Accounting and Finance for Managers: Performance and Investment Report

This report undertakes a comprehensive analysis of accounting and finance principles, focusing on comparative performance analysis and investment appraisal techniques. The first section delves into the financial performance of Next Plc and Hennes & Mauritz (H&M), utilizing various financial ratios such as current ratio, quick ratio, debt-equity ratio, inventory turnover, asset turnover, gross margin, net margin, return on equity, and operating cash flow per share to evaluate their financial health and efficiency. Non-financial aspects, including EBITDA per employee, revenue per employee, staff turnover, and absenteeism, are also examined to provide a holistic view. The second part of the report focuses on investment appraisal, specifically for Hilltop Ltd, employing techniques like net cash flow, payback period, net present value (NPV), and accounting rate of return (ARR) to assess the viability of potential projects. The report concludes with recommendations for both companies, addressing areas for improvement, and acknowledges the limitations of the methods employed.

ACCOUNTING AND
FINANCE FOR
MANAGERS

Table of Contents
INTRODUCTION......................................................................................................................3
TASK 1 COMPARATIVE PERFORMANCE ANALYSIS.....................................................3
Financial performance analysis.............................................................................................3
Non-Financial performance analysis.....................................................................................5
Presentation through column charts......................................................................................6
...............................................................................................................................................8
Recommendation to H&M....................................................................................................8
Drawbacks of uses of ratio analysis method for comparative performance analysis............8
TASK 2 INVESTMENT APPRAISAL TECHNIQUES...........................................................9
Computation of Net Cash Flow (NCF)..................................................................................9
Identification of Pay back period.........................................................................................10
Uses of Net Present Value (NPV).......................................................................................11
Computation of Accounting rate of return (ARR)...............................................................11
Recommendation to Hilltop Ltd, with the justification.......................................................12
Limitation of capital budgeting techniques.........................................................................12
CONCLUSION........................................................................................................................12
REFERENCES.........................................................................................................................14
Index of Tables
Table 1: NCF of project A ( In £000's)......................................................................................9
Table 2: NCF of project B (In £000's)......................................................................................10
Table 3: Payback period of project A and B (In £000's)..........................................................10
Table 4: Determining NPV of project A and B........................................................................11

INTRODUCTION
Looking at the present era, managers plays an very important role in the organization
as they frame policy, make financial planning and evaluate business performance to take
strategic decisions. Next Plc and Hennes and Mauritz are well known fashionable cloth
retailer organization who are serving wide range of customers through operating at global
level. Both the organizations have good corporate image around the world therefore, Asol
Ltd, is considering to invest in this company. It is a large fashion retailer firm whose certified
financial manager desires to enhance their profits through increasing their return on
investment. In this report, comprative financial performance will be carry out to identify that
which of these company will be more superior for investment purpose. Along with it, Hilltop
Ltd, who is a manufacturing organization intends to purchase a new machinery to enhance its
production capacity. Capital budgetings tools analysis will be carry out to assess most viabel
project out of two mutual exclusive projects.
TASK 1 COMPARATIVE PERFORMANCE ANALYSIS
Financial performance analysis
Financial strength: Balance sheet is a statement that measure financial position of the
company (Droms and Wright, 2015). Some of the financial strength showing ratios are
analysing here:
 Current ratio (CR): It identify that firms have enough resources or not to meet out its
debts over the upcoming one year time period. The ratios has been selected to
measure that which firm is more able to pay off its current liabilities out of its current
assets available. Next Plc's CR was 1.28 in 2011 decreased to 1.82 nearest to the idle
ratio of 2:1. Contrary, H&M's ratios goes down to 2.11 which is not good. Growing
trend of Next Plc is more beneficial because it indicates that company increase its
current assets to meet out their current obligations. On the contrary, in H&M, it may
be reduced because of high short-term borrowings, spending more cash and
amortization of prepaid expenses (Fields, 2016).
Current ratio
Year Next PLC H &M
2010 N/A 2.96
2011 1.28 2.71
2012 1.54 2.66
2013 1.48 2.25

