Financial Decision Making Report: Financial Analysis of Two Companies

This report provides a comprehensive analysis of financial decision-making, focusing on two companies: HSBC and Alpha Ltd. It begins with an introduction to financial decision-making, emphasizing its importance for organizations. The report then delves into a detailed examination of HSBC, including its company profile, SWOT analysis, and the significance of its finance and accounting departments. Key functions such as investment, financing, dividend, and working capital are explored. The core of the report involves a comparative financial analysis of Alpha Ltd, calculating and interpreting five crucial financial ratios: return on capital employed, net profit margin, current ratio, average receivable days, and average payable days. Each ratio is analyzed for trends, performance indicators, and potential improvement strategies. The report concludes with a summary of findings, highlighting key insights into financial performance and decision-making processes.

Financial Decision
Making

Table of Contents
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
Information about the company ..................................................................................................4
Importance of finance and accounting department .....................................................................6
TASK 2............................................................................................................................................8
Calculate five ratios of Alpha Ltd. ..............................................................................................8
CONCLUSION ............................................................................................................................12
REFERENCES .............................................................................................................................13
Appendix .......................................................................................................................................14
Income statement ......................................................................................................................14
Balance sheet ............................................................................................................................15
Cash flow...................................................................................................................................16

INTRODUCTION
Financial decision is a process which is responsible for all decisions associated with
liabilities & stockholder's equity of the corporation as well as the issuance of bonds. Finance is
essential for every organisation and without it business can not start and expand so it is the
responsibility of management to take effective decisions related to money so that firm does not
face the problem of funds. To better understand this concept HSBC Holding Plc and Alpha Ltd
has been chosen which is a British multinational banking and financial service holding company
and other one is manufacturing company based in UK. This report discuss about various topics
such as: importance of finance and accounting function, SWOT analysis, management
accounting, tax function, investment function, dividend function, working capital function. Apart
from this it also discuss about different types of ratios, what does the ratio indicates about
company's performance and ways to improve the value to the ratio in future.
TASK 1
Information about the company
My choose is HSBC.
HSBC is a multinational bank which belongs to United Kingdom and provide banking
and financial services to its consumers. It is organised in four business groups which involves
investment banking, global private banking, wealth management and private banking. Company
is performing its operations in different countries such as: Europe, Asia Pacific, Middle east &
north Africa, America etc. Finance is essential for a corporation and it involves arrangement of
financial resources, introducing effective capital structure and better utilization of resources. As
HSBC used the finance functions for the purpose of investment decision, financing decisions,
dividend decisions and liquidity decisions. Accounting is helpful to handle the systematic
process of financial transactions & the business records. Accountant of HSBS handles the
accounting related work in the corporation. Accounting function involves communication
financial information, analysing net results, recording and summarising financial transactions etc
(Resta, 2016).
Introduction about the company
HSBC operates in different countries across the world and it is a British multinational
bank which provide financial services. Company has approx 7500 offices in 87 nations which
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involves South America, North America, Asia, Africa, Europe etc. As organisation provide
various services to the consumers which involves retail, corporate and investment banking,
wealth management, insurance etc. There are around 275000 staffs are working in the company
as on financial year 2018. The total revenue has earned by the firm is around 53.8 billion in the
year 2018. As the market share of corporation is high because it is the seventh largest bank
across the globe. The management of company is always emphasis to satisfy the needs of
consumers by providing quality products & services so that maximum number of clients will
attract towards the firm and it can generate higher profits which help the organisation to sustain
for a long term.
SWOT analysis is a strategic planning technique which is beneficial for individual or
company to analyse its strength, weakness, threats & opportunities. By this analysis HSBC can
understand and identify the business activities and take corrective actions for the further
improvement so that business of organisation can grow and get success (Robinson and Roiser,
2015).
Strength:
 As bank provide different types of banking and financial services around 87 nations
across the globe.
