Financial Decision Making: Understanding Accounting and Finance Departments and Calculating Ratios for Alpha Ltd

This report discusses the roles of accounting and finance departments in Uniliver and calculates ratios for Alpha Ltd to evaluate its performance. It suggests ways to improve ROCE and net profit margin for higher competitiveness. The subject is financial decision making and the course code is not mentioned. The college/university is not mentioned.

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Task 1...............................................................................................................................................3
Task 2...............................................................................................................................................7
Calculating Ratios........................................................................................................................7
Commenting on the Ratio Calculated..........................................................................................9
Recommendation.......................................................................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
Financial decision is the term used to refer to the decision making process. The financial
decisions are concerned with acquiring and putting the funds in effective exploitation of a project
proposal to generate maximum returns and maximize the shareholder wealth.
A British based MNC dealing in consumer goods named as Uniliver is the world’s largest
soap manufacturing company. In this report the meaning of accounting and finance departments
will be understood. The varied roles of accounts and finance department will be highlighted.
Further in the task 2 of this report the ratios will be calculated and commented upon for
Alpha Ltd. The report will describe the meaning of various ratios and interpret them for
evaluating the performance of Alpha Ltd.
MAIN BODY
Task 1
Accounting Department: Accounting department is that division of Uniliver that is
concerned with all the activities for preparing the financial statements, general ledger keeping,
bill clearance, consumer bill drafting, payments of the staff members, and related activities
(Nawir, Alber and Syafitri, 2021). The entire economic front of the company maintained by the
accounting department of Uniliver. There is a major role of accounting department behind the
long term continuance of the organization.
Importance: Accounting department is very important for Uniliver in order to run the
business. The organization with the help of its accounting department is able to keep track of its
cash inflows or income and cash outflows or expenses of the company in accordance to the
adherence with the legal requirements. The financial information is provided to the management
of Uniliver through the accounting department in the quantitative terms.
Finance Department: The finance department is that department of an organization
which is responsible for the management of the cash related activities (El‐Haj and et.al., 2019).
Importance: The finance department of Uniliver is important as it makes sure that the funds of
the organization are distributed efficiently and in sufficient amount and at correct time are
effectivity in the business operations (Sultana, 2019).
Role of Accounts Department: Financial Accounting: The foremost role of the accounts department is financial
accounting. The role of financial accounting of accounts department is fulfilled through

the making of records, then summarizing them and finally reporting them to the board of
directs in the form of financial statements (Surma-Syta and Majek, 2021). The outcome
of financial accounting function of accounts department is in the form of stamen of
financial position, cash flow statements and profit and loss statements. These statement
carry huge importance and are used by the stakeholders of the company. Management Accounting: By the role of management accounting the accounts
department of the company identifies the financial information. After the identification of
the financial information the information is measurement. The effective measurement of
the financial information once done the accounts department by following the
management accounting role analysis the identified and measure financial information.
The analysis results are interpreted by the department. After the interpretation of the
financial information analysis the department communicates the interpreted results to the
management of the company for further use of it for organizational goals (Tashnazarova,
2021). The role of management accounting of accounts department is different from the
role of financial accounting. The accounts department with its role of management
accounting reports the financial information to the management, accounting is basically
done for the management. Whereas the financial accounting function of accounts
department is concerned with preparation of financial statements for the stakeholders. Tax Function: The next role of the accounts department in an organization is tax
function. By the tax function of the accounts department it is ensured that the company
runs with the due compliance with the rules that have been formed by the governing body
regarding the taxes. Tax transactions are recorded by the accounts department. There are
two types of tax transactions. As a result of tax transactions the liabilities can be created
known as tax liabilities or the assets can also be created referred to as tax assets (Soomro,
2018). The income statement of the organization represents the tax figures that are
sometimes not concealing with the values that are computed as per the tax accounting.
The reason behind the variedness in the figures is a result of the fact that rules and
regulations concerning the tax are sometimes enacted fast and sometimes their enactment
gets delayed. As a result of this the identification of the types of expenditure varies in
both the cases. The identification of the tax figures should be accurate for the concerned

reporting period. This role of accounts department is considered important from the
statutory perspective of the company. Auditing Function: The last role of the accounts department is the auditing function.
With the preparation of the financial statements as a part of financial accounting role of
accounts department arises the role of accounts department is auditing function. In this
role of accounts department, the prepared statements during the financial account are
checked for their authenticity. The function of checking of financial accounts is called as
auditing function. The role of the department with the auditing function is to ensure that
the actual stand of the financial information of the company is ensured to be represented
in the financial statements. The accounts department of the Uniliver is responsible are the
carrying forward of internal audit in the organization. For maintaining the accuracy in the
financial information of the company the auditing role involves number of functions.
Role of Finance Department: Investment Function: The finance department of the company is expected to fulfil
certain roles. The first role of the finance department is investment function. In the
investment function the finance department’s role is to select the best investment
alternative for the company. The best investment option is considered to be the one that
yields maximum benefits to the company (Kaverzina and Cherutova, 2019). It happens
that in order to capture the opportunities available in the market the firm have various
kinds of options available. There may exist number of opportunities that are available in
the market for the company of explore and have benefits but with the limited amount of
resources it is not possible for the organization to undertake each of the opportunities or
investment alternatives available. The investment function is concerned with the
evaluation of the investment alternative available and select the optimum alternate. Financing Function: The next role of the finance department is to make finance
decision. In the previous role the alternatives of the investment opportunities available
are analysed for selection of the best alternate. In order to make the investment decision
being implemented in actual the main requirement is the requirement of funds. The funds
are required for capturing the selected investment proposal. There are various sources
available in the market for the fulfilment of the requirement of the fund for the
organization. The sources of funds are broadly two that are internal and external sources.