2014 1.76 2.11
2015 1.82 N/A
Column chart:
Bar chart:
 Quick ratio (QR): QR measure firm's ability to satisfy its all short-term liabilities out
of its most liquid assets (Shi, 2015). Inventory is the most liquid assets after cash.
Hence, this ratio has been choosed to assess that how much both firms are able to
mitigate their short term liabilities with current assets but excluding inventory. In
Next Plc, the ratio goes enhanced to 1.16 while in H&M, it has been reduced to 1.07
in 2014. Thus, the ratio moved in an unfavourable direction and indicates that H&M's
2010 2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
3
3.5
0
1.28
1.54 1.48
1.76 1.82
2.96
2.71 2.66
2.25 2.11
0
2010
2011
2012
2013
2014
2015
0 0.5 1 1.5 2 2.5 3 3.5
0
1.28
1.54
1.48
1.76
1.82
2.96
2.71
2.66
2.25
2.11
0

ability to convert its quick assets into cash gone decreased (Kirkham, 2012).
Henceforth, it can be said that liquidity position of Next Plc is much better than
H&M.
Quick ratio
Year Next PLC H &M
2010 N/A 2.06
2011 0.72 1.69
2012 0.91 1.49
2013 0.97 1.22
2014 1.18 1.07
2015 1.16 N/A
Column chart:
Bar chart:
2010 2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
0
0.72
0.91 0.97
1.18 1.16
2.06
1.69
1.49
1.22
1.07
0

 Debt equity ratio (D/E ratio): It is a solvency ratio that indicate capital structure of
the company and measure the proportion of debt and equity. It has been chosen to
determine the level of risk associated with the investment in both the companies. In
Next Plc, the ratio moved in an upward direction and gone enhanced from 2.57 to
2.61 it impose more financial risk to the company. However, in H&M, the ratio stood
at zero it is because of unpresence of debts in the business (Greenwood and
Scharfstein, 2013). Thus, this is not good because firm may take advantage of trading
on equity and maximize their shareholder return through using debt funds. Therefore,
Next plc will be consider more profitable for investment purpose by Asol Ltd.
Efficiency ratios: This ratios measure managers ability whether they are using assets
efficiently or not. It can be use for measuring inventory using efficiency to meet out their
liabilities.
 Inventory turnover ratios: It identifies the number of time in which inventory is sold
or used in a given financial year. In other words, it determine the rotation of inventory
from purchase to sales in the market. In 2011, Next Plc's ratio was 6.70 got reduced to
6.62 in 2015 however, in H&M, it has been declined to 3.46 in 2014. Both the ratios
are declining that is not good sign but still, Next Plc's ratio is 2 times higher than
H&M's ratio. Therefore, it interpreted that Next Plc purchasing adequate quantity of
inventory that is sufficient to meet customer demand (Arrow and Lind, 2014). It is
because very low inventory turnover is a sign of poor sales and excess inventory in
the business.
2010
2011
2012
2013
2014
2015
0 0.5 1 1.5 2 2.5
0
0.72
0.91
0.97
1.18
1.16
2.06
1.69
1.49
1.22
1.07
0

Year Next plc H&M
2010 0 3.7
2011 6.89 3.47
2012 6.47 3.37
2013 6.91 3.29
2014 6.97 3.46
2015 6.62 0
Column chart:
Bar chart:
2010 2011 2012 2013 2014 2015
0
1
2
3
4
5
6
7
8
0
6.89 6.47
6.91 6.97 6.62
3.7 3.47 3.37 3.29 3.46
0
2010
2011
2012
2013
2014
2015
0 1 2 3 4 5 6 7 8
0
6.89
6.47
6.91
6.97
6.62
3.7
3.47
3.37
3.29
3.46
0

