Financial decision making assignment : ALPHA limited company

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................6
1. Calculation of ratios.................................................................................................................6
2. Assessment of the results and position of the company..........................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial decision making is referred to as an effective process which is responsible for
taking strategic decisions related with the stockholder's equity and liabilities of the organization.
Financial decision making is very crucial for the sustainable growth and productivity of the
company for a longer period. Financial functions consists of taking strategic decision related
with the financial reporting, planning, controlling and monitoring. The key role of accounting is
to focus on immediately managing the financial issues on a timely and systematic manner. The
key function of accounting is to control cost, prepare budget, prevention of errors, preparation of
financial statements, etc. Finance function is very crucial because it helps in determining the
inflow and outflow of cash. The finance function can be categorized into long term, medium
term and short term finance of the company. The financial function is very crucial as it helps in
effectively identifying the needs and sources of the finance and make various investment
decision to ensure there is enough fund in order to carry out operations of the business.
ALPHA limited company is a UK based manufacturing company which was founded in
the year 1954. The company aids to focus on expanding its operations in the various parts of the
UK. ALPHA limited company integrates with effective management accounting techniques in
order to perform efficiently. It makes various financial statement in order to make various
financial, operating and investment decision regarding business.
TASK 1
Financial decision making is referred to as an effective process which is responsible for
taking strategic decisions related with the stockholder's equity and liabilities of the organization.
The key purpose of accounting is to effectively provide the financial information of the company
to the stakeholders in order to make strategic decision. Accounting is very useful in analysing
and summarizing the activities of the ALPHA limited company which in turn is very useful in
evaluating the financial position of the company in a systematic and efficient manner (Nyathi
and et.al., 2018). Accounting is useful in effectively keeping track of the income and
expenditures by strategically complying with various financial information and make informed
decision. Accounting is useful in recording all the financial transactions in financial statements
of the company. It is useful in preparation of budget and reducing cost. Accounting helps in
determining the fraud and error in the financial activities of the business.

Management of finance helps in carrying out all the activities in a systematic and
appropriate manner (Alfraih, Alanezi and Alanzi, 2015). Finance is an effective function as it is
responsible for managing funds within the organization. It helps in planning and budget plan in
order to control the expenses and expenditures of the company. It is very useful in controlling
cost of the company and attain economies of scale. This in turn helps in improving the financial
position and strength of the ALPHA company. The key role of finance is to manage cash flow of
the business. It is also very crucial in planning profits and controlling cost of the business
effectively. It helps in managing unavoidable risk of the business and take necessary measures to
analyse the potential risk in the market. Finance function is very crucial in the or organization as
it is useful in analysing the present and forecasting the future (Bebbington and Unerman, 2018).
It is very crucial for the organization to do financial analysis in order to function in a systematic
and efficient manner. The key role of financial management is to take financial decisions and
exercise control on the finances of the business with the help of benchmarking, key performance
indicator, financial forecasting, profit and loss analysis, ratio analysis, etc. It is also very useful
in financial planning and capital budgeting by effectively analysing the capital required by the
organization and also evaluating the source of funds in order to fulfil the capital needs of the
ALPHA limited company. The key role of finance is to make strategic decision related with the
investment, dividend, financing and liquidity for smooth ad sustainable growth of the business
(Lee and Lee, 2015).
Management accounting techniques is useful for planning, monitoring and controlling the
activities of the management in the organization. Management accounting techniques is very
crucial as it helps in financial planning, financial statement analysis, budgetary control, cash flow
analysis, marginal costing, etc.
Financial planning: The key role of management accounting is to maximize the profits
of the business through making sound financial decision making (Osadchy and et.al., 2018).
Financial planning is useful in attaining the goals and objectives of the company.
Financial statement analysis: It is very crucial in determining the financial position of
the company and also critically examine the growth rate of the ALPHA limited company.
Budgetary control: It helps in setting budget for the particular set period. It helps in
setting a base for the future. It helps management of the organization to set budget by evaluating

