Financial Decision Making: Wm Morrison Performance Analysis Report

This report provides a comprehensive analysis of financial decision-making, focusing on Wm Morrison as a case study. It begins with an introduction to financial decision-making and its importance, followed by an overview of Wm Morrison's operations and financial performance. The report then delves into the role of management accounting, exploring various techniques such as financial planning, financial statement analysis, budgetary control, and standard costing, and critically evaluates their impact on planning, controlling, and decision-making within the company. The second task involves calculating and interpreting key financial ratios, including Return on Capital Employed (ROCE) and Net Profit Margin, to assess the company's performance from a potential investor's perspective. The analysis highlights trends in these ratios and offers recommendations for improvement. The report concludes with a summary of the key findings and a review of the importance of financial decision-making in achieving organizational goals.

FINANCIAL
DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Role of the management accounting system and finance...........................................................1
TASK 2............................................................................................................................................4
Calculation of the ratios to analyse company performance from a potential investors
perspective...................................................................................................................................4
CONCLUSION ...............................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making is consider to be an important concept that is related with
making of meaningful decision in order to utilize the available monetary resources in best
manner which result into maximum benefit to company (Beaudoin, Cianci and Tsakumis, 2015).
In companies mainly manager focuses on two sort of financing decision such as from where does
the funds to be generated and how much funds to be borrowed from outside to run business
operations. In today's business environment, corporations will have to consider many financial
decisions relating to funding, growth, cash flow and distributions of profit. In this project, Wm
Morrisons has been selected which is the fourth biggest supermarket company of UK.
In this project, the role of accounting and finance within organisation and its critical
evaluation is discussed in the context of selected company. In addition to better understand the
importance of financial decision making with the help of financial statements ratio are calculated
and appropriate recommendation are given to potential investors.
Overview of company
Wm Morrisons was founded in 1899 by William Morrison with an egg and butter stall
and from there in 2016 it was 498 superstore all over England, Wales and Scotland (About
Morrisons, 2019). The company have number of product to be sold such as food items, medical
necessities, cloths, basic household things etc. There are around 110000 employee employed to
give extra ordinary services to huge number of people and the total revenue in 2018 £17,262
million and net profit was £311 million. Morrisons have the six main priorities such as be more
competitive, serve customer with the best, find best solution, create more useful and effective
services, make more simple and specific process and most important make the core supermarket
strong enough.
TASK 1
Role of the management accounting system and finance.
In modern business world, management accounting is defined as the process of
identifying, assessing, analysing and defining the financial data into proper accounts which
support internal manager to make decision. In Wm Morrisons, there are number of management
accounting techniques used which support in defining the framework to manage and control
different operation so that predetermined goals can be achieved. These techniques also aid
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manager to make more detailed plans and strategies which results into better growth and
development. Some of these methods are discussed underneath in the context of Wm Morrisons:
 Financial planning: It is considered to be a conduct connected to a final decision in the
context of financial operations, that is important in order to achieve the main objective of
the enterprise in the respective period (Birt, Muthusamy and Bir, 2017). Financial
planning establishes respectively for short and long-term financial targets in context of
business as it helps managers develop and implement financial tactics and make
preparations of those methods that aid to achieve the goal. In Wm Morrisons this
technique is used for plan effectively about funds requirement for both short and long
period so that maximum return can be gained. Manager make use of current figures and
ask for the sufficient funds for future use which results in developing valuable services
for customer and outcome to increase entire profitability.
 Analysis of financial statements: Financial statement are prepared by companies to
record each and every business transaction so that overall financial status and strength be
determined at the end of year (Wright, 2016). Statements of cash flow, balance sheet and
trading P&L account is used to describe the overall profitability and productivity of
company. This management accounting method is useful for management of Wm
Morrisons to determine the amount of net earning, total liabilities and overall profitability
within a year. With the support of financial statements manager can make more
descriptive plans and program to improve and attain the business objective of company.
 Budgetary control: In almost every company management accountant uses the method
of budgetary control for regulating and managing the different business operations. This
is a critical technique that supports managers to guide the whole worker to perform the
business operation so that profitability can be maintained. In respective company,
manager used the technique of budgetary control process to make sure that there would
be no any situation in which expenses are over earning (Correia, Dussault and Pontes,
2015). They keep regular update about entire working operation so that unexpected
events that could lead to increase overall expenses of Wm Morrisons.
