Financial Decision Making Report: Accounting and Finance Functions

This report delves into the crucial realm of financial decision-making, a cornerstone of effective financial management. It begins by outlining the fundamental functions of accounting and finance departments within an organization, emphasizing their roles in managing cash flow, maintaining financial records, and ensuring operational efficiency. The report then transitions to a practical application of financial ratio analysis, providing detailed calculations and interpretations of key ratios such as Return on Capital Employed, Net Profit Margin, Current Ratio, Average Receivable Days, and Average Payable Days. These ratios are applied to the context of Alpha Limited, offering a clear understanding of the company's financial performance over a specific period. The analysis provides insights into profitability, liquidity, and efficiency, highlighting the importance of these metrics in assessing a company's financial health and making informed decisions.

FINANCIAL DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Functions of accounts and finance department in the organization.......................................3
TASK 2............................................................................................................................................7
Financial Ratio Analysis.........................................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial decision making is the most important decision made by the financial manager
of the company. It consists of financing mix of the organization and concerned with allocation
and borrowing of funds which are required to make investment decisions. Finance decisions
involve two sources from which funds can be raised in which the first one is where a company
can use its own money such as share capital and retained earnings whereas the other way is to
borrowing funds from outside the organization which can be in the form of debenture, loan and
bonds etc. the objective of financial decision making is to maintain an efficient capital structure
that will be a proper mix of equity and debt to ensure trade off between shareholder's risk and
return. The report will consist of functions of accounting and finance department within the
organization. Moreover, it will show calculation of ratios in context to their performance along
with their interpretation in context to Alpha limited company to have a clear understanding of
how well or bad the company is performing.
TASK 1
Functions of accounts and finance department in the organization
Accounting and finance play an essential role in the management of any businesses.
Companies operate on cash and if cash is not managed properly, company cannot work
effectively. By properly maintaining accounts and finance department of the company, company
can manage flow of money and can direct the business towards the attainment of its goals.
Accounting department
Accounting department in Alpha limited provides accounting services and financial
support to the company. The accounts' department records accounts payable and receivable,
inventory, payroll, fixed assets and all other financial elements (Mitchell, 2017). The accountant
of the company reviews the records of each department to determine the financial position of the
company and any changes that are required to run the organization cost effectively.
It manages accounting services and finances of the company and its responsibilities includes
billing clients and customers, paying bills, tracking assets and expenditures etc. The accounting
department team need to be a dedicated team of specialists who manages finances of the
company (Accounting department definition, 2019). The Alpha company ensures full
transparency in its financial transactions while providing specialized, centralized support to the
teams and managers. The functions of accounting department are:

Account payable and Cash disbursements: The Account payable section of the account
department records goods and services which it receives and the payment that it owes such as
inventory from a supplier or other expense. Cash flow that goes out of the company is called
cash disbursement and is handled by accounts payable department. It is also responsible for
paying vendors for supplies purchased or any other expenses incurred by the business that are
taxes, utilities etc. The financial control occurs in order to maintain a good separation of duties in
this department. In Alpha limited, one person is responsible for recording accounts payable and
the other one in for signing the checks.
Accounts receivable and Cash receipts - The cash flow that comes in the company is
known as cash receipts. The process involves recording the cash payments from customers for
the services and products it provides to the company (Feltz, 2016). Account receivables under
accounting department is responsible for ensuring that the customer receives an invoice for the
goods and services. Financial controls come into action when cash is received and recorded in
the system. In order to maintain the best work, one person takes care of recording cash and other
person make the deposits at bank. In Alpha limited company, the cash receipts is managed by
accountant with specific knowledge and skills to manage all the accounts receivables adequately.
Payroll – The payroll function of accounting department ensures that the company pay to
its employee accurately including their bonuses, commission and benefits (Maimunah, 2016). In
Alpha limited, the accounts' department records and monitors each employee's time off, vacation
and sick days. It sees that the taxes are being paid on time to the government as well as dues owe
to union. The department also reimburses employees for expenses and makes payment to
vendors. Alpha limited ha employees that are serving the company for many years and it is
important for the company to take care of their benefits like incentives, bonuses etc and these are
managed by accounting department via payroll function.
Inventory cost management – Company's inventory is the goods that is owned for the
purpose of sale by the company. Inventory is sold within a year therefore accounting department
of Alpha company watches the cost of inventory over a specific period and uses inventory
management system for smooth operations. It compares the cost of inventory against the
revenue generated by the company to ensure cost of labor, raw materials and overhead so that
they do not affect the cash flow of the company negatively. The accounting department tries to
find out the balance between high inventory levels that lead to customer satisfaction but are

