Alpha Limited's Financial Position and Expansion Feasibility

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FINANCIAL DECISION MAKING
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Task 2...............................................................................................................................................7
a....................................................................................................................................................7
b....................................................................................................................................................9
Conclusion.................................................................................................................................14
References..................................................................................................................................15
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Introduction
This report is written in order to assess the financial position of firm ALPHA Limited. This
firm is planning to expand its operations and that’s why this study is carried out to suggest the
firm whether it is feasible to expand in the current times or not. ALPHA Limited is a
manufacturing company based in the UK which was started back in 1954. This report also
throws light on the importance of accounting and finance operations in a firm. Ratio analysis has
been carried out further in order to understand the financial position even is a better way for the
concerned firm.
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Task 1
Accounting and finance function are paramount to any organization. Critically evaluate the role
of accounting and finance within any organization of your choice (i.e. related to your academic
discipline/program). Your evaluation must include some examples within the organization where
appropriate.
Answer For evaluating the role of accounting and finance, considering the case study of Alpha
Group which is situated in Maidenhead and providing recruitment services to various business
houses located in Thames Valley and London.
Role of Finance for managing the business operations of Alpha Group:
 Help in preparation of Budget: Accounting and finance help the Alpha Group in
preparation of Business Budget on the basis of projected income and expenses and finally
it generated different reports. For instance, the cash flow statement of Alpha group
provides information about when income arrives on an actual basis. (Chron,2017)
 Cost Analysis: All the cost must be divided into production cost and overhead cost. The
production cost of Alpha group remains constant if it produces the same amount of units
year by year whereas overhead cost includes insurance, marketing, and rent expenses
reduces per unit of production cost if production increases year by year. Accounting and
finance have a major role to determine the actual analyzing of the cost of the firm.
 Trend Analysis: Finance department personnel have summarized all the data of sales and
profit into trends, it helps in determining which product are more profitable to the firm if
they raise the price of the product. (Chron,2017)
 Debt Management: Finance department decides the capital structure of alpha group on
the basis of their creditability that how much they sources from debt and equity to
minimize the cost of capital of the Alpha Group and increase the profit per unit of sale.
(Chron,2017)
 Decide Credit Limit: By Using Accounting and Finance statement, Alpha Group analysis
the cost of receivables, on the basis of which they decide the credit limit allowed to the
wholesalers, retailers and other intermediaries while selling goods or rendering services
to them. For instance, offering a credit limit of 90days can cost more to the alpha group
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due to blockage of funds cause a cash shortage or production problem. Finance
Department carefully determines the credit limit to the customer who is valuable to them
in terms of profit irrespective of delayed payment. (Xie,et.al.,2018)
 Complied Compliances: Finance Department of Alpha Ltd is responsible for preparing
accounting records and generates financial reports at the year-end. It helps the tax
preparer in calculating the taxable value as well as in deducting the allowed expenditure
as per the provision of Income Tax Act, 1961. And finally, it helps in determining the
amount of tax payable.
 Business Analysis: The Accounts and Finance Department of Alpha Ltd determine the
actual financial position as well as the financial performance of the current year by
stating them in Balance Statement and Profit and Loss Statement.
 Strategic Management: Strategies regarding business operation mostly based on the
financials of Alpha Ltd. For Instance: Alpha Ltd makes an outsourcing contract with the
outside service providers with respect to the digital marketing services which may
become costlier to the firm and not give too much conversion from them. In the end,
Alpha Ltd built their in house digital marketing team for running their ad campaign with
lower cost and achieves more leads from them. Such strategic decision making based on
the financial that shows the expenditure to the service provider of digital marketing and
how much sales get it from that. It helps to take the decision to develop theirs in house
digital marketing team.
Roles of the Accounting Department of Alpha Group are:
 Pay Out Mechanism: Accounts department of Alpha Ltd. to make sure that every
vendor's payment should be made on time and manages with a proper entry made in the
company's account payable account. They ensure that the least amount of money has to
be paid as quickly as possible so that late payments should be avoided. (Jennilyn,2015)
 Pay in (Receipt mechanism): Another important role of the accounts department is to
ensure that receivables would be track regularly including outstanding invoices and issue
reminders to the borrower on time for repayment of borrowed amount along with interest
if any.
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 Pay Roll Mechanism: Payroll is the crucial function of the accounts department to issue
salaries of employees on time and does proper deduction as per the employee's benefit
and properly deposit the respective tax with the government authority on time.
(Jennilyn,2015)
 Financial Reporting: The Accounts Department of Alpha Ltd prepare the data on
accounting software and generates financial reports from them that can be useful in
budgeting and forecasting of company's expected financials (Yang, et.al.,2018).