 Assets turnover ratios: This ratio measure that in what extent firm is able to generate
sales through using this assets. In H&M, the ratio got increased from 1.91 to 2.14
while in Next Plc, it shows an declined trend as it reduced to 1.81 in 2015. Thus, it
indicates that H&M is using its business assets more efficiently than Next Plc.
Year Next plc H&M
2010 0 1.91
2011 1.89 1.84
2012 1.89 2.01
2013 1.89 2.04
2014 1.85 2.14
2015 1.81 0
Column chart:
Bar chart:
2010 2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
0
1.89 1.89 1.89 1.85 1.81
1.91 1.84
2.01 2.04 2.14
0

Profitability ratios: This ratios evaluate business profit earning capacity on its total revenues
and capital employed, examined below:
 Gross margin: GM is the surplus of total organization's sales revenues over the cost
of goods sold. The reason for selection of this ratio is to measure the amount of profit
margin through only sales operations. Inclining trend of GM indicates that Next Plc is
earning good profit percentage on their profits (Masso, Meriküll and Vahter, 2013).
Its GM was increased from 29.27% to 33.59% in the year 2015 because of larger
increase in revenues. On contrary to it, GM of H&M shows an adverse trend and gone
declined to 58.81% while in 2010, it was 62.93%.
Year Next Plc Hennes and Mauritz
GM NM GM NM
2010 N/A N/A 62.93% 17.22%
2011 29.27% 11.93% 60.13% 14.38%
2012 30.38% 12.62% 59.50% 13.96%
2013 31.48% 14.34% 59.13% 13.30%
2014 33.16% 14.79% 58.81% 13.19%
2015 33.59% 15.87% N/A N/A
2010
2011
2012
2013
2014
2015
0 0.5 1 1.5 2 2.5
0
1.89
1.89
1.89
1.85
1.81
1.91
1.84
2.01
2.04
2.14
0

Column chart:
bar charts:
 Net margin: NM is the balance of profits after covering all the business expenditures.
It has been selected to determine the amount and percentage of net earnings through
its overall business operations. In Next Plc, it was 11.93% in 2011 got increased to
15.87% in the year 2015. However, in H&M, the ratio demonstrating an adverse trend
and declined to 13.19%. It may be because of lower revenues and high administrating,
selling and distribution and other operating expenses. Hence, the ratio interpreted that
Next Plc is performing well as compare to H&M.
2010 2011 2012 2013 2014 2015
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
29.27% 30.38% 31.48% 33.16% 33.59%
62.93% 60.13% 59.50% 59.13% 58.81%
0
2010
2011
2012
2013
2014
2015
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
0
29.27%
30.38%
31.48%
33.16%
33.59%
62.93%
60.13%
59.50%
59.13%
58.81%
0

Column chart:
Bar chart:
Management's effectiveness
 Return on equity: It measure the profit percentage on total business equity in both the
firms. Investors often use this ratio to determine potential earnings on their
investment. In Next Plc, ratios moved in an unfavourable direction and reduced to
208.75% while in H&M business, it has been inclined to 41.27%. The direction is
favourable in H&M but still, in Next Plc, it is 5 times higher than H&M business. Its
reason are H&M has lower profits and using only the equity in its total capital
2010 2011 2012 2013 2014 2015
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0
11.93% 12.62%
14.34% 14.79%
15.87%
17.22%
14.38% 13.96% 13.30% 13.19%
0
2010
2011
2012
2013
2014
2015
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
0
11.93%
12.62%
14.34%
14.79%
15.87%
17.22%
14.38%
13.96%
13.30%
13.19%
0

(Heikal, Khaddafi and Ummah, 2014). Hence, it indicates that Next plc is providing
higher return to their investors so Asol Ltd, should invest funds in this organization.
Year Next plc H&M
2010 0 44.07%
2011 214.98% 35.84%
2012 190.90% 38.36%
2013 200.12% 38.38%
2014 193.43% 41.27%
2015 208.75% 0
Column chart:
Bar chart:
2010 2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
0
214.98%
190.90% 200.12% 193.43%
208.75%
44.07% 35.84% 38.36% 38.38% 41.27%
0