costly with low inventory levels that satisfy expenses of company but dissatisfy customers.
Alpha limited choose high inventory level which satisfies the customer because customer
satisfaction id the main objective of the company.
Recording fixed assets – Every company needs machines, equipment to work efficiently
and effectively and to stand in the competition. The company uses a lot of fixed assets over the
years which includes vehicles, fixed assets etc. Fixed assets of the company can be intangible
which are trademark and goodwill or tangible like machinery (Mitchell, 2017). As the
technology of Alpha is not up to the mark therefore to see that it remain in the competition, its
financial statement will help the company in determining what technology business can afford.
The recording of fixed assets by accounting department helps the company in knowing the
liquidating position of the company and also helps Alpha limited in knowing the amount of fixed
assets company have.
Finance department
Finance deportment is important for smooth working operations of the company. The
most common function of finance department is to control cash inflow and outflows of the
company (Function of finance department, 2019). Cash flow can be displayed on up to date basis
every day and can help finance department in knowing how the company is performing at any
given time. The finance department also performs various functions like payment of bills, wages
and salaries. The role of finance department in the company is as follows :
Bookkeeping – The most important function of finance department is book keeping. It
tracks all the transactions in the organization, covering both sales and expenses. As Alpha
limited is planning to expand its operations therefore it will receive more payable and receivables
and to keep the record of that finance department is necessary. The effective book keeping helps
the company in achieving overall success by keeping proper track of account receivables, cash
receipt and account payable.
Financial reporting and control – It is the another function of financial department that
takes raw accounting entries and transforms them into comparable and usable financial
statements. This function involves everything from ruling on how to implement accounting
principles to designating financial process of the company. In alpha limited, the accountant very
keenly observe and record accounting entries and transforms them into financial statements.
These statements include balance sheet, income statement of the company which helps the user

in knowing about the financial position of the company. Also, it helps the company in knowing
and making their investment decision as the company by the help of these know where it stands
in the market.
Treasury management – The finance department set up treasury management policy to
be adopted by all who come in contact with cash. The treasury functions are usually managed by
assistant finance manager whereas chief financial manager of the company handles financial
accounting aspects. In Alpha limited, the treasury management is handled by finance manager in
which manager plan, organize, control funds and working capital requirements of the company.
Cost control – The finance department makes sure that the cost of the company is in
control and cost cutting is being done wherever necessary. The whole essence of the company is
to control cost and report activities and finance department perform that function. The Alpha
limited for this purpose uses various techniques like inventory management, cost management
etc. the company uses absorption costing method to get proper idea of costing and to control it.
Tax and compliance – Running a business involves paying taxes to government and
unions which means lot of calculation and filling out lot of forms as well. The finance
department takes care of these issue and take financial statements of the company as a basis to
pay taxes and find ways to minimize taxes. In Alpha limited the taxes are paid on time with the
help of tax and compliance function of finance department which helps the company inn having
good reputation among its customers, suppliers as well as government.
Capital budgeting – It is the function responsible for selecting between various uses of
capital and projects. Most of the companies have money to invest in the business with the hopes
of growing sales and in the same way Alpha limited want to expand its operations outside UK.
Capital budgeting is the function of finance department that helps the company in identifying and
forecasting benefits of the project and will also help Alpha limited in tracking the benefits over
time to determine whether the use of capital was as effective as was estimated by the company.
As the Alpha limited is planning to expand its operations outside UK therefore capital budgeting
function of finance department will help the company in knowing whether the decisions was
effective or not.
Corporate development and strategy – Finance department of the company deals with area
of making corporate strategy for the company. As Alpha limited wants to expand its operations
in other countries, it can make decision of acquiring or merging local company of that country to

