Financial Decision Making Report: ASDA Limited Financial Analysis

This report delves into financial decision-making, focusing on the roles of accounting and finance within ASDA Limited and its impact on the business. The first task explores the significant contributions of accounting and finance, including financial accounting, budgeting, management accounting, financial planning, taxation, and support for business strategy. The second task involves a comprehensive ratio analysis of ALPHA Limited, examining key financial metrics such as return on capital employed, net profit margin, and current ratio over two years. The analysis includes calculations, interpretations, and identification of factors influencing these ratios, providing insights into the company's financial performance and efficiency. The report emphasizes the importance of financial strategies and their influence on business objectives and overall value creation. The report also provides an understanding of the business and its financial trends.

FINANCIAL DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
Task 1.........................................................................................................................................3
Role of accounting and finance in ASDA Limited................................................................3
Task 2.........................................................................................................................................6
Ratio analysis.........................................................................................................................6
CONCLUSION..........................................................................................................................9
REFERENCES.........................................................................................................................10

INTRODUCTION
Financial decision making is one of the most important task performed by the
financial management team of a company. It is concerned with estimating the requirements of
the funds, making it available at the right time and at the least possible costs. In other words,
it is the decision made in relation to the utilization of money (Rafatnia and et.al., 2020). The
financial health of the business is based upon the quality of financial decision made. The
present report comprises of two tasks. In the first task, by selecting ASDA as an organisation,
the discussion pertaining to what role does accounting and finance play within the company
will be discussed by highlighting its importance and benefits ASDA limited. In the second
task, by calculating ratio of various types, the financial performance of ALPHA limited will
be done by interpreting and analysing the movement in the ratios within two years and what
are probable causes of such movements will also be identified.
Task 1
Role of accounting and finance in ASDA Limited
Finance and Accounting plays a very significant role in the management of ASDA limited
company. As every business operate on money, the same applies on ASDA and if they don’t
control the affairs of money, then the company fails to control their business which is very
critical to the success of any organisation.
By appropriately accounting the income and expenses of the company, the management of
flow of money and the direction to the course of business can be easily established
(Weetman, 2019). While a business grows, it is necessary to have a comprehensive practices
of accounting to help with the strategic growth of ASDA Company.
Accounting and finance facilitates to understand what is happening in the company and thus
provides useful insight on how and where to go ahead. As no business can function without
having an efficient supply of funds. Finance is the lifeblood of all the companies and is a
common measure through which the performance of ASDA limited can be determined both
externally and internally (Secinaro and et.al., 2019). The practices of accounting and finance
is at the core of every business and also responsible for efficiently managing and controlling
the financial resources of the company which is necessary for the survival and sustainability
of a business. By developing a good and efficient financial strategy, achievement of business
goals become easier.
There are many roles played by accounting and finance that can be stated with reference to
ASDA limited as follows:
Financial accounting: The function of accounting and finance allows for keeping record of
all the transactions that take place at ASDA limited. By applying double entry bookkeeping
system, the final accounts so prepared are useful for meeting many statutory requirements,
for determining stock exchange performance and reporting to taxation authorities. For

example, final accounts such as income statement and statement of financial position are of
great importance while dealing with statutory and tax authorities (Hamdan, 2018).
Helps in setting budgets: Budgeting is the most important task performed by accounting and
finance department of ASDA limited which involves setting standards and meeting those
standards at the end of the period. Budgeting allows for reporting against it and improving
performance by identifying deviations between planned and actual performance with help of
corrective actions (Birt and et.al., 2020). For example, ASDA limited set budgets for every
quarters and regularly track their sales performance against their sales budget and takes
necessary steps to align their actual figures with the budgeted one to avoid any kind of poor
performance at the end of the year.
Management accounting: By carrying out activities under management accounting, ASDA
limited and its management is able to analyse their financial information and accordingly
control their financial performance which assist management in managing day to day
operations of the company (Bui and De Villiers, 2017). The reports prepared here are based
on the information derived from financial accounting. For example, ASDA has a fully
integrated system of standard costing which allows company to structure their financial
accounts in such a way which provides information pertaining to cost and management
directly.
Helps in financial planning or treasury activities: The treasury operating under accounting
and finance department is responsible for creating financial provisions, making profitable
investment and efficient utilisation of funds.
Taxation: Under the accounting and finance department itself, the affairs related to tax are
handled. It involves day to day reporting and management of taxation, as there is a tax
implications for all the decisions made by ASDA and these are necessarily required to be
identified and built into the process of financial planning and decision making. Not only the
accounting of tax is necessary but also the availability of cash is required to be ensured in
order to make payment of tax to the concerned authority (Ainsworth and Deines, 2019). So,
ASDA while performing their cash planning and cash budgeting while performing their
accounting and finance function always considers tax also.
Providing support to business strategy: With the help of financial environment created by
accounting and finance, many strategies of business are supported by it. While exploiting
opportunities available at marketplace, there is a need of finance which must be obtained
from both long term and short term sources by identifying accurately the best mix of the
same. Along with long and short term sources, it is also necessary to determine the correct
mic of equity and debt capital to finance ASDA’s aspirations. Therefore, accounting and
finance department facilitates the framing of best financial strategy integrated with the
business plan.
Creating value for the company: By carrying out business plan, management resorts to
create value for the ASDA limited (Palepu and et.al., 2020). For example, by obtaining funds
at a best possible rates, controlling costs by cutting and minimizing the wastages, reducing

