Functions of Accounting and Finance in Financial Decision Making

This article discusses the functions of accounting and finance in financial decision making. It covers topics such as financial planning, analyzing financial statements, budgetary control, and management accounting techniques. It also includes a case study on the financial position of a manufacturing enterprise in the UK.

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Functions of accounting and finance...........................................................................................3
Management accounting techniques............................................................................................4
TASK 2............................................................................................................................................6
a.) Cal. of fiscal ratios..................................................................................................................6
b.) Interpretation and assessment of the financial position of company......................................7
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial decision is a strategic process which is related with making decision in relation
with the financing mix of the company. It is very useful in allocation of funds which in turn
results in making investment, financing, liquidity and operational decision in a systematic and
efficient manner. Financing is referred to as an effective source which is mainly concerned with
the equity of the stakeholders and the liabilities of organization to attain long term development
and objectives of organization. This study will highlight on various accounting functions and role
related with accounting and finance. This study will also evaluate fiscal ratios of organization
with the help of financial statements.
ALPHA ltd. is a manufacturing enterprise in UK. It was established in 1954. ALPHA
supply various components of metal to leading companies of the UK. This company focus on
growing its business activities in the diverse other part of UK.
TASK 1
Functions of accounting and finance.
Financial decision is a strategic process which in turn is accountable for decisions making
associated with stake of the stakeholders and the possession of company to attain objectives of
organization (Schaltegger and Burritt, 2017). Financial decision of the business can be associated
with investing, financing, dividend, liquidity and operations of the business. Decision associated
with managing finances are very important for organisation because it is useful in maximizing
the shareholder value in an efficient and strategic manner. It is useful in taking effective decision
related with the income and expenditure of the business in order to maintain sufficient financial
resources in order to smoothly carry out the operations of the ALPHA Ltd. Financial accounting
is very useful in keeping track of all the financial transactions of the business in order to provide
baseline for the various stakeholders of the company (Collier,2015). It is helpful in interpreting
the financial health and position of the company by assessing the creditworthiness, solvency
position and liquidity position of the ALPHA Ltd. Accounting and finance are very useful in
preparation of an effective budgeted plan which in turn helps in carrying out the business within
the set budget plan. In case of variation take necessary actions to resolute any financial difficulty.
MA plays key role in formulation of plan, organizing, controlling and decision making of
business. The main function of accounting and finance is to help stakeholders of the organization
make strategic decision. It is very useful in interpreting the financial information and

communicating the same to the management and stakeholders of the company in a strategic and
efficient manner (Petersen, Kushwaha and Kumar, 2015). Accounting and finance are useful in
determining the cash flow of the business which in turn is very useful in credit analysis,
estimation of risk and profitability of the company. Finance and accounting plays a key role in
administrating the assets of the business. MA helps in critically examining the financial
performance of enterprise by effectively preparing various internal fiscal reports and records.
Management accounting is useful to evaluate the cost of the ALPHA limited company to
determine the income and expenses of business (Maas, Schaltegger and Crutzen, 2016). It is
useful in determining and evaluating the budget plan which is useful in making various strategic
financial decision. Controlling the activities of the business is one of the common aspect of the
management accounting which helps in reducing the cost of the business and attain higher
economies of scale. This helps in determining the underperforming and outperforming units of
the ALPHA Ltd. It is also useful in evaluating highly profitable departments of the business and
gain higher profitability by reducing operational cost of the company (Kubilay, and
Bayrakdaroglu, 2016). MA is useful in planning as it helps in effectively predicting the future
elements for growth and detecting financial patterns according to the latest market trend (The
Role of Accounting & Finance in Business Management, 2019). Planning helps management
accounting in creating long term policies of organization. It helps in better analysis of fiscal
records to improve the performance and profitability of ALPHA ltd.
Management accounting techniques
MA method is useful in interpretation of financial information and communication of the
same to share holders of business in order to attain growth and objectives of company.
Financial planning: This tool is mainly concerned with attainment of organizational
goals and objectives of the company by effectively evaluating the financial policies of the
company. It helps in maintaining adequate finance in the company which in turn results in
smooth functioning of ALPHA limited company and attain long term sustainable growth.
Analysing financial statements: This tool helps in evaluating various financial reports of
the company in order to forecast the future needs and requirements of the company.
Representation of financial statements in a systematic and timely manner helps stakeholders in
making strategic financial decision.

