Financial Decision Making (BM414) Assignment Report - Analysis

This report analyzes financial decision-making, focusing on accounting ratios and their significance in business. It defines and explains various ratios, including Return on Capital Employed, Net Profit Margin, and Current Ratio, providing their importance and formulas. The report includes a case study of Alpha Limited, comparing its performance between 2017 and 2018 using the calculated ratios. The analysis highlights trends, potential causes for changes in financial metrics, and their effects on the company's financial health. Additionally, it discusses the accounting and finance functions within an organization, emphasizing their interrelation and importance in managing revenues, expenditures, and providing information to stakeholders for informed decision-making. The report also explores the role of finance in fund management, cost reduction, and financial planning, including budgeting and dividend policies. Overall, the report offers a comprehensive understanding of financial analysis and its practical application in business contexts.

Financial Decision Making

Financial Decision Making 1
Table of Contents
Question 1........................................................................................................................................2
Accounting and Finance Function...............................................................................................2
Question 2........................................................................................................................................5
Accounting Ratio Concept...........................................................................................................5
Importance of Accounting Ratio..............................................................................................5
Return on capital Employed.........................................................................................................5
Analysis of Alpha Limited.......................................................................................................5
Net Profit Margin.........................................................................................................................5
Analysis of Alpha Limited.......................................................................................................6
Current Ratio................................................................................................................................6
Analysis of Alpha Limited.......................................................................................................6
Debtor Collection Period.............................................................................................................6
Analysis of Alpha Limited.......................................................................................................7
Creditors Collection Period..........................................................................................................7
Analysis of Alpha Limited.......................................................................................................7
Conclusion.......................................................................................................................................7
References........................................................................................................................................9

Financial Decision Making 2
Question 1
Accounting and Finance Function
Accounting or Accountancy is the way that measures the accounts of the organization. It also
involves the processing, communicating financial and non-financial information of the
organization. It is often referred to as the language of business. Various stakeholders like
investors, creditors, regulators, management are also involved in the process of Accounting
(Sikka, 2015). Further, there are several broad fields of accountancy which are named herein:
Financial Accounting, Management Accounting, External Auditing, Tax Accounting, and Cost
Accounting amongst others. It is basically designed to help in accounting functions. The
information is recorded in a systematic manner which allows presenting the information of
financial reports knows as bookkeeping (Kaplan and Atkinson, 2015). Amongst many types of
bookkeeping, Double Entry Bookkeeping is the most famous method of bookkeeping. Camden
which is in the business of real estate is also required to have robust accounting systems to
prevent it from prospective frauds. Generally, by manipulating facts and figures in the
accounting, the company decreases or increases the profit so as to lure investors. There have
been many frauds in the past which have put questions on the accounting systems across the
world (Maas, Schaltegger and Crutzen, 2016).
Accounting plays a very important and vital role in managing finances, expenditures, revenues,
compliances, provides relevant information to the stakeholders who provide a base for decision
making for both the company as well as investors. As for taking any decision maintenance is a
must, here accounting comes in and maintains all the data and relevant information. Camden
Limited also follows the Accounting functions in order to effectively manage its revenues,
expenditures, profits, etc and to provide a good picture to its shareholders.
The finance function is somewhat related to Accounting functions. Both deals with money,
former deals with fund management, acquisition, disposal, etc while the latter deals with the
management of accounts of the company, its payables, receivables, etc (Bobryshev et al., 2015).
Finance plays an important role in all the aspect of the organization. It is referred to as the
lifeline for any business as money is the backbone. Companies appoint finance officers for

