Financial Decision Making: A Ratio Analysis of Alpha Ltd

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Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Accounting and finance function of Alpha Ltd...........................................................................1
Role of accounting in an organisation.........................................................................................3
Role of finance in business.........................................................................................................4
TASK 2............................................................................................................................................4
(a): Calculation of financial ratios...............................................................................................4
(B): Analysis of the ratio calculation..........................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance is one of the crucial aspects for any business organisation. It can be useful for managing
and regulating their day to day operations so that future goals can be achieved in near future.
Financial decision is basically a process which is key role to play in making decision associated
with liabilities and stockholders’ equity of an organisation (Fonseca and et.al., 2012). Some of
the decision are also related to investment in companies fixed assets as well as capital budgeting
which is a significance in growth and sustainability for an organisation. This project report aimed
at providing valuable information regarding accounting and finance functions of the company.
Apart from this, role of these function within ALPHA limited is also be discussed effectively.
Further this report examines various financial ratios to determine the performance of the
company.
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TASK 1
Accounting and finance function of Alpha Ltd
In every business organisation, it has been seen that they require an effective system that can
assist them in managing and recording their various transaction in proper manner. The primary
motive behind this to maximize profitability and overcome all expenses so that market share of
the company can also increased. It has been analysed that both investment and financial decision
helps Alpha Ltd to increase shareholder wealth. The Alpha limited is huge manufacturer of
cement, stone and building material and ready mix concrete. It is an essential aspect for an
organisation to manage their capital. However, business functions of any finance department
consist of planning, organizing, auditing and controlling capital sources of the company. Thus, it
is crucial for Alpha limited to make right use of accounting methods or standards so that
performance of company can be determine more perfectly (Koropp and et.al., 2014). It is very
important for every business persons to have a specific knowledge regarding accounting as well
as finance. Finance function is entirely relies on the accounting data. The outcome of finance
decision is related to accounting information which is ultimately processed through key
accounting data. There are specific function of both accounting and finance which has been
discussed below:
Planning: It is made with the motive of attaining short as well as long term plan to attain specific
goals of the company. Budget is core of financial planning that can show all utilisation of
resources that can be acquired and make use over a particular timeframe. Management of
accounting is generally associated with providing information for effective decision making. It
would help managers in planning through delivering reports that can estimate entire effects of
alternative course of action on Alpha ltd ability at attain their targets. Like, in case Alpha limited
wants to determine their targeted profit for the coming year, it could also have to make plan to
reach that particular milestone.
Organising: It is crucial function that is established an alpha limited design and assign proper
responsibility to staffs those are working in the company. The pattern of organisation structure is
entirely differing from other business enterprise. Accounting assist managers in organising
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information of the company by providing accurate reports and essential data to regulate and
make adjustment in operations activities as per the changing situations (Arnold and et. al., 2012).
Example, the reports that is prepared under the guidance of management could be prepared on
the basis of product line under which manager can take decision, whether to include or reduce a
product line in the same mix. Basically accountant tends to provide sales report, production
report to the close manager for taking valuable actions regarding the sales and manufacturing
position of Alpha Ltd.
Controlling: It is an essential function of monitoring, measuring, evaluating and analysis actual
outcome to make sure that a business organisation goals can be attain in more reliable manner.
Feedback is crucial data that would be utilise to analyse or correct the process that is being taken
to formulate an effective plan in near future time. It allows managers to make decision to let the
operation as well as other activity regularly so that remedial action in case of any financial
decision. Management accounting assist in control function through producing performance
reports that can determine the variances among actual and standard performances of Alpha Ltd.
The use of these reports tends to follow basic principles as per the expectation of management.
Decision making: It is another crucial function of an organisation that can be selected among
best alternatives. It tends to valuable aspects for the manager because plans cannot be make
without analysing the reports and financial performance of Alpha Limited. Organisational
structure and control function of alpha ltd need to be analysed properly before making any
investment decision in near future (Fourie and et.al., 2015).
Finance function is basically a valuable part of financial management. It is an activity that is
associated with proper control and planning of resources. In Alpha Ltd, finance function consists
of acquiring and proper utilisation of capital that is essential for efficient operations. The
functions are basically consists of three parts which is be mentioned below:
Long-term finance: This consists of capital investment for more than 3 years. There are certain
specific sources of long term capital such as share capital, debenture, owner capital as well as
internal sources of funds.
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Medium term finance: This type of finance is normally done for the period ranges from 1 to 3
years time period. It can be utilise for the purpose of expansion as well as purchase of fixed
assets for the Alpha limited. The basic sources are bank loans and investment from other
financial institutions (Arjaliès and et.al., 2017).
Short-term finance: Such type of finance function is needed for the period less than one year. In
Alpha limited, financing is basically considered as uneven flow of cash into respective business
as well as seasonal pattern of business activities. It can be collected from commercial paper,
trade credit and overdraft from banks.