financial risks, improving the system of collecting debt and managing cash in a better way;
all these activities are critical to the success of ASDA limited and is thus performed by
accounting and finance department.
Analysis of financial performance of ASDA limited: Improvement in the profitability or
financial performance can only be possible if the causes of deficiency will be determined.
Accounting and finance function of a business facilitates understanding of the past and
learning from it, so that informed financial decision can be made regarding which operations
are needed to downsize and which has potentiality to grow. It provides better view of where
the money has gone and what good will it make for ASDA in the long run (Cuadrado-
Ballesteros, Martínez-Ferrero and García-Sánchez, 2017). For example, budgeted balance
sheet and income statement provides much useful insights of how the future aspects of the
company would be and the necessary changes required to be made in the policies and
strategies can also be determined.
Finding financial trends: Simply looking at the sales revenue figures might not provide any
useful insight about revenue maximization. It is accounting and finance function which
facilitates breakdown of sales to determine profit margins, so that management can decide
upon dropping off or enhancing the particular product line which not contributing or
significantly contributing to the profitability of ASDA limited respectively (Birt and et.al.,
2020). Also decision regarding pricing of products can be done for example, raising or
reducing the price of a product in an attempt to enhance overall profitability of ASDA
limited. The accounting or financial manager can easily determine the trends like shrinking
profit margins with the corresponding growth in sales by identifying whether production or
overhead costs are creating problem.
Facilitates Cost analysis: Effective accounting in place allows for understanding costs
associated with making and selling of a product along with understanding how different
levels of sales volume are affecting profit margins of ASDA limited. It involves division of
overall costs into production and overhead costs (Secinaro and et.al., 2019). There can be a
consistency in production cost while producing and selling similar products again and again
but the overhead cost gets reduced per unit with the increase in the units sold. Therefore, such
an analysis allows for lowering prices to increase volume of the product in order to raise
market share of ASDA limited.
Helps in managing debt services: Accounting and finance manager help in avoiding
unnecessary interest charges paid on debt capital sourced externally by utilizing excess cash
available with the business towards making repayment of debt (Rafatnia and et.al., 2020).
Also, these managers at ASDA have a responsibility of tracking credit scores and reports in
order to obtain loans at lowest interest rates possible. Therefore, a considerable amount of
costs can be reduced if debts are appropriately managed.
In this way, there are different roles that has been played by accounting and finance
department of ASDA Company which is helping it in deriving profitability and success in the
market.

Task 2
Ratio analysis
Return on capital employed
Earnings before interest and tax / capital employed
2017
= 675 / 2235 – 322.5
= .35
2018
= 750 / 4035 – 1110
= .26
The return on capital employed is all about the earnings before interest and tax in
comparison to capital employed associated with the Alpha Limited Company. The ratio
was .35 in the year 2017 that was .26 in the financial year 2018. The ratio is decreased in the
financial year 2018 as compare to the year 2017 (Islami and Rio, 2019). The possible reason
behind the decreased ratio is the capital employed that has significantly affected the ratio.
Due to the increased capital employed even after having or addressing more sales company
could witness less return on capital employed. The return on capital employed is all about
analysing the overall efficiency and potential of the business entity.
Net profit margin:
Net profit / sales * 100
2017
= 300 / 2400 * 100
= 12.5%
2018
= 262.5 / 3000 * 100

