Financial Decision Making Report

This report analyzes the financial performance of ABC Consulting LLP, a company providing financial services, and evaluates the feasibility of expanding into the Eastern European market. It includes a comprehensive analysis of profitability ratios, liquidity ratios, cash flow ratios, and segmental analysis. The report also explores investment appraisal techniques, including payback period, accounting rate of return, and net present value, to assess the potential return on investment. Additionally, it examines different sources of finance, such as bank loans and equity shares, and discusses non-financial factors to consider for business expansion. The report concludes with recommendations for ABC Consulting LLP based on the findings.

FINANCIAL DECISION
MAKING

EXECUTIVE SUMMARY
Decision-making particularly in financial perspective is for any company. Present report
deals with ABC Consulting LLP which is engaged in providing financial services. It is planning
to expand in Eastern market as it has established its position and profits that can be attained.
Seeking this, it can be summarized that financial statements have been analysed and company
needs to perform well because profitability has decreased. Moreover, it is performing good in the
US market. Investment appraisal techniques are applied for making analysis whether investment
would be feasible in Australian market or not. Furthermore, sources of finance and non-financial
factors are also explained with regards to firm's nature of operations.

TABLE OF CONTENTS
PART 1- Business Performance Analysis.......................................................................................1
Statement of Profit or Loss (SPL)..........................................................................................1
Statement of Financial Position (SFP)...................................................................................2
Statement of Cash Flows........................................................................................................4
Segmental Analysis................................................................................................................6
PART 2- Investment Appraisal........................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

PART 1- BUSINESS PERFORMANCE ANALYSIS
Statement of Profit or Loss (SPL)
Profitability Ratios Formula 2018 2017
Gross profit 3145 3005
Revenue 3598 3437
Gross profit ratio
Gross Profit / Revenue *
100 87.41% 87.43%
Net profit 820 887
Revenue 3598 3437
Net profit ratio
Net Profit / Revenue *
100 22.79% 25.81%
Operating Profit 869 927
Revenue
Operating Profit /
Revenue * 100 3598 3437
Operating profit ratio 24.15% 26.97%
Interpretation
It can be interpreted from the above profitability position of ABC Consulting LLP that it
is able to earn good quantum of profits. This is evident from the fact that gross profit, net profit
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and operating profit have been favourable over the past couple of years. The firm should be
profitable enough by which it may be easily expanded in the new market. It is expected to
expand in the Eastern European market and it requires that profits should be maximised in the
best possible manner by initiating overall expenses and gain desired revenue quite effectually.
By seeking the gross profit ratio, ABC Consulting LLP had earned 87.43 % in the
financial year of 2017. While, in the next year, it went down to 87.41 % which clearly shows
organization is maximising sales by eradicating expenditure up to a high extent. In relation to
this, sales in 2017 were 3437 while it reached to 3598 in 2018. This means that sales have
increased recently.
On the other hand, operating profit ratio is being calculated for the past two years. It can
be analysed that operating profit has been decreased in 2018 as compared to 2017. This may be
seen from operating profit of 927 in 2017 and 869 in next period. Hence, ratio was 26.97 % in
2017 and decreased to 24.15 % indicating difference of 2.82 % which is much reduced.
It is advised that ABC Consulting LLP should control operating expenses particularly
that are least important for maximising profits. Furthermore, net profit ratio is also computed that
shows income left after charging or deducting all operating and non-operating expenses. In
simple words, residue is achieved after reducing expenditures of company (Charitou, Karamanou
and Kopita, 2017).
It can be said that firm had accomplished net profit of 25.81 % in 2017 which reduced to
22.79 % implying significant margin. Main reason behind such decrease in profits is that overall
costs are more as compared to sales which has minimised net profit. It is recommended to ABC
Consulting LLP regarding incurring of unwanted expenses to improve profit in the best possible
manner. It can be analysed that company has been performing well but in the recent financial
year, profitability position has been somewhat decreased as margins have gone down. Hence, it
should focus on decreasing its expenses in order to maximise returns in effectual manner.