Financial Decision Making 3
effective management of finances such as Chief Financial Officer (CFO) or Risk Officer,
Treasury Officer amongst others. Functions of finance include a reduction in expenses of the
company which can be achieved in many ways such as a reduction in unnecessary cost etc.
Reduction in internal and external cost is also one of the ways to achieve cost optimization.
Hence the role of financial planning is very important. The company plans a budget in advance
so as to plan how and where are they planning to invest in the near future and what are the cost
expectations for the same to be incurred. Budgets are also further divided into various kinds such
as cash budget, Capital Budget, operational budget (Quattrone, 2016).
Camden has been able to rewards share appropriately during the last decade. The company has
been able to maintain a 16% annualized return which is considered significant for the
shareholders. Also, the company is paying a dividend of 3$ per share on average for the last 4-5
years. In addition to this, the company also rewards its shareholders with an appropriate special
dividend on special occasions. The dividend paid at the rate of 3.08$ per share is the highest for
the company. This indicates that the company follows a constant dividend policy. Constant
dividend policy indicates that the company is paying regular and near-to-fixed dividends
annually to its shareholders irrespective of its profit/loss. So far it has already created a value of
close to 800$ million for its shareholders. The company grew at a rate of 5.3% during the last
year which can be considered solid performance as the sector is struggling to match with the
company. Revenue from the property also grew at 3% which is also significant (Chrisinger et al.,
2018). The balance sheet is also robust and best in industry. With a view to expanding, the
company took an additional loan of 350$ million worth of loan via a secured mortgage at the
interest rate of 4.4%. The company’s current Debt-to-EBITDA stands at around 4.1 times.
Recently the company achieved A- rating from Standard & Poor with a stable outlook which is
very significant when the market is seen as a whole. Also, the company raised equity as well as
debt for managing its operations and the company has been able to repay its obligations before
the due date without any fail. The company’s fundamental looks strong and they have a lot of
potentials to grow in the market. Also, millennials who are living in rented apartments are the
main source of revenue from them which contributes to approx. 50% of total revenue. The
company’s revenue over the number of years has been on an increasing trend which is very
significant for the company as well as shareholders. In the span of just 5 years, the revenue from
property jumped from 790,263$ ‘000 to 954,505$ ‘000 in 2018. With an increase in the revenue

Financial Decision Making 4
proportion, the expenditure incurred also increased to earn higher revenue. The company earns
most of its revenue from the real estate, whereas the Non-property revenue of the company
contracted over a period of 5 years. From 14,611$ in 2014 to just 2,797$ in 2018 is significant
DROP. In another way, it is also positive that the company is mainly focussing on its core areas
i.e. real estate arm. The Earning per Share (EPS) came out to around 1.63$ per share, from 3.08$.
Despite an increase in revenue, there is a significant drop in Earning per Share (EPS) (Wheeler,
2016).
It is already discussed above about the robust position of the balance sheet of the company. The
assets of the company stand at around 6,219,586$ in the year 2018. In the year 2014, it was close
to 6,043,981$. So the company has seen an increase in the position of its assets as well. Along
with it, there are liabilities on the books of the company which company is striving hard to
reduce it day by day. The company has paid off close to 20% of its liabilities in the last 5 years
which is a step further in the right direction. In the year the Notes payable was close to
2,730,613$ and in the year 2018, it came to around 2,321,603$. The company reduced its
dependence on debt financing over the number of years. The company increased the proportion
of equity as a measure of financing for its future operation and to save from interest cost. The
equity proportion in the year 2014 was close to 2,888,409$ and in the year 2018, it increased to
3,385,104$. The company raised its equity by 30%. The benefit of raising funds via equity is that
the company is not obliged to pay any interest, but the biggest disadvantage is that the company
has to dilute its ownership by offering its shares to the general public or other investors, hence
the ownership gets diluted. The cash flow position of the company is also robust and the
company has sufficient cash position in its books. The company has generated close to 503,747$
from operating activities in the year 2018 which is an increase of about 20% from the year 2014.
Therefore it can be analyzed that the corporation is able to spawn sufficient cash from the
operating activities to manage its day-to-day operations. Taking about the generation of money
from Investing Actions, the cash flow generated is negative i.e. the company is not able to make
optimistic cash flows from the operations. In the year 2016, the cash flow from investing
activities was positive amongst the last 5 years. The same goes for financing activity; the cash
flow earning is negative which shows that the overall cash flow position of the company is not
showing good and encouraging signs for investors and other stakeholders. The profile of the

Financial Decision Making 5
company is quite robust, as they have 161 operating properties and 55,160 apartments homes
which is encouraging and shows how large is the company’s profile (Camden, 2019).
The analysis which is discussed above is made possible only with the help of accounting and
finance functions in the organization. Accounting function helps in collating data and then data is
recorded to its respective position, whereas Finance functions help in raising funds from varied
sources of funds. Finance uses the data prepared by the accounting department. Hence both the
departments are interrelated and the functioning of both is dependent on each other. Accounting
properly manages the company’s income and expenses, and by this, the cash flow position of the
company can be properly managed. Whereas financing functions mainly manages the fund's
operations of the company. Thereafter, planning of raising funds and its cost comes in. They also
manage for collection of overdue payments and minimization of debt. In addition to it, tax
management is also one of the important aspects of the finance function. Further, it also involves
the financial planning, requirement of short term and long term fund for business expansion and
day-to-day operations. Working with a budget is also a part of the finance function (Hamer et al.,
2017).
Hence the statement “Accounting and Finance Function is paramount to any organization” is apt
as Accounting and Finance Function are the backbones for any organization working and the
organization depends upon data and facts which are derived from the accounting and finance
team. They both work hand in hand and can’t be separated under any circumstances.

