concept helps in devising the new business
strategies with the help of which the ALPHA LIMITED can improve the existing position of the
business. The strategies involve the preparation of the budgets, monthly reports, auditing of the
transactions as well as comprising if the financial data under one roof known as the annual report
(Maskell, Baggaley and Grasso, 2016).
Accounting is also often known as the language of the business which with the help of the
financial terms can reorganize the data of the ALPHA LIMITED and present it to the users of the
financial statements. Accounting assumes a noteworthy job in organizations with regards to the
money related exchanges of a business. Budgetary bookkeeping records all exchanges and
condenses the sums on fiscal summaries toward the finish of every month and year. Partners and
the members of the business dissect the monetary data. Partners incorporate banks, investors,
proprietors of the ALPHA LIMITED and representatives and also utilize this data to settle on
loaning and contributing choices (Nielsen, Mitchell and Nørreklit, 2015).
In short it helps to manage the entire business to work in the efficient as well as the effective
manner. The management accounting helps in allowing the managers of the ALPHA LIMITED
ALPHA LIMITED to carefully analyze their responsibilities and work accordingly. Since the
reports are customized to the requirements of individual directors, and their capacity is to supply
pertinent, precise, opportune data in an organization that will help administrators in deciding. In

Financial decision making 4
getting ready, breaking down, and imparting such data, bookkeepers work with people from
every single practical zone of an association (Gitman, Juchau and Flanagan, 2015).
TASK 2
Ratios of ALPHA LIMITED 2017 2018 2017 2018
Liquidity
Current Ratio Current Assets 757.5 1035 2.35 0.93
Current Liabilities 322.5 1110
Profitability
Net profit Net income 300 262.5
12.5
% 8.8%
total revenue 2400 3000
Return on capital Employed EBIT 375 412.5
19.6
% 14.1%
Total assets- Current
Liabilities 1912.5 2925
Liquidity
Under the liquidity scenario, a measurement which defines how the ability of the ALPHA
LIMITED to pay back the current obligation with the assistance of the current cash in hand. The
entire role is played by the realization of the cash and how well the ALPHA LIMITED makes its
creditors happy (Kim, and Im, 2017).
The table above defines the position of the ALPHA LIMITED as a low one with respect to the
previous years in terms of the current ratio. The current ratio of the ALPHA LIMITED is 0.93 in
the financial year 2018 whereas the same in the year 2017 was 2.35. It was the sound ratio until
the ALPHA LIMITED has invited the liabilities of the trade creditors on its head. The funds
might have acquired for the purposes of the expansion or manufacturing the other item, however
the ALPHA LIMITED shall make sure that the ALPHA LIMITED realizes the money from the

Financial decision making 5
debtors on an early basis to pay back the liabilities to avoid any financial leverage on head
(Vintilă and Nenu, 2016).
Improvement strategy
In order to make the current ratio sound and equivalent to 2: 1 the ALPHA LIMITED shall get
rid of the obsolete technology and moreover the ALPHA LIMITED shall also focus on acquiring
the funds by the way of the long term loans and liabilities rather than the short term loans.
Profitability
Under the scenario off the profitability, the position of the ALPHA LIMITED has again shown a
fall in comparison to the previous year. The net profit margin of the ALPHA LIMITED fell from
12.5% to 8.8% in the year 2018. This is due to the slow growth in the volume of the sales and a
rise in the cost of the goods sold. The net profit margin depicts the entire position of the ALPHA
LIMITED and the investors are mainly interested in the profitability of the business on the basis
of which they make the investments. Therefore it is the necessity of the ALPHA LIMITED to
keep almost constant or greater net profit margins (Robinson, Henry, Pirie and Broihahn, 2015).
In case of the return of the capital employed the ratio fell from 19.6% to 14.1% which again is
not a happy sign for the ALPHA LIMITED. This indicates that the ALPHA LIMITED is able to
pay fewer returns in comparison to the previous years and the investors might switch and take a
back step from the ALPHA LIMITED (Goldmann, 2017).
Improvement strategy
Hence, in order to save the ALPHA LIMITED from the adverse situations, the ALPHA
LIMITED must focus on lowering down the operating cost by in house manufacturing. The
volume of sales shall be increased by expanding into different segments that can use the same
production process. In order to satisfy the investors the ALPHA LIMITED must keep aside
funds that can be distributed later on.
Efficiency
In this scenario the debtors collection period have been showcased which indicates that in the
year 2017. The ALPHA LIMITED performed well and was able to realize the cash from the
debtors in 68.44 days, however the ALPHA LIMITED lost its ability and now they are bale to

Financial decision making 6
collect the amount in 73 days. Though there is not a major impact as of now but if the situation
continues to grow this way the ALPHA LIMITED can face difficulties (Maynard, 2017).
The worst scene is in case of the accounts payables, where the ALPHA LIMITED had the ability
to pay back to the creditors in 53 days, whereas now the ALPHA LIMITED is able to pay back
in almost double the figure days. This is red alert situation for the ALPHA LIMITED and such
scenario the ALPHA LIMITED shall not opt for financing through creditors at all (Robinson,
Henry, Pirie and Broihahn, 2015).
Activity Ratios
Average receivables Accounts receivables * 365 164250 219000 68.44 73.00
Total credit sales 2400 3000
Average payables Accounts payables * 365 104025 383250 53.35 146.00
Total credit purchases 1950 2625
Recommendation and Conclusion
Form the above analysis it can be stated the accounting and finance plays a vital role in the
ALPHA LIMITED like Alpha Limited and it helps in taking the ALPHA LIMITED from the
normal grounds to the high level of the operating capacity. Not only has this will the regular
supervision of the performance through the ratio analysis technique keep the management aware
of the necessary steps that needs to be taken immediately.

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References
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Goldmann, K., 2017. Financial liquidity and profitability management in practice of polish
business. In Financial Environment and Business Development (pp. 103-112). Springer, Cham.
Kim, J. and Im, C., 2017. Study on corporate social responsibility (CSR): Focus on tax
avoidance and financial ratio analysis. Sustainability, 9(10), p.1710.
Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision
making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 66-82).
Taylor & Francis.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Saeidi, S.P., Sofian, S., Saeidi, P., Saeidi, S.P. and Saaeidi, S.A., 2015. How does corporate
social responsibility contribute to firm financial performance? The mediating role of competitive
advantage, reputation, and customer satisfaction. Journal of business research, 68(2), pp.341-
350.
Vintilă, G. and Nenu, E.A., 2016. Liquidity and profitability analysis on the Romanian listed
companies. Journal of Eastern Europe Research in Business & Economics, 2016, pp.1-8.