Report on Financial Decision Making and Ratio Analysis for Alpha Ltd

This report provides a comprehensive analysis of financial decision-making within Alpha Ltd, a UK-based metal sheet manufacturer. It begins with an introduction to financial decision-making, emphasizing its importance in achieving organizational goals. The report then delves into the roles of the accounting and finance functions, detailing the responsibilities of each department, including financial accounting, management accounting, tax, auditing, investment, financing, dividend, and working capital functions. A SWOT analysis of Alpha Ltd is also presented to provide a broader understanding of the company's position. The report further includes the calculation and analysis of key financial ratios, specifically the Return on Capital Employed (ROCE) for the years 2017 and 2018. The report concludes with a summary of the findings and insights gained from the analysis, highlighting the financial performance and efficiency of Alpha Ltd.

Financial decision
making

TABLE OF CONTENTS
Introduction......................................................................................................................................1
TASK 1............................................................................................................................................1
Role of accounting and Financing function in the organisation ................................................1
TASK 2............................................................................................................................................6
Calculation of different ratios for the tow years of alpha Ltd company.....................................6
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

Introduction
Financial decision making is the process in which decision related with liabilities,
stockholders equity of the company and the issuance of bonds etc. Establishing the company
goals, setting the goals, company want to achieve and the risk they are able to suffer and all
related decisions are taken under the financial decisions in the company. This is the most
important decisions which is need to make effectively and efficiently in order to achieve the
organizational goal.
The present study is based on Alpha Ltd company which is manufacturer of metal sheets
and is UK based company. There are different types of departments and their key functions will
be explained in the report. Furthermore, the report will include about the different types of ratios
which will help to analyse and evaluate the financial performance of the organisation which
further helps them in making the effective decisions for achieving their goal and objectives.
TASK 1
Role of accounting and Financing function in the organisation
Alpha Ltd is a manufacturing are leading precision metal sheet fabricators based on
Hixon, Staffordshire. The company is the part of the Bri-store group of companies. Alpha are
subcontract supplier to man of the largest brands of the UK across sectors such as automotive
retail, agricultural, electrical, construction and utilities. The company orders the metal work
design, power coating, welding and laser cutting services. The company serves the customers in
the UK. The company started back in the year 1954.the company is also planning to expand their
operation sin different parts of the UK in coming 10 years(Barth, Papageorge and Thom, 2017).
There are large number of employee in the company which are highly efficient and
capable of handling their respective job roles and responsibilities. The company has around
11,000 employees which are working focus towards the organisation and making the Alpha Ltd
brand value stronger and loyal among the customers by providing the quality services and
products which is the source of attracting more customers and capturing the larger share of the
market which ultimately contributes towards the future growth and success of the
company(Carvalho, Meier and Wang, 2016.). The company's annual turnover is around £300000
and thy are still working to improve their efficiency and increasing their annual turnover as it
will lead them in achieving their organisation goal and objectives.
1

Swot analysis of the company
STRENGTH
 Established the infrastructure
 Increased adoption of energy efficient
technology.
 Optimum utilisation of all resource
 close relationship with customers
 proximity of the supply networks and
related industries make easy to adapt
the change flexibly (Chambers,
Echenique, and Saito, 2016)
 Strong position on high end markets by
providing their high quality products
 Technology intensity ans strategic focus
on innovation in small and large sized
companies.
 Efficient and effective use of input
materials
 Expertise in recycling
 High degree of differentiation,
specialization including the functional
flexibility which provides the sector the
ability to adapt the changes
WEAKNESSES
 Higher level of dependency in imported
raw materials
 Lab-or intensity in sector which cause
high tabor cots.
 Demand for the skilled engineers are
expecting to rise due to increasing
complexity.
 Higher cost of capital.
OPPORTUNITIES
 Increases mergers, acquisition helps in
creating larger company which can be
engage in R&D for innovative product
THREATS
 Demographic changes which leads to
decreasing number off technical
education students(Francis, Hasan, Park
2

offerings.
 Higher energy efficient solutions can
able to drive the innovation and reduce
production costs.
 Increasing the use of new technology
for better products and services
 Innovative networks and other
collaborations between companies,
customers and education for accessing
to new and technical knowledge fir life
long earnings(Hershfield, John and
Reiff,2018).
 Positive growth of national economy .
and Wu, 2015)
 Skill shortage creates a structural
barrier to competitiveness.
 Increase imports and competition which
resulting in increased risk of offshoring
to reduce the cost.
 Rising cost of raw material will lead to
large clients offshoring .
 Slow industry growth

