Comprehensive Report: Financial Decision Making for ALPHA Ltd.

This report delves into financial decision-making, focusing on ALPHA Ltd., a UK-based manufacturing company. It explores the functions of accounting and finance, emphasizing their role in strategic decisions related to investment, financing, and operations. The report analyzes financial ratios such as return on capital employed, net profit margin, current ratio, debtors collection period, and creditors collection period, providing a detailed assessment of the company's financial position. It also examines management accounting techniques including financial planning, budgetary control, and cash flow analysis. The report references various academic sources to support its analysis, offering a comprehensive overview of financial management principles and their application within a business context. The study provides insights into the interpretation and assessment of financial performance, supporting stakeholders in making effective strategic decisions. The report is contributed by a student and is available on Desklib, a platform offering AI-based study tools for students.

Financial Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Functions of accounting and finance...........................................................................................3
Management accounting techniques............................................................................................4
TASK 2............................................................................................................................................7
a.) Calculation of financial ratios.................................................................................................7
b.) Interpretation and assessment of the financial position of company......................................8
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial decision is a strategic process which is related with making decision in relation
with the financing mix of the company. It is very useful in allocation of funds which in turn
results in making investment, financing, liquidity and operational decision in a systematic and
efficient manner. Financing is referred to as an effective source which is mainly concerned with
the equity of the stakeholders and the liabilities of the company in order to attain long term
sustainable growth and objectives of organization. This study will highlight on various
accounting functions and role related with accounting and finance. This study will also evaluate
the financial ratios of the company with the help of financial statements.
ALPHA ltd. is a UK based manufacturing company which was established in the year
1954. ALPHA supply various components of metal to leading companies of the UK. This
company tends to focus on expanding its operations of the business in the various other part of
the UK.
TASK 1
Functions of accounting and finance.
Financial decision is a strategic process which in turn is responsible for taking decisions
related with the equity of the stakeholders and the liabilities of the company in order to attain
long term sustainable growth and objectives of organization (Schaltegger and Burritt, 2017).
Financial decision of the business can be related with the investment, financing, dividend,
liquidity and operations of the business. Financial decision are very crucial for the organisation
because it is useful in maximizing the shareholder value in an efficient and strategic manner. It is
useful in taking effective decision related with the income and expenditure of the business in
order to maintain sufficient financial resources in order to smoothly carry out the operations of
the ALPHA limited company. Financial accounting is very useful in keeping track of all the
financial transactions of the business in order to provide baseline for the various stakeholders of
the company (Collier,2015). It is very useful in interpreting the financial health and position of
the company by assessing the creditworthiness, solvency position and liquidity position of the
ALPHA limited company. Accounting and finance are very useful in preparation of an effective
budgeted plan which in turn helps in carrying out the business within the set budgeted plan and
in case of deviation take necessary actions to resolve any financial problem.

Management accounting plays a key role in formulation of plan, organizing, controlling
and decision making of the company. The key role of accounting and finance is to help
stakeholders of the organization make strategic decision. It is very useful in interpreting the
financial information and communicating the same to the management and stakeholders of the
company in a strategic and efficient manner (Petersen, Kushwaha and Kumar, 2015). Accounting
and finance are useful in determining the cash flow of the business which in turn is very useful in
credit analysis, estimation of risk and profitability of the company. Finance and accounting plays
a key role in administrating the assets of the business. Management accounting is very useful in
critically analysing the financial performance of the company by effectively preparing various
internal financial reports and records which in turn aids to strategic decision making.
Management accounting also helps in effectively analysing the cost of the ALPHA limited
company in order to determine the income and expenditures of the company (Maas, Schaltegger
and Crutzen, 2016). It is useful in determining and evaluating the budget plan which is useful in
making various strategic financial decision. Controlling the activities of the business is one of
the common aspect of the management accounting which helps in reducing the cost of the
business and attain higher economies of scale. This helps in determining the underperforming
and outperforming units of the ALPHA limited company. It is also useful in determining the
highly profitable units of the business and gain higher profitability by reducing operational cost
of the company (Kubilay, and Bayrakdaroglu, 2016). Management accounting is very useful in
planning as it helps in effectively predicting the future elements for growth and detecting
financial patterns in order to make strategic decision according to the latest market trend (The
Role of Accounting & Finance in Business Management, 2019). Planning helps management
accounting in creating long term policies of the business. It is useful in analysis of financial
records and in turn helps in improving the performance and profitability of the ALPHA limited
company.
Management accounting techniques
Management accounting techniques are very useful in interpreting the financial data and
communicating the same to the stakeholders of the company in order to achieve long term
sustainable growth and development of the business.
Financial planning: This tool is mainly concerned with attainment of organizational
goals and objectives of the company by effectively evaluating the financial policies of the

