Financial Decision Making Module Report: Alpha Ltd Financial Analysis

This report provides a comprehensive analysis of financial decision-making, using Alpha Ltd as a case study. It begins with an introduction to financial decision-making and its importance, followed by a SWOT analysis of Alpha Ltd, evaluating its strengths, weaknesses, opportunities, and threats. The report then delves into the functions of the accounting and finance departments, detailing their roles in financial accounting, management accounting, tax, auditing, investment, finance, dividend, and working capital management. The second task involves a detailed calculation and analysis of key financial ratios for Alpha Ltd over two years, including Return on Capital Employed and Net Profit Margin, to assess its financial performance and make informed decisions for future growth and expansion. The report concludes with a summary of the findings and references.

FINANCIAL DECISION
MAKING MODULE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Swot analysis of the company.....................................................................................................1
Functions of accounts and finance department in the organization............................................2
TASK 2............................................................................................................................................4
Calculation of ratios of Alpha Ltd for two years........................................................................4
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
The decision which is hard and important or make by keeping in mind all the finances
mix of the organization is what is financial decision making. The decisions are related to
borrowing and allocating the funds which are needed for investment decision. The financial
decision includes raising funds which can be done either through using company's own money or
by borrowing in the form of debentures, loan etc. it helps in maintaining efficient structure of
capital for the company. To understand it better, the report has taken Alpha limited as a base
which is manufacturing company situated in UK and is operating in the industry for 10 years and
want to expand is market and for that the report will do swot analysis if the company and will
mention importance of accounting and finance department for making financial decision.
Further, it will include ratio analysis of the company which will compare the data of previous
and current years to make effective decisions.
TASK 1
Swot analysis of the company
Alpha limited is a manufacturing company which is planning to expand its operations
outside UK and was started 10 years ago and serving the customers from last 10 years with its
services. It has good reputation among the customers and has successfully retained its customers.
For expanding its market sharethe company need to be aware about its strength, weakness, threat
and opportunity(Malina, 2018). In order to do the internal analysis, the company need to carry
out internal analysis of the company, the company will use SWOT analysis.
Strengths : The strength of Alpha manufacturing company is that it is relatively stable
although the demand for manufacturing tends to fluctuate with economic conditions of the
country but it tends to recover from the down turns soon which act as an advantage for the
company. Moreover, the manufacturing process of the company is highly efficient and has
ability to maximize both the productivity of workers and machines which maximize the profit of
the company. The other strength of the company is its futuristic designs which attracts customers
and also it has maintained good reputation among the customers as its providing its services for
years now which increases the trust of the customers on the company and its products.
Weakness – The weaknesses of Alpha limited is that it has less skilled labours and old
workers who are hard working but not innovative and creative which can arise as an issue in the
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way of expansion. The other weakness is that it has high production cost and outdated machines
which slower down the process.
Opportunity – The opportunity of the company can be technology up gradation and
replacing outdated machines with new advanced machines which will make the operation of
company smooth and efficient (Osadchy and et.al, 2018). The other opportunity can provide
training to existing employees to be skilled and to hire new employees who can work on new
machines with effective skills.
Threats – The threat for the company is government rules of country that it needs to
follow which can affect the operations of the company. The another threat can be new
competitors with innovation and technology as entering in this industry is very easy (Osadchy
and et.al, 2018). As company is thinking of expanding its operation outside UK therefore
business fluctuation can also act as a threat of the company which includes inflation, depression,
boom and recession.
Functions of accounts and finance department in the organization
Accounting and finance play an important role in the management of any businesses.
Companies operate on cash and if cash is not managed properly, company cannot work
effectively (Van der Stede, 2015). 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.
The various functions of accounting and finance department that lead to the success of the
organization are :
Accounting department :
Financial accounting- It deals with recording of transactions. In Alpha ltd, it helps in
recording all the transactions by following double entry system. It also helps the managers of
Alpha ltd in communicating all the necessary information to the internal as well as external
parties through financial statements like balance sheet, income statement etc. it also helps Alpha
ltd in comparing its own performance with its competitors and to evaluate opportunities of
investment. It helps the company in calculating financial ratios of the company by using
financial statements and then compare the ratios to benchmarks or other competitions in the
market which lets the company know its financial position accurately.
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Management accounting- This account helps the company in making internal financial
reports which helps the internal management of the company in making policies and procedures
which lead to decision making. It helps Alpha ltd in doing cost analysis of the company to
determine current expenses of the company and suggestions for activities like expansion,
launching new product for future purpose (Baldarelli, 2017). It also helps alpha ltd in evaluating
the real cost of solution and to determine that company need to produce items internally in the
organization or buy them from outside.