Moreover, it needed for communication to investors as well as banks to determining their
decisions of investment or may be financial assistance to Alpha Group.
 Internal Control of Finance: Financial Controls are the procedures set to manage the
financial data properly without any error. These controls are applied to follow the
compliance for preventing fraud and theft. These controls are mostly based on accounting
principles like as per GAAP standard. (Chalmers,et.al.,2019)
Following are the Key Positions responsible for managing Accounts and Finance of Alpha Ltd.
 Chief Financial Officer (CFO): The CFO'S of the company are the chief financial head
of the finance department. As per Companies Act, 2013, the CFO of the company come
under the category of the Key Managerial Personnel and ensures to take a real-time
decision for the financial success of the firm.
Their duties involve Financial planning, controlling and reporting, give supporting roles
towards investment, corporate finance, Risk management, auditing, and accounting, etc.
 Treasury Manager: They have a key role in the accounts department regarding the
formulation and implementation of treasure policies like to identify the investment
opportunities for the firm and minimizing the cost of capital.
 Accounting Manager: Work as an accounting head of the company responsible for
maintaining books of accounts and do proper reporting of the accounts with proper
accounting principles as per the statutory requirement or as per their bye-laws or auditing
policy as prevailing.
 Accountant: Accountant responsible for preparing the ground records for key financial
decision making.
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Task 2
a.
Particulars
Amount
(2017)
Amount
(2018)
Total assets 2,235 2,235
Net Profit 300 262.5
current assets 757.5 1,035
current liabilities 322.5 1,110
average debtors 450 600
average creditors 285 1,110
capital employed 1,478 1,200
total sales 2,400 3,000
Ratio calculation 2017 2018
Return on capital employed 20% 22%
Net profit margin 13% 9%
Current ratio 2.35 0.93
Average Receivable days/ Debtors
collection period 68.44 73.00
Average Payable days/ Creditors collection period 43.34 135.05
The formulae used for the above calculation are as follows :
Working notes:
The formulas used are as follows:
return on capital employed net profit/ capital employed
net profit margin net profit/ sales
current ratio current assets/ current liabilities
debtors receivables (average debtors/ sales )*365
creditors collection period (average creditors/
purchases)*365
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Assumptions:
In the absence of total credit sales and total credit purchases, the total sales and the total
purchases have been used for the above calculations.
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b.
Comment on the financial position of the company ALPHA LTD. is stated as follows:
Return on capital employed:
Return on capital employed refers to the ratio which establishes the relationship between net
profit/ EBIT to the capital employed of a company. The capital employed is calculated as the
difference between total assets and current assets of the firm (Readyratios, 2019). Capital
employed states the efficiency of the company to utilize the capital employed in order to earn
profits. It is used by the investors in order to see whether the company in which the investment is
to be made by them is efficient enough to generate profits from the capital employed in the firm.
The formula used to calculate return on capital employed is net profit or EBIT / total assets-
current liabilities.
As far as the company’s return on capital employed performance is concerned for the two years
2017 and 2018, it is more or less stable for the two years as the ratio percentage does not
fluctuate much. The capital employed ratio percentage for the year 2017 is 20% and the capital
employed ratio for the year 2018 is 22%. This shows that the company is quite efficient in
turning its's capital employed into profits.
The reason for the increase in the capital employed ratio from the year 2017 to 2018 can be
attributed to the increase in the total assets and current assets of the firm. However, the net profit
of the firm has decreased from 2017 to 2018 but this did not impact the overall capital employed
performance of the firm.
Net profit ratio:
Net profit of the firm refers to the one which establishes a relationship between the total net
profit or earnings before interest and tax to the total sales of the firm (Accountingtools, 2018).
Net profit states the remaining profit which is left after deducting all the factory, administration
and sales expenses of the firm.
Net profit is calculated as :
Net profit/ total sales of the firm
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For the firm, ALPHA LTD., the net profit for the year 2017 was 13% and the net profit for the
year 2018 was 9%. This shows a decrease in the overall net profit performance for the two
subsequent years. The reason for this can be attributed to the huge decrease in the net profit from
the year 2017 to 2018. Therefore, the net profit has decreased by 4% in the year 2018. This is a
huge fall for the company. The reason for a decrease in the net profit is the increase in
administrative, factory and selling expenses of the firm. As the total expenses did not increase in
proportion with the increase in total increase. The more than proportionate increase in the
administrative, selling and factory expenses has led to a decrease in the net profit ratio of the
firm.
As far as the investor’s point is concerned, the decrease and the huge fall in the net profit ratio
would lead to an aversion in investors when it comes to investing in the company. This is
because no investor would like to invest in a firm which has a decreasing net profit
(Accountingcoach, 2019). The decrease in net profit states that the company would pay its
investors and shareholders really low. This would not attract more investors in the firm and some
of the existing investors might also drift away from investing in the company ALPHA LTD. In
order to attract more investors towards the firm, it is very important for company ALPHA LTD.
to increase its net profit.