Budgetary control: It is very useful in controlling the finances of the company by
effectively allocating funds to the various business operations of the business (Top 11
Techniques used in Management Accounting, 2019).
Standard costing: This is a predetermined cost which helps in providing a yardstick for
effectively measuring the actual performance of the ALPHA limited company.
Revaluation accounting: It is useful in determining the impact of change in the price
while preparation of the various financial statements. It is very useful in examining the fair return
on the capital employed by the business.
Cash flow analysis: This tool is useful in evaluating the cash inflows and out of the
business. It is useful in determining the reason for change in the cash balance between two
accounting periods (Mitchell, Hammond and Utkus, 2017). It is determining cash inflows and
outflows from operating, financing and investing activity.
Fund flow analysis: This is an effective tool which is useful in effectively analysing the
difference in the financial position of the company between two consecutive years. It helps
management in determining the sources of funds through which money is coming into the
business and how efficiently the funds are used.
Decision making: This technique is useful in choosing the best and most profitable
alternative for the business. It is useful in effectively evaluating the business problem and take
strategic decision to solve the complexity of organization.
Critical evaluation of the role of finance and accounting within a business context.
Razumovskaia and et.al., (2016) sought to examine the fact that, accounting and finance
plays a crucial role in effectively managing the income and expenditure of the business. It is very
useful in managing the flow of the money and effectively direct the course of the business in
order to attain desired goals and objectives of the ALPHA limited company. It is beneficial in
making strategic financial decision related with the operations, financials, liquidity, dividend and
investment decision in order to attain higher operational goals and standards. On the contrary,
Hirshleifer, Jian and Zhang, (2016) argued that, accounting and finance helps in allocating funds
to various activities of the business in order to attain economies of scale and higher profitability
for the business. Accounting and finance helps in effectively controlling the finances of the
company in order to maintain certain resources which in turn can be effectively used at the time

contingent events. The key role of accounting and finance is to reduce the risk of theft and fraud
by maintaining sound financial records.
Engle-Warnick, Pulido and de Montaignac, (2016) said that, MA tool is helpful in
bridging the gap between the operations and finance function of the business. It is very useful in
controlling the activities of the ALPHA limited company by assuring the long term growth and
success of the company. It is very useful in improving the quality of the business which in turn
results in higher operational growth and efficiency. On the contrary, Chambers, Echenique and
Saito, (2016) argued that, management accounting tool is based on personal prejudice and leads
to intensive decision making. This in turn, affects the financial information of the company and
also loosen up the validity and reliability of the financial information. Maas, Schaltegger and
Crutzen, (2016) sought to determine the fact that, management accounting tools are useful in
planning, organizing, controlling and making decisions for controlling the operations of the
business. It is very useful in analysing and understanding the financial reports which in turn is
useful in critically examining the various business problems. It is very useful in effectively
evaluating and understanding the financial reports of the organization in order to take strategic
decision associated with investing, funding, profit, liquidity and operations of the ALPHA ltd. It
is very useful in controlling the operations of the business by formulating future policies and
communicating the latest information to the stakeholders of organization. It helps in managing
cost of the business and preventing fraud and errors from the business operations.
TASK 2
a.) Cal. of fiscal ratios.
a.) ROCE
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Net income 300 262.5
TA 2235 4035
Current liab (CL) 322.5 1110
Funds employed TA- CL 1912.5 2925
ROCE NI/ Funds employed*100 15.68 8.97

b.) Net profit margin
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Net earnings 300 262.5
Net sales 2400 3000
Net profit margins Net earnings/Net sales*100 12.5 8.75
c.) Current ratio
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Current Assets (CA) 757.5 1035
Current Liabilities (CL) 322.5 1110
Current Ratio CA- CL 2.34 0.93
d.) Debtors collection period
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Trade receivables 450 600
Annual sales 2400 3000
Debtors collection
period
Trade receivables/ Annual sales*365 68.43 73
e.) Creditors collection period
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Trade payables 285 1050
COGS Opening inventory+ Purchase – Closing 1725 2250

