Financial Decision Making: Financial Ratio Analysis and Interpretation

This report provides a detailed analysis of financial decision-making, emphasizing the crucial role of accounting and financial divisions in maintaining business viability. It elaborates on the concept of financial decision-making, highlighting its importance in monitoring revenue and expenses, ensuring regulatory compliance, and providing quantifiable fiscal statistics. The report includes recommendations for improving financial processes, such as centralizing data access and leveraging financing options like factoring and invoice discounting. A significant portion of the report is dedicated to calculating and interpreting financial ratios, including gross profitability, operational income, return on capital employed, current ratio, acid test ratio, stock turnover days, debtor collecting period, and creditor payment period, using data from 2018 and 2019 to assess the company's financial health and performance trends.

FINANCIAL
DECISION MAKING

Contents
FINANCIAL DECISION MAKING..................................................................................................1
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Elaboration of the concept...........................................................................................................3
TASK 2............................................................................................................................................6
A. Calculation of ratios:...............................................................................................................6
B. Ratios and their Interpretation.................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial decision making is a very crucial aspect as it helps in making decisions according
to its funds (Andarsari and Ningtyas, 2019). There could be no business sans consistent cash
flow. It's the most significant measurement in company, and it's utilised both domestically and
outside. It is the responsibility of the accountancy and financial division to guarantee that
perhaps the firm's funds are appropriately handled and maintained to enable every one of the
firm s commercial operations. Regular monitoring of revenue and expenses, maintaining
adherence with laws and regulations, and delivering quantifiable fiscal statistics to shareholders,
managers, and the authorities are all essential to a corporation's performance.
TASK 1
Elaboration of the concept
If one wishes to uphold the business viable, they must preserve precise and up-to-date fiscal
statements. Here are some causes why a micro or med-sized company needs an accountancy and
financial division, and also what respective tasks are.
 Accounting could likewise assist a corporation in keeping its staff on their toes. Regularly
reconciling financial records and conduct financial statement. Dishonest behaviour would
be detected earlier on, before it has a significant consequence on the firm (Blue, O’Brien
and Makar, 2018).
 It assists in the decision-making processes. To know and understand to such types of
queries, the business would have to examine the information, notably financial
information. Accountancy could assist you prevent making typical company mistakes
like:
Wasting resources
Insufficient funds
Plateauing
 Could use actual data to examine alternative plans- Before implementing any big
adjustments, the firm most likely conducted a vulnerability analysis for the smaller
corporation. It would be possible to determine if accepting such risk is advantageous to
the business.

 Aids in the evaluation of company productivity- The fiscal documents provide an
insight of the corporation's operational and economical condition. As a consequence, they
assist the organisation in gaining a greater understanding of its financial. If one maintains
clear and up-to-date documents in relation to monitoring expenditures, operating income,
and anticipated indebtedness, one could contrast existing information with historical
financial statements and change the budgeting depending on such analysis (Cardoso, de
Oliveira Leite and de Aquino, 2018).
 It backs up the assumptions made on the taxation refund- Smaller company taxation
submitting is feared by several company entrepreneurs, especially ones who don't know
where to start. Given these, it's evident that accountancy is essential to any company. The
initial stage in completing a taxation refund is collecting monetary documents. If the firm
does not have the appropriate documents (like income accounts), it will be unable to
complete the taxation refund.
 Accountancy maintains the organisation accountable- A modest firm operator
understands the need of showing instead of discussing. This is handled by accountancy
and the financial division. Personal stockholders are held responsible for the performance
of the firm. Accountancy documents offer insight into the firm's growth and expansion
(Commerford, Hatfield and Houston, 2018).
 It assists in the production of prospective budgeting and anticipation- The
accountancy and finances division is critical for preparing and implementing prospective
estimations depending on monetary recording data.
 It Makes Processing Fiscal Reports Simpler- The fiscal report of each firm should be
filed with the Certificate of Incorporation. Businesses which are publicly traded must
submit both immediate and intermediate taxation reports with the Income Taxation
Agency. Accountancy is required in all of those circumstances.
Recommendations
 Personal involvement and redundancies would have accessibility to a central data center
which could be accessed from every location.
 Allow customers to exploit benefit of the business by offering to acquire additional
supplies or engage in new technology if the accounts section is strong (Eichelberger,
Mattioli and Foxhoven, 2017).