 It has good reputation and brand image and have strong financial position and it has
earned 53.8 billion revenue in the year 2018.
 Bank has diverse portfolio of locations & financial products which can reduce the
financial risk as compare to the other banks.
Weakness:
 As the operating cost of the company is continuously increasing which can reduce the
profits.
 Interest rate in United Kingdom is reducing whereas organisation has increased the
mortgage rate. It can perceived negatively by borrowers & potential borrowers.
 As the share price of HSBC is fluctuating very frequently so that investors hesitate to
invest in the business (Shouzhen and Su, 2015).
Opportunities:
 To grab those market area where the operations of company is not existing till now so
that HSBC can earn more market share and it leads to maximize the profits.
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 As the company has strong capitalisation position which is beneficial to acquire
additional assets to further strengthen so that company can survive for a long term in the
market.
Threat:
 As the biggest threat is related to financial losses and it can hamper the business
operations of HSBC.
 Borrowers who take loan and does not make payment to the company as a result financial
losses are increasing which can affect the profits of company.
Importance of finance and accounting department
Accounting department: This department of company take cares of financial
accounting, management accounting, tax function, auditing functions etc.
Financial accounting: As financial accounting focuses on past data with the motive to
analyse the corporation's value. It is helpful to record accounting transactions & converts
resulting information into financial statement. With the help of this financial position of HSBC
can be identified. There are various types of financial statements which are needs to be prepare
such as: income statement, cash flow and changes in equity and these are require to prepare so
that company can know its financial performance.
Management accounting: It is the procedure of making management reports & accounts
which provide faithful, timely financial & statistical information that is beneficial for the
management to take important decisions for the growth of business of HSBC.Planning,
controlling and decisions making are the tools which are use by the organisation to manage and
control the business effectively.
Tax function: This function focuses that it is required for HSBC to follow the rules and
compliances which are associated with tax regulations. It emphasis that tax returns are filled
within stipulated time frame. By using this function company can make proper tax planning
which is beneficial for the business of organisation (Shapiro and Stefkovich, 2016).
Auditing function: This function has been performed by the audit department of
company. As audit division analyse corporation procedure & controls to manage fraud,
mismanagement, waste etc. It also suggest to use more suitable control system which can be used
by HSBC in various procedures and It is helpful for the company to reduce expenses.
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Finance department: This department of company is responsible to manage the finance
so that work can be done effectively. Finance division of HSBC is responsible for planning,
auditing and accounting work in the corporation. The financial reports has prepared by the
finance department of organisation. It perform various functions such as: investment, financing,
dividend and working capital function.
Investment function: For an organisation it is require to make effective investment so
that it can get higher returns. As investment decision has emphasis towards following things such
as: to identify new investment opportunities in context to the profitability and comparison of cut
off rate which are related to new investment & prevailing investment.
There are various investment appraisal tools which can be used by HSBC such as: payback
period method, accounting rate of return net present value method.
Financing function: The finance department of HSBC is responsible to manage finance
and take important decision for the growth of firm. It is the responsibility of management of
company to analyse appropriate source of funds so that organisation can acquire money at
minimum interest rate. To perform business activities finance is required and corporation can
arrange funds through debt and equity sources. A healthy financial structure is helpful for the
shareholders to get maximum returns by taking lower risk (Lerner and et. al., 2015).
Bank loan: It is require to expand the business and organisation take loan from bank so
that it can perform its business operations.
Equity: It is the difference between the value of assets and liabilities.
Dividend function: The main motive of an organisation is to generate higher profits and
from that profit it distributes dividend to the shareholders. It is the duty of finance manager to
make better dividend policy that increase market value of company. Finance department takes
the dividend decisions in HSBC in order to satisfy the needs of shareholders.
Dividend: It is a payment made by a company to its shareholders and it is given from the
profits.
