Evaluating Alpha Ltd's Financial Decisions through Ratio Analysis

This report provides a financial analysis of Alpha Ltd, a UK-based manufacturing company, focusing on the role of accounting and finance within the organization and evaluating the company's performance through ratio analysis. The report begins by defining accounting and finance, highlighting their importance in recording transactions, preparing financial statements, and managing funds. It discusses the roles of various accounting professionals within Alpha Ltd, such as financial accountants, systems accountants, and payroll managers, and their contributions to budgeting, cost control, and tax compliance. The analysis then transitions to evaluating Alpha Ltd's financial performance by calculating and interpreting key financial ratios, including Return on Capital Employed (ROCE) and Net Profit Margin. The report identifies a decline in both ROCE and Net Profit Margin between 2017 and 2018, indicating potential challenges in capital utilization and overall profitability. The report concludes by emphasizing the importance of an effective finance and accounting team for a company's smooth operation and informed decision-making.

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................4
MAIN BODY..................................................................................................................................4
TASK 1............................................................................................................................................4
Role of accounting and finance within the organisation..............................................................4
TASK 2............................................................................................................................................7
Ratios...........................................................................................................................................7
Position of Alpha ltd..................................................................................................................12
Conclusion.....................................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial decision making is the very important business activity. It identify strengths and
weakness of the decision because it is attached with money. It is the decision which is taken by
managers related to company finances. These decisions are considered as one of complex
decisions. Alpha ltd is the UK based company. This is the manufacturing company and wanted to
extent their operations. This report will discuss about the role finance and accounts in the
organisation. Further will evaluate company's performance by calculating ratios using company's
financial statements and also stating causes and effects for change.
MAIN BODY
TASK 1
Role of accounting and finance within the organisation
Concept of accounting:
Accounting is the procedure to record financial transactions of the business (Zyznarska-
Dworczak, 2018). Steps of accounting involves reporting, evaluating and interpreting the
transactions in order to regulate and to get tax collection entities. Through accounting financial
statements are prepared which can be called as a summary of financial transactions. Financial
statements are helpful to know company's financial position and cash flows. Accounting is the
function which takes place in every business regardless of their size. In small company accounts
are handled by accountant and in large companies it is handled by accounting and finance
department of the company. Accounting have many field like cost accounting, managerial
accounting etc. these accounting streams helps management of the company in decision-making
process.
Concept of finance:
Finance means managing money of the company and it covers activities like saving,
investing, budgeting, lending, forecasting etc. finance are of three type that is public finance,
personal finance, corporate finance. The concept of finance can be defined as study of money
and various financial instruments. Finance is related with funds which can be taking or using the
funds. So business have to make sure that necessary funds should be always available from right
sources at right time. It depends on business that from which source they raise funds like banks
loans or issuing securities. After business has taken funds from the market then it is very
important to allocate funds in different projects in order to gain returns (Jayasinghe and Uddin,

2019). Every business have the objective to make higher profits and this is possible only if
company is utilizing funds in efficient manner. Finance department is also responsible to check
that minimum funds are available with business so that business can run smoothly.
Role of accounting and finance in organisation
Business require financial information in order to run. Finance plays important role in
running business and by using finance performance of business also gets measured. Accounting
and finance department are necessity for business because they record daily transactions, prepare
financial statements, ascertain company's financial position and do financial management so that
company can make effective decisions (What is the Role of the Accounting and Finance
Department., 2021). As effective financial department is that who knows objectives and goals of
the company and make such financial strategy which helps company in achieving growth.
Example, Alpha ltd also have good finance department which helps them in making finance
related decisions for the company. Accounting department of the company uses double entry
bookkeeping system to record all business transactions and making financial reports which helps
in fulfilling regulatory requirements of the company. Alpha ltd have finance accountant who is
responsible for making financial statements and than financial accountant gives report to
financial director of the company. In order to review financial systems, systems accountant is
hired by the organisation. System accountant have role to identify financial needs of the
company. System accountant is responsible for maintaining financial systems and give interface
between technology and finance department.
System accountant has to report to management account or financial accountant. Alpha
ltd understand the importance of systems accountant and hire these accountant because it helps in
bringing change in finance team and also helpful in managing financial systems. for payroll work
organisation hire payroll manager. This work also comes under finance department. In small
companies payroll can be handles by financial accountant. Finance and accounting department
plays vital role in budgeting. Budgeting means making company's financial plans (Amara and
Benelifa, 2017). In simple words it means to give budget or funds to every business activities and
activities has to be done in that particular budget only. It is general done on monthly basis.
Finance department provides budget to other department of the organisation so that they does not
go out of budget. Management accounting refers to evaluating and controlling financial
information which is required to do day to day activities of the company (Abhayawansa, Guthrie