Statement of Financial Position (SFP)
Financial Ratios Formula 2018 2017
Liquidity ratios
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Current Assets 1269 1393
Current liabilities 790 802
Current Ratio
Current assets/ current
liabilities 1.61 1.74
Current Assets 1269 1393
Current liabilities 790 802
Working capital
Current assets - current
liabilities 479 591
CCE (Cash and Cash
equivalents) 75 214
Current liabilities 790 802
Cash ratio CCE / Current liabilities 0.09 0.27
Net income 820 887
Total Assets 2175 1842
Return on Assets
(ROA) Net income / Total assets 0.38 0.48
Interpretation
Balance sheet is another useful form for analysing assets and liabilities at a particular
date. It provides a clear view whether firm has enough assets to discharge off current and non-
current liabilities or not. This is essentially required for constructive analysis of financial position
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of company in an effectual manner. Firm has purchased PPE in 2018 which is more than
purchased in previous year. It means that investment is made by company in non-current assets.
By implementation of ratio analysis, liquidity ratio has been computed i.e. current ratio. It
can be analysed that total current assets in 2017 were 1393 which decreased to 1269 in 2018.
Current liabilities were 802 and 790 in 2017 and 2018 respectively. By applying formula, current
ratio comes to 1.74 and 1.61 in both years. In addition to this, ideal standard ratio guided by
market experts is around 2:1. However, it can be seen that the current ratio is decreased in 2018
in comparison to 2017. This means that organization will face difficulties in paying off liabilities
lapsing within time of one year.
Working capital is also calculated by subtracting current liabilities from current assets. It
can be interpreted that working capital in 2017 was 591 which decreased in the next year to 479.
This clearly implies that company has less amount of current assets for discharging current
liabilities in the business. Moreover, it is required that organization should pay-off liabilities in
effectual way which can be achieved only by enhancing working capital with much ease.
However, firm has enough quantum of total assets in 2018 amounting to 2175 while it was 1842
in 2017. Furthermore, firm will have to increase its working capital so that it may be able to
improve upon its position and also requirements of day-to-day basis that can be met quite
effectually.
Moreover, ABC Consulting LLP has enough non-current assets which have been
analysed by seeking financial statement i.e. balance sheet. It can be derived from the same that
PPE (Property, Plant and Equipment) were 370 in 2017 which increased in further year to 827
signifying that firm has made investment in the fixed assets (Gordon and et. al., 2017).
On the other side, current assets include trade receivables and cash. With relation to
receivables ratio, figures in 2017 were 1179 and it increased to 1194 in the next. While, cash has
been reduced up to an extent as figure was 214 in 2017 and reached to 75 in the last year.
Moreover, ROA is also calculated which implies that how much profit is being generated
by company by utilising its assets. The ratio in 2017 was 0.48 while it decreased to 0.38 in 2018.
Higher the ratio, better for the company. However, it can be seen that ratio has been reduced in
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the past year which implies that firm is not adequately using its assets for generating higher
amount of profits.
Statement of Cash Flows
Cash flow ratios
Operating cash flow 861
Revenue 3598
23.93%
Operating Cash Cycle (OCC)
Accounts receivable 365 / Receivables turnover
Trade receivables Turnover
Credit sales / Average Trade
receivables
Average trade receivables 1194 + 1179
1186.5
Revenue 3598
Trade receivable 3.0324483776
Receivables outstanding 365 3.03
120 days
Inventory outstanding 827+370/2
365/598.5
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60 days
Average Trade payable 760+776/2
768
Payable outstanding 365/78
47 days
Operating Cash Cycle (OCC) 133 days
Interpretation
It can be interpreted that firm's cash flow statement is analysed of two years along with
cash flow ratios. Operating cash flow ratio of 23.93 % have been achieved in the current
financial year as disclosed figures in operating flow of 861 and revenue generated amounting to
3598. This means that company has good quantum of cash flows which can be paid to
shareholders in the form of dividends. OCC (Operating Cash Cycle) is computed by taking into
formula of the same. Operating cycle is termed as total number of days, and the company uses it
to realise its stocks in cash (Cash Conversion Cycle (Operating Cycle), 2018).