inventory
Creditors collection
period
Trade payables/ COGS* 365 60.30 170.33
b.) Interpretation and assessment of the financial position of company.
a.) ROCE
This financial profitability ratio is useful in determining the capability of organization in
rendering profits from the fund engaged in business. It can be calculated as net income of the
company divided by funds employed. The ROCE of the ALPHA limited company in 2017 was
15.68 and in 2018 was 8.97. The ROCE of ALPHA Ltd. is declining by 6.71 which is a negative
sign for the company. This states that, the organisation is not making optimum use of the
financial resources of the company. In order to improve the return on capital employed, the
company must focus on maintaining its operating profit and effectively reduce the amount of
capital employed into the business. Paying off debts, repayment, refinancing on lower interest
rate, sale of outdated machinery, etc. helps in improving the return on capital employed of the
ALPHA limited company (Arkan, 2016). Higher ROCE of the company helps in utilizing the
financial resources of the company and generating higher return on sum of money endowed by
the ALPHA Lrd.
b.) NP margin
This ratio evaluates the percentage of profit rendered by business in comparison to the
total sales. It can be calculated as net income divided by the net sales of the ALPHA limited
company. The NP margin of the ALPHA Ltd. in 2017 was 12.50 and in 2018 was 8.75. The NP
margin of the ALPHA Ltd is declining by 3.75 which is a negative sign for the company. This
states that, the enterprise is making lower profit in comparison to the last year profit of the
company. According to the general rule of thumb, a good net profit margin is considered to be
10%. The key reason of decline in the net profit margin is due to ineffective marketing strategy,
increase in market competition, ineffective market programs, inability to cope up with market
trends, etc. are some common cause which in turn affects the operations of the business
(Morales-Díaz and Zamora-Ramírez, 2018). The net profit margin of the ALPHA limited
company can be improved by reducing labour and operational cost and effectively improve the
sales of the company, increasing prices, etc. which results in growth of the business.

c.) Current ratio
This is a liquidity fiscal ratio which is beneficial in examining the capability of
organization to mitigate its short-term debts. It can be calculated as current assets divided by the
current liabilities of the ALPHA Ltd. The current ratio of the ALPHA Ltd. in 2017 was 2.34 and
in 2018 was 0.93. The current ratio of the ALPHA Ltd. has decreased which states that, the
current liabilities of the organization has increased over the last year and ALPHA Ltd. doesn't
have enough cash to meet the current liabilities of the company. The acceptable cur rent ratio of
the company is 2:1 which states that the company must have twice the current assets in order to
meet the current liabilities of the company. ALPHA Ltd. improves current ratio of the
organization by paying off the debts and cutting down overhead expenses. High current ratio
i.e., more than 2 is not a good indication for the company as it states that the company is not
using its current assets efficiently (Morales-Díaz and Zamora-Ramírez, 2018). The company can
improve the current ratio of the company by effectively getting rid of the various overhead
expenses and it must also focus on using long term financing than short term financing.
d.) Debtors collection period
This ratio is useful in evaluating the time taken by the business enterprise in order to
receive amount which has been owed by the clients. It can be calculated as trade receivables
divided by the annual sales of the ALPHA Ltd. The debtor's collection period of the ALPHA
limited company in 2017 was 68.43 and in 2018 was 73. The debtor's collection period of the
ALPHA limited company is increasing by 4.57 which in turn states that the company is not in a
good position to collect cash on the invoices held by the debtors. ALPHA limited company is
taking more time to collect cash on the goods given on credit. The debtor's collection period of
the company can be improved by improving credit control and improving stock control (Tian and
Yu, 2017). An effective debtor's collection period ratio improves cash flow of the business. The
key reason for poor accounts receivable is to that the company is not in a good position to collect
money from debtors. Improving debtor's collection period helps in building strong relationship
and clear credit policies for the ALPHA Ltd.
e.) Creditors collection period
It can be calculated as trade payables divided by the cost of goods sold of the ALPHA
limited company multiplied by 365 days. The creditor's collection period the ALPHA Ltd in
2017 was 60.30 and in 2018 was 170.33. The creditor's collection period of the ALPHA Ltd. is

increasing by 110.03 which demonstrates that, the company is not in a good position to make
payments to the suppliers on the timely manner. This in turn may results in late payment charges
and potential threat of legal charges by the company. Lowering creditor's collection period helps
in improving the goodwill of the company and more goods will be given on credit which results
in higher standards and efficacy of the business. To modify the creditor's collection period, the
company must focus on improving the stock levels and credit of the company (Liang and et.al.,
2016). This in turn results in lower debt obligations and higher profitability for the ALPHA
limited organization.
CONCLUSION
This study reason out that, fiscal decision making is useful in critically examining the
role of accounting and finance in order to make strategic decision making. Financial decision are
very crucial for the organisation because it helps in maximizing the shareholder value. MA tool
is useful in understanding the financial reports of the organization and also make strategic
decision in relation with investing, funding, dividend, liquidity and operations of the company.
This study has summarized the financial reports of the organization to measure the financial
ratios of the organisation. It has been determined that, the ALPHA limited company needs to
strengthen the financial operations of the business in order to attain higher operational goals and
objectives.

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