 Communicating: It has been noticed that with more strong communication network
company gaols can be attained in particular time. Effective communicating between
manager and other worker help to remove any kind of problem and develop more
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healthier environment of working. In Wm Morrisons, this management accounting
technique is very much useful that support manager to communicate with entire
workforce. This leads to better execution of plans and removing of any disparities that
help to reach the actual goals of company. It also aid to prepare effective reports which
gives detail information to every employee about their job responsibility in order to gain
the objective in specific time. Standard costing: This is defined as a method of costing method which is related to
calculating all potential future expenses applicable to various operations which will
become a standard for company. It helps the organization to make comparisons among
the present level of expenditure with the standard expenditure for different activities in
certain time period. This technique is considered as one of the advantages because it
makes it much easier for managers to evaluate the area which require improvement so
that expenses can be reduced (Daher and Mohtar, 2015).
Management accounting techniques used in planning, controlling and decision making.
From the above discussed management accounting techniques it has been critically
evaluated that all these techniques are helpful for company to make procedures simple and
effective. It also provide additional framework to improve the method of conducting business
operation which directly benefit to make more effective plans, control different activities and
make decision for future improvement. The importance of each techniques in planning,
controlling and decision making is discussed underneath:
 Financial planning: This has been critically assessed that managers Wm Morrisons use
financial planning to control and decide about the financial resources necessity which aid
to operate the different project (Keller, 2018). They plan efficiently to allocate the gained
income into different department which help to reach the desired goals. It also support to
make decisions in order to identify the best amount of investment among different assets
that results with maximum benefits.
 Analysis of financial statements: Manager of Wm Morrisons with the support of yearly
financial statements can make better decision. Such as Statement of cash flow is helpful
in controlling the excess flow of cash out of business in operating activity and make
better plans to improve the inflows of cash equivalent. Balance sheet define the
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availability of inventory which support manager to make decision to increase production
to increase sales and maximise profit.
 Budgetary control: It is compulsory for business firm to manage its budget so that profit
can be maintained. By using this techniques manager of Wm Morrisons control all
unwanted expenses that could lead to reduce in profit, they make better plans which
support in increasing sales with a respective time frame. This technique is also used to
make better decision such as considering activities that results in more sales and develop
strategies to remove operating costs.
 Communicating: From the above discussion it is evaluated that manager use to prepare
proper plans which will provide the necessary information to entire workforce to run
business operation in relevant manner that gives better results and satisfy customer more.
Manager also make effective decision about removing of gaps between staff member that
could lead to unhealthy atmosphere in company. This techniques is also used in
controlling the business activity as manager shows they way to conduct business
activities (Kim and Upneja, 2014).
TASK 2
Calculation of the ratios to analyse company performance from a potential investors perspective.
Return on capital employed: In business term, the ROCE is defined as the crucial
profitability ratio which support in demonstrating the actual usage of capital by company to run
its different operation in most profitable manner (Kliger and Gilad, 2012). In general sense, it
mainly states the overall ability of company to effectively use its capital to reach the desired
targets. It is consider to be the most useful from shareholder viewpoint has the are able to
recognise weather the company is doing well and making investment can give better results or
they look to other option. In ROCE, Invested capital is the total sum of money allocated in a
company. Capital invested are typically measured as being either total assets with less current
liabilities plus the need for working capital. On the other side EBIT is actually the profit of
company that involve expenses but do not consider tax and interest expenses.
Ratio
1. ROCE or Return On Capital Employed :
= (Operating Profit /Capital Employed) x 100
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here, Capital Employed = Total Assets – External liabilities.
2017 2018
= 375 / 1749 *100
= 21.06%(Approx)
= 412 / 2925 * 100
= 14.10%
Interpretation: From the above table it has been determined that in year 2017 the ROCE
was 21% approx which reduces to 14.10% in 2018. It is noticed that the ratio decrease in the
consecutive year due to less revenue generation in 2018 and company was not able to maintain
enough profit as compared to 2017. Due to lower ROCE potential investor might move to other
option in greed to earn more profit. In order to improve the ratio Alpha Ltd could reduce cost and
increase sales, monitor area of excessive spending and might sell out unprofitable or unnecessary
assets.
