Role of Accounting and Finance in an Organization

This report discusses the role of accounting and finance in an organization, focusing on the importance of accounting practices in complying with the law, creating budgets, analyzing costs, and evaluating financial performance. It provides insights into the functions and responsibilities of the finance department in managing the financial resources of the business. The report also includes a case study of ALPHA Limited, a manufacturing concern in the UK.

Financial Decision
Making

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
Role of accounting and finance in an organization................................................................3
CONCLUSION..........................................................................................................................6
TASK 2......................................................................................................................................6
Ratio analysis.........................................................................................................................6
Interpretation and analysis.....................................................................................................7
CONCLUSION..........................................................................................................................9
REFERENCES.........................................................................................................................10

INTRODUCTION
Financial decision making refers to the process of taking decisions in relation to the
liabilities and stakeholder’s equity of the business. It involves two sources of funding’s which
are through issuing shares of the company or borrowing from outside. The core objective is to
optimize the capital structure of the business. Also, it helps businesses in taking better
decisions for achieving the growth and success of the organization and effective management
of business finance. In this report, ALPHA Limited is taken as an organization, which is a
manufacturing concern in UK. It was started in 1954.This report presents the deep insight
about the role of accounts and finance department in an organization. It also includes ratio
analysis of the ALPHA Ltd and interpreting the same in respect to the investment purpose.
TASK 1
Role of accounting and finance in an organization
Accounting and Finance plays an important role in the overall management of the
business. Organization’s mainly run on money which are required to be properly controlled
and managed. By properly managing accounting and Finance of the company will help in
better flow of money. Some of the key roles of finance and account stated below.
Obeying the law: implementing good accounting practices helps in taking multiple
advantages of it. It helps company in complying with the law and without having a good
accounting system may led to the violation of number of laws. For example, not paying the
right amount of tax, delay in filling the return etc. Also, poor accounting may lead business to
overlook many minor details that can collectively affect the business functioning such as
facility improvement in order to comply with safety regulations (Fredman, 2019). The
accounts department of Tesco, which is a retail multinational organization in UK, needs to
maintain proper accounting records which helps it in the proper management of the business
financial resources and also complying other statutory standards. The finance and accounts
department is responsible for maintaining the proper record of day to day activities and at the
end of the year it is used in carrying out the audit process. It also has the responsibility for
filling the payroll, worker’s compensation and also filling income tax. But in all this process
the overall functioning of the business is affected and sometimes it may cause delay in
decision making.
Creating budgets: After implementing proper accounting practices, the process of
budgeting can be started. A budget is something more than just a list of estimated income and
expenses. A master budget is prepared in which different and multiple reports are prepared in
respect to purchase, sales, production etc. It helps in taking better and informed decisions
about the company’s growth plans. It can be considered as a blueprint or road map for
achieving the desired goals and bringing stability to the business (Dyer and et.al, 2016). For
example, in Tesco timely budgets are prepared with respect to the accounting information
made available which assists in effective planning and preparation of the budget. It uses cash
flow statement in analysing the amount of cash available to order to carry out required
expenditure. It helps it to spend only that much amount that it has. The major drawback of
this is that sometime organizations are required to forego some opportunities just because it
does not have enough money to grab it. Sometimes, it is out of the budget. Thus, budgeting
and the future projections has the tendency to either make or break the business and the