Importance of finance and accounting function in organisation.
There are different function which are performed in the organisation and are need to perform
effectively and efficiently in order to create the activities and offering the high quality products
and service sin the market to capture larger share of the market. Some functions are explained
below:
Accounting department-
This department is basically responsible for recording and reporting the cash flow transactions
of the company. This department has some key roles and responsibilities which they need to
perform effectively which includes account receivables, account payables, financial reporting,
payroll and maintaining financial controls in the organisation(Jetter and Walker, 2017).
There are various other functions also which are performed under the accounting department of
Alpha Ltd that is :
Financial accounting-This accounting helps in preparing the financial statements of
company which provides various financial information that can be use by investors and creditors
in order to evaluate the company's financial performance. Financial statements are also used to
ascertain the financial health and soundness of the company. These statements help the Alpha
Ltd in evaluating it future trend and their financial performance through different type of ratios.
3

Management accounting- is the process of preparing the management reports and
accounts which provide accurate and effect' the financial and statistical information s that
mangers can make out the short term and long term decisions(Le and Viviani, 2018).
Management accounting involves the completer process of planning, organising, controlling and
monitoring all the accounting information so that according to the information generated they
can able to identify and make decisions which result in useful and effective.
Tax function- this function of the accounting department ficus majorly on fulfilling their
all tax liabilities in order to be work legally and by being a responsible citizen. This lead the
company in avoiding the disruptions of tax authorities. It is the duty of the finance manger to
analyse, evaluate and identify the different activities or elements in which tax is being charged
and the appropriate calculation of tax is also the responsibility lies under the financial department
so that tax can e paid in order to follow the legal rules( Martin and Gomez-Mejia, 2016.). Tax
liability is the most important liability under the head of financial department and needs to fulfil
by keeping it prioritizes.
Auditing function- is the function which focuses on systematic and independently examination
of books, statutory records, accounts and voucher of the organisation so that they able to
ascertain the true, accurate and reliable financial position of the business.
Finance department
It is the most important department of the complete organisation as it focuses on the
financial resource of the company which acts as a basis for all other resources and operation of
the business. This department manges the money of the organisation the business function of the
financial department includes the planning, organisation, auditing, accounting and controlling the
company's finances(Petersen, Saunders, and Inzlicht, 2018. ). This department also produces the
company's financial statements which are further used to communicate to the users so tat its user
can obtain useful information from it and can make useful and prompt decision regarding their
purpose.
Investment function –
This function of the financial department is to focus in the various type of investment s
which company doe sin order increasing their profitability and earn good amount of profit in
long run. The department major task is to decide how much money is to be invest, in which to be
invest, and for how long to b invest these three elements are completely depended on the
4

financial department as all the major financial decisions are taken on the basis of financial
reports generated by the department(Soares, and Pina, 2016. ).
There are some other factors also which needs to be evaluated and analyse before taking
the investment decision, This is the responsibility of the manager to identify and evaluate all the
available options and alternatives in which investment can be profitable, then after evaluation
pros and cons of different investment is ascertained and after analysing the prod and cons the
best and potential investment is decided by the company so that there money can be invested in
the most efficient investment(Spreng, Karlawish and Marson, 16).
Financing function- It is the part of the financial management. Its activities is to control
and plan the financial resources. Finance function involves acquiring and utilisation of funds
which re necessary for efficient operations. It helps in managing all the other resources of the
organisation which ultimately leads to optimum utilisation of all resources and help the Alpha
Ltd in achieving their goals and objective effectively and efficiently.
Dividend function- Dividend is basically the part of the company's earning which is being
distributed among the shareholders holding the shares of the company(Barth, Papageorge and
Thom, 2017). This function means distributing the dividend in the ratio of their share holding
and deal made within. Alpha Ltd. Is in under the obligation to pay the dividend to their
shareholders and if boards feel that they not having the sufficient fund than they omit to pay the
dividends in case of equity shareholding and then pay after when company has enough fund
available to make out fr the dividends.
Working capital function- working capital covers all the company's short term expenses
which are required for meeting day to day requirements including purchasing of raw material.
Maintenance expenses, inventory, payment of short term debts and other operating expenses.
Basically the working capital helps in keeping the business operations work smoothly and
optimally and helps in meeting all the financial obligations within the coming year(Carvalho,
Meier and Wang, 2016.). Sufficient availability of working capital is required by the company so
that its operations get not disturb as a disturbance in smooth flow of operations leads to sever
damage in the manufacturing process for which company may needs to pay high cost. Hence, the
financial department must make necessary arrangements in advance for the sufficient availability
of the working capital so that smooth flow of manufacturing can be carried and continued.
5