have cultural advantage but will the decision would be beneficial will be analyzed by finance
department (Osadchy, 2018). It helps the company in analyzing merger and acquisitions deals,
raising debt and equity financing. It helps in making capital structure decisions and provides
insight into high level strategic decisions like entering into new market, launching new product
etc.
TASK 2
Financial Ratio Analysis
Ratio analysis
Particulars Formula Amount (in £000) Amount (in £000)
2017 2018
Operating profit 300 262.5
Total assets 2235 4035
Current liabilities 322.5 1110
Capital employed Total assets-current liabilities 1912.5 2925
Return on capital
employed
Operating profit/capital
employed*100 15.69% 8.97%
Net profit 300 262.5
Sales 2400 3000
Net profit margin ratio Net profit/sales*100 12.50% 8.75%
Current assets 757.5 1035
Current liabilities 322.5 1110
Current ratio Current assets/current
liabilities 2.35 0.93
Trade receivables 450 600
Sales 2400 3000
Average receivable days Trade receivables / Sales * 68.4 73

365
Trade payable 285 1050
Sales 2400 3000
Average payable days Trade payable / Sales * 365 43.3 127.8
Interpretation
Return on capital employed – The term Return on capital employed is a financial ratio
which assess the profitability and operational efficiency of the company, in using its own capital
employed for generating profit. This ratio helps in evaluating that how properly and effectively
the company is utilising its capital funds for generating more and more profits. Return on capital
employed is considered as one of the most useful metric for making comparison of the different
companies on the basis of profitability earned by these companies with the help of the capital
amount used by them.
Return on capital employed of Alpha Limited was 15.69% & 8.97% for the year 2017
and 2018 respectively that indicates return from capital invested is declining. It means that
profitgenerated is lower in proportion to the capital amount employed. Investor can easily predict
that capital is not utilized properly for conducting business operations which has affected the
performance and profitability level of the company (Banerjee, Guha and Bandyopadhyay, 2016).
This return is having a declining trend due to several reasons such as using of outdated
machinery and business processes, increase in debt amount along with high liability side.
For improving this ratio, the company should formulate sound and better business
strategies, plans and policies. By paying off business obligations & liabilities company can
improve the return on capital employed ratio. By disposing off outdated plants and machinery,
equipment associated with production and manufacturing function can lower the cost of
production of unproductive and unnecessary business areas for enhancing the operational
efficiency of business.
Net profit margin ratio – This ratio depicts the amount of revenue earned or profit remaining
after meeting all business expenses related to production and manufacturing operations etc. out
of total sales made. Net profit is the amount of profit which is available for its shareholders after

deducting all business expenses in form of interest paid to debenture holders, tax paid for
relevant accounting year, preference dividend distributed to its preference shareholders.
It indicates profit earned from total sales level made during a particular period or an
accounting year (Lakshan and Wijekoon, 2017). The sales in this ratio is taken after making all
deductions which are pertaining to the sales amount. Alpha limited net profit margin is
decreasing from 12.50% in 2017 and 8.75% in the year 2018 which means that income
remaining after meeting all the business expenses is very low. Low sales reflect poor
performance caused as a result of low prices for its product and services. Also, the cost of goods
sold, operating expenses of Alpha limited are very high which can lead to the decrease in the
net profit margin.
Alpha should focus on improving its performance, business operation and profit level by
reducing labour and operational cost. By increasing product and service selling price can
havhigh earning. Alpha limited should emphasize on producing goods at cheaper rate
thereby resulting in lower cost of production, increasing return, market position and
competitive advantage of the company.
Current ratio – Is considered as a part of liquidity ratio which helps in determining the ability of
a company in paying off or meeting all the obligation and dues of short term nature. This ratio
helps in determining the availability of current asset with the company for paying of all the
business obligations of short term period or dues which are going to arise within a period of one
year (Hosaka, 2019).
In 2017, the current ratio for Alpha ltd. was 2.35:1 which is considered good ratio. 2:1 is
the ideal current ratio states that company is having enough current assets for paying of its
liability. But on the flip side, this ratio decreases to 0.93 in 2018 which means liabilities of
company are more than current assets.
Alpha Limited does not have sufficient funds and assets to meet its short term obligation which
depicts poor liquidity position of company. The current ratio of Alpha Limited decreases due
to the increase in the short term loans, having high cash expenditures & decrease in trade
receivables. For improving the liquidity and solvency position of the company it should focus on
factors such as collection of due amount on early basis, switching to long term loans instead of
short term, controlling overhead expenses etc.