financial records of the business plays an important role in it. This is because historical data
and information is used for budgeting and helps to keep the business operation in an
organised and profitable manager. But it is a time-consuming process and requires highly
skilled personnel.
Analysing cost: Effective accounting and finance management helps the
organizations in understanding the different aspects of business in terms of finance. It helps
in analysing the cost in association with the product and services offered by the organization.
It helps in analysing what cost it will take to sell a product and how it will affect the profit
margin of the business. At first, expenses are divided into overhead and production costs
(Schroeder, Clark and Cathey, 2019). The production cost may remain same or constant but
the overhead expenses keeps on decreasing with per unit of sells and it includes insurance,
office rent etc. For example, in Tesco, it has an effective accounts and finance team which
works together to carry out a detailed cost analysis of the products of the business and also
helps in determining the profitability associated with each and every product. It also enables
it to discontinue any product which is not having higher profitability or involves more cost.
But it becomes very difficult to identify and quantify costs based on the cost drivers. Also,
inaccurate calculation of present value may result in wrong decision making and may hamper
the business functioning.
Analysing the financial performance of the business: With the availability of the
well-structured accounting reports of the business of the past year years then it will be very
useful in analysing the financial performance of the business. It will help in reviewing the
performance of the business in respect to its past performance and also helps in evaluating its
finance. By the looking at the financial records, it will assist the business in identifying the
various things like inflow and outflow of money, its performance in long term and short,
current position of the projects undertaken (Narayanaswamy, 2017). The accounts and
finance function in Tesco is very well-structured and organised which help in carrying out the
performance analysis of the business more effectively by reviewing the company’s existing
liabilities such as loans, credit from vendors etc. It is very useful at the time when business is
looking for expansion through loan. The financial statements will be very useful in
determining the extend of debt already taken. Also, it will help Tesco in evaluating its assets
and inventory. It includes analysing whether there is too much or less inventory for meeting
the future sales needs of the product (Weygandt, Kimmel and Kieso, 2019). Reviewing the
financial statement of the business also helps in determining the growth trend of the business
and whether it is meeting the projected estimates. The major drawback of financial statement
analysis is that it uses different accounting methods which changes the reliability of the
accounting figures and also the managerial ability cannot to analysed.

Figure 1 Purpose of accounting. (Source: Difference between Accounting and Auditing. 2018)
Developing business strategy: After analysing the financial performance of the
business, one thing is very clear that is the productivity and future prospect of the business. It
will help in taking better decisions in order to achieve the set targets within the specified
period of time (Thuhoye, 2017). The finance team is responsible for providing relevant
resources and information which will help in supporting the business strategy. The finance
department makes sure that there is a right mix of debt and equity in the business both long
term and short term. The finance department of Tesco, are responsible for creating value for
the business and because of which it is important to integrate finance strategy to the business
plan. But is will also have a negative impact on the business plan. It will make the planning
process more complex and may require organization to make adjustment in the goals and
objectives or in the target.
Setting the terms of credit: The organizations where products are sold through
various intermediaries like wholesalers, retailers and other, then in that situation, the
organizations are required to offer credit in order to sell its products. In such situations, the
finance team analyses what credit terms should be offered such as 30 day terms, 60 day erm
or 90 day terms and helps in avoiding the deadbeat customers (Franklin, Graybeal and
Cooper, 2018). It can also determine the slow paying customers and may recommend to cut
one or more customers. In the Tesco, the accounts and finance departments are very effective
in setting and evaluating the credit terms. It has introduced a separate account for managing
credit. But it can also have a negative consequence over the business if the customer fails to
pay the amount on time or get bankrupt which can pose a huge loss to the business even if
proper analysis is done because future is uncertain.
Management of organizations investments: It is the responsibility of the finance
department to effectively and efficiently manage the company’s assets. The finance
department is more focussed on the managing the current assets of the business apart from
fixed assets. This is because it is more essential to manage the working capital of the business
more efficiently in order to increase the profitability of the business (What is the Role of the
Accounting and Finance Department? 2020). The finance department of Tesco, are very