and Bernardi, 2019). For management accounting, organisation hire management accountant
who helps them in taking decisions for the company. Management accounting is based on
financial accounting because management account use information which is derived from
financial accounting. Example expenditure which is shown by management accountant is taken
from financial reports only. Role of accountant and finance department is to control financial
policy. Management are given financial information so that can can design financial policies and
also make planning for the future of the company. Cost control is the function of finance
department. It is considered as one of the important function because if costs are not controlled
properly than company can face failure. So for controlling costs financial information is required
and it is taken from accounting reports. Cost is controlled by comparing actual and standard cost.
By using accounting information organisation can also analyse performance of their employees
of every department. This is the reason that Aplha ltd has hire effective finance and accounts
team so that they provide true information of every scenario. Accounting also helps company in
preventing errors and frauds. By implementing accounting system in the organisation, manager
can check what employees are doing and regular checking can prevent fraud.
Financial accountant is also responsible for taxation of the company. Tax is one of the
most important thing and every business have to file tax and tax is also calculated on the basis of
profits of company like sales tax and this can be checked through company's financial
statements. Decisions which company will take will bring tax implications. So identification of
these are very important so that financial plans can be made. Tax needs to be paid to the
authorities and for paying the tax, cash is required so finance department is responsible for cash
planning. If company will not pay tax that in many countries it is considered as illegal activity.
So it is the responsibility of finance department to check that all taxes are paid on time or not.
Often taxation in large companies are managed by lawyer and accountant. Accounting is also
helpful in motivation. Company have to give financial rewards to the employees in order to
motivate them. So before deciding rewards which has to be given to the employees. Management
should aware of financial position of company. As according to the financial position only
company will announce rewards. Accounting also contribute in coordination. Every business
have objective to achieve its target through proper coordination (Zambon, Marasca and Chiucchi,
2019). So accounting helps in coordination between various departments of the organisation. It

further assists management in doing adjustment to purchase with sales, sales with debt, expenses
with income etc. role of accounting is also assists management in controlling.
As planning and controlling is the very important business activities which is done by the
company's management. With the help of accounting it has also become very easy to
communicate information from one department to other. Accounting give information to the
management regarding purchasing of stock, cost of stock and product selling price etc.
accountant also provides information of financial reports of the company to different interested
parties. Account also provide professional advice to the management so that it can bring
development in the business. As business management is becoming complex day by day so that
is making accounting role more important. So management should use accounting information
and reports properly before taking important decisions for the company. Accounting is very
important tool and in some companies accountant are included in management of the company
because accountant have complete information of financial position of the company.
Accountants helps organisation to follow ethical practice and become successful in order to
attain sustainability. Major role of an accountant is to maintain accounting systems. So that they
can provide financial reports to the business. Accounting information helps managers and leaders
in order to take various decisions for the organisation. Directors of the company also uses
accounting information to analyse organisation performance or other policies. Finance
department is also responsible for creating value for the company. Value can be provided by
improvising debt collection, cutting costs, effective cash management etc. alpha ltd believes that
without the presence of accounting or finance team no business can run smoothly (Moll and
Yigitbasioglu, 2019). As to run properly company has to know that they are incurring profit or
loss and this information can be given by accounting team only.
TASK 2
Ratios
Return on capital employed
Particular Formula 2017 2018
Profit before interest, Tax and
dividends
300 262.5

Total Assets 2235 4035
Current liabilities 1162.50 1110
ROCE EBIT/capital
employed
27.97% 8.97%
Return on capital employed ratio is being calculated by dividing the earnings before interest and
tax by capital employed (Roy,2019). This ratio is used to measure the success of business by
generating satisfied profit for the company. This ratio Express how much company is sufficient
to generate profit bi capital. One of the basic component of return on capital employed ratio as
capital employed which is calculated by subtracting liabilities from assets. It is one of the
important ratios for the perspective of investor as well because it help investors to compare
between different companies and it helps with the investor's to know that which company is
using their capital effectively to generate profit. As per this company the return on capital
employed ratio was 27.97% in the year 2017 but in the year 2018 it has been decreased and
becomes 8.97 %. This ratio is decreasing so it is showing that company is not able to effectively
use their capital to generate profit and therefore it is not a good symbol for the investor's as well.
Investors always want to invest in such companies which provide them higher return and also
give them an opportunity for capital appreciation but here in this company return on capital
employed ratio is declining. It clearly shows that company needs to work on there are strategies
and then need to maintain capital efficiently.
Net profit margin ratio
Particular Formula 2017 2018
Profit 300 262.5
Revenue 2400 3000
Margin Net
profit/Revenue*100
12.5 8.75%