In other words, time taken by ABC Consulting LLP is to convert stock and receivables in
cash and cash equivalents. It is known as OCC because inventories are bought, sold to customers
on credit and collecting cash from receivables. Generally, time taken to convert materials into
sales and then into recovering money from debtors is OCC. Shorter the OCC, better for
organization implying that cash is blocked for no longer period.
The computation of OCC is carried out by applying formula such as Receivable
outstanding + Inventory outstanding – Payable outstanding = OCC. Numerically,
= 120 + 60 – 47
= 133 days
This means that it takes total of 133 days to convert stock into cash received from debtors
by ABC Consulting LLP. The period is higher for company and to shorten the same, firm should
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use inventories in quick manner and also it should apply strict credit policies so that cash can be
collected from debtors with much ease.
On the other hand, firm has made payments to members (partners) amounting to 668 in
2017 while, in next year, it has paid 551 to partners' capital account. The payment has been
reduced despite of good opening balance of 447 in 2018. However, profit for the year is
minimised amounting to 820 which was 887 in 2017. This is the reason for making less payment
to members which is feasible and appropriate as profits are decreased (Yang and et. al., 2018).
Segmental Analysis
UK-
It can be analysed from the above figures that net revenue has been increased in
comparison to 2017. Figure was 2207 in 2017 which got increased to 2251. However, operating
expenses have maximised leading to affect operating profits of company up to a major extent. It
can be analysed that operating expenditures were 1522 and 1674 in past consecutive years. Staff
costs are maximised as well by 33 in comparison to previous year. This means that UK's segment
ratios are calculated of gross profit margin was 45.58 % in 2017 while, increased to 45.18 % in
2018. This shows that margin has decreased in the current year. Operating margin was 33.53 %
signifying that company has initiated good control over operational expenditures. But ratio
reached to 25.63 % in 2018 having much difference as compared to previous year. It means that
UK segment is not performing adequately (Gitman, Juchau and Flanagan, 2015).
US-
The segmental analysis of US market is also being carried out showing whether firm is
earning profits in optimum way or not. Revenue was 324 in 2017 which increased to 553 in 2018
showing that ABC Consulting LLP is making good sales in US. Expenses and disbursements in
2018 was 49 which was 56 in the previous year. This shows that expenses have been reduced
quite effectually. Moreover, net revenue is much more in 2018 and is just double of previous
period.
Deducting operational expenses, the operating profit of 179 is achieved which was
negative in the earlier year. Seeking this, ratios of US segment are computed which are in favour
of firm. Operating margin was -7.84 % in 2017 increased to 35.52 % in 2018 implying
organization has generated good operating income leading to maximum profit. On the other
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hand, gross margin was 32.84 % and 58.13 in 2017 and 2018 respectively. This clearly shows
that ABC Consulting LLP is earning higher profits in US market as major earnings are
accumulated from this that only leads profitability for company.
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Australia-
It can be interpreted that Australian market is also equally important for the company in
achieving profits in excess (Wu, Chen and Olson, 2014). The figures show that this segment is
not much profitable for it. This is evident from the fact because revenue was 648 in 2017 which
decreased to 516 in 2018 stating sales have gone down.
Expenses and disbursements have also increased affecting operating profit quite badly. It
was 208 in 2017 that reduced to 113. Staff costs are maximised as well which is shown by
figures. In relation to this, gross margin was 70.57 % in 2017 which decreased to 55.13 %.
Similarly, operating margin was 39.25 % in 2017 and reached failure in the next year to 28.97 %.
By considering segmental analysis, it can be interpreted that firm is better performing in US
market as profitability ratios are higher.
PART 2- INVESTMENT APPRAISAL
With the present investment, appraisal information by the Financial Director, management can
forecast about the future return of the new project planned.
Management Forecast
Exhibit 3:
1

2

It can be interpreted from the information that the new project's payback period will be
nearly 2 years and 7 months; it means that investment done by the company will be recovered
within this period. ABP LLP has targeted 100% return on their investment, and average rate of
return of the company is 100%. (Gotze, Northcott and Schuster, 2016).
The proposed project has the potential to earn as per its target in less time period. The net
present value of project is 111% which is more than company's criteria. It is evident from the
facts and figures that proposed project has good returns in terms on investment in less time
period. ABC LLP should opt for these project.
