Analysis of Financial Decision Making for Business Performance

This report delves into the critical aspects of financial decision-making within organizations, emphasizing the roles of accounting and finance departments in generating crucial financial information. It analyzes the importance of these departments, using Cabrera & Co Ltd as a case study. Furthermore, the report assesses the financial performance of ALPHA Limited through ratio analysis, focusing on key metrics such as Return on Capital Employed (ROCE), Net Profit Margin, Current Ratio, Average Receivable Days, and Average Payable Days. The analysis provides insights into the company's profitability, liquidity, and efficiency, highlighting trends and potential areas for improvement. The report concludes with a discussion on how these financial analyses can inform lending decisions, considering the observed financial health of ALPHA Limited and its implications for future performance.

Running head: FINANCIAL DECISION MAKING
Financial Decision Making
Name of the Student
Name of the University
Author’s Note

1FINANCIAL DECISION MAKING
Table of Contents
Introduction................................................................................................................................2
Task 1.........................................................................................................................................2
Introduction............................................................................................................................2
Accounting Department.........................................................................................................3
Finance Department...............................................................................................................4
Task 2.........................................................................................................................................5
Requirement a........................................................................................................................5
Requirement b........................................................................................................................6
Conclusion..................................................................................................................................9
Conclusion................................................................................................................................10

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Introduction
The crucial role of accounting and finance functions within the organizations cannot
be ignored due to the fact that these functions ensures recording accounting and financial
functions are convert them into crucial information in the financial statements. This
information helps the users in understating the financial performance and position of the
companies (Brief and Peasnell 2013). On the other hand, financial analysis of a company is
needed for the investors and other users of the financial statements with the aim to know the
financial performance and position of the companies over the years which is needful for
effective investment decision-making process (Cochrane 2013). The use of various tools can
be seen by the users and investors to analyze the financial performance of the companies and
Ratio Analysis is considered as a crucial technique among them. There are two parts of the
report. The first part aims at the evaluating the importance of different accounting and
finance departments for the businesses and Cabrera & Co Ltd is taken into consideration for
this part. The aim of the second part of the report is ascertaining the financial performance of
ALPHA Limited by using the technique of ratio analysis.
Task 1
Introduction
Cabrera & Co Ltd is a private limited company with share capital and the company is
involved in the licensed restaurant business. The company started their business on 7th June
2017. The operations of Cabrera & Co Ltd can be seen in United Kingdom (UK). Innovative
and good quality of foods is considered as the main strength of Cabrera & Co Ltd. High price
of the products and over dependency on UK market is its main weakness. Expansion in the
new market can be considered as opportunity where the presence of rival companies is the
main threat.

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Accounting Department
Financial Accounting – The main responsibility of financial accounting department is to
ensure recording and reporting the cash flow transactions of the business. Some key roles of
this department are accounts receivable and payable, financial reporting, payroll and to
establish and maintain financial control (Edwards 2013). The same is applicable for Cabrera
& Co Ltd since this department is helpful for the company in maintaining the overall flow of
cash related transactions so that the processes of financial reporting can be conducted in
proper manner.
Management Accounting – Management accounting department plays a crucial role through
connecting the financial function and other parts of the business by preparing various
management reports and accounts for providing timely and accurate financial information to
the manages for both short-term and long-term decision-making (Kaplan and Atkinson 2015).
The same concept is applicable for Cabrera & Co Ltd because the management accounting
department of the company provides the senior management with the required financial and
accounting information so that they can make effective long-term and short-term decisions
for the business success.
Tax Function – The tax function department is a crucial department in a company that
involves in the functions of efficient tax planning, tax risk management, development of
effective tax control mechanism, proactive engagement with the taxation authorities and
resolving taxation related issues (Higgins, Omer and Phillips 2015). These roles of tax
function department are crucial for the business of Cabrera & Co Ltd as the company has to
face the above-mentioned issues. Tax function department is responsible for ensuring the
overall efficiency of taxation related operations in the company.

4FINANCIAL DECISION MAKING
Auditing Function – The audit function department has many important roles to play such as
checking compliance with the required policies and procedures, assessing the quality of
internal control, evaluating the quality of risk management, assessing the compliance with
accounting standards, reviewing the effectiveness of IT securities, reviewing the strength of
code of ethics, verifying the physical assets and inventories, investigating frauds and others
(Mohamud 2013). These same roles of the audit function department are also applicable for
Cabrera & Co Ltd since these functions helps in establishing control over the whole internal
control of the firm.
Finance Department
Investment Function – The main role of investment function department in a company can
be seen in efficient management of different investment funds in a cautious manner while
maintaining the consistency with its trustee’s related obligations so that benefits can be
provided to the investors and clients (Riad, Hattaf and Yousfi 2016). Hence, in Cabrera & Co
Ltd, the investment function department is responsible for the effective management of the
investments in their company with the aim to provide maximum return to the investor and
other clients.
Financing Function – Financing functions within the organization involves the acquisition
as well as utilization of the necessary funds for securing efficient business operations. On the
overall, this provides the necessary money for the business from different sources (Bates and
Robb 2016). This is a crucial function for Cabrera & Co Ltd. This department selected the
sources of finance for the business of Cabrera & Co Ltd based on their needs while
considering the relevant aspects like interest on loans, return on loans and others. This
department ensures the smooth functioning of the business of Cabrera & Co Ltd.