Tax function- It plays an important role in the organization and is associated with doing
proper tax calculation and payment which include compliance with law. It helps Alpha ltd to
gather information that is spread among various departments and to produce final impact on
taxes. It increases the transparency of the company and helps the company in optimizing its risk
management and manage tax area of the company. The effective plan and management
implementation of plans and policies increases efficiency of tax management and reduce the cost
of tax.
Auditing function- This function helps Alpha limited in examine the financial statements
of the company and to analyze whether they are accurate or not. It also included doing internal
control of the company along with taking measures to reduce accounting fraud and errors. The
accounting audit of the company helps in assessing company's objectives to determine if the
policies of the company are being planned correctly or not (Avino, 2019). It also helps Alpha ltd
in assuring the public that financial paperwork of the company is completely done by auditors
which eliminates the possibility of fraud and lead to increase in trust among customers and
shareholders.
Finance department :
Investment function – It is one of the most important decision taken by finance
department of the company. It deals with allocating capital to long term assets which can
generate return (Mete Soner, 2018). It helps Alpha limited in tasking two decisions regarding
evaluation of new investment in accordance with profitability and comparison of cut off rate
against new and existing investment. It helps in considering both expected return along with risk
to calculate the actual return that the company can earn on that particular investment. It not only
helps the company in allocating capital to long term assets but also helps in knowing the assets
that are less profitable and productive to sale.
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Finance function - The another important decision of finance department performed by
finance manager is to take financial decisions regarding where and how the company need to
acquire the funds. It helps Alpha ltd in figuring out ways to acquire funds and to correct ratio of
equity and debt in the company which can lead to efficient capital structure. The decision need to
aim at maximizing shareholder's return with minimum risk which will attract more shareholders
and will increase the market share of the company.
Dividend function – When company earns profit or get positive returns on its investment,
dividend comes into the picture. The function of finance department is to decide that in case of
profitability, the profits need to distribute among shareholders in the form of dividend or not.
This functions helps Alpha ltd in deciding optimum and efficient dividend policy which
maximizes the market share and value of the company (Avino, 2019). It gives optimum dividend
payout ratio. It can also issue bonus shares to existing shareholders in terms of profit earning.
When company pays dividend regularly to its shareholders the image of the company increases
and it attracts new shareholders as well.
Working capital function – The another important function of finance department is to
manage working capital. It helps Alpha limited in achieving long term success by managing
cash, accounts receivables and payable etc. It constantly keeps the check on all this functions to
ensure efficient working capital management. It helps Alpha limited in expanding its investment
portfolio in existing project or in new project (Role of working capital requirements, 2018). It
helps the company in saving cost of finances which otherwise would have been wasted in
managing short term assets and liabilities of the company and this leads to increase in
profitability of the company. The most important component of this function is that it helps
Alpha limited in ensuring that all resources are sufficiently available at times in the organization
to perform various activities.
From the above discussion it can be concluded that accounting department and finance
department are responsible for the success of the company. They perform various functions
which are of utmost importance and lead to success of organization and help company in earning
profit. Due to these departments the company can give competitive advantage to other companies
and continue to increase its reputation in the eyes of shareholders, consumers etc.,
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TASK 2
Calculation of ratios of Alpha Ltd for two years
Return on capital employed
It is a profitability ratio which shows that how organisation is using its capital as it
depicts ability of company for utilizing the capital in efficient manner. This is very censorious
for investors because it helps in undertaking decisions that company is good for investment
perspective. It could be calculated by dividing operating profit margin to capital employed as it
indicates about company's financial performance with significant debt (Lowe, Papageorgiou and
Perez‐Sebastian, 2019). In simple words, it indicates about large chunk of margin could be
invested back into organization for providing benefit to shareholders. The reinvested capital is
again employed with high rate of return and helps in generating high earnings per share growth.
This replicates that how organization is producing profit with context to its capital.
Comparison
Particulars 2017 2018
(Operating profit/ Total Assets – Current liabilities) * 100
Operating margin 375 412.5
Capital employed 1912.5 2925
Return on capital employed 15.69% 8.97%
In the above scenario, it has been observed that, Alpha Ltd is generating positive return
on employed but on the other hand, it has been observed that it reduced from previous year
because of high purchases along with finance cost which leads to decrease in operating profit
margin. Apart from this, its employed capital also raised with high proportion in year 2018
which leads to decrement in return on capital employed (Rai and Lin, 2019). With reference to
improving return in capital employed, it must improve top line by raising operating margin with
absence of corresponding increment. Furthermore, it should maintain operating profit but
decrease the value of capital employed.