Role of accounting in an organisation
In has been seen that good accounting is crucial for Alpha limited for increasing the performance
of the company. The role of accounting tends to provide individual as well as stakeholders within
financial data regarding the company. Like cost benefit analysis, sales reports and supplier’s
data. Some of the essential roles are mentioned below:
 Government: For a business, it is crucial to pay taxes on total income earn, sales tax and
social security on employee pay check. An accountant needs to inform Alpha about total amount
which is needed to pay and obligation that is associated with the business.
 Control: It has been seen that as the business of Alpha limited grows, management feels
difficult to keep proper track of their capital. The accountant needs to set a benchmark as
warning signs so that future losses or mistakes can be avoided (Oakshott, 2012).
 Investment: It is crucial for the accountant to keep consistent record of alpha limited
investments because most of the shareholder needs to earn maximum profit from the sales of
products. The role of accounting is key for the finance manager to keep basic facts of values on
the ledger books into a cash flow statement and other financial reports.
Role of finance in business
Accounting is a vital ways to maintain proper management of financial transaction that are done
during the time. It is essential for manager of Alpha limited to make proper record of finance so
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that future investment decisions should be made properly. Some vital role of finance in business
is been discussed underneath:
Strategic planning and budgeting: It is simply related with the planning for the future
operations by the owner. The objectives and gaols that have been set for upcoming period would
be taken into account and the concern department asked to the finance department about the total
cost it will required reaching their estimated target (Ross and et.al., 2013).
Profit planning and cost control: It has been seen that business always wants to attain
maximum profit from their given resources. The finance tends to play major role in searching
simple ways in order to modify the profitability position of Alpha Ltd. The finance manager
should need to review constantly about their financial statements for any expenses that is
unexpectedly get away of line in relation to budget.
Managing unavoidable risk: Being a financial manager, it is the primary responsibility to make
analysis of all the risks those is affecting the performance of Alpha Ltd. It would be associated
with the interest rates, changes in stock prices and currency changes. Financial reports used to
measure these areas and record data and presented in front of owners to take necessary action
(Dash, 2016).
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TASK 2
(a): Calculation of financial ratios
In order to analyse the performance and financial stability of Alpha limited, it is essential to
make use of right tools that can provide valuable outcomes for effective decision making in near
future. Nowadays, it has been seen that performance can be evaluated by the help of various
tools and techniques. Ratio analysis is said to be a quantitative approach through which manager
can gain insight information about the Alpha Ltd liquidity, operation and profitability position.
There are various types of ratios that can effectively useful to assess companies, whereas
corporate insiders that relies very narrow because of their accessibility to more specific
operational information about Alpha Ltd (Härdle, et. al., 2017). For investors, ratio analysis tells
regarding fundamental aspects that are basically associated with overall position of the company
in the market. On the basis of these ratio, stakeholders or investors tends to make their further
investment decision in the company projects. The information collected from the various
statements of Alpha ltd is being used to make comparison of company performance over the time
of assessing, whether Alpha ltd is improving their performance as compare to last couple of
years. Ratio analysis tends to utilise a trend line for the company outcome over a wide number of
financial reporting. Some of the crucial ratios that can be taken into account in relation of
determine the performance of Alpha ltd is computer underneath:
Return on capital employed: It is known as financial ration that helps the management to
measure Alpha ltd profitability and efficiency in relation to their capital utilisation (Härdle, et.
al., 2017). On the other hand, this ration used to measure ability of profit generation out of their
capital investment.
Formula: Operating profit/ capital employed *100
Capital employed: Total assets-capital liability
2017: 2235-322.50:1912.5
2018: 4035-1110: 2925
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Ratio 2017 2018
ROCE 675/1912.5*100=35% 750/2925*100=25.64%
Net profit margin: It is said that total percentage of revenue remain after making all the
adjustment of expense, interest and stock dividends (Melicher and Norton, 2013). It used to
measure the amount of earning that Alpha ltd is getting from overall sales during the period.
Formula: Net profit / Total sales *100
Ratio 2017 2018
Net profit margin 300/2400*100=12.5% 262.50/3000*100=8.75%
Current ratio: It is basically considered as liquidity ratio which is used by manager to measure
the Alpha ltd ability to pay their short term debt obligation which is due from one year time. It
would information investors about the company to maximise the current assets on their balance
sheet in relation to satisfy their debt (Härdle, et. al., 2017).
Formula: Current assets/ current liability
Ratio 2017 2018
Current Ratio 775.50/322.50= 2.4 1035/1110= 0.93
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Average receivable days: It is known as total number of days that a client invoice is remaining
outstanding before it gets collected. It is an effective method to make use of accounts receivable
days that helps to measure the information on a trend line. It shows specific changes in overall
ability of alpha ltd to collect amount from their customers.