TASK 2
Calculation of different ratios for the tow years of alpha Ltd company
Particulars 2017 2018
£0.00 £0.00
operating profit 375 412.5
total assets 2235 4035
current liabilities 322.5 1110
net profit 300 262.5
sales 2400 3000
current assets 757.5 1035
receivables 450 600
payables 285 1050
purchases 1350 2400
Return on capital employed
2017 2018
Return on capital
employed=Operating
profit/Total assets- current
liabilities*100 19.61 14.10
Return on capital employed is a financial ratio which measures the company's
profitability and the efficiency with which its capital is employed. It shows how efficiently the
company is working to increase their profitability. The ratio is indication the percentage of
Return the company has earned with respect to its amount of capital employed in the business.
The above table representing the ratio of 19.61 in the year 2017 and 14.10 in the year 2018
6

which also showing the decreasing trend of return on capital employed ratio that means company
earns less in context with the capital employed by them from year 2017 to 2018(Chambers,
Echenique, and Saito, 2016).
Ratio represents the percentage of return earned by company n relation wit h the capital
employed which is the indication of financial performance of the company including debt, These
ratios representing the net return company is earning in context to its capital employed.
Decreased Return On Capital employed in year 2018 is because of more liabilities and debts held
with the company which leads to decrease the return of the company(Francis, Hasan, Park and
Wu, 2015).
Net profit margin
2017 2018
Net profit margin=Net profit/
sales*100 12.5 8.75
Net profit margin basically represent that how much net income or profit is generated as a
percentage of the revenues. Net profit margin depicts the ratio of the net profit or net margin to
revenues of the company or business. From the above table it can be clearly interpreted that in
the year 2017 Alpha Ltd has generated higher percentage of profit margin of their revenues
compared to the year 2018 in which they achieve generated only 8.75% of profit margin.
A decreased net profit margin clearly indicates that Alpha Ltd. Are not generating strong
sale price relative to their cost of goods sold which is the cost to make ore acquire the goods.
Company can have many reasons for keeping their profit margin low as they may not have much
customer attraction so they are selling the goods at low prices hence they earning wit low profit
margin. In the year 2018 the company has net profit margin of 8.75% because their sales many
high but their cost of goods sold is also high which ave the very less profit margin between them
and resulting in low profit in 2018 compared to the year 2017(Hershfield, John and Reiff,2018).
As in 2017 their cost of goods sold are less compared to their sales which result in earning higher
profit margin of 12.5%.
7

The company can improve the value to the ratio in future by increasing either increasing their
sales price by decreasing and controlling their cost of goods sold so that they able to generate the
increased percentage of profit margin.
Current ratio
2017 2018
Current ratio=current assets/
current liabilities 2.34 0.93
Current ratio is basically the liquidity ratio which measures the company's ability to pay
its all short term obligations within one year by using their current assets. From this ratio
Investors and analyst can know how the company can maximize their current assets to satisfy the
current debts and other payable or liabilities(Jetter and Walker, 2017). Current ratio is
comparison of the current assets and current liabilities which is calculated by dividing the current
assets by the current liabilities of the company.
Potential customers generally use the current ratio to measure the company's liquidity or
ability to pay off their short term liabilities, debts or obligations. From the above table it can
clearly interpret that in the year 2017 Alpha Ltd have the ratio of 2.34 and 0.93 in the year 2018
which clearly indicates that company has higher ratio in year 2017 which representing the
company high liquidity positions that means they have great and higher ability of paying their
debts and liabilities from using their currents assets(Le and Viviani, 2018).
The current ratio goes down in the year 2018 as their ratio is 0.93 because of their low
liquidity position or the company is not capable of paying off their debts and liabilities
effectively in respect to the to their current assets. The reason for low current ratio can also be
that their current asset s are not highly liquid that is why they are incapable of paying off their
obligations to those of the current assets.
Average receivable days
2017 2018
Average receivable 68 73
8