the historical information and forecast the budget required for the future operations of the
business.
Cash flow analysis: It is very useful in analysing the cash inflow and cash outflow of the
business for the particular period (Tools and techniques of Management Accounting, 2019).
Marginal costing: It is a very effective management accounting tool which helps in
determining the increase in the cost by producing one additional unit of the product.
Decision making: The management of the organization focuses on solving the various
business problems which in turn tends to arise from increasing complexity in the business
(Mann, and Kutz, 2016). The management should focus on finding the best profitable solution to
the problem for higher operational efficiency.
Petersen, Kushwaha and Kumar, (2015) sought to determine the fact that, management
accounting technique is very crucial in financial planning of the ALPHA limited company.
Budgetary control is an appropriate tool which is useful in directing the operations of the
business in order to achieve desired return on investment. It can be best applied in the company
in order to critically evaluate the past historical performance of the company and effectively set a
budget for the future which in turn leads to long term sustainable growth and efficiency.
Management accounting is very crucial in providing proper financial reports in order to gain long
term sustainable efficiency and productivity. On the contrary, Drever, and et.al., (2015) argued
that, management accounting techniques are useful in performance measurement and project
decision making. Management accounting reports are crucial for strategic decision making and
helps in higher operational growth and sustainability of the ALPHA limited company. It helps in
determining the most profitable units of the company in order to sustain in the market for the
longer period. Performance measurement is said to be crucial for the benchmarking. This helps
organization in setting a benchmark for comparison with its competitors. Management
accounting is useful in increasing productivity and improving sales trend of the business. Barati
and et.al., (2016) said that, management accounting tools are very crucial for controlling the cost
of the business which in turn helps in enhancing the practice of the ALPHA limited company.
The key role of management accounting techniques is it is very beneficial in improving the
productivity and profitability of the business. It is useful in providing relevant information to the
management for proper planning, controlling and decision making. Theses tools and techniques
of the accounting helps in solving complex business problems. Leonard, (2019) investigated that,

management accounting tools and finance function are very crucial for the ALPHA limited
company in order to take various crucial decision related with the investment, financing,
operations and dividend. Management accounting tools and techniques are useful in controlling
various operational function of the organization. It is very crucial in analysing the performance
and productivity of the business. Effectively analysing the management reports of the
organization helps in outlining the expenditures and investment decision in order make strategic
decision for the future. This in turn is very crucial in enhancing the performance and practice of
the company.
TASK 2
1. Calculation of ratios.
a.) Return on capital employed
Particulars Formula
Amount
(in £)
Amount
(in £)
2017 2018
Net income 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 Net income/capital employed*100 15.68 23.64
b.) Net profit margin
Particulars Formula
Amount
(in £)
Amount
(in £)
2017 2018
Net profit 300 262.5
Net sales 2400 3000
Net profit margins Net income/net sales*100 12.5 8.75
c.) Current ratio
Particulars Formula Amount Amount

(in £) (in £)
2017 2018
Current assets 757.5 1035
Current liabilities 322.5 1110
Current ratio current assets/Current liabilities 2.34 0.93
d.) Average receivable days
Particulars Formula
Amount
(in £)
Amount
(in £)
2017 2018
Accounts receivables 450 600
Annual sales 2400 3000
Average receivable days Accounts receivables/ annual sales*365 68.43 73
e.) Average payable days
Particulars Formula
Amount
(in £)
Amount
(in £)
2017 2018
Accounts payable 285 1050
COGS
Opening inventory+ purchase – closing
inventory 1725 2250
Average payable days Accounts payable/ COGS* 365 60.30 170.33
2. Assessment of the results and position of the company.
a.) Return on capital employed: This is referred to as the profitability ratio which in turn
helps in effectively evaluating the efficiency of the organization to yield profit from the
particular capital employed (Sokolov, Elsukova and Sadykova, 2016, March). ROCE can be
effectively computed by net income divided by capital employed. The ROCE of the company is
very beneficial in determining the profitability and financial position of the company. The ROCE
of the company for the year 2017 is 15.68 and for the year 2018 is 23.64. It has been critically
evaluated that, the ROCE of the ALPHA limited company has increased by 7.96 which in turn

