Financial Decision Making Assignment Solved (Doc)

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................2
MAIN BODY...................................................................................................................................2
TASK 1............................................................................................................................................2
Importance of accounting and financial department and SWOT analysis of Unilever...............2
TASK 2............................................................................................................................................5
Calculation of ratios of Alpha Limited company........................................................................5
CONCLUSION ...............................................................................................................................9
REFERENCES .............................................................................................................................10
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INTRODUCTION
Financial decision making is very crucial aspect of the organization as it relates with the
decisions to be taken regarding the sources of raising the funds, allocating the funds and using
the funds optimally so that larger profits can be gained. It involves the risk associated with the
raising of the funds and helps the firm in mitigating such risk which in turn develops the
capability in coping with any uncertain situation or event. The basic financial decisions that
every managers of the company includes the investment, financing and dividend decisions. The
present study is based on the Alpha Limited company, a manufacturing company, established in
UK during 1975. This company has been planning for making expansion in its operation in other
segments of the UK in next ten years. Furthermore, the report includes the functions relating to
the accounting and finance within the organization. The study also describes the performance of
the Alpha Limited through the computation of the ratio analysis for its two consecutive years.
MAIN BODY
TASK 1
Importance of accounting and financial department and SWOT analysis of Unilever.
For this case, the company chosen is Unilever Plc. Unilever is a British Dutch company
providing transnational consumer goods which is founded by Lever Brothers and Margarine
Unie on 2 September 1929. The company is having its headquarter in London, United Kingdom
and Rotterdom, Netherlands. Unilever is engaged in a manufacturing business and provides wide
range of products across the globe and to its customer worldwide. Its products includes Food and
Beverages, Beauty products, Cleaning agents and Personal care products. Basically, this
company is engaged in manufacturing of Consumer Goods in approx 190 countries. Currently
the company is employing approximately 155,000 till 2019. The overall Revenue and Net
Income for the year 2018 of Unilever is £50.982 billion and £9.808 billion respectively.
SWOT Analysis for Unilever Plc
Strengths - Strong and effective advertising, marketing and promotional activities. Unilever has
excellence in providing Corporate Social Responsibility initiatives and activities towards the
welfare and development of the society in which it is conducting its business operations.
Company is providing wide portfolio of brands, product mix and diversified range of products as
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per the taste and preferences of consumer. Due to long run existence has lead to creation of brand
popularity and acquisition of market share. Also, the company is having high economies of scale
which provides support in improving and increasing the production efficiency leading to
competitive pricing strategies (Gürel and Tat, 2017).
Weaknesses – The products provided by Unilever is of Imitable nature as a result of which other
competitor firms are taking advantage of it and entering into the market. This has resulted into
increase in market competition and restricted pricing which in turn has lead to low profit
margins.
Opportunities – Unilever has the opportunity to enter into business other than consumer goods
industry by making diversification of products especially for health conscious customers. This
idea of health product innovation can leads to increase in consumer attractiveness. Also, Unilever
has the opportunity to develop and increase its market share, revenue amount by selling or
offering its current products into new market segments or areas. By making business more
sustainable and environmental friendly, it can help company in attracting and increasing its
customer base who are more conscious about environment.
Threats – Unilever has to face tough competition in the market because of which it has result
into decline in the market share and financial performance level (Santos and Laczniak, 2015).
One of the weakness of Unilever has become a threat for company which is its imitable nature of
products. Another threat for Unilever is increasing popularity and trend of the retailer house
board, which Unilever is lacking.
Accounting and Finance are considered as one of the most important aspect for every
business organisation. The term Accounting is defined as the process of identifying, recording,
measuring, evaluating, classifying, making interpretation and communication of the financial
information with the help of financial statements prepared of the company (Alexander and et.al.,
2017). With the help of Accounting department, an investor or any stakeholders can make
analysis of financial position of the company by having an overview of the profits and loss
situation of a given time period. Accounting department provides correct valuation and define
true value of business assets, owner equity and liabilities. The importance of Accounting
department is as follows:
1. Financial Accounting – It is branch of accounting which keeps track record of the
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financial transactions of the company. By following correct guidelines Unilever can
record, classify, summarize, monitor and present its business transaction related financial
information in its financial report or statements.
2. Management Accounting – It is defined as the process of preparing managerial report or
making presentation of analysis made related to the business activities to the internal
management of the company for taking crucial business decision (Kaplan and Atkinson,
2015). Unilever by seeking internal managerial report can formulates better and effective
business strategies and plans for increasing the market share.
3. Tax function – The function of tax accounting is to ensure that company has made
compliance with all the applicable laws, rules and acts related to the Tax provisions. With
the help of proper tax planning, Unilever can minimize it taxes expenses in form of
money. Also, this function ensures timely filling of federal and state income tax returns.
4. Auditing function – Auditing is a process of making detailed observation and analysis of
books, accounts and financial documents for determining whether company has provided
correct and accurate information and material disclosure. Unilever by appointing a good
auditor can assess the risk or error made during preparation of statement, recording etc.
Also, it assists company in timely detection of fraudulent business activities and thus
reduces the cost of capital.