=8.75%
The net profit margin of the Alpha Limited Company entertained as 12.5% for the
financial year 2017 and the same ratio for the financial year 2018 is 8.75%. The role of the
net profit margin is significant in respect to the business organisation. It is essential fro the
business unit that it guide the business entity in a direction where company get to deliver the
operations in such manner that the business unit get to fulfil all its business objectives. The
role of the net profit margin is very significant as it empower the business unit to channelize
the business operations in the best way possible. The low net profit margin demonstrate that
the decision making of the business venture is not effective enough that do not favour the
company to generate best level of profitability against delivering the business operations. The
low net profit margin is never a positive sig for the business of the company (Pasaribu and
et.al., 2018). Alpha Limited Company require to approach all its business operations in the
best way possible so that company get to increase its profitability and the growth rate. This
makes it more significant for the business unit to approach the profit margin in such manner
that company get to deliver all its business objectives. The low profitability ratio certainly
demonstrate about all elements and areas associated with the business organisation. The sales
of company has also affected that could certainly decrease the net profitability of the business
unit.
Current ratio
Current asset / current liability
2017
= 757.5 / 322.5
= 2.35
2018
= 1035 / 1110
= .93
Current ratio denote about the comparative assessment in between the current nature
assets and current nature liabilities of the business organisation. The current ratio calculated
of the Alpha Limited Company of the year 2017 is 2.35 that could further decrease to .93 in

the financial year 2018. The ratio is significantly low in the year 2018. The reason is clearly
witnessed that is the increased current liability of the business organisation. This is been
certainly demonstrated by the business organisation that indicate that the organisation
consider the current nature assets and liabilities. In the year 2018 the current liabilities could
significantly increased as compare to the earlier financial year (Cafiso and D'Agostino,
2020). The role of current ratio is very significant in nature that influences the business
operations of the organisation. The current ratio certainly affects the basic operations and
functional direction of the entity. This is require for the business unit to canalises and sustain
the flow of operation. The low current ratio could also affect the quality of operations and
functional areas of the business entity that could involve the operations of company to be
more progressive in nature.
Average receivable days:
Trade debtor / sales * 365
2017
= 450 / 2400 * 365
= 68.44 days
2018
= 600 / 3000 * 365
= 73 days
The average receivable days calculated of the year 2017 are 68.44 days whereas the
days calculated for the financial year 2018 is 73. The number of days could increase the
number of days in the year financial year 2018. The average receivable days increased that
affected the liquidity situation of the business enterprises. The increased receivable days
could also reduce the liquidity of the business organisation (Perini, Carbone and Camin,
2017). The role of the liquidity situation of the business organisation that allows the company
to channelizes the business organisation. The role of the liquidity is very important in the
business organisation as it completely influence the basic operations of the organisation. The
average receivable days are very important for the business organisation that it require the
entity to channelize the business operations of the organisation.

Average payable period
= Trade payable / purchase * 365
2017
= 285 / 1350 * 365
= 77 days
2018
= 1050 / 2400 * 365
= 160 days
The average creditor receivable days calculated is 77 days for the year 2017 and the
160 days for the financial year 2018. The number of days contains a huge difference between
the creditor payment days that can certainly indicate that the business unit taking more time
to pay the creditor associated with the business. The increased creditor payment day’s
demonstrated the fact that Alpha Limited Company has a challenged liquidity situation that
influences the business ability to repay its creditors (Fadli and Imtihan, 2019). This is a
negative side of the business operations operate by the organisation that it clearly
demonstrated the fact that the company is addressing the higher payable days. This is not a
positive sign for the business unit. The number o days payable must be decreased that
demonstrate about the strong liquidity situation of the organisation.
CONCLUSION
From the above report it has been concluded that financial decision making required
vital management skills from the personnel responsible for carrying out this function which is
very much critical to the financial performance and success of the business. In this report
various role played by accounting and finance in ASDA limited has been determined which is
aiding its management in deriving success and better financial performance of the company.
Also, financial performance analysis has been done for two years with reference to ALPHA
limited where it has been determined that profitability, liquidity and efficiency of company
has comparatively reduced from previous year.

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