Formula: Average receivable/ Total credit sales * 365 days
Ratio 2017 2018
Account receivable days 450/2400*365=68.43 days 600/3000*365=73 days
Average payable day: It refers as that entire outstanding financial ratio that could indicate the
average time that Alpha limited takes to pay their bills and invoices to their trade creditors such
as vendors and other suppliers. The average period under which a business or company is
basically takes into account to pay-off their purchase that has to be made by credit (Laudon and
Laudon, 2016).
Formula: Average payable/ cost of goods sold *365
Ratio 2017 2018
Account payable days 285/1950*365= 53.3days 1050/2625*365= 146 days
(B): Analysis of the ratio calculation
From the above computation of various ratios in relation to Alpha ltd, it has been analysed that
overall performance of the company is showing appropriate outcome in relation to the last year.
There analysis has been discussed below:
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Interpretation of Liquidity position: According to the current ratio, it has been determine that
company is able to meet their short term of ability in the year 2017 because the ratios calculated
is showing 2.4 ratio. It means that the Alpha ltd is having 2.4 times more assets in accordance
with the debt obligation. In the year 2018 the values has come down to 0.93 ratios, it means that
they are not being able to capitalised short term obligation. The drastic downfall in the liquidity
position in 2018 has been occurring because of debt for Alpha ltd has increase in relation to
assets. In accounting period, the term liquidity has been determine as overall ability of a
company that can meet their financial obligation as they come due during the time (Lusardi,
2012). The overall financial performance has been seen more recorded low as compare to the
ideal ratio of 2:1. It will directly effect on the total profitability position of the company in
coming time.
Net profit margin interpretation: As per the calculation of net profit ratio of Alpha ltd, it has
been seen that in the year 2017 the total net profit margin is around 12.5% it means that Alpha
Company is more efficient at converting total sales in accordance to their actual outcome.
Whereas the total net profit in the year 2018 has come down to 8.75%. It means that Alpha ltd
has incurred maximum operating expenses during the same year so that they are not being able to
generate valuable amount of revenue during the time. It would cause internal profitability of the
company and future sustainability can get affect because of this results (Koropp, et. al., 2014).
The Alpha ltd manager need to make specific planning to overcome their additional expense so
that chance of financial stability can be maintained in near future time. In the essences to this,
Alpha ltd is not generating positive sales prices in relation to their total cost of goods sold that
has been incurred in manufacturing products
Interpretation of ROCE: It is crucial for Alpha limited to make evaluation of their profitability
position in context to company’s common equity through considering capital employed. It would
provide proper direction of financial performance for Alpha with relation to their total debt.
From the above calculation of ratio, it has been clearly seen that Alpha limited is able to attain a
specific return on their total investments in accordance with their debt obligation. The results
show 35% of return in 2017, whereas 25.6% return in the next year 2018. It means that Alpha
limited is more efficient to make use of their capital for the generation of sufficient amount of
profit during 2017 (Dash, 2016). But, in the very next year the outcome get reduce to 25% which
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means that Alpha ltd has maximum debt in relation to their capital investments. Because of this
particular outcome, they are not being able to turn their capital into revenue in 2018. The
implication can also effect on the overall performance as well as reputation of the company in
front of the investor. The management need to taken specific decision in relation to control their
debt or additional expenses that are incurred during the time so that chances of getting reliable
outcome in coming time can get enhanced.
Interpretation of Average receivable days: In relation to this collection period, the average
number of days Alpha takes to collect payment on their good sold is 68.3 days in the year 2017,
whereas 73 days time in 2018. Basically, it has been analysed that the average number must be
range from 40 to 50 days seems too considered as overly strict credit plan that can affect the
higher sales earning for the company (Dash, 2016). But in relation to Alpha limited they have
generated a high amount of ration in 2017, it means that collection of accounts receivable is
more efficient and they are having quality customers that are paying their debt quickly. The
overall performance in continues from the next year too as they are take 73 days time to make
payment of their debt amount. This will help Alpha ltd to manage their resources more
effectively in near future time.
Interpretation of Accounts payable days: It basically associated with the amount Alpha ltd is
taking to make payment to their suppliers. It is the average time that company takes to meet the
bills to their creditors. From the above calculation, it has been seen that Alpha limited is taking
53 days time in 2017 to completely pay the amount to their creditors. But in 2018, the time
period goes much higher side with 146 days time. It will be not so effective results because
without the supplier support Alpha limited cannot operate their business effectively. In case the
supplier would not be able to receive the payment on timely basis the supply of crucial resources
cannot be available to them. This will results in huge loss as well as goodwill of the company
could also get affected at the same point of time. Thus, it is vital to make regular payment to
their supplier so that chances of sustainability in near future can get increased.
CONCLUSION
From the above project report, it has been articulated that finance is one of the crucial aspects for
an organisation to meet out their day to day operations. Thus, it is vital for the manager to make
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