Valuation ratio:
 Operating cash flow/share: In H&M, OCF to share shows an upward trend and goes
increased from 1.20 to 1.25 in 2014. However, in Next Plc, it is just doubled as it has
been inclined from 2.49 to 4.86 in 2015. Therefore, Asol Ltd, should invest in this
organization (Soin and Collier, 2013).
Non-Financial performance analysis
Non-financial performance are not reported in company's financial statements. As per
the scenario, EBITDA to employee in Next Plc has been increased from 23869 to 31864
while in H&M, it has been reduced from 42580 to 28008 in 2014. However, Next Plc's
revenue to employee has been increased from 114727 to 135729 in 2015. On contrary to it, in
H&M, it has been declined to 166639 to 138467 in the year 2014. Both the ratios interpreted
that Next Plc is performing more well as compare to H&M business.
Moreover, according to the swot reports, Next Plc is performing sound. It is because
of its varied product range, qualitative products and services, high growth in market demand,
and quicker deliveries that is contributing to high level of customer satisfaction. Another,
better quality of products at cost effective prices lead to attract large number of customer and
get high customer loyalty and trust which ultimately increase corporate image to a great
extent. Therefore, Asol Ltd, should buy shares in Next Plc. In addition to this, staff turnover
ratio of Next plc has been inclined from 0.17 to 0.21 while in H & M, it has been increased
from 0.17 to 0.22. High staff turnover ratio in H & M has been arised due to high
absenteeeism. In Next Plc, absenteeism has been increased from 7300 to 9855 whereas in
H&M, it has been increased from 8030 to 12045. It implies that H &M human resource
2010
2011
2012
2013
2014
2015
0 0.5 1 1.5 2 2.5
0
214.98%
190.90%
200.12%
193.43%
208.75%
44.07%
35.84%
38.36%
38.38%
41.27%
0

management team established liberal control on employees results in high turnover.
Moreover, it may happen because of health issues. Henceforth, it has became clear that Next
Plc is performing much better than H&M as it is optimuly utilized its workforce compare to
H&M business.
Recommendation to H&M
 In order to enhance profitability, H&M need to maximize its revenues by offering
large variety of fashionable cloths products at affordable rates. Another way is to
minimize expenses through applying a controlling mechanism. Lower selling,
distribution, bargaining with suppliers and lower labour's wages and number of
workers are some of the ways available to H&M.
 In order to increase liquidity, firm has to enhance conversion period of debtors, pay
off some current liabilities as soon as possible and sell some unproductive assets
(How to analyze and improve current ratio, n.d.).
 In order to enhance solvency, H&M has to use both the debts and equity funds.
Therefore, it must be recommended that H&M business should take debts either in
form of debentures and loans so that firm will be able to meet out its long term
liabilities effectively. Another most important benefits is trading on equity. In this,
H&M can maximize business profits for shareholders and provide them maximum
return through getting tax benefits.
Drawbacks of uses of ratio analysis method for comparative performance analysis
Although ratio analysis is a better way to compare company's performance but still it
has some limitations of it which analysts should kept in mind, given below:
 Ratios are computed on the basis of data reported in the company's financial statement
therefore, incorrect statement may lead to misinterpretation (Limitations of ratio
analysis, n.d.). This in turn, analysts may take harmful decisions.
 It is quantitative technique that analyse financial performance henceforth, can not be
used for qualitative performance analysis.
 It is a technique to analyse past performance while in the present age, investors are
more concern about predicting potential performance to secure their money. However,
this technique will not provide any assistance to measure future business performance.
 A company may have some good or bad ratios in relations to different aspects such as
liquidity, efficiency, solvency and profitability. Thus, in this case, it is very difficult to