much focussed towards maintaining the required amount of working capital so that it can
smoothly run its business with no need to borrow money. But by focussing more on current
asset it may pose as a threat to fixed asset which includes machines and equipment used for
the production of the products.
CONCLUSION
It can be summarized from the above that the accounts and finance plays an important
role in an organization. Both carries out activities that are very essential for the business with
respect decision making which results into smoothly running the business. The accounting
finance department helps in evaluating the financial performance of the business, record
keeping, formulating business strategies etc.
TASK 2
Ratio analysis
Particulars Formula 2017 2018
EBIT 375 412.5
Total assets 2235 4035
Current liabilities 322.5 1110
Capital employed
Total assets - current
liabilities 1912.5 2925
Return on capital
employed 20% 14%
Particulars
Formul
a 2017 2018
Net profit 300 262.5
Sales 2400 3000
Net profit
ratio
net
profit /
sales *
100 13% 9%
Particulars Formula 2017 2018
Current assets 757.5 1035
Current
liabilities 322.5 1110
Current ratio
Current assets / current
liabilities 2.35 0.93

Particulars Formula 2017 2018
Trade receivables 450 600
Sales 2400 3000
Debtors collection
period (in days)
Trade
receivable
s / Sales
*365 68 73
Particulars Formula 2017 2018
Trade payables 285 1050
Purchase 1725 2250
Creditors payment
period
Trade
payables
/
purchase
*365 60 170
Interpretation and analysis
Return on capital employed (ROCE)
The return on capital employed is the long-term profitability ratio that measures how
the company is utilizing its capital employed which can be assessed in terms of profitability.
In other words, it shows the investors how much profit the company is generating for each
unit of pound employed generates (Gomme, Ravikumar and Rupert, 2017). It is one of the
most important ratios considered by the investors for taking decision whether to invest in the
company or not. It evaluates how effectively company is utilizing it assets along with taking
into account the long-term financing. The companies and investors expect the higher rate of
return in comparison to the rate of borrowings. It is used for various financial decision
making by the managers. Higher return reflects that the company is generating more profits.
It is calculated by dividing EBIT to the capital employed. ALPHA Ltd. is having the return
on capital employed as 14% in the year 2018 as compared to 20% in 2017 which shows a
decrease in 6%. This means that the company is not effectively utilizing its capital employed
and is not generating shareholder value (Return on Capital Employed (ROCE). 2020).
Investors are mostly interested in the companies that are having increasing and higher return
on capital employed. The lower return may be because of the decrease in profit or increase in
cost and expenses and also it can be because of increase in capital employed by the ALPHA
Ltd. Thus, the decreasing rate of return is a big concern for the ALPHA Ltd. The company
can improve it by increasing its operating profit by reducing its operating expenses and also
by reducing its capital employed.

Net profit margin ratio
Net profit margin ratio is the profitability ratio that measures how much profit is
generated as a percentage of revenue. This ratio helps investors in assessing whether the
company is able to generate enough profit from its revenue and it is also important indicator
of the financial health of the company. It is calculated by dividing net profit by net sales of
the business. This ratio is mostly used by creditors and investors to know the effectiveness of
the business in converting its sales into income (Hadi, 2018). The low profit margin shows
that company is incurring more expenses against its sales and management is required to cut
the unnecessary expenses. Thus, this ratio is a strong indicator of the company’s overall
growth and success. The net profit margin ratio of ALPHA Ltd has reduced from 13% in
2017 to 9% in 2018, a drop of 4%. This drop in ratio tells that company is less effective in
managing its business operation. It can also mean that company is ineffective in managing its
cost structure or the pricing strategy (Monea, 2017). Thus, the low ratio can be because of
inefficient management, high expenses and weak pricing strategies. The company can
improve its net profit margin by either increasing the price or selling more products which
will lead to increase in revenue and also by reducing cost of sales.
Current ratio
Current ratio is the one of the liquidity ratios that measures the liquidity position of
the business. In other words, it measures whether the business is having enough cash to carry
out its day to day activities smoothly. This ratio is very important for manufacturing concerns
as it involves raw material and product cycle. It is calculated by dividing current assets by
current liabilities. Basically, higher the ratio means company is having sufficient cash for
meeting its current liabilities easily (Gibson, 2016). The ideal ratio is 1. The companies
having current ratio of less than 1 means that it has capital to meet its some of the obligations
mainly short term. The ALPHA Ltd is has seen a reduction the current ratio from 2.35% in
2017 to 0.93% in 2018. It can be said that ALPHA Ltd needs to either increase its current
assets or reduce its current liability in order to reach the ideal ratio. Otherwise, lower ratio
can be considered as an alarm for the company to work effectively or it may lead to cash
crunch (Sunjoko and Arilyn, 2016). Also, it needs to make sure that the ratio is not much
higher like 2.35% because it may mean that the company is blocking its cash and is not using
it effectively or improper management of working capital. The company should invest more
in its current assets by increasing cash and cash equivalents, inventory and debtors but on the
same it should work on reducing its current liabilities.
Average receivable/collection days
Average receivable/collection days refers to the amount of time it takes for the
business to collect the payment from its debtors’ terms as account receivables. It is derived by
dividing average receivable turnover ratio by 365 days. This ratio is very important for the
concerns who mostly rely on the credit sales. It represents the number of the days from the
date a credit sale is made to the customer and the date of receiving the payment for it. The
lower the average receivable period more favourable it is for the company which indicates
that company is efficient enough to collect its payments within time (Kenton, 2019). The
longer collection period indicates that company is not able to collect its money from the
customers. The ALPHA Ltd has the debtor collection period of 73 days in 2018 in
comparison to 68 days in 2017. There has been an increase in 5 days which is point of