Net profit ratio: In present business era, each and every company require to calculate net
profit ratio and compare for the previous year finding in order to check weather business is
profitable or needs some improvement (Klinsukhon and Ussahawanitchakit, 2016). It is also
known as profit margin which is a major financial ratio that actually used to compute the overall
percentage of profit company generate through its annual revenue. In general, The net profit
margin, widely recognized as the net profit margin, shows how often net revenue a business
receives on overall sales. A better net profit margin indicates a business is far more productive in
turning sales towards real profits. Furthermore, this ratio aid to identify the entire efficiency of
company operation and indicate how well these operation help to generate revenue.
Ratio
Net Profit Margin:
= Net Profit / Sale * 100
2017 2018
= 300/ 2400 * 100
= 12.5 %
= 262.50 / 3000 * 100
= 8.75 %
Interpretation: The above table indicates that in year 2018 the NP margin of Alpha Ltd
was 8.75% which reduces from the previous year, as in 2017 the ratio of net profit was
12.5%.This demonstrate that net profit that is earned by company in comparison to income
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generated from different operation is less which was higher in 2017. In year 2018, the cost of
good sold was higher and there are even more unexpected cost which overruns the budgets this
can led to even more tense situations for Alpha Ltd as investor shall remove their investment out
of operations. In order to increase NP margin and hold its potential investors manager of
respective company can increase sales by raising price and providing more goods in market,
reduce daily operating expenses such as reduce the lease amount, reduce workforce that results
to increase profit.
Current Ratio: It is defined as the curial ratio among the current assets and liabilities
that support in appraising credit worthiness of company. It is a sort of liquidity ratio which
shows that company is capable enough to meet its all long and short term financial obligations
(Pang, 2016). This ratio actually compare the total assets that can be easily liquidate in a
respective twelve month with those assets that are due for the payment in that year. The ideal as
per industry norms is 2:1 that states that current assets must be greater that current liabilities to
meet any future obligations. In order to keep the proportion of current assets higher company
mainly focus to minimise its short term debts in that accounting year and roughly measure the
actual financial health.
Ratio
Current Ratio:
=Current Assets / Current Liability
2017 2018
= 757.50 / 322.50
= 2.34
= 1035 / 1110
= 0.93
Interpretation: From the above calculation, it has been identified that the current ratio in
year 2017 was 2.34 which reduce to 0.93 in next year. This demonstrate that as compared to last
year Alpha Ltd is not enough capable to pay its current liabilities in 2018. It also states that
financial position of Alpha Ltd is weaker in 2018 and total of current assets is decreasing and
amount of liabilities are increasing due to more debts. Company also maintain excess cash that
might reduce profit with implied interest cost due to which proportion of current liabilities are
greater. In this situation, the above-mentioned organization must aim to increase its current
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assets to enable them to make short-term debt payments. Therefore, if this proportion is lower it
will be simpler for them just to fulfil the optimal ratio requirements and they would be capable of
paying their short-term loans and liability.
Debtors collection period: In business term, debtors are the people those take business
goods or money to meets its certain requirements (Tridimas, 2012). In accounting sense, debtors
collection period or average collection period is known as the average amount of time or days
customer take to make its payment for goods purchase on credit basis. In practice, this is
important for businesses to reclaim their liabilities in much less period so they can acquire
sufficient funds to conduct different types of activities and processes. It is stated that the shorter
the period of collection is more beneficial for company to run its different operations. The
shorter time taken by customer to pay its debts will assist company to maintain its cash flow and
reduce the chances of losses or slow production.
Ratio
Debtor Collection Period:
= Average Receivable / Sales *365
2017 2018
= 450 / 2400 * 365
= 68.43
= 68 Days
= 600 / 3000 * 365
= 73 Days
Interpretation: The above calculation shows that in year 2017 the average take time
taken by customer to pay its outstanding amount was 68 days. Similarly, in year 2018 it increase
to 73 days which means that there is delay in payment from customer side. Through depending
upon the provided balance sheet, the explanation for this discrepancy can be considered to be
greater amount of debtors in 2018 relevant to 2017. In this respect, it is critical for the Alpha Ltd
that they could concentrate only on those customer those are capable enough to pay their
outstanding amount on time.