Working capital function: To meet the regular operations it is required so that business
activities does not get hamper. It is the difference among current assets & current liabilities of
business. It is used to cover short term expenditures of the organisation which involves payment
to debts, payment to supplier for stock and other operating expenditures. As the finance
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department of the HSBC is responsible to mange working capital so that company does not
suffer from the problem related to shortage of funds.
TASK 2
Calculate five ratios of Alpha Ltd.
Ratio Formula 2017 2018
Return on capital
employed
Operating profit/Total
assets-current
liabilities *100
19.60% 14.10%
Net profit margin ratio Net profit/Sales*100 12.50% 8.75%
Current Ratio Current assets/ Current
liabilities
2.34 0.93
Average receivable
days
Receivables/ Sales
*365
68 days 73 days
Average payable days Payables/ purchase *
365
77 days 160 days
(I) Return on capital employed
a. Definition
Return on capital employed is useful to measures that how a corporation is earning profits
from its capital. It is important for the investors to analyse the profitability so that they can take
investment decisions on the basis of it.
b. What does the ratio indicate about company’s performance
Return on capital employed ratio indicates that profitability & efficiency with which is
used by the organisation. If it is high than it shows that capital is effectively used by the
company in order to generate higher profits (Hassan and Johl, 2015).
c. Compare 2017 figures with 2018 figures calculated above
As from the above table it has been reflected that in the year 2017, return on capital
employed ratio was 19.60% where as in the year 2018 it is 14.10%. It shows that this ratio is
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decreasing which is not good for the growth of company and Alpha Ltd is not earning higher
profits.
d. Reasons behind the value of the ratio is going down in 2018 as compared to 2017
As from the above table, it has been analysed that return on capital employed is
increasing in the year 2018 and it becomes 14.10% and the reason behind is that operating profits
are not increasing so that this ratio is also not increasing. It is not a positive sign for the
organisation and will not help Alpha Ltd to grow its business.
e. Ways to improve the value to the ratio in future
Return on capital employed ratio can improve and there can be various ways. As Alpha
Ltd can improve it through similar procedure which it undertakes to maximise its overall
profitability. For that purpose it is important to minimise cost and to maximize sales. It is helpful
for the organisation to improves the operational efficiency.
(ii) Net profit margin
a. Definition
Net profit margin ratio is used to figure out the percentage of profit that corporation
produces from its total revenue. In this percentage of revenue left after deducting all
expenditures from sales. It is calculated by dividing net profit through sales and than multiple by
hundred.
b. What does the ratio indicate about company’s performance
Net profit margin ratio indicates that how much profits a company is generating from its
revenue and if it is increasing than it shows that performance of Alpha Ltd is good because it is
earning profits.
c. Compare 2017 figures with 2018 figures calculated above
As from the above figures it has been identified that in the year 2017, net profit margin
ratio was 12.50% and in the year 2018 it is 8.75%. It shows that this ratio is not increasing which
is not a positive sign for the company (Grohmann and Menkhoff, 2015).
d. Reasons behind the value of the ratio is going down in 2018 as compared to 2017
From the above table, it has been analysed that net profit margin ratio is not increasing in
the year 2018 as compare to the year 2017. The reason behind is that profits are not increasing
and operating expenses are increasing.
e. Ways to improve the value to the ratio in future
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There are various ways through which net profit margin ratio can improve and for that
purpose it is required to reduce utilities, to minimize labour cost, to minimize operation cost and
to increase sales revenue. By these methods this net profit ratio of Alpha Ltd can increase.