Internal sources are those sources in which the company does not require to raise the
required funds from the outside market. Instead the company can use its retained
earnings. The external sources are of various kinds ranging from debt to equity. The
finance decision taken by the finance department assures that the cost of raising funds is
optimum for the company. Dividend Function: The next role of the finance department is to perform the dividend
function. This role is entirely concerned with the making of dividend decision. The
dividend decision means whether to distribute the earnings in the form of dividends to the
preference and equity shareholders or not (Raj and et.al., 2021). If the dividend is not
distributed among the shareholder and kept within the business it is known as retained
earnings. So the main point of taking up of decision for non-distribution of profits is to
create retained earnings. Retained earnings are kept with perspective of maximizing the
wealth of the shareholders. Funds for the investment that has been decided to be
undertaken by the company in the investment decision are arranged through retained
earnings if the returns are higher than the cost of capital.
 Working capital function: To decide the amount of working capital that has to be
maintained within the organization is the role of the finance department of the company.
Working capital is current assets minus current liabilities. Working capital is maintained
for the daily business operations and for the creation of ability to pay for the short term
obligations of the company (Akanbi, 2021). Operating costs and short term obligations
for the debt of the company are paid using the working capital held with the company.
Right amount of working capital being available with the company is thus very crucial
for the company for the smooth operations. There are number of factors that are
considered by the finance department before making such decision like nature of the
business, the length of the operating cycle, scale of operations, business cycle
fluctuations, technology and production cycle (Dafe, 2019). For instance, if the scale of
operations is large than the working capital maintained should be high and if the
production is not labour intensive based then the working capital maintained should be
low.

Task 2
Calculating Ratios
a) Return on Capital Employed
Particulars Formula Figures
2017 2018
Return on capital employed EBIT / Capital employed
Capital employed : Total assets - Current liabilities
Total Assets 2,235 4,035
Current liabilities 322.50 1,110
Capital employed 1,912.5 2,925
EBIT : Profit after financial cost +
financial cost
Profit after financial cost 300 262.50
Add: financial cost 75 150
EBIT 375 412.5
Return on Capital employed 375 / 1,912.5
× 100
412.5 / 2,925
× 100
19.60 14.1025
b) Net Profit Margin
Particulars Formula Figures
2017 2018
Net Profit margin ratio Revenue - cost / Total
Revenue ×100
300/675 × 100 262.50 / 750 ×
100
12.5% 8.75%
c) Current Ratio

Particulars Formula Figures
2017 2018
Current assets 757.50 1,035
Current liabilities 322.50 1,110
Current ratio Current Ratio = Current
assets / Current Liabilities
757.50 /
322.50 =
2.3488
1035 / 1110 =
0.9324
d) Debtors Collection Period
Particulars Formula Figures
2017 2018
Net credit sales Average receivable collection
period
2,400 3,000
Average receivables 450 600
2,400 / 365 3,000 / 365
Average collection per day 6.5753 8.2191
Average receivable collection
period
Average receivables
/ Average receivable collection
period
450 / 6.5753 600 /
8.2191
= 68.43 days = 73 days
e) Creditors Payment Period
Particulars Formula Figures
2017 2018
Net credit purchase 1,350 2,400

Average payable 285 1,050
1,350 / 365 2,400 / 365
Average payment per day 3.6986 6.5753
285 / 3.6986 1,050 /
6.575
Average payable days 77.05 days 159.68 days
Commenting on the Ratio Calculated
1. Return on Capital Employed- with the help of return on capital employees the company can
easily know about the profitability of its business and find out capital efficiency. By
calculating this ratio, the firm is able to understand how well it is performing and is
generating profits from its capital (Nariswari and Nugraha, 2020). The computed outcomes
for the year 2017 and 2019 is 19.60 and 14.1025 respectively. From the table it has been
evaluated that there is declining pattern of organization performance which needs to be
taken into consideration. By improving the return on capital employed the company is able
to achieve high competitiveness. In order to improve this, the firm can use the course of
action such as promotional activities as people are spending more time on internet and also
focus on effective marketing strategies so that greater revenue can be generated in almost
effective way. By having improvement in its ROCE the firm can gain higher profitability so
that proper gaining of elements will be done such as reduction in costs and enhancement of
sales and revenue. With the help of such steps the company can enhance its financial
performance and it is also suggested to keep track and measure effectiveness of company on
daily basis.
2. Net profit margin- with the help of net profit margin calculation company can easily
measure how much net income is being generated as a revenue percentage (Nariswari and
Nugraha, 2020). If the net profit margin of the company is good, then it can be said that firm
is doing well and more efficient at converting sales into actual profit. From the calculation it
has been identified that for the year 2017 and 2018 net profit margin is 12.5 and 8.75%