states that the company has been generating better returns on the amount invested. The company
tends to prefer high ROCE which in turn helps in improving the generation of higher capital
employed into the business. High generation of profit can be effectively invested in the company
which is beneficial for the growth and profitability of the company. On the contrary, lower
ROCE of the company indicates that the company has not been generating enough profit on their
investment. The key reason for change in the ROCE of the ALPHA limited company is that it
focuses on removing assets which are not in use in order to increase productivity of the business.
The company focuses on paying off the debts of the business and reduce liabilities which in turn
improves the ROCE ratio. Higher ROCE indicates the financial resources of the company has
been effectively utilized.
b.) Net profit margin: This financial ratio states the revenue generated by the company
after deduction of all the expenses from the sales (Clarke, and et.al., 2019). This ratio is useful in
determining the amount of profit that has been yielded from the total sales of the company. The
net profit margin of the company is calculated by net income divided by net sales of the
company. The net profit margin of the company for the year 2017 is 12.5 and for the year 2018 is
8.75. It has been critically evaluated that, the net profit margin of the ALPHA limited company
has reduced by 3.75 which in turn states that the profit of the company are lower. The main
reason for lower profit margin states the company has generated lower profit of its and in turn
results in lower operational performance and efficiency. In order to improve the net profit margin
of the company, it must focus on increasing revenue and market share of the company.
Ineffective cost structure and pricing strategy of the ALPHA limited company leads to lower
profit margins for the company. Lower selling of goods in turn results in lower profit margins
for the company. ALPHA limited company can improve the profit margin of the company by
effectively increasing the sales of the organization. The company tends to focus on reducing the
cost and attain economies of scale in order to improve the operational efficiency of the business.
It must focus on reducing the cost of production and reduce wastage in order to attain higher
profit margins for the business.
c.) Current ratio: It is a liquidity ratio that effectively measures the ability of the
organization to pay- off its short term obligations on time (Hassan and Haque, 2017). It helps in
determining how many current asset does the company have to pay off its current debts and
liabilities. The current ratio of the company is computed by dividing current asset by current

liability. The ideal current ratio of the company is said to be 1: 2. If the current ratio of the
company states to be too low, then it means that the company is not in a position to pay off its
debts. On the contrary, if the current ratio of the company is too high then it states that the
company is not effectively utilizing the cash. The current ratio of the company for the year 2017
is 2.34 and for the year 2018 is 0.93. It has been critically evaluated that, the current ratio of the
ALPHA limited company has declined, which in turn attributes that the short term liabilities of
the company is increasing as compared to the last year. The decline in the current ration tends to
state that, the company has reduced capability to generate cash from its assets. The current ratio
of the company greater than 1 states that company has enough current assets to mitigate its
current liabilities for the specific period. On the contrary, if the current ratio of the company is
lower than 1 then it states that, company does not enough current assets to mitigate its short term
liabilities for the specific period. The current ratio of the ALPHA limited company is decreasing
because company is not in a position to generate enough cash to pay off its short term liabilities.
d.) Average receivable days: This ratio is also referred to as debtor's collection period.
This ratio states, the number of days required to collect the outstanding invoice from the
customers (Jermias, 2017). Use of trend line is an effective measure to track the accounts
receivable days. The average accounts receivable days is calculated by dividing the accounts
receivable with the actual sales of the company multiplied by the number of working days i.e.,
365 days. The average accounts receivable days of the company for the year 2017 is 68.43 and
for the year 2018 is 73. It has been critically evaluated that, the average accounts receivable days
of the ALPHA limited company has increased by 4.57 which in turn states that the company has
been taking more time to collect the cash from the customers as compared to the last year. This
states that the company is giving more goods on credit in order to improve the operational
performance and productivity of the business. In order to improve the number of receivable
days, the company should focus on tightening the credit terms and focus on aggressive collection
assistance in order to improve the collection process in the company. ALPHA limited company
has to lower the goods to be given on credit in order to improve the receivable days of the
company. It also helps in reducing the risk of non- payment default made by the customers. The
company needs to maintain better communication network in order to reduce the average
receivable collection period time for ALPHA limited company.