Financial Decision Making 6
Question 2
Accounting Ratio Concept
Accounting ratios is one of the essential substitute set of the financial ratios that cover the
collection of metrics which is jumble-sale to extend the effectiveness as well as competence of
the organization that is based on its financial statements. Accounting ratio delivers the manner of
stating the association between one secretarial data point to the other as well as it is the basis of
the ratio analysis (Focacci, 2017).
Importance of Accounting Ratio
 Accounting ratios help in analyzing the financial statement of the company in an
effective manner. Ratio analysis supports in presenting the actual picture of the business
which is used by the manager, investor as well as the creditor of the company for making
the decision.
 It helps in finding the faintness of the business that provides an opportunity for the
company to work over its weaknesses to a certain extent.
 It helps in arbitrating the competence of the corporation. Optimum utilization of the
assets, as well as liabilities, is analyzed by the accounting ratios (Christensen, Nikolaev
and Wittenberg‐Moerman, 2016).
Return on Capital Employed
It is the financial ratio that is used by the company to measure the profitability as well as the
efficiency with which its capital is used. It is the tool through which the company can measure
how well it can able to generate profitability for the capital.
Return on capital Employed help the organization to associate the presence of the businesses in
sectors of capital intensive which include utilities as well as telecoms. It is used to analyze the
efficiency of the company as well as the variation of the return on capital employed (Caballero,
Farhi and Gourinchas, 2017).

Financial Decision Making 7
Analysis of Alpha Limited
In order to analyze the recital of Alpha Limited in the year 2017 and 2018, t has been found that
the company performed better in the year 2017 rather than in 2018. In the year 2017, the return
on capital employed was 21% that was decreased to 14.1% in the year 2018. It showcases that
the company does a better job and execute the better job of organizing its capital in the year 2017
as a comparison to the year 2018. A higher ROCE represents a more well-organized use of the
capital. The ROCE must be higher than the cost of capital of the company. Therefore, the
company has deployed better in the year 2017 that represents the company that has performed
great in the year 2017 rather than in the year 2018.
Net Profit Margin
It is the ratio of net profit to the income for the business or the section of any business. It is
characteristically showcased as the fraction but can also be present in the form of a decimal. It is
the ratio that is used to calculate the percentage of the profit an organization produces from is
total revenue.
It is one of the essential indicators of the financial health of the organization. By tracing
increases as well as decreases in its net profit margin an organization can able assess whether the
current prices are working as well as forecast profit that is based on the revenues (Farris et al.,
2015).
Analysis of Alpha Limited
In order to analyze the performance of the business has been examined that the business has
earned approximately 12% in the year 2017 and in the year 2018 the net profit margin of the
corporation was 8.75%. It represents that the company has earned sufficient profit in the year
2017 as a comparison to the year 2018. It showcases that the management of the company was
better in the year 2017 that help them to improve the overall profit margin of the business to a
certain extent as a comparison to the year 2018. It affected the overall earnings of the company
to a certain extent. It can occur due to lack of attention done by the company in the year
2018over the management of the company that creates a loss of profit margin in such a year.

Financial Decision Making 8
Current Ratio
It is one of the liquidity as well as an efficiency ratio that is used to degree the aptitude of the
business to manage its short-term accountabilities with its current assets. It is vital to portion the
liquidness of the business due to the reason the short-term liabilities are due within the next year.
It helps in measuring the short term solvency of the organization when it is placed in the context
of what has been historically normal for the organization as well as its peer group (Fu, Singhal
and Parkash, 2016).
Analysis of Alpha Limited
In order to examine the current ratio the business has been initiate that the current ratio of the
business in the year 2017 was 2.3 that was going down to 0.93.it represents that the company
manages sufficient assents in the year 2017 that was realized in the year 2018. It is caused by
taking or raising funds form the market more than the assets that are acquired by the company it
affected the overall performance of the company to a certain level. moreover, in the year 2017, it
is assumed that the company does not use its current assets effectively as well as it is not
securing financing very well or the company may not managing its working capital that raises
the ratio of the company in the year 2017 rather than in the year 2018.
Debtor Collection Period
Debtor Collection Period is a period which signifies the amount received by the
enterprise/company from its clients. It is calculated in terms of a number of days. It is calculated
by the companies to ensure that they have enough or minimum cash to fulfil their obligations.
Debtor Collection Period = Trade Receivables/Credit Sales * 365
This ratio is important for those companies which are heavily depended on credit sales and those
who deal in cash sales have nothing to do with this ratio. It is significant for the business to
achieve the ratios efficiently so as to make sure that they can operate peacefully and smoothly
without any hassle (Samiloglu and Akgün, 2016).