tell that company is performing well or worst in the market (What are the limitations
of ratio analysis, n.d.).
 Some of the large companies operates in different industries hence, it is very difficult
task to set an ideal or benchmark ratio.
 Different firms adopted varied accounting policies, practices and principles for
drafting their financial statements. Henceforth, reported data will be very from each
other and affect ratios figures as well.
 It is very difficult to generalize that computed ratio is good or bad for the company.
For instance, high cash ratio is consider good but still it also represents no longer
growth because of high retention rate of cash funds in the business.
TASK 2 INVESTMENT APPRAISAL TECHNIQUES
Investment appraisal techniques are the ways to evaluate and examine attractiveness
of available proposal so as to determine most profitable proposal. Scenario tells that Hilltop
Ltd, has two proposal to invest funds worth £120000 in new machinery. Due to limited funds,
firm intends to invest funds in only one proposal out of these. Therefore, capital budgeting
tools will greatly help to identify most viable project and ensure long term growth.
Computation of Net Cash Flow (NCF)
NCF can be determined through considering all the cash related affairs while non-
cash related transactions will be eliminated from this such as depreciation.
Table 1: NCF of project A ( In £000's)
Year Profits Depreciation
Cash inflows
through sales
Cash outflow
to purchase
new machine
Net Cash
inflow
2016 40 33 73
2017 40 33 73
2018 40 33 21 -50 44
2019 30 10 40
2020 30 10 40
2021 20 10 30
Total 200

Table 2: NCF of project B (In £000's)
Year Profits Depreciation NCF
2016 10 20 30
2017 20 20 40
2018 30 20 50
2019 60 20 80
2020 70 20 90
2021 55 20 75
Total 245
Working note:
Depreciation = (Initial project investment-scrap or residual value)/Useful life of the machine
Project A Project B
Old machine (£120000-£21000)/3 years= £33000 £120000/6 years = £22000
New machine (£55000-Nil)/5 years= £10000
Identification of Pay back period
The time period at which cumulative cash inflows will be equal to the initial project
cost is called pay-back period (DeFusco and et.al., 2015).
Decision rule: Shorter or fastest pay back period will be identifies as better proposal for
Hilltop Ltd.
Table 3: Payback period of project A and B (In £000's)
Year Project A CCF Project B CCF
2016 73 73 30 30
2017 73 146 40 70
2018 44 190 50 120
2019 40 230 80 200
2020 40 270 90 290
2021 30 300 75 365

Project A Project B
Pay-back period 1 + (£120-£73)/£73 = 1.643 year CCF of 3rd year = £120
Hence, PP = 3 year.
Uses of Net Present Value (NPV)
It is a discounted method that determine excess or shortfall of cash inflows over the
project cost. The method use a discount rate, also called cost of capital to predict future
values of all the concerned cash inflows associated with both the projects (Sari and Kuchta,
2013). As per this method, any surplus of future values over project initial outlay will
represent excess otherwise deficit will be shows.
Decision rule: High NPV will gains preferences over the lower yielding project by Hilltop
Ltd.
Table 4: Determining NPV of project A and B
Year Project A
DV of 1
@20% DCF Project B DCF
2016 73 0.833 60.809 30 24.99
2017 73 0.694 50.662 40 27.76
2018 44 0.579 25.476 50 28.95
2019 40 0.482 19.28 80 38.56
2020 40 0.402 16.08 90 36.18
2021 30 0.335 10.05 75 25.125
Total 182.357 365 181.565
Less: Project cost 120 120
NPV 62.357 61.565
Computation of Accounting rate of return (ARR)
It is also known as return on capital employed (ROCE) that measure potential
accounting profits rate on initial project investment.
Decision rule: Higher ARR always gains preference over others projects that has lower
ARR.