e.) Average payable days: This is a financial ratio which is also referred to as days
payable outstanding or creditors payable days. This ratio states that, the average time taken by
the company to pay off it invoices to its creditors and suppliers (Petersen, Kushwaha and Kumar,
2015). The average accounts payable days is calculated by dividing the accounts payable with
the cost of goods sold of the company multiplied by the number of working days i.e., 365 days.
The average accounts payable days of the company for the year 2017 is 60.30 and for the year
2018 is 170.33. It has been critically evaluated that, the average accounts payable days of the
ALPHA limited company has increased by 110.03 which in turn states that the company has
been making delay in payment to its creditors. On the contrary, lower creditors payable days
states that the company has been settling its on the time for the particular accounting period. The
main reason for increase in creditors payable days is increased inventory levels, new purchases,
etc. This ratio can be improved by effectively negotiating the terms of payment with suppliers,
offer discount and improve stock control. The company should focus on reducing the creditors
payable days in order to improve the brand image and performance of the company.
CONCLUSION
This study concludes that, financial functions consists of taking strategic decision related
with the financial reporting, planning, controlling and monitoring. This study concludes the role
of finance and accounting in the company. It has been determined that, accounting is very crucial
in providing the financial information of the company to the stakeholders in order to make
strategic decision. This study is useful in determining the fraud and error in the financial
activities of the business. This study further examines the role of finance in planning and budget
plan in order to control the expenses of the company. It is very useful in controlling the cash of
the business. It helps management to take various investment, financing, operating, liquidity and
investment decision. This study critically evaluates that, management accounting techniques is
very crucial for planning, monitoring and controlling the activities of the management and also
make strategic decision in the company. Management accounting techniques is useful in
financial planning, budgetary control, analysis of financial statements, decision making, cash
flow analysis, etc. It is useful in providing relevant information to the management for proper
planning, controlling and decision making. Furthermore, this study states the financial ratios of
the company and determine the performance by evaluating the cause and effect of the company.

REFERENCES
Books and journals
Alfraih, M.M., Alanezi, F.S. and Alanzi, K.A., 2015. Do the characteristics of the board of
directors affect the value relevance of accounting information?. International Journal of
Accounting and Finance.5(2). pp.172-187.
Barati, M and et.al., 2016. A Review of Financial Strategies Impact on the Financial Performance
In Iranian Banks. International Journal of Humanities and Cultural Studies (IJHCS) ISSN
2356-5926. 1(1). pp.1789-1806.
Bebbington, J. and Unerman, J., 2018. Achieving the United Nations Sustainable Development
Goals: an enabling role for accounting research. Accounting, Auditing & Accountability
Journal.31(1). pp.2-24.
Clarke, B and et.al., 2019. Strategic management accounting: CPA program.
Drever, A.I and et.al., 2015. Foundations of financial well‐being: Insights into the role of
executive function, financial socialization, and experience‐based learning in childhood and
youth. Journal of Consumer Affairs.49(1). pp.13-38.
Hassan, N. and Haque, H.M.M.U., 2017. Role of Accounting Information in Assessing Stock
Prices in Bangladesh. International Journal of Business and Social Research.7(10).pp.18-
25.
Jermias, J., 2017. Development of management accounting practices in Indonesia. In The
Routledge Handbook of Accounting in Asia (pp. 104-114). Routledge.
Lee, S.W. and Lee, K.H., 2015. Decision Making Model for Selecting Financial Company Server
Privilege Account Operations. Journal of the Korea Institute of Information Security and
Cryptology.25(6). pp.1607-1620.
Leonard, B., 2019. Irish farm succession and inheritance; an examination of farmers’ economic
decision-making strategies as socially-constructed risk assessment (Doctoral dissertation,
NUI Galway).
Mann, J. and Kutz, J.N., 2016. Dynamic mode decomposition for financial trading
strategies. Quantitative Finance. 16(11). pp.1643-1655.
Nyathi, K.A and et.al., 2018. The role of accounting information in the success of small &
medium enterprises (SMEs) in Zimbabwe: A case of Harare. Journal of Business and
Management (DRJ-JBM).1(1). pp.01-15.

Osadchy, E.A and et.al., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy. European Research Studies Journal.21(2).
pp.339-350.
Petersen, J.A., Kushwaha, T. and Kumar, V., 2015. Marketing communication strategies and
consumer financial decision making: The role of national culture. Journal of
Marketing. 79(1). pp.44-63.
Sokolov, A., Elsukova, T. and Sadykova, A., 2016, March. Management of financial results of
the organization by using management accounting techniques. In Proceedings of
Economics and Finance Conferences (No. 3205778). International Institute of Social and
Economic Sciences.
Online
Tools and techniques of Management Accounting. 2019. [Online]. Available through:
<https://accountlearning.com/tools-and-techniques-of-management-accounting/>