company. It helps in maintaining adequate finance in the company which in turn results in
smooth functioning of ALPHA limited company and attain long term sustainable growth.
Analysing financial statements: This tool helps in evaluating various financial reports of
the company in order to forecast the future needs and requirements of the company.
Representation of financial statements in a systematic and timely manner helps stakeholders in
making strategic financial decision.
Budgetary control: This technique is useful in comparing the actual plan with the
budgeted plan and in case of any deviation take necessary action to resolve the problem in a
systematic and appropriate manner (Top 11 Techniques used in Management Accounting, 2019).
It is very useful in controlling the finances of the company by effectively allocating funds to the
various business operations of the business.
Standard costing: This is a predetermined cost which helps in providing a yardstick for
effectively measuring the actual performance of the ALPHA limited company. In case of any
deviation take necessary action to resolve the problem.
Revaluation accounting: It is useful in determining the impact of change in the price
while preparation of the various financial statements. It is very useful in critically evaluating the
fair return on the capital employed by the business.
Cash flow analysis: This tool is useful in evaluating the cash inflows and out of the
business. It is useful in determining the reason for change in the cash balance between two
accounting periods (Mitchell, Hammond and Utkus, 2017). It is useful in evaluating the cash
flows from operating, financing and investing activity.
Fund flow analysis: This is an effective tool which is useful in effectively analysing the
difference in the financial position of the company between two consecutive years. It helps
management in determining the sources of funds through which money is coming into the
business and how efficiently the funds are used to carry out operations of ALPHA limited
company.
Decision making: This technique is useful in choosing the best and most profitable
alternative for the business. It is useful in effectively evaluating the business problem and take
strategic decision in order to solve the complexity of the business.
Critical evaluation of the role of finance and accounting within a business context.

Razumovskaia and et.al., (2016) sought to examine the fact that, accounting and finance
plays a crucial role in effectively managing the income and expenditure of the business. It is very
useful in managing the flow of the money and effectively direct the course of the business in
order to attain desired goals and objectives of the ALPHA limited company. It is very useful in
determining the financial position of the company by critically evaluating all the financial reports
in a systematic and appropriate manner and make strategic decision. It is very useful in making
strategic financial decision related with the operations, financials, liquidity, dividend and
investment decision in order to attain higher operational goals and standards. On the contrary,
Hirshleifer, Jian and Zhang, (2016) argued that, accounting and finance helps in allocating funds
to various activities of the business in order to attain economies of scale and higher profitability
for the business. Accounting and finance helps in effectively controlling the finances of the
company in order to maintain certain resources which in turn can be effectively used at the time
contingent events. The key role of accounting and finance is to reduce the risk of theft and fraud
by maintaining sound financial records.
Engle-Warnick, Pulido and de Montaignac, (2016) said that, management accounting tool
is useful in bridging the gap between the operations and finance function of the business. It is
very useful in controlling the activities of the ALPHA limited company by assuring the long
term growth and success of the company. It is very useful in improving the quality of the
business which in turn results in higher operational growth and efficiency. On the contrary,
Chambers, Echenique and Saito, (2016) argued that, management accounting tool is based on
personal prejudice and leads to intensive decision making. This in turn, affects the financial
information of the company and also loosen up the validity and reliability of the financial
information. Maas, Schaltegger and Crutzen, (2016) sought to determine the fact that,
management accounting tools are useful in planning, organizing, controlling and making
decisions for controlling the operations of the business. It is very useful in analysing and
understanding the financial reports which in turn is useful in critically examining the various
business problems. Management accounting tool is useful in strategic management and helps in
effectively managing the funds of the organization for smooth functioning of the business. It is
very useful in effectively evaluating and understanding the financial reports of the organization
in order to take strategic decision related with the investment, financing, dividend, liquidity and
operations of the ALPHA limited company. It is very useful in controlling the operations of the

business by formulating future policies and communicating the latest information to the
stakeholders of the company. It is very useful in controlling cost of the business and preventing
fraud and errors from the business operations on a timely and systematic manner.
TASK 2
a.) Calculation of financial ratios.
a.) Return on capital employed
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Net income 300 262.5
Total assets (TA) 2235 4035
Current liabilities (CL) 322.5 1110
Funds employed TA- CL 1912.5 2925
Return on capital
employed
Net income/ Funds employed*100 15.68 8.97
b.) Net profit margin
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Net earnings 300 262.5
Net sales 2400 3000
Net profit margins Net earnings/Net sales*100 12.5 8.75
c.) Current ratio
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Current Assets (CA) 757.5 1035
Current Liabilities (CL) 322.5 1110
Current Ratio CA- CL 2.34 0.93

d.) Debtors collection period
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Trade receivables 450 600
Annual sales 2400 3000
Debtors collection
period
Trade receivables/ Annual sales*365 68.43 73
e.) Creditors collection period
Particulars Formula Amount (in
£)
Amount (in
£)
2017 2018
Trade payables 285 1050
COGS Opening inventory+ Purchase – Closing
inventory
1725 2250
Creditors collection
period
Trade payables/ COGS* 365 60.30 170.33
b.) Interpretation and assessment of the financial position of company.
a.) Return on capital employed
This financial profitability ratio is useful in determining the capability of the company in
generating the profits from the capital employed in the company. It can be calculated as net
income of the company divided by funds employed. The ROCE of the ALPHA limited company
in the year 2017 was 15.68 and in the year 2018 was 8.97. The ROCE of the ALPHA limited
company is declining by 6.71 which is a negative sign for the company. This in turn states that,
the company is not making optimum use of the financial resources of the company. In order to
improve the return on capital employed, the company must focus on maintaining its operating
profit and effectively reduce the amount of capital employed into the business. Paying off debts,
repayment, refinancing on lower interest rate, sale of outdated machinery, etc. helps in