 Maintain your half of the contract and decline to provide any additional services unless
all overdue payments are made.
 Timely reconciliation is essential.
 It is necessary to set and follow threshold guidelines.
 As a result, the department, leadership, and other associated systems which depend on it
have been affected.
Businesses could leverage financing and invoicing discounted to collect funds against the
valuation of their accounts receivables, enabling businesses to generate finance. This form of
loan is more costly than an advance and is usually only accessible for a limited period of
duration. A developing small and medium sized, on either side, would be able to obtain more
funds from a component or invoicing retail outlet, which is among the major advantages of such
funding choices. Factoring and invoice discounted are 2 funding options that can develop with a
company (Fan and Chatterjee, 2018).
Bank loan financing as institutions could be open for considering both shorter
run borrowings and longer run mortgages supported by major holdings such as property and
facilities. Since financiers are more conservative, medium-term funding for small and medium-
sized firms (SMEs) is more hard to come by. To compensate for a solitary adverse mortgage, a
large number of positive loans are required. As a result, small and midsized
companies frequently employ short-term borrowing, including an overdraft, to finance medium-
and long-term facilities. Sadly, this falls short of our objectives and therefore must be ignored.
The "duration difference" is the discrepancy among the competence of a firm's holdings and
obligations. To get a banking mortgage, a smaller company owner-manager may have to put his
or her personal possessions on the line.
A citation firm's capacity to generate funds is increased when it is listed on the securities
market. It is feasible for a company to be evaluated for a financial markets registration at
occasions. Several small and medium-sized firms (SMEs) would probably never be capable to
achieve this objective (Fijałkowska, Zyznarska-Dworczak and Garsztka, 2018).
When it comes to capital, smaller and mid-sized companies have a range of possibilities.
Such businesses can choose from a variety of funding solutions. On either side, the
disadvantages could restrict their utility. The following are among the most significant materials

and their shortcomings. Following that, crowd sourcing and distribution network funding are
investigated in deeper level.
Those who are connected to the proprietor of the small and medium sized could be willing to
endure a lower rate of interest than most other shareholders. Many individual's capacity to
increase funds through their own or with the help of relatives and colleagues is restricted.
The corporation's sponsors as rich individuals that are ready to accept a chance and engage in
tiny enterprises are known as company entrepreneurs. Since such individuals are so uncommon,
they are quite selective regarding the businesses in which they could deposit their funds. Angel
investors could be immensely valuable to small and medium-sized businesses since of their
broad connections and commercial expertise (Hastings and Mitchell, 2020).
Transactions are charged to the account- Whenever it relates to taking credit for services
performed by 3rd parties, a modest corporation is no unique than any other corporation. If the
vendor has categorised company as a high-risk smaller company, increasing the payment terms
could be challenging. For this moment the approach is just little helpful as it cannot be used in
the long term (Kalkavan and Ersin, 2019).
TASK 2
A. Calculation of ratios:
Gross profitability ratio:
Gross profit/ Net sales * 100
2018: 3500/ 10000 * 100 = 35%
2019: 3265/ 11500 * 100 = 28.39%
Operational income ratio:
Operating profit/ Net sales * 100
2018: 2765/ 10000* 100 = 27.65%
2019: 2305/ 11500* 100 = 20.04%
Return on capital employed:
Earnings before interest and tax/ Share equity + Long term liabilities * 100
2018: 2765/ 6755 * 100 = 40.93%
2019: 2305/ 8111* 100 = 28.41%
Current ratio:

Current assets/ Current liabilities
2018: 1175/ 970 = 1.211: 1
2019: 2110/ 512 = 4.12: 1
Acid test Ratio:
Current assets – Inventory / Current liabilities
2018: 1175 – 350/ 970 = 0.85: 1
2019: 2110 – 675/ 512 = 2.80: 1
Stock turnover days:
Inventory / Cost of goods sold * 365
2018: 350 / 6500 * 365 = 19.65 days
2019: 674 / 8235 * 365 = 29.87 days
Debtor collecting period:
Average account receivables / Net credit sales * 365 days
2018: 760 / 10000* 365 = 27.74 Days
2019: 1340 / 11500* 365 = 42.53 Days
Creditor payment period:
Average account payable/ Cost of goods sold * 365 days
2018: 920 / 6500 * 365 = 51.661 Days
2019: 495 / 8235 * 365 = 6.010 Days
B. Ratios and their Interpretation
Gross Income Ration- "Gross margin" relates to the gross income ratio to selling ratio,
commonly referred to as the gross profitability margin ratio. Researchers could examine at a
company's gross margin to see how much revenue it makes following removing its cost of goods
sold. It is a ratio that measures how efficiently a corporation uses its basic resources and
manpower in the production procedure (Mahalingam and Vivek, 2016). The gross profitability
ratio of a company varies depending on the sector. The effectiveness of a corporation rises in
directly proportionate to its income. It makes no difference if it's a specific item or an entire
organisation. Panini Ltd.'s gross profitability ratio fell by 6.6 percent from the prior season.
Increased competitiveness and lower expenses could indicate that the industry is becoming more
efficient, and thus more productive.