Investment Appraisal Techniques: It’s important to estimate benefits of the investment in the
financial basis (Li and Trutnevyte, 2017). The following are the different investment appraisal
techniques to assess the effects of capital invested that might have on the business.
Payback period:
It is the simplest method to determine the period of time an investment would take to
repay. Payback period helps to ascertain break even time, (Almarri and Blackwell, 2014). The
Payback period of a project with a shorter time period are usually preferred for such investment.
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Benefits of Payback Period are:
 It is simple and easy to understand and compute.
 It gives more importance on liquidity for making decisions about the investment
proposals.
 It is preferred when quick decisions on the project has to made. It is ranked in term of
their economic merits without many complications.
Drawbacks of payback period:
 Payback period totally ignores annual cash flow after the period.
 It gives high emphasis on liquidity and ignores profitability.
 Cash flow before the payback period is considered and not after the payback.
Accounting Rate of Return: This method compares profit that can be earned with the amount
of investment capital required for the project (Upton and et.al., 2015). The project with the
higher rate of return is preferred in comparison with a project which has lower rate of return.
Benefits of ARR:
 It is a vital factor in the appraisal of an investment proposal. It gives emphasis on net
earnings after tax and depreciation.
 This method gives clear picture of the profitability of a project.
 This concept satisfies the interest of the owners since they are more concerned on the
return on investment.
 It can be easily calculated with the help of accounting data.
Drawbacks of average rate of return:
 It ignores time value of money which is important in project appraisal decision.
 This method does-not take cash flow in consideration which is more important than the
accounting profit (Götze, Northcott and Schuster, 2015).
 Average rate of return does not consider external factors which are also affecting the
profitability of project.
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Net Present Value: This is the strongest technique for investment appraisal techniques as it is
calculated by taking the cash flows which will arise as a result of taking a new project and
discounted them to find their present value (Albertijn, Drobetz and Johns, 2016). A positive NPV
shows that the project will give higher return compares to cost of company's financing which
leads to increase in shareholders’ wealth. Where the negative NPV means that the project is not
preferable.
Benefits of NPV are:
 It gives importance to the time value of money.
 While calculating net present value, both before cash flow and after cash flow is
considered in a life period of project. (Ilyas and et.al., 2017).
 Both profitability and risk of the projects are given high priority.
Drawbacks of NPV are:
 It is very difficult to calculate and understand.
 The biggest problem with using NPV is the requirement of predicting future cash flows
and cost of capital.
 It is not preferable when the project has differing investment amount.
Source of Finance
ABC Consulting LLP is considering a further expansion which cost 500 million pound.
There could be two sources of funding which ABC LLP can opted for the investment, loans from
bank and issuing equity shares (Higham, Fortune and Boothman, 2016).
Bank Loans: if a company wants to expand its business, bank loan is suitable option fir
financing a big amount. The loan offers tax benefits and have comparatively less interest rates
and has a set period within agreed repayment schedule (Bernstein, 2015). But the loan repayment
burden can affect the business capital.
Advantage of having bank loan for finance the business expansion:
 Taking loans from banks is very flexible, and company has to worry only for the regular
instalment payments.
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 Banks do not monitor how a company is using the amount, so the funds can be invested
anywhere.
 Bank loans are usually the cheapest option in terms of interest rates and hence bank
loans are cost-effective.
 Taking bank loans help to retain the company's profit, as it only requires to pay interest
and principle amount only.
 Using bank loans for business purpose, the interest charged is a tax-deductible expense
which gives tax benefits.
Disadvantage of taking loans from bank:
 For granting high amount of loans, company has to give some form of mortgage to get
their loan application approved.
 Regular payment of interest and instalment is very important as if a company fails to pay
will face the prospect of having their assets seized.
Equity share: Funds can be raised by issuing equity shares in the market, the investors agree to
share profit and loss to the extent of its share without expecting any fixed return (Caglayan and
Demir, 2014). This investor becomes the owner of the company to the extent of their shares
Advantage of equity financing are:
 It is a permanent solution of financing needs of the company, as it provides
leverage to the management to continuously focus on the company's objective.
 Equity shareholders do not expect the immediate return on their investment.