respectively. On the basis of this, it can be mentioned that there is a downward trend which
needs to be taken into consideration for improvements. The company must focus on this
ratio so that it can gain higher competitiveness. For improving this, the firm can increase its
revenues this can be done through selling more services and products at effective price and
increase cost (ways to increase profit margin, 2022). It is also recommended that the
company should reduce unnecessary expenses by lowering its cost for purchasing raw
materials (Widiyanti, 2019). Also, the Alpha Ltd. Can decrease costs by lowering costs and
enhance pricing strategy for developing value.
3. Current ratio- the current ratio of the company indicates that whether the firm is able to pay
its debts or not. It is a liquidity ratio that measures the ability of firm to pay short term
obligations (Hasanudin and Awaloedin, 2020). If the company is having current ratio of 1.5
or above, then it is considered healthy in terms of performance. The computed outcomes for
the year show that current ratio is respectively 2.3488 and 0.9324 which shows indicate
downward trend which depicts that there is lack of efficiency while paying short term
obligations. So it is essential for the company to improve this as it tells investors how a
company can maximize the current assets on its balance sheet to satisfy its current debts. In
order to improve this, the company needs to reduce the personal draw on the business and
can sale any capital assets that are not generating an effective return to the business. It is
also helpful for the company to build significant strategy for overcoming liabilities of the
firm so that positive impact on various stakeholders can be executed which is beneficial for
the future performance.
4. Debtors collection period- it is the indicator of average time taken by the company to collect
trade debts from its debtors (Rahmani, 2020). This ratio plays a vital role in reflecting the
liquidity position of the firm which can give assistance in receiving crucial insights' ability
collection period that is 68.43 days and 73 days for the year 2017 and 2018. From this
calculation it can be identified that there is need of implementing strategies fr improvements
so that collection period can be reduced for enhancing the performance. In order to improve
this, the company can change payment terms and conditions, send early reminders so that it
can give hint to debtors to make payment on time, it is essential to improve stock control so
that performance of the company can be enhanced in terms of debtors’ collection period.
Also, by providing offers and benefits such as discounts for early repayment can attract

debtors for making of payments (Nugraha and Susyana, 2021). In addition to this the course
of action must be implemented for having modification relating to debtors’ collection period
such as formulation of proper credit policy, management approach and maintain good
customer relations. Hence, reducing period of time is an indicator of increment in efficiency
and benefits for future performance.
5. Creditors Payment Period- with the help of this ratio of finance the company is able to
know about the average time taken to pay its bills and invoices to its suppliers. If the
company is taking too long time to pay its creditors then it may be possible that they have to
pay financial penalties for late payments which can harm its reputation and loss of trust can
be seen among creditors (Dewi and Solihin, 2020). From the calculation it can be interpreted
that for the year 2017 and 2018 the payment period is 77.05 days and 159.68 days. There is
an increasing trends seen in the year 2018 which means it is better for the company since all
the companies wish to conserve their business capital as much as possible. In order to
improve creditors payment days, the company can do external credit control and negotiate
payment terms and conditions with suppliers. By doing so the firm is able to enhance its
performance for the future needs.
From the above discussion of financial ratios, it can be recommended to the organization
to make effective use of strategies for enhancing the good market position. With the support of
these strategies such as reducing costs, avoid unnecessary expenses, management approach
keeping track on financial records the company can get higher profitability, efficiency and
liquidity in the market.
Recommendation
Based on the evaluation of the accounting ratios calculated for the Alpha Ltd it is advised
for the investors not to invest in the company. The reasons for the advice of not to invest are that
the efficiency of the company to generate profits from the capital employed reduced and net
profit generation by the company is also declining. Further the company is not able to maintain
ideal current ratio and do not have ability to recover amount from its debtors quickly.
CONCLUSION
Based on the above report the meaning of financial decision making has been
highlighted. The report has explained the meaning of two most important departments in an
organization that is finance and accounts department.

The report has discussed the importance of both the department operating within an
organization. Financial and management accounting role along with tax function and auditing
function roles of accounts department has been made clear. Further, the report has also discussed
the roles of investment, finance, dividend and working capital functions of finance department.
Ratios for Alpha Ltd has been calculated in this report and also the report comments on
the results of the ratios. The report has recommended for the investors.

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ways to increase profit margin. 2022. [Online]. Available through:
<https://online.hbs.edu/blog/post/how-to-increase-profit-margin>
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