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Creditor collection Period: This is a kind of ratio which is linked with the method of
evaluating the actual time company take to pay the total amount to its potential creditors. In
business creditors can be supplier, financial bodies, bank that help company to arrange enough
funds so that business can run operations in profitable manner (Vučijak, Kurtagić and Silajdžić,
2016). In case if creditor collection period is higher or company take more time to make its
outstanding payment that shows that there is a problem in cash flow and enough funds are not
generated to meet obligations. The delay in outstanding debt would also impact goodwill due to
which stakeholder would move to some other company.
Ratio
Creditor Collection Period:
= Payable / Purchase * 365
2017 2018
= 285 / 1,725* 365
= 60.03
= 60 Days
= 1050 / 2,250* 365
= 170.33
= 170 Days
Interpretation: In the above table, it has been founded that in year 2017 the creditor
collection period of Alpha Ltd was 60 days. While in year 2018 it increase to 170 days which is
just double than previous year, that clearly shows that company is far lacking behind to make
payment to its creditors. The main reasons for such a huge increase in days is due to less earning
in respective year and more and more borrowing to meet the business needs. In order to reduce
the creditor collection period Alpha Ltd can change the term and condition of payment with
suppliers, set chaser and automate credit control so that never there is a situation of delay
payment.
From the above financial ratio, it has been suggested to potential investors that they
should move to other option or hold money for some period because the current business
situation of Alpha Ltd is not quite good enough. Net profit and ROCE is also decreasing due to
which they would not get enough profitable return on their investment and might there are
chances of losses in future.
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CONCLUSION
In the end of this report, it has been concluded that financial decision-making is a wider
and crucial process that support in controlling and managing the financial resources in proper
manner. This help to run different business activity in more profitable manner and maximising
the overall profit of company. It has also been reported that the company will have to measure
various types of financial ratio which enable to assess the overall company financial performance
that is shown by the financial statements. Different management accounting techniques are
effective to provide valuable guidance to internal manager that help in reaching the desired
results.
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REFERENCES
Books and Journals:
Beaudoin, C. A., Cianci, A. M. and Tsakumis, G. T., 2015. The impact of CFOs’ incentives and
earnings management ethics on their financial reporting decisions: The mediating role
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Birt, J .L., Muthusamy, K. and Bir, P., 2017. XBRL and the qualitative characteristics of useful
financial information. Accounting Research Journal. 30(01). pp.107-126.
Correia, T., Dussault, G. and Pontes, C., 2015. The impact of the financial crisis on human
resources for health policies in three southern-Europe countries. Health Policy. 119(12).
pp.1600-1605.
Daher, B. T. and Mohtar, R. H., 2015. Water–energy–food (WEF) Nexus Tool 2.0: guiding
integrative resource planning and decision-making. Water International. 40(5-6).
pp.748-771.
Keller, E., 2018. Noisy business politics: lobbying strategies and business influence after the
financial crisis. Journal of European Public Policy. 25(3). pp.287-306.
Kim, S. Y. and Upneja, A., 2014. Predicting restaurant financial distress using decision tree and
AdaBoosted decision tree models. Economic Modelling. 36. pp.354-362.
Kliger, D. and Gilad, D., 2012. Red light, green light: Color priming in financial decisions. The
Journal of Socio-Economics. 41(5). pp.738-745.
Klinsukhon, S. and Ussahawanitchakit, P., 2016. Accounting information transparency and
decision making effectiveness: evidence from financial businesses in Thailand. The
Business & Management Review. 7(5). p.112.
Pang, M. F., 2016. Enhancing the financial literacy of young people: a conceptual approach
based on the variation theory of learning. In International Handbook of Financial
Literacy(pp. 587-602). Springer, Singapore.
Tridimas, T., 2012. Financial supervision and agency power: reflections on ESMA. In From
Single Market to Economic Union: Essays in Memory of John A. Usher. Oxford
University Press.
Vučijak, B., Kurtagić, S. M. and Silajdžić, I., 2016. Multicriteria decision making in selecting
best solid waste management scenario: a municipal case study from Bosnia and
Herzegovina. Journal of Cleaner Production. 130. pp.166-174.
Wright, D. J., 2016. Superstitious behavior in financial decision-making. Available at SSRN
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Online
About Morrisons. 2019. [Online] Available Through:
<https://www.morrisons-corporate.com/about-us/strategy/>
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