They have the long term view of profit in company and also takes the risk of
losing their investment if a business plan fails.
Disadvantage of Equity financing:
 Equity investors expect to receive a return on their investment. The company has to share
the profit with company's shareholders. Sharing the profit can cost company higher than
the bank's interest rates.
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 Owners has to give some control to the investors; company has to take their advices on
taking big decisions regarding financial management.
 Owners of the company can have conflicts with shareholders over the decision making in
the business. Only owners have to deal with these differences.
At the rime of financing funds from any of the two alternatives, company should
follow the 0.5/1 ration while taking loans. This means if a company is taking 1 from bank loan,
then it should take 0.5 from equity shares, as it is the optimal way of financing capital.
Non-Financial factors
ABC Consulting LLP should also consider several non-financial factors for expansion of
business into Eastern European markets are:
 Capacity Availability: It refers to the planning, sizing, and controlling of
manufacturing or service capacity that ensures about minimum performance
levels are specified are exceeded (Bernstein, 2015). Capacity management
ensures that goods and services will be provided in best quality and will cost
effective.
 Marketing environment: ABC consultancy should check the marketing
environment in eastern Europe with their product line like political situation of the
area, availability of resources in that area. The government norms and regulations
which may affect the business of company (Khan, 2015). Correct technology
incorporated in the new project is very important as incorrect use of technology
may even fail the most profitable ventures.
 Competitive position: ABC consultancy have to consider the competitors
position in the market. In current era of tough competition, strategies of the
competition should be taken into consideration before expanding business in a
new market.
 Customers need and preferences: Before expanding the business, company has
to make a market research on the customer needs and wants in that area. The
product or services which ABC is introducing in new market should meet the
preferences of the customer (Ogechukwu, Akinlo and Goldman, 2015). It is the
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basic factor for a successful business to satisfy the expectations of their
customers.
CONCLUSION
By summing up the following report, the importance of business decision making on
funds has been concluded. ABC consultancy LLP is involved in providing financial services.
The company is planning to expand its business in Eastern Europe market. This report concluded
several business performance analyses to be considered while planning the decisions for new
projects.
The calculation on different ratios are presented in this report which gives the overview
of company's financial performance in last couple of years. The report represented ABC
consultancy' financial position statements with current ratio, liquidity ratio, cash ratio etc. The
present report also concluded different investment appraisal techniques to find the suitability of
the proposed project. This report dictated different financial and non-financial sources of
financing expansion plan for ABC consultancy LLP.
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REFERENCES
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Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Gordon, E. A., and et. al., 2017. Flexibility in cash-flow classification under IFRS: determinants
and consequences. Review of Accounting Studies. 22(2). pp.839-872.
Wu, D. D., Chen, S . H. and Olson, D. L., 2014. Business intelligence in risk management: Some
recent progresses.Information Sciences, 256, pp.1-7.
Yang, W., and et. al., 2018. Good news or bad news, which do you want first? The importance of
the sequence and organization of information for financial decision-making: A neuro-
electrical imaging study. Frontiers in Human Neuroscience. 12. p.294.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-
VERLAG BERLIN AN.
Li, F. G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal
pathways for the UK electricity sector transition to 2050. Applied energy. 189. pp.89-109.
Upton, J.and et.al., 2015. Investment appraisal of technology innovations on dairy farm
electricity consumption. Journal of dairy science. 98(2). pp.898-909.
Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP
procurement success in large green projects. Procedia-Social and Behavioral
Sciences.119. pp.847-856.
Götze, U., Northcott, D. and Schuster, P., 2015. Discounted Cash Flow Methods. In Investment
Appraisal (pp. 47-83). Springer, Berlin, Heidelberg.
Albertijn, S., Drobetz, W. and Johns, M., 2016. Maritime investment appraisal and budgeting.
In The International Handbook of Shipping Finance (pp. 285-313). Palgrave Macmillan,
London.
Ilyas, R and et.al, 2017. Sensitivity analysis for the determinants of investment appraisal. Audit
Financiar. 15(148). pp.686-700.
Higham, A. P., Fortune, C. and Boothman, J. C., 2016. Sustainability and investment appraisal
for housing regeneration projects. Structural Survey. 34(2). pp.150-167.
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