(iii) Current ratio
a. Definition
It is the liquidity ratio which shows that corporation's ability to pay short term debts
which arises within the year and this is also known as working capital ratio. Current ratio is
calculated by dividing current assets through current liabilities.
b. What does the ratio indicate about company’s performance
Current ratio indicates about the corporation's performance that how much company have
current assets as compare to the total current liabilities. Performance of an organisation will be
good when this ratio will 2:1 because it is ideal ratio and it shows that company have sufficient
currents assets to pay off obligations towards current liability.
c. Compare 2017 figures with 2018 figures calculated above
In the year 2017 the current ratio was 2.34:1 and in the year 2018 it is 0.93:1 and it
changed because current liabilities are increasing as compare to current assets.
d. Reasons behind the value of the ratio is going down in 2018 as compared to 2017
The main reason behind the value of the ratio is going down in 2018 as compare to the
year 2017 because current assets of company are reducing where as current liabilities are
increasing which is not a good sign for the business. (Graham and Puri, 2015).
e. Ways to improve the value to the ratio in future
There are various ways through which current ratio can improve in future and it includes
early invoice submission which describes that submit the invoices as quickly as possible to the
consumers. Shift from short term debt to long term debt and to manage & control overhead
expenditures and to negotiate longer payment cycles. So these are the ways which provide help
to Alpha Ltd to improve the value of the ratio in future.
(iv) Average Receivable days/ Debtors collection period
a. Definition
It is the amount of time it takes for a business to receive payments owned in terms of
account receivable.
b. What does the ratio indicate about company’s performance
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Debtors collection period ratio indicates that in how much time debtors pay the amount
which is unpaid. Performance of company can indicates through this when the debtors take less
time to make payment.
c. Compare 2017 figures with 2018 figures calculated above
As from the above table it is been identified that in the year 2017, debtors collection
period ratio was 68 days and in the year 2018 it becomes 73 which shows that it is increasing and
it is not good for the company.
d. Reasons behind the value of the ratio is going down in 2018 as compared to 2017
The main reason behind the value of the ratio is reducing in the year 2018 as compare to
the year 2017 because debtors are not making payment and taking more time to make payment
which is not a positive sign and company have to suffer from the problem of cash. (Crowther,
2018).
e. Ways to improve the value to the ratio in future
To improve the value to the ratio is important for Alpha Ltd so that it can get payment
earlier or within stipulated time period which is set by the organisation. For that purpose
organisation can tight the policy and instruct the debtors to make payment as per the set time
frame.
(v) Average Payable days
a. Definition
Average payable days ratio shows that in how much time a company a takes to pay the
the amount to the creditors.
b. What does the ratio indicate about company’s performance
This ratio indicates the company's performance that creditors days estimates the average
time it takes a business to settle the obligations with trade suppliers. As performance of
organisation can be affected when it takes too much time to make payment.
c. Compare 2017 figures with 2018 figures calculated above
In the 2017 this ratio was 77 days where as in the year 2018 it has been increased and it is
160 days which shows that company is taking more time to make payment to the creditors.
d. Reasons behind the value of the ratio is going down in 2018 as compared to 2017
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As compare to 2018 this ratio is going down because in the year 2017 company is taking
less time to make payment and it is the reason behind it. Where are in the year 2018 organisation
is taking more time to make payment.
Ways to improve the value to the ratio in future
For an organisation it is important that it takes more time to make payment to the
creditors so that funds can be use by the company in the expansion of business project. For that
purpose Alpha Ltd can set a time in which it make payment and it should be more than the time
of debtors collection period. As a result company does not face the problem related to shortage
of cash and business operations can perform effectively which help the corporation to expand
and grow the business (Carvalho and Wang, 2016).
CONCLUSION
As from the above report, it has been concluded that it is important for an organisation to
take effective financial decisions so that business activities can perform as per the requirement of
company. There are various sources of arranging funds which involves equity, debt or the
combination of both. As finance and accounting functions are important for an organisation so
that it can know about the financial position of the business and management can take better
decisions for the growth of company. With the help of SWOT analysis firm can identify its
strength and weakness and take corrective actions for the further improvement so that
corporation can sustain for a long term. There are various ratio's which are identified such as:
return on capital employed, net profit margin, current ratio, average receivable days and average
payable days. These ratio's are helpful to determine liquidity, efficiency, solvency and financial
position of the corporation and it is require for the company to take corrective steps for the
improvement of these ratio's.
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