Net Profit margin
This is percentage of revenue left after every expense which has been excluded through
sales. It is equal to how much profit is produced as revenue's percentage as ratio of net profits to
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company's revenue. Generally, this is intended for measuring overall business success of Alpha.
It indicates about Alpha's pricing of its products along with exercising best control of cost. It is
mandatory for purpose of comparing outcome of business within similar industry, as subject to
same environment of business along with customer base and it might have identical cost
structure (Tampubolon, Marina and Hasrat, 2019). It is also known as company's bottom line and
it is equivalent to net income on profit and loss statement. It is considered as one of the very
crucial indicators of financial health of the organization. Through tracing decrement and
increment in its net profit margin, one could assess that current practices are appropriate and
predicts margin on basis of revenues.
Comparison
Particulars 2017 2018
(Net profit margin / sales) * 100
Net profit margin 300 262.5
Total sales 2400 3000
Net profit margin 12.50% 8.75%
In the above table, net profit margin of 2017 and 2018 is compared as per sale
contributed 12.50% towards the Alpha’s net profit. On the contrary, in 2018 it has contributed
only 8.75% as it varies on significant basis with business perspective and could be impacted
through different internal and external factors as well. It could be improved by decreasing
expenses such as finance cost which is just doubled in 2018 from previous year. Apart from this,
it must decrease labour cost, utilities, operation cost, insurance premium and most important is to
increase the sales revenue.
Current ratio
It is also replicated as liquidity or working capital ratio which provides reflection about
proportion of business's current assets on basis of current liabilities. Generally, it expresses the
particular extent to which business’s current liabilities are to be recouped with its current assets.
It helps in assessing business liquidity and outcome could be implied for purpose of granting
loans or credit or for taking decision to invest in business (Lee and et.al., 2019). It could be
calculated by dividing current assets from current liability and in simple terms, it measures
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ability of Alpha for repaying its debt over next 1 year or specific business cycle. The optimal
current ratio is 2:1 as it shows about presence of sufficient current assets to cover twice amount
of short term liabilities of company.
Comparison
Particulars 2017 2018
Current Assets / Current Liabilities
Current assets 757.5 1035
Current liabilities 322.5 1110
Current ratio 2.35 : 1 0.93 : 1
The above table is measuring liquidity in terms of current ratio of past 2 years that is
2017 and 2018. It has been observed that, in 2017, Alpha has 2.35 of current assets for purpose
of paying off its liabilities. On the contrary, in 2018, it had only 0.93 of current assets as it is not
reaching the minimum of 1 as well. Thus, it could be concluded that in 2017 Alpha Ltd was in
better position and liquid as in 2018 both components rise with high proportion which is not
acceptable. Henceforth, to improve current ratio, current liabilities could be paid off as it is
equally dependent on current assets. The current liabilities must be repaid as soon as possible and
reduce level of current liabilities and improve the current ratio.
Average receivable days/ Debtors collection period
It is linked to concept of accounting with reference to accounts receivable as is referred
as number of days taken for clearing every accounts receivable or how long it considers for
receiving money for goods sold. It is very important for identifying that how efficient
organization is at gaining short term payments is owed. In simple words, number of days that
specific customer invoice is outstanding prior to its collection. The point of measurement helps
in identifying effectiveness of credit of company along with collection efforts to allow credit for
reputable customers (So and et.al., 2019). Simultaneously, this enables for collecting cash in
timely aspect and it is applied to the whole set of invoices which organization has presence of
outstanding at any point instead of a single invoice. Generally, it indicates about average time
undertaken for purpose of collecting trade debts. The credit sales are replicated as sales which
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are made on credit and long average receivable days represent late or slow payments through the
debtor.
Comparison
Particulars 2017 2018
(Receivable / Sales) * 365
Receivables 450 600
Sales 2400 3000
Debtors collection period 68 73
The above table is stating comparison in accounts receivable days of past consecutive
years of 2017 and 2018. It is clearly viewed that in year 2017, Alpha has its average receivable
collection period is 68 and increased to 73 which is negative signal. It has been elaborated that
short and prompt collection period signifies better management of receivables as longer period
gives negative impact ability of short term paying of business. However, for improving debtor
collection period, Alpha must quickly alter credit terms a business offers. The time frame of
customer must be decreased for repaying bill with context to improve ratio. In this aspect, each
credit policy must be revised for sending invoices on immediate basis. Furthermore, there must
be applicability of diligent follow up on collections of accounts receivable is also essential and to
be proactive in collections and invoicing efforts.