Net profit margin ratio used to compare the company’s profit from the entire amount which has
been bringing into the company. Is ratio also used to know that effectively company is
operating? If the net profit margin ratio is good then it can be considered that company is doing
well in the market and it has potential to grow further (Widiyanti, 2019). It is another ratio which
is helpful for investors because by checking net profit margin ratio investors can get to know that
how effectively management of the company can generate enough profit by increasing their sales
and revenue and also management can cut down the unnecessary cost and overheads from the
company. That for net profit margin is one of the important indicators to know the overall
financial health of the company. Expert this company is concerned net profit margin ratio was
12.5 in 2017 which has decreased to 8.75 in 2018. Net profit margin ratio is again showing a
negative response in the favour of the company as it is declining means the overall profitability
of the company is declining and companies not able to generate good profitability for the
investors. So it very important that the management should focus on overall improves digestion
of the profit and they may do some changes in the Strategies and planning. If the net profit
margin ratio continuously decreasing the company can lose their potential and existing investors.
Current ratio
Particular Formula 2017 2018
Current assets 757.50 1,035
Current liabilities 322.50 1110
Margin Current assets/
current liabilities
2.34 0.93
Current ratio indicates the overall firm’s liquidity. It is also known as efficiency ratio which
measures the ability of the company to repair it short term liabilities with the help of current.
This ratio is very important to measure the liquidity because if company do not have proper
liquidity then it will not be able to repay their short term loans and obligations. This ratio also

provides detailed information about the Limited amount of time of the company so that in that
time period company can raise more funds from liabilities (Cozette and et.al 2019). Current
assets such as cash marketable securities and other assets which can easily convert into cash
within one year is used to repay the obligations and liabilities. In the year 2017 current ratio was
2.3 which got decreased in 2018 become 0.9 it means Company not have proper current assets
and liquidity. The ideal ratio of current assets is 2:1 which means company must have to assets
opposite to 1 liability. It means company is not able to repay their short-term loans on given
duration because company do not have sufficient current assets and current liability is
continuously increasing which represents that this company is in need of more funds therefore it
is taking more short term loans and obligations. Current ratio is one of the most useful ratios for
financial analysis and it also helps the investor's to know the current assets and the situation of
liabilities of the company.
Debtor Collection period
Particular Formula 2017 2018
Net credit sales 2400 3000
Average net receivables 450 600
Total amount of days in
period
365 365
Debtor Collection
period
Average net
receivables/ net
sales *365
68.44 73
Debtor’s collection period is being calculated by dividing the average of net receivables by net
sales in further it is multiplied by 365 days to get the accurate collection period. The average
collection period refers to the time taken by the business to receive all the payments from their
clients. Company always Point Average collection period so that they can collect the entire due
amount in payments faster. Overall average collection period refers to the period and average
number of days from the date when the credit cell has happened in the company and the date on

which company will receive the due amount (Tantri, 2020). Everything election period of any
company indicates the effectiveness of their management practices perfectly company is getting
payment from their customers. Indus company collection period was 68 days in 2017 but it has
been increased to 73 days in 2018. This is not a beneficial ratio for the company because this
ratio is continuously increasing and company wants that their average collection period remain
less. But here it is increasing means customers are making delay in doing payment. So the
management of this company must focus on getting the payment at the earliest. Management
should change payment terms and also make negotiation payment with their suppliers.
Creditor’s payment period
Particular Formula 2017 2018
Payable trades 285 1050
Cost of sales 1950 2625
Total amount of days in
period
Trade payables/ cost
of sales*365
53.34 146
Creditor’s payment period is a valuable term which indicates the entire time duration in which
current liabilities remain outstanding. It states about the time duration taken by the company to
pay their suppliers. This ratio is very important for the company as every wants to take full
advantage of trade credit and it is also useful for recognising the effectiveness of the company
that how they can use the credit period and amount. Company always try to keep the creditors
payment period high so that they can utilize the money and can make further investment. In the
year 2017, 53 days were the collection period which has increased in the year 2018 and reaches
to 146 days it means company is able to keep the money and make further investment by using
such money. But sometimes it doesn't work in the favour of the company because it can create
negative image in the market because when company do not pay to their suppliers on time then it
will become difficult for the company to get the raw material and other equipment.
Position of Alpha ltd
The overall position of this company is not favourable and appropriate. As most if the ratios are
generating negative outcome for this company. As the return on capital employed is also

declining which means company is not able to generate profit by using capital effectively. If the
ROCE will continuously decline then this company may lose its existing investors. apart from
this the net profit margin ratio is also providing negative information about the company that
their profit is continuously declining and company is not able to generate more return and
profitability for their investors (Tran, 2019). It can be stated that this company is in loss and if
the management did not take it seriously then in future company has to go for wind up. Along
with this current ratio of this company has also not providing any satisfactory result between the
two years because companies not able to repay their obligations and liabilities with the help of
current assets. It means Company do not have sufficient current assets and it is not good for the
working capital of the company because company needs accurate working capital and liquidity
and this will definitely going to impact the profitability of the company and there is high chances
that complete not get any new investors in future. So overall the position of this company is not
good and company need to work on their Strategies and management so that they can improve
their profitability by increasing the sales and revenue.
Conclusion
From the above report has been concluded that it provides detail information about Role of
accounting and finance within the organisation and it also defines various ratios.