Operational Income Ratio- The operational income margin ratio that is utilised by both
shareholders and other stakeholders can be employed to assess a company's fiscal sustainability.
The capacity of a corporation to generate enough money to remain solvent grows in directly
proportionate to its level of monetary soundness. A company which depends on both operational
and non-operating earnings to finance its operations expenses is unlikely to be viable. If the
company's business operations generate sufficient income to support both fluctuating and static
expenses, a higher operational income is preferred to a lower operational ratio. Likewise, the
operating income ratio has decreased by 7.7% year over year. In addition to stay relevant, the
firm's spending management must be strengthened (Nusron, Wahidiyah and Budiarto, 2018).
ROCE (Return on Capital Employed): It is a metric that can be used to assess a firm's
financial performance. Return on capital employed is among the most important performance
metrics evaluated among shareholders to determine whether a company is worthwhile its effort
and cash. In 2018, the sum of money used increased but operating income decreased, resulting in
a fall in Return on capital employed. The firm's operating income could well have declined as a
consequence of the fresh expansion programme, but its capital employed can be grown (Said,
Kanzari and Bezzine, 2018).
Current ratio: This ratio of a corporation is described as its capacity to settle short-term
liabilities, comprising liquid liability. Short-term accounts and marketable securities which could
be turned into cash inside a year are examples of current assets. Short-term monetary
commitments are referred to as "current liabilities." To put it another way, better current ratios
are beneficial to the organisation. A high current ratio requires a company to have at least twice
as much current assets as liabilities. The firm's current ratio is currently at an excellent 4.1
percent as of this reporting. The corporation has sufficient short-term assets to meet its short-
term liabilities (Sonnenberg, 2018)(Suykens, De Rynck and Verschuere, 2019).
Acid test ratio: All current liabilities, especially credit, could be payed off employing
solely assets which could be converted into money immediately. Amongst these are cash and
short-term assets, trade receivables, and liquid assets. Whenever a firm's quick ratio goes under
one, it indicates a shortage of readily available liquid assets to cover current liabilities. If the
quick ratio is much less than the current ratio, current assets would be largely dependent on
inventory. The quick ratio is much less risky since stocks are not considered in the computation
of current assets. An acid test ratio is a preferable way to determine volatility than simply

looking at the current ratio. The company's quick ratio appears to be improving, going from 0.9
to 2.8 times in just a year.
Stock Turnover Days- Stock turnover refers to the frequency of instances a company can
replace the stock it has supplied in a certain term. Higher turnover implies higher selling, while
lower and reduced turnover shows lower selling and possibly far too much stock in the storage.
Stock turnover is high in industries with high volumes and low profitability ratios. Over the last
year, Panini Ltd's stock turnover days have increased by ten days (Thuong, Zhang, Li and Hong,
2018).
Debtor Collecting Period- This is the usual duration a business requires to recover all of
its trade receivables. Businesses examine the average collecting duration to ensure that they have
sufficient funds to satisfy its debt responsibilities. The collecting duration is the mean term it
requires a company to recoup trade receivables. Businesses examine the average collecting
duration to ensure that they have sufficient funds to satisfy their debt responsibilities. The time
limit for collection has already been increased from 28 to 43 days. It's probable that Panini Ltd.
needs to improve its communication with customers that owing it payment. It's possible that
more stringent debt collection techniques will be required.
Creditor payment period- The Days Payable Outstanding relation can be used to
determine how soon a company settles its accounts payable payments and obligations. This
section includes distributors and subcontractors, and also lenders and other monetary institutions
which lend funds to the company. Companies possessing significant DPOs might enhance
operating capacity and money circulation by deferring obligations and then employing the
additional funds to undertake short-term acquisitions. Even though higher DPO levels are
preferred, a firm's ability to repay its debts is really not necessarily a good sign. The repayment
period has already been shortened from 34 to 16 days. Yet, this could indicate that Panini Ltd is
reaping the benefits of the vendor's advance settlement incentive (Zimon and Zimon, 2019).
CONCLUSION
To conclude, an accountancy and financial division not only aids an organization's day-to-
day activities, but it could also assist in its potential development. A broad variety of users use
various accountancy methods at the same time to achieve financial choices. Businesses who
adopt acceptable compliance with accountancy processes lead to a healthier current economy by
maintaining shareholder confidence.

REFERENCES
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reflection on the efficacy of impression management: An experimental analysis with
financial analysts. Accounting, Auditing & Accountability Journal.
Commerford, B.P., Hatfield, R.C. and Houston, R.W., 2018. The effect of real earnings
management on auditor scrutiny of management's other financial reporting decisions.
The accounting review, 93(5), pp.145-163.
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capability: Underrepresented students’ access to financial resources. Journal of Student
Financial Aid, 47(3), p.5.
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effectiveness of financial education: A behavioral finance perspective. Journal of
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research on global issues in financial communication and investment decision making
(pp. 148-167). IGI Global.
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Thuong, N.T.H., Zhang, R., Li, Z. and Hong, P.T.D., 2018. Multi-criteria evaluation of financial
statement quality based on hesitant fuzzy judgments with assessing attitude.
International Journal of Management Science and Engineering Management, 13(4),
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