improving the return on capital employed of the ALPHA limited company (Arkan, 2016). Higher
ROCE of the company states that the company is effectively utilizing the financial resources of
the company and generating higher returns on the amount invested by the ALPHA limited
company.
b.) Net profit margin
This ratio states the percentage of profit generated by the company in comparison to the
total sales. It can be calculated as net income divided by the net sales of the ALPHA limited
company. The net profit margin of the ALPHA limited company in the year 2017 was 12.50 and
in the year 2018 was 8.75. The net profit margin of the ALPHA limited company is declining by
3.75 which is a negative sign for the company. This in turn states that, the company is making
lower profit in comparison to the last year profit of the company. According to the general rule
of thumb, a good net profit margin is considered to be 10%. The key reason of decline in the net
profit margin is due to ineffective marketing strategy, increase in market competition, ineffective
market programs, inability to cope up with market trends, etc. are some common cause which in
turn affects the operations of the business (Morales-Díaz and Zamora-Ramírez, 2018). The net
profit margin of the ALPHA limited company can be improved by reducing labour and
operational cost and effectively improve the sales of the company, increasing prices, etc. which
in turn results in long term sustainable growth of the business.
c.) Current ratio
This is a liquidity ratio which helps in examining the ability of the company to mitigate
its short term debts and obligations. It can be calculated as current assets divided by the current
liabilities of the ALPHA limited company. The current ratio of the ALPHA limited company in
the year 2017 was 2.34 and in the year 2018 was 0.93. The current ratio of the ALPHA limited
company has reduced which in turn states that the current liabilities of the company has
increased over the last year and ALPHA limited company does not have enough cash to meet the
current liabilities of the company. The acceptable cur rent ratio of the company is 2:1 which
states that the company must have twice the current assets in order to meet the current liabilities
of the company. ALPHA limited company can improve the current ratio of the company by
paying off the debts and cutting down overhead expenses. High current ratio i.e., more than 2 is
not a good indication for the company as it states that the company is not using its current assets
efficiently (Morales-Díaz and Zamora-Ramírez, 2018). The company can improve the current

ratio of the company by effectively getting rid of the various overhead expenses and it must also
focus on using long term financing than short term financing.
d.) Debtors collection period
This ratio is useful in evaluating the time taken by the business enterprise in order to
receive amount which has been owed by the clients. It can be calculated as trade receivables
divided by the annual sales of the ALPHA limited company. The debtor's collection period of the
ALPHA limited company in the year 2017 was 68.43 and in the year 2018 was 73. The debtor's
collection period of the ALPHA limited company is increasing by 4.57 which in turn states that
the company is not in a good position to collect cash on the invoices held by the debtors.
ALPHA limited company is taking more time to collect cash on the goods given on credit. The
debtor's collection period of the company can be improved by improving credit control and
improving stock control (Tian and Yu, 2017). An effective debtor's collection period ratio helps
in reducing the risk of non- payment made by the customers and improving cash flow of the
business. The key reason for poor accounts receivable is to that the company is not in a good
position to collect money from debtors. Improving debtor's collection period helps in building
strong relationship and clear credit policies which results in higher operational growth and
efficiency for the ALPHA limited company.
e.) Creditors collection period
This ratio is useful in determining the time taken by the company to pay off its debts to
its suppliers. It can be calculated as trade payables divided by the cost of goods sold of the
ALPHA limited company multiplied by 365 days. The creditor's collection period the ALPHA
limited company in the year 2017 was 60.30 and in the year 2018 was 170.33. The creditor's
collection period of the ALPHA limited company is increasing by 110.03 which in turn states
that the company is not in a good position to make payments to the suppliers on the timely
manner. This in turn may results in late payment charges and potential threat of legal charges by
the company. Lowering creditor's collection period helps in improving the goodwill of the
company and more goods will be given on credit which in turn results in higher operational
standards and efficiency of the business. In order to improve the creditor's collection period, the
company must focus on improving the stock levels and credit of the company (Liang and et.al.,
2016). This in turn results in lower debt obligations and higher profitability for the ALPHA
limited company.

CONCLUSION
This study concludes that, financial decision making is useful in critically examining the
role of accounting and finance in order to make strategic decision making. Financial decision are
very crucial for the organisation because it helps in maximizing the shareholder value. It has
been concluded that, management accounting tool is useful in understanding the financial reports
of the organization and also make strategic decision in relation with investment, financing,
dividend, liquidity and operations of the company. This study has summarized the financial
reports of the company in order to evaluate the financial ratios of the company. It has been
determined that, the ALPHA limited company needs to strengthen the financial operations of the
business in order to attain higher operational goals and objectives.

REFERENCES
Books and journals
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