Formula of ARR = Average accounting profits/Initial investment*100
Project A Project B
ARR or ROCE (£200/6 yrs)/(£120)*100
= 27.78%
(£245/6 yrs)/(£120)*100
= 34.03%
Recommendation to Hilltop Ltd, with the justification
Hilltop Ltd, senior managers should prefer project A to and invest funds of £120000
in Machine A. Justification of this recommendation is Machine 1st has shorter pay-back
period of 1.63 year. However, project B will take 3 years to reearn its initial investment.
Hence, it takes high time period than compare to project A. Moreover, NPV is also higher to
£62357 that indicates that surplus cash flows are avaiable after meet out inital cash outlay.
While, in project B, it is only 61565 lower than project A. On contrary, ARR of both the
machines are 27.78% and 34.03%. It is higher in project B. It is because it is based on the
accounting profits not the cash inflows. Henceforth, decisions can not be taken on this basis.
NPV is the best method of investment appraisal hence, on this basis, it should be advised that
finance manager should accept project A because it will be more viable and provide more
benefits to Hilltop Ltd.
Limitation of capital budgeting techniques
Pay-back period drawback:
1. It ignore time value because it does not take into consideration discounted cash inflows.
2. It analyse cash inflows prior to pay back period only and do not evaluate post pay back
cash flows (Bierman and Smidt, 2012). However, it may be higher in the projects who has
higher pay back period. Therefore, in this case, this method may lead to harmful investment
decisions.
3. It avoid projects profitability and consider only the time length in which initial project
investment will be recover.
ARR drawbacks:
1. It does not consider timing of cash flows and it is a non-disocunted method.
2. It ignore projected cash flows and consider profitability.
3. It may change according to changes in company's accounting policies.
NPV drawbacks:

1. Correct estimation of discount rate is very difficult and largely depends upon the market
uncertainties (Baum and Crosby, 2014).
2. High interest rates will tend to increase discounting rate this in turn, ultimately impact on
the future values of the cash inflows and NPV as well.
CONCLUSION
In conclusion, it must be advised that Asol Ltd's CFO should invest funds in Next
Plc's equity shares. It is because both the financial as well as non-financial performance of
Next Plc is better comparatively than H&M. On the other hand, Hilltop Ltd, managerial team
must be advised that they should purchase Machine 1st due to earlier receovery of £120000
and higher NPV amounted to £62357.

REFERENCES
Books and Journals
Arrow, K.J. and Lind, R.C., 2014. Uncertainty and the evaluation of public investment
decisions. Journal of Natural Resources Policy Research. 6(1). pp. 29-44.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
DeFusco, R.A. and et.al., 2015. Quantitative investment analysis. John Wiley & Sons.
Droms, W.G. and Wright, J.O., 2015. Finance and accounting for nonfinancial managers:
All the basics you need to know. Basic Books.
Fields, E., 2016. The essentials of finance and accounting for nonfinancial managers.
AMACOM Div American Mgmt Assn.
Greenwood, R. and Scharfstein, D., 2013. The growth of finance. The Journal of Economic
Perspectives. 27(2). pp. 3-28.
Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence Analysis of Return on Assets
(ROA), Return on Equity (ROE), Net Profit Margin (NPM), Debt To Equity Ratio
(DER), and current ratio (CR), Against Corporate Profit Growth In Automotive In
Indonesia Stock Exchange. International Journal of Academic Research in Business
and Social Sciences. 4(12). p. 101.
Kirkham, R., 2012. Liquidity analysis using cash flow ratios and traditional ratios: the
telecommunications sector in Australia. The Journal of New Business Ideas &
Trends. 10(1), p. 1.
Masso, J., Meriküll, J. and Vahter, P., 2013. Shift from gross profit taxation to distributed
profit taxation: Are there effects on firms?. Journal of Comparative Economics.
41(4). pp. 1092-1105.
Sari, I.U. and Kuchta, D., 2013. Fuzzy Capital Budgeting-Fuzzy Bailout Payback Period and
Fuzzy Accrual Accounting Rate of Return Methods. Multiple-Valued Logic and Soft
Computing. 21(3-4). pp. 247-268.
Shi, S., 2015. Liquidity, assets and business cycles. Journal of Monetary Economics. 70. pp.
116-132.
Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and
control. Management Accounting Research. 24(2). pp. 82-87.
Online