Average receivable days – Also known as Debtors collection period. This defines the average
number of days in which the company will receive its debt amount or amount due from its
customers on behalf of credit sales made. It is very much important for every business
organization to have focus on reducing the time period of its debtors’ collection so that company
is able to complete its business operations on time and have enough cash available with itself so
as to avoid a situation of business loss. By reducing the debtors’ collection period, Alpha
Limited is able to have more liquidity and cash in its business.
This ratio indicates average time taken by Alpha Limited in collecting amount due
against goods purchased by its customer on credit basis. For year 2017, it is 68.4 days and 73
days in 2018. This can be because of several reasons such as granting of goods and services more
on credit basis, for increasing sales company introduce attractive credit sales offer for limited
period time etc.
By formulating strict rules, policies and norms related to business operations, credit
services etc. company can improve its business performance. The increase in debtor collection
period states that Alpha is focusing more on credit sales in place of cash. Alpha limited by
adopting some other mode of receiving cash such as online payment facility can be able to
receive its money faster. Alpha Limited should focus more on formulation of policies and
strategies related to credit sales by considering Accounts Aging Receivable Report of the
company. Also, its should make clear specification related to terms & conditions, norms and
standards of taking goods and services on credit basis to its customers related to payment factor.
Average payable days -This ratio helps in assessing the time period in which the company will
make payment of due amount or bills for the raw material, inventory or goods purchased from its
vendors, creditors or any other business suppliers. The payment period should be increased and
delays should be made in making payment. By this Alpha Limited can have enough cash in hand
and will remain liquid for certain period of time which will improves its business operations and
performance level (Arkan, 2016).
The average payable period for Alpha Limited was 43.3 and 127.8 days in year 2017 and
2018 which shows that company is taking more time in making payments for credit purchase
made from its creditors, suppliers, vendors. Increasing payable period is good for company as it
will have more cash for meeting day to day business operations on time. Account payable days
can be improved by having reminders for payment due, looking for discounts, making proper

budgets etc. The creditors payable period of Alpha has increased with time which is good for
company as it will have cash with itself. Reason for increase in payable period may be because
of delay being made by the company in making its payment for procurement of goods and
resources in form of raw material from vendors, creditors etc. Alpha should focus on purchasing
of raw material from that supplier or creditor which is ready to grant high payable period time.
CONCLUSION
The report concluded the importance of accounts and finance department of the company
that how both the departments act as the base of decision for the company and help in assisting
uncertainties. The report summarized the functions of both departments by also showing. Later,
the report showed ratio analysis of the firm which showed the performance of the company along
with their interpretation on their adequacy and inadequacy. The report compared ratios of two
years and have focused the light on impact of decrease and increase of these ratios which helped
the company to seek for improvement.

REFERENCES
Books and journal
Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study
in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia. 79(1). pp.13-26.
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selected IPOs and its impact on grading: an empirical inquest. Journal of Business Studies
Quarterly. 8(1). p.23.
Consigli, G., Kuhn, D. and Brandimarte, P., 2017. Optimal financial decision making under
uncertainty. In Optimal Financial Decision Making under Uncertainty (pp. 255-290).
Springer, Cham.
Feltz, A., 2016. Financial surrogate decision making: lessons from applied experimental
philosophy. The Spanish journal of psychology. 19.
Hirshleifer, D., 2015. Behavioral finance. Annual Review of Financial Economics. 7. pp.133-159.
Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional neural
networks. Expert Systems with Applications. 117. pp.287-299.
Lakshan, A. I. and Wijekoon, W. M. H. N., 2017. The use of financial ratios in predicting
corporate failure in Sri Lanka. GSTF Journal on Business Review (GBR). 2(4).
Maimunah, M., 2016. Implementation of Accrual Accounting: Review of Readiness and Arising
Problem. Procedia-Social and Behavioral Sciences. 219. pp.480-485.
Mitchell, O. S., Hammond, P. B. and Utkus, S. P. eds., 2017. Financial Decision Making and
Retirement Security in an Aging World. Oxford University Press.
Osadchy, E. A., and et.al., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy. European Research Studies Journal. 21(2).
pp.339-350.
Online
Accounting department definition, 2019. [Online]. Available through:
<https://www.accountingcoach.com/terms/A/accounting-department>
Function of finance department. 2019. [Online]. Available through:
<https://saplingfinancial.com/blog/company_finance_department/>