concern for the company. The reason for this can be that the company is having loose credit
policy which grants more credit to its customers in an effort to increase sales. Also, the
economic slowdown can eb the reason that is affecting the cash flow of customers leading to
delay in payments. Another reason is that the collection team or department of the company
is not effective or there has been an increase in staff turnover which is affecting the collection
of the receivables. Thus, the company needs to work on these aspects for improving its
performance like implementing strict credit policy and an effective collection team as well.
Average payable days
Average payable days is the solvency ratio which determines the average number of
days business takes in order to pay back to its vendors and suppliers for the purchases made
on credit. The increase in number of days from one year to another indicates that the
company is paying back to its suppliers very slowly. In case, the company is making payment
to its suppliers very quickly indicates that the supplier is having strict credit policy and also
having a strong collection team. In case of ALPHA Ltd, the average payable period has
increased from 60 days to 170 days which is beneficial for the company as it can retain more
cash with it and continue its production process smoothly (Average payment period. 2020). It
can take the advantage of it by investing the available or excess cash. Also, it requires to
consider the negative of it as well. Taking a very long time in making payment may
disappoint and make suppliers unhappy which in turn can affect its relationship with
suppliers or the supplier may refuse to extend the credit or other favourable credit terms.
Also, the higher payable days also indicates that the company is struggling to pay off its
creditors because in insufficient cash. Thus, higher payable period, would mean that either
supplier is providing better credit terms or company has inability to pay on time. Thus,
currently company have effectively managed its accounts payable.
It can be said from the above that currently the financial position and performance of
ALPHA Ltd is not good. It has reduced return on capital employed, decreasing net profit
margin, lower current ratio and higher collection period and all these are pointing towards
one thing only, that is, ineffective management of business operation, cost and insufficient
cash. The increase is average payable period is also not so favourable to the company. Thus,
from the investors point of view, it is not feasible to invest in the ALPHA Ltd.
CONCLUSION
It can be concluded from the above analysis that the financial decision making is very
crucial part of every organization. The accounts and finance department of the organizations
plays an important role in it which cannot be eliminated. It helps in taking better decisions in
respect to investment, complying with statutory requirements which are required to be
fulfilled, preparing budget for future growth etc. Also, the ratio analysis of the ALPHA Ltd is
carried out which has helped in analysing the financial performance and position of the
business in terms of liquidity, profitability and solvency. Based on the interpretation of the
same it can be said that the current position of the ALPHA Ltd is not good and stable as there
is a greater fall in profitability and return and from investors perspective it is not the right
company. Thus, financial statement analysis is very useful in taking effective decisions.

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