Average payable days/ Creditors collection period
It is a financial ratio which indicates about average time that organization undertakes for
repaying its invoices and bills to its trade creditors which comprises vendors, suppliers and other
organization. Usually, it is calculated on annual and quarterly basis and reflects that how cash
flows of company are managed (Ariyani, Pangestuti and Raharjo, 2019). In simple terms, it
measures numbers of days that organization undertakes for paying its suppliers.
Comparison
Particulars 2017 2018
(Payables / Purchase) * 365
Payables 285 1050
Purchase 1350 2400
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Average Payable days/
Creditors collection period ratio 77 days 160 days
The above table is reflecting comparison of data of past two years with context to average
payable days as in 2017 Alpha operating was 77 days. On the other hand, in year 2018, it was
increased till 160 days as high ratio signifies that short time among purchase of goods and
services and payment (Campbell and et.al., 2019). The lower ratio, signifies that organization is
slow to pay its suppliers is positive aspect. Thus, in order for improving Creditors collection
period, Alpha should negotiate payment terms with suppliers, offers discounts for early
payments, automating credit control and improving stock control as well.
CONCLUSION
On basis of above report it could be concluded that financial decision is a procedure
which is responsible for every decision with reference to liabilities and company's stockholder's
equity along with bonds issuance. It has shown that accounting and finance both are paramount
to company with presence of strength and weakness as well. It had been recommended to
appropriate align in finance and accounting as it helps in sustainability and dividend operations.
Moreover, it has shown ratio analysis where organization was performing in best manner in
12017 but in 2018, it has decreased its performance so in this aspect, it should maintain working
capital requirements and operating profit margin. In the same series, it should reduce its expenses
as well and to raise the total sales revenue and must alter credit policies and negotiate payments
terms with suppliers and improving stock control for debtor and creditor collection period.
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REFERENCES
Books and Journals
Ariyani, H. F., Pangestuti, I. R. D. and Raharjo, S. T., 2019. THE EFFECT OF ASSET
STRUCTURE, PROFITABILITY, COMPANY SIZE, AND COMPANY GROWTH ON
CAPITAL STRUCTURE (The Study of Manufacturing Companies Listed on the IDX for
the Period 2013-2017). JURNAL BISNIS STRATEGI. 27(2). pp.123-136.
Avino, D., Stancu, A. and Wese Simen, C., 2019. The predictive power of the dividend risk
premium. Journal of Financial and Quantitative Analysis.
Baldarelli, M. G., Del Baldo, M. and Nesheva-Kiosseva, N., 2017. Environmental Accounting
and Reporting. CSR, Sustainability, Ethics & Governance.
Campbell, R. C. and et.al., 2019. Assessment of financial decision making: an informant
scale. Journal of elder abuse & neglect. 31(2). pp.115-128.
Cole, D., and et.al., 2019. Accounting and Accountability. Bodies of Information: Intersectional
Feminism and the Digital Humanities.
Gupta, G. and Mishra, R. P., 2016. A SWOT analysis of reliability centered maintenance
framework. Journal of Quality in Maintenance Engineering. 22(2). pp.130-145.
Lee, S. J. and et.al., 2019. Ratio Error Reduction of a Current Transformer Using Multiple
Winding Technique. Journal of Electrical Engineering & Technology. 14(2). pp.645-651.
Lowe, M., Papageorgiou, C. and Perez‐Sebastian, F., 2019. The Public and Private Marginal
Product of Capital. Economica. 86(342). pp.336-361.
Malina, M. A. ed., 2018. Advances in management accounting. Emerald Publishing Limited.
Mete Soner, H., Reppen, M. and Rochet, J.C., 2018. Optimal dividend policies with random
profitability (No. 882). Institut d'Économie Industrielle (IDEI), Toulouse.
Overbeck, L. and Chen, C. Y. H. eds., 2017. Applied Quantitative Finance. Springer.
Rai, D. and Lin, C. W. W., 2019. The influence of implicit self-theories on consumer financial
decision making. Journal of Business Research. 95. pp.316-325.
Sammut‐Bonnici, T. and Galea, D., 2015. SWOT analysis. Wiley Encyclopedia of Management,
pp.1-8.
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