Finance is related to the process of managing money, fund and capital requirements of the
company. Financial department carries on activities such as borrowing, lending, investing,
budgeting etc. (Nakajima, Sawamoto and Taguchi, 2016). With the help of financial tools,
company can make proper and effective allocation of financial resources. The importance of
Financial department is as follows:
1. Investment function – For every business organisation, the investment function is
considered as one of the most important business activity. Company by making sound
business strategies, plans, budgets and policies can make effective investment in available
business options. Unilever by evaluating rate of return and cost of capital, can make more
profit.
2. Financing function – Company requires funds, money for meeting its day to day
business obligations which can be achieved by properly management of financial
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resources available with the company. Unilever should always manage its financial
resources and makes its proper and effective utilisation for business expansion and
growth.
3. Dividend function – Dividend distribution policy for company should be made in such a
manner that it leads to balance between shareholders expectations of wealth creation and
also leads to retention of capital amount in the business (Ainsworth and Deines, 2019). A
good dividend policy adopted by Unilever can make its shareholders satisfied as it will
lead to creation of their wealth and also emphasizes on meeting the funds requirements
for future business expansion.
4. Working Capital function – It is a measure which determines the ability of a company
to pay off all its short term or day to day business operations expenses and debt amount
due. By properly managing of working capital, Unilever has able to expand its business
operations across the world.
TASK 2
Calculation of ratios of Alpha Limited company
Ratio analysis
Particulars Formula Amount Amount
2017 2018
Operating profit 300 262.5
Total assets 2235 4035
Current liabilities 322.5 1110
Capital employed
Total assets-current
liabilities 1912.5 2925
Return on capital
employed
Operating
profit/capital
employed*100 15.69% 8.97%
Net profit 300 262.5
Sales 2400 3000
Net profit margin ratio Net profit/sales*100 12.50% 8.75%
Current assets 757.5 1035
Current liabilities 322.5 1110
Current ratio
Current assets/current
liabilities 2.35 0.93
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Trade receivables 450 600
sales 2400 3000
Average receivable
days
Trade
receivables/sales*365 68.4 73
Trade payable 285 1050
sales 2400 3000
Average payable days Trade
payable/sales*365 43.3 127.8
1. Return on capital employed- It is the profitability ratio that assess the efficiency of the
company in generating the profits from the capital employed by it through the
comparison of the net profits to capital employed. Capital employed is evaluated by
reducing the current liabilities from the total assets. The return on capital employed ratio
of Alpha Limited resulted for the years 2017 and 2018 resulted as 15.69% & 8.97%
which indicates that the returns gained from the capital invested is decreasing that means
the profit generated are lower in proportion as compared to the proportion of capital
employed (Banafa, Muturi and Ngugi, 2015). This reflects that the capital of the company
is not utilized efficiently within the business which in turn depicts that the performance of
the company is getting poor in the coming year. Return on capital employed analyses the
profitability of the enterprise in relation to its common equity and also considers the debt
and the other liabilities. This shows that the profitability position or financial
performance of the Alpha Limited is declining against its significant debts. The return on
capital employed ratio of Alpha Limited is decreasing due to the use of the outdated
machinery, increase in debt and rising liabilities. For improving the ratio the company
must sell its outdated equipment for lowering its total of asset base as by removing the
unused assets allows an entity for employing less capital with facilitating the same
amount of the production (Philippon, 2015). By paying off the debts, liabilities of the
enterprise reduces which in turn improves the return on capital employed ratio.
Monitoring the areas that are incurring excessive cost or unnecessary cost is also an
important phenomenon for enhancing the operational efficiency.
2. Net profit margin- It is the ratio that is expressed as the percentage of the revenue left
after the payment of all the operating expenses, taxes, interest expenses and the
preference dividend that has been subtracted from total revenue of the Alpha limited. This
ratio indicates or reveals the profit that the business extracts from its total revenue or
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sales (Morales-Díaz and Zamora-Ramírez, 2018). The net sales equates to the gross sales
less all the deductions and the allowances of the sales. The net profit margin of the Alpha
limited is showing the decreasing trend that is 12.50% in 2017 and 8.75% in 2018 which
means that the income generated against the sales are lower. This happens due to
inefficient conversion of revenue into the profits by the firm. It reflects the poor
performance of the Alpha limited in setting up the prices for its product and the cost of
goods sold is high or the operating expenses are greater of Alpha limited. These can be
the major reason for resultant decline in the ratio including the high interest expenses and
the higher tax rate leads to the decrease in the net profit margin. There are various ways
that need to be adopted by the company such as by reducing the labor cost and the
operation cost with increase in the sales revenue results in the improvement of the net
profit margin. The company should increase its prices so that higher earnings can be
gained from the greater sales and it must reduce its interest expenses by paying off its
debts or loan (He, Zhang and Zhang, 2018). Alpha limited must find for the ways to
produce the goods at cheaper rate which leads to lower cost of production per unit which
in turn increases the return and competitive edge can be achieved by the firm in the
overall market.