Financial Decision Making 9
Analysis of Alpha Limited
In the given case, Alpha Limited has been able to maintain its Debtor Collection Period between
68 to 73 days. In the financial year 2016-17, the company’s Debtor Collection Period was 68
days that means the company was able to achieve its payment in or around 68 days. But in the
Financial Year 2017-18, the company’s debtor collection period rose to 73 days which is a
worrisome situation for the company. As in F.Y 2017-18, they are required to have 5 additional
days to receive the same payment from their client. The probable reason could be a slowdown in
the economy and a lack of liquidity position in the market. The clients possibly are not able to
generate revenue and ultimately not been able to pass on to Alpha Limited hence increase in
Debtor Collection Period can be seen as a result.
Creditors Collection Period
The creditor collection period is a period that indicates how many days are occupied by the
business to pay its dealers. Likewise, the Debtor Collection Period is also calculated in a number
of days.
Creditor Collection Period = Trade Payables/Credit Purchase * 365
Every enterprise tries to pay on time so as to save from the interest and penalty cost, but there are
always risk associated with business activities which delay the payment. It is recommended to
pay as soon as the company gets the fund from various sources. But one point which contradicts
this statement is that, if the company is not paying the funds on time, it suggests that the
company is retaining funds for some productive purposes (Oseifuah and Gyekye, 2017).
Analysis of Alpha Limited
In the given case, Alpha Limited has not been able to maintain its creditor’s collection period to
normalcy. There are a huge amount of fluctuations in the Financial Year 2017 and 2018. In the
Financial Year 2016-17, the company was able to pay to their clients on an average by the end of
60 days. The bit in the Financial Year 2017-18, the period rose up to 170 days which is
worrisome. There is 2 possible condition, either the company is not having sufficient funds or the
company intentionally is blocking funds for payment and is using in their business activity.

Financial Decision Making 10
There could be a negative aspect to this; a company might have to pay interest cost or even
penalties for delaying in the payment. Hence it is recommended to pay on time to save from
interest and penalties.
Conclusion
It can be concluded from the above analysis that accounting ratio plays a vital role in the
organization.it helps the company to analyze its overall performance that can support them to
grow in the competitive market. The risk and weaknesses of the company can also be analyzed
by adopting accounting ration. There is a different type of ratio such as net profit margin, return
to capital employed current ratio as well as many more that help in analyzing the efficiency of
the business one of the corporation Alpha Limited has been found that the firm has performed
very well in the year 2017 as a comparison to the year 2048. It is occurred due to certain reasons
that are required for the company to be more focused on their work.

Financial Decision Making 11
References
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The Concept of Management Accounting in Crisis Conditions. Journal of Advanced Research in
Law and Economics, 6(3 (13)), p.520.
Caballero, R.J., Farhi, E. and Gourinchas, P.O. (2017) Rents, technical change, and risk premia
accounting for secular trends in interest rates, returns on capital, earning yields, and factor
shares. American Economic Review, 107(5), pp.614-20.
Camden. (2019) Annual Report [Online]. Available from:
http://www.annualreports.com/Company/camden-property-trust [Accessed on 24/10/2019]
Chrisinger, B.W., Ramos, A., Shaykis, F., Martinez, T., Banchoff, A.W., Winter, S.J. and King,
A.C. (2018) Leveraging citizen science for healthier food environments: a pilot study to evaluate
corner stores in Camden, New Jersey. Frontiers in public health, 6, p.89.
Christensen, H.B., Nikolaev, V.V. and Wittenberg‐Moerman, R. (2016) Accounting information
in financial contracting: The incomplete contract theory perspective. Journal of Accounting
Research, 54(2), pp.397-435.
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investment: Seeking clarity for concept and measurement. Applied Marketing Analytics, 1(3),
pp.267-282.
Focacci, A. (2017) Managing project investments irreversibility by accounting
relations. International Journal of Project Management, 35(6), pp.955-963.
Fu, L., Singhal, R. and Parkash, M. (2016) Tobin's q ratio and firm performance. International
Research Journal of Applied Finance, 7(4), pp.1-10.
Hamer, M., Aggio, D., Knock, G., Kipps, C., Shankar, A. and Smith, L. (2017) Effect of major
school playground reconstruction on physical activity and sedentary behaviour: Camden active
spaces. BMC public health, 17(1), p.552.