5FINANCIAL DECISION MAKING
Dividend Function – The role of dividend function can be seen in deciding as to how much
portion of the profit needs to be retained for the future investments and how much portion of
the profit will be distributed among the shareholders as dividend (Avram, Palmowski and
Pistorius 2015). Higher wealth of the shareholders is the outcome of high rate of dividend. It
implies that dividend function has a crucial role to play in Cabrera & Co Ltd in deciding how
much part of the profit needs to be distributed as dividend and how much part of the profit
needs to be retained.
Working Capital Function – The main concern of this function is the effective management
of current assets for ensuring the short-term survival of the companies. It ensures securing
more funds with the current assets for ensuring greater liquidity of the firms (Enqvist,
Graham and Nikkinen 2014). Thus, in Cabrera & Co Ltd, working capital function involved
the effective management of the working capital that included both current assets and current
liabilities so that the company can retain an effective liquidity position.
Task 2
Requirement a
i) Return on Capital Employed (ROCE)
ii) Net Profit Margin

6FINANCIAL DECISION MAKING
iii) Current Ratio
iv) Average Receivable Days
v) Average Payable Days
Requirement b
i) Return on Capital Employed (ROCE)
a. ROCE is a profitability ration that assists in measuring the efficiency of a company in
generating profit from its capital employed through the comparison of net operating
profit to capital employed (Taani 2013).
b. ROCE shows how effectively the assets of the companies are performing through
considering the effects of long-term financing.
c. ROCE in 2017: 19.61 and 2018: 14.10. It implies that there a major decrease in
ROCE of Alpha Limited in the current year.
d. The main reasons behind the decrease in this ratio in 2018 are the increase in
operating expenses along with massive increase in current liabilities of the company.

7FINANCIAL DECISION MAKING
e. In future, ALPHA Limited can increase their ROCE by reducing the operating
expenses, ensuring increase in sales and paying off their debts in timely manner. This
will prevent the excessive increase in their current liabilities.
ii) Net Profit Margin
a. Net profit margin can be defined as the percentage of revenue lest after the deduction
of all the expenses from the sales.
b. Net profit margin helps in measuring a company’s performance in making net income
from each dollar of sales. It implies that it measures a company’s ability to extract
how much amount of profit from total sales (Khadafi, Heikal and Ummah 2014).
c. The net profit margin of ALPHA Limited in 2017:12.50% and 2018: 8.75%. It
implies that there is a decrease in this ratio in 2018 due to the decrease in the net
profit of the company.
d. The main two reasons behind the decrease in this ratio in 2018 are the increase in
operating expenses and double increase in the finance cost of ALPHA Limited.
e. The major ways to improve this ratio is to ensure decrease in both operating and
finance expenses by paying off the debts in time and to ensure increase in sales.
iii) Current Ratio
a. Current ratio can be defined as the liquidity and efficiency ratio that helps in
measuring a company’s ability to pay off short term business obligations with current
assets (Parsian and Shams Koloukhi 2014).
b. This ratio measures a company’s performance in efficiently using their current assets
or short-term financing facilities.

8FINANCIAL DECISION MAKING
c. Current ratio in 2017: 2.35: 1 and 2018: 0.93:1. This indicates the deterioration in the
liquidity position of ALPHA Limited in 2018 due to major increase in current
liabilities.
d. The main reason behind the decrease in current ratio is that fact that the proportion of
increasing the current liabilities is more than the increase in current assets.
e. The ways to improve this ratio are early invoice submission, switching from short-
term to long-term loans, negotiation for longer payment terms and others.
iv) Average Receivable Days
a. Average accounts receivable days can be defined as the average days a year that a
company takes to collect all its receivables.
b. This ratio measures a company’s performance in speedy collection of the receivables
in a year (Gorondutse, Ali and Ali 2016).
c. This ratio in 2017: 68 days and 2018: 73 days. The increase in this ratio in 2018
indicates that ALPHA Limited has taken more time in collecting their receivables in
2018.
d. The main reason behind increase in this ratio is that sales of ALPHA Limited have
increased faster than the accounts receivable. In addition, ALPHA Limited’s credit
policy and issues in collecting receivables can be considered as the reasons for the
increase in this ratio.
e. The ways to improve this ratio is the reduction in the payment terms to the debtors so
that they can make payment faster.
v) Average Payable Days
a. Average accounts payable days can be defined as the average days in a year that a
company takes to pay its suppliers.

9FINANCIAL DECISION MAKING
b. This ratio measures a company’s performance on how many days it takes to make
payments of all of their suppliers (Gul et al. 2013).
c. This ratio in 2017: 77 days and 2018: 160 days. It implies that ALPHA Limited has
taken more time to pay their suppliers in the current year due to increase in payable
and purchase.
d. The main reason behind the massive increase in this ratio is that that the accounts
payable of the company has increased faster than the increase in purchase. In addition,
issues in collecting receivable can also be considered as the reason of this increase.
e. ALPHA Limited is needed to ensure speedy collection of their receivables so that
they can make the payments for payable out of the receivable. In addition, the
company can offer discount for early repayment so that they can make the payments
early.
Conclusion
It needs to be mentioned that the decision of Camden Limited to grant the loan is
largely associated with the outcome of ratio analysis of ALPHA Limited. When considering
the profitability position of ALPHA Limited, it can be seen that both the ROCE and net profit
margin of its have decreased in the current year which indicates towards the deterioration of
the profitability position of the company. In case of the liquidity position that is needed for
repaying the loan, there is a massive fall in the liquidity position of ALPHA Limited due to
massive increase in current liabilities which is not good for company’s health. Lastly,
ALPHA Limited is taking increased time to collect the receivables and paying off the
suppliers which are an indicator of the deterioration in the efficiency of ALPHA Limited. The
presence of these negative aspects raise question about ALPHA Limited’s ability to repay the
loan in case Camden Limited grants it. For these reasons, it is recommended to Camden
Limited not to provide the loan to ALPHA Limited.

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Conclusion
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