Current ratio
The current ratio is the one which establishes the relationship between the current assets and
current liabilities of the firm. This is a ratio which shows the liquidity of the company to pay off
its current obligations in time. This ratio is an essential ratio to estimate whether the company
will be able to pay its short term creditor’s in time. It shows the liquidity for a firm for the
current obligations and liabilities which may arise in the near future.
For the firm, ALPHA LTD., the current ratio has decreased for the two consecutive years 2017
and 2018. This is not a good sign for the company. The ideal current ratio for any firm is 2:1. For
the firm, the current ratio is 2.35 times in the year 2017 and in the year 2018 the current ratio
is .93. This is not a good sign for the company’s liquidity position.
The reason for the decrease in the current ratio of the firm can be attributed to the increase in
current liabilities. The current liabilities in the year 2018 has increased to a great extent.
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However, the increase in the current liabilities was not proportionate to the increase in current
liabilities. If the current assets and current liabilities both grew at the same pace then the current
ratio would not have fallen to such a great extent. The fall in the current ratio can cause a
negative image in the eyes of the creditors of the firm because of the declining liquidity of the
firm. In such a case, the firm cannot pay off its current creditors and other current liabilities in
time.
From the point of view of the investors, the declining current ratio position is not a good sign.
The firm's declining current assets ratio would lead to a bad liquidity position in the firm. This
would lead to a fall in the goodwill of the company in the eyes of creditors and in the eyes of the
general public. As the goodwill of the company falls, the share prices also fall. No investor
would like to invest in a firm which has a low liquidity position. This would further drift away
from investors from investing in the company. Even, the current investors of the firm might
withdraw their investments from the firm. If the firm ALPHA LTD., wants to attract more
investors in the firm, it needs to improve its current liquidity by paying off some of its current
liabilities as soon as possible.
Debtors collection period/ Average Receivable days
Debtor’s collection period refers to the ratio which establishes the relationship between the
average debtors and the net credit sales of the firm ( Learnmanagement2, 2018) This is used in
order to check if the company can collect the debts from its current debtors in a reasonable time.
It is calculated as follows:
Debtors collection period= (average debtors/ net credit sales )* 365(Efinancemanagement, 2018)
This ratio states the efficiency of the firm to collect its current debts in time. The lesser the
number of days required to collect the funds from the debtors, the better is the efficiency of the
company. The debtor's collection period for the firm in two years 2017 and 2018 is 68 days and
73 days respectively. This ratio is increasing from the year 2017 to 2018 which is not a good sign
for the firm. The delay in collecting the funds from the debtors shows a deficiency in the debtor's
policy of the firm. The firm needs to revive the debtor's collection policy so that it does not have
to face unnecessary delays in collecting the funds from the debtors. Also, the more the delay in
fund collection from debtors, the more are the chances of bad debts for the firm. Therefore, it is
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very important that the firm focuses on improving its debtor’s collection period as soon as
possible.
From the point of view of the investors, the increase in the number of days in collecting the
current debts from debtors is not a good sign. No investor would be interested in a firm which
has a high debtors collection period. However, there exists no ideal debtors collection period for
the firms because the collection varies from firm to firm depending upon nature if the business.
but it is advisable that there should be no unnecessary delays in the collection.
Average Payable days/ Creditors collection period
The average collection period of the firm establishes a relationship between the average creditors
and the total credit purchases of the firm (Tutor2u, 2018). This ratio states the number of days
that a firm takes in order to repay its current creditors for purchases made. It is calculated as
follows:
Creditors collection period= (average creditors/ credit purchases)* 365
For the firm ALPHA LTD., the creditor's payment period for the two years 2017 and 2018, is 77
days and 168 days respectively. This is not a good sign for the firm as its average payment
period is increasing for the two years. Although, the average payment period varies for different
firms and it depends upon the nature and the scale of the firms. The average collection period
must not fluctuate so much as it has for the firm ALPHA LTD.,and it shows that the firm needs
to revive its creditor's collection policies as soon as possible.
The reason for the increase in the creditor's collection period days can be attributed to the poor
and inefficient creditors policies of the firm and the decreasing liquidity of the firm
( Wallstreetmojo, 2018). If the firm needs to improve its image in the eyes of the creditor’s, it
must take sincere efforts to improve its liquidity position.
From the point of view of the investors, it is very important that the firm improves this ratio. The
investors would never invest the funds in any such firm which has a low liquidity position and
delayed creditors payment period.
The overall financial position of the firm, depending upon the ratios calculated is as follows:
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