3. Current ratio- It is the liquidity ratio that helps that assess the ability of the company in
meeting its short term obligations or the current liabilities towards its creditors or
accruals. It tells the ways by which the Alpha Limited can maximize its current assets
over its current liabilities for getting the better liquidity position (Lane and Milesi-
Ferretti, 2018). It is very important for the firm to measure the current ratio as it provides
for the information in terms of the short term liabilities that are due on the side of the
company. Current ratio indicates the capability of the business to payoff its dues on time
from its current assets. In 2017, the current ratio of the Alpha limited resulted as 2.35
which means a better ratio as it states that the current assets of the company was doubled
in respect of its liability which is the ideal stage of the current ratio that is 2:1. However,
In 2018, the current ratio of the Alpha Limited evaluated as 0.93 that is lower than the
past years which means that the company lacks in managing its current assets effectively.
The ratio for 2018 is said to be poor as it is lower than 1 which means that the liabilities
of the company are greater than the current assets and this in turn increases the financial
burden of interest payment and debts on the enterprise. This also reflects that Alpha
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Limited does not have sufficient funds to meet its obligations and this results in poor
liquidity position of the company. The current ratio of Alpha Limited decreases due to the
increase in the short term loans, spending more cash expenditures, increase in accruals or
payable with decrease in trade receivables (Bitar, Pukthuanthong and Walker, 2018).
Alpha Limited must seek for various ways in so that its liquidity position could get better
such as submitting the invoices on early basis, switching for the long term loans rather
than the short-term loans, removing or selling the irrelevant assets, controlling the
overhead expenses and negotiating payment cycle for longer duration etc.
4. Average receivable days- It means the number of the days for which the invoices of the
customers are outstanding before it get collected. It is computed by dividing the trade
receivable to the sales and multiplying it by the total number of days that is 365 in a year.
The most effective way for using the measurement of the account receivable days by
tracking it on the trend line for each month so that changes regarding the ability of an
entity ca be shown in collecting the receivables from its customers. This ratio indicates
the average time taken by the Alpha Limited in collecting its payments on the goods sold
by it (Rodrigues and Rodrigues, 2018). The average collection or receivable days for
2017 equates to 68.4 and for 2018 it is equals to 73 which means that the average
duration of the collection is been increased by the company in the current year. As the
days are increasing from one period to another, the working capital of the Alpha Limited
increases as it considered that the source of the cash on the cash flow statement of the
company. It shows that the credit policies of the company is not being strict or the higher
sales revenue is not been protected. The increased number of days depicts that the
company is seeking for more and more credit sales rather than the cash sales. The reason
for higher account receivable days is that the Alpha limited is taking longer duration in
collecting its payment which could be better sometimes as it leads to increase in the sales
revenue (Sobiech, 2019). On the other hand, the more credit sales, more is the risk of
losing the money. Alpha limited can go for electronic medium of receiving the money so
that the amount can be collected faster and by reducing the term for the payment leads to
improvement in the debtor collection period. The company must maintain healthy
working relations with its customers for receiving payment on time and by setting up of
the clear policies in relation to credit also results in improving he average collection days.
Alpha limited could improve its receivable period through offering the multiple methods
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for making the payment.
5. Average payable days- It is just opposite to the debtors' collection period which means
that the number of days the company takes for paying the dues to its suppliers against the
purchases of the raw material (Argimon, and et.al., 2019). The creditors payable period
of Alpha Limited for the year 2017 resulted as 43.3 days and during the year 2018 it
evaluated as 127.8 days which is rising with the higher amount. The average payable
days of the Alpha Limited is increasing from one accounting period to another which
clearly indicates that the payment made by the company to its suppliers is very slow
which reflects the worst financial condition. It states that the account payable are not
managed well by the company. However, it can also be depicted that higher the ratio of
accounts payable, the better term for the credit purchase is been enjoyed by the Alpha
Limited from the suppliers. The foremost reason for increasing the accounts payable is
buying of the inventory or material on a credit basis. Secondly, the reason of increasing
the number of days is the corporate is taking more time in paying its invoices and the
bills to the creditors that includes the vendors, other companies and the suppliers
(Grashuis, and Su, 2019). Account payable days can be improved by setting up the
reminders for the due date of payment, looking for the discounts, budgeting for the
expenses, maintaining the relationships and standardizing the workflow process of the
accounts payable.
CONCLUSION
From the above report it can be summarized that accounting and the finance function
plays the important role in the business as it facilitates the proper accounting of the financial
transactions in terms of the income and the expenses of the company. It provides for managing
the flow of the money and directs the course of action that the business must adopt for attaining
the growing success in the future. For accumulating the financial information regarding the
performance and position of the organization, company has to take into consideration the account
and the finance functions effectively and efficiently. Computation of the ratios for analyzing the
performance of the Alpha Limited so that operating, liquidity, efficiency and the profitability
position can be ascertained.
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REFERENCES
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Online
Investment Function. 2019. [Online]. Available through:
<http://www.businessdictionary.com/definition/investment-function.html>.
SWOT Analysis for Unilever Plc. 2019. [Online]. Available through:
<https://www.mbaskool.com/brandguide/fmcg/13494-unilever.html>.
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