days=Receivables/ Sales*100
Average receivable days is the number of days that customer invoice is outstanding
before they are collected. An effective and efficient way of using the account receivable days'
measurement is to track it on trend kine that is month by month( Martin and Gomez-Mejia,
2016.). This will help in showing the changes in the ability of the company to collect their dues
from the debtors from the above table it can be interpreted that in the year 2017 average
receivable days are 68 and in the year 2018 they have 73 days in 2018 they take more days for
collecting the receivable of the company compared with 2017.
The increasing ration in year 2018 depicts that company not performer their activities
efficiently as they increase the number of says in respect to collect the debts(Petersen, Saunders,
and Inzlicht, 2018. ). The sooner or less number of days company is collecting the debts shows
better efficiency of the company to work and perform. By being more effective and efficient and
also by preparing effective guideline or deal with the debtors company can able to decrease the
number of days for their receivables which will help them in receiving their dues oner and which
can be further used to improve the operational activities and other related activities of the
business so that they cam able to achieve their organisation goal.
Average payables days
2017 2018
Average payables
days=payables/ purchases*100 77 160
9

Average payables days is the financial ratio that indicates that the average time which
company takes for paying their bills and invoices to their trade creditors which may include
suppliers, vendor or other companies who owes money from the company. Alpha Ltd has taken
more number of days in the year 2018 compared to the year 2017 as they take only 77 days in
2017 while in the year 2018 they take 160 days which is large number of days for paying their
debts to the creditors of the company(Soares, and Pina, 2016. ).
The ratio showing the number of days the company take to pay off their debts to the
creditors of the company. Company may purchase the goods on credit from suppliers which in
return they need to calculate the average payables . Through this ratio company is able to track
the days of different years to measure their efficiency how fast and effective they are paying of
their debts. The company needs to reduce the days as it shows the inefficiency if the organisation
to pay their debts and because of this company might suffer future difficulties in ascertaining the
borrowings from the vendor or suppliers(Spreng, Karlawish and Marson, 16). They can improve
and decrease the number of days by being more efficient and making the profitabilities which
will lead them to availability of funds and hence they will able to pay on time to their creditors.
CONCLUSION
From the above report it can be concluded that there are different factors which affect the
financial decision making of the organization in long run, Alpha Ltd consist of many
departments whose work is differentiated according to the activities they perform. The different
department may include the financial department and accounting department which focuses on
their key areas. Accounting department includes the Financial accounting, management
accounting, Tax functions and auditing functions whereas financial department includes
Investment function financing function, Dividend function and working capital function whose
focus on their specialised key areas. Management of tall these departments effectively is the
responsibility of the company and their mangers.
This report also conclude different types of ratios which helps in ascertaining the
financial performance of the business and their deficiency to operate and perform for providing
quality services and achieving their organisational goal.
10

REFERENCES
Books and Journals
Barth, D., Papageorge, N.W. and Thom, K., 2017. Genetic ability, wealth, and financial
decision-making.
Carvalho, L.S., Meier, S. and Wang, S.W., 2016. Poverty and economic decision-making:
Evidence from changes in financial resources at payday. American Economic
Review. 106(2). pp.260-84.
Chambers, C.P., Echenique, F. and Saito, K., 2016. Testing theories of financial decision
making. Proceedings of the National Academy of Sciences.113(15). pp.4003-4008.
Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting
decision making: Evidence from accounting conservatism. Contemporary Accounting
Research. 2(3). pp.1285-1318.
Hershfield, H.E., John, E.M. and Reiff, J.S., 2018. Using vividness interventions to improve
financial decision making. Policy Insights from the Behavioral and Brain Sciences. 5(2).
pp.209-215.
Jetter, M. and Walker, J.K., 2017. Anchoring in financial decision-making: Evidence from
Jeopardy!. Journal of Economic Behavior & Organization.141,.pp.164-176.
Le, H.H. and Viviani, J.L., 2018. Predicting bank failure: An improvement by implementing a
machine-learning approach to classical financial ratios. Research in International Business
and Finance, 44, pp.16-25.
Martin, G. and Gomez-Mejia, L., 2016. The relationship between socioemotional and financial
wealth: Re-visiting family firm decision making. Management Research: Journal of the
Iberoamerican Academy of Management. 14(3). pp.215-233.
Petersen, G.K., Saunders, B. and Inzlicht, M., 2018. The conflict negativity: A neural correlate
of value conflict and indecision during financial decision making. BioRxiv.p.174136.
Soares, J.O. and Pina, J.P., 2016. Macro-Regions, Country Effect and Financial Ratios: A
Comparative Study in the Euro Area. In Proceedings, 1st AMSR Congress and 23rd APDR
Congress, Sustainability of Territories in the Context of Global Change.
11

Spreng, R.N., Karlawish, J. and Marson, D.C., 2016. Cognitive, social, and neural determinants
of diminished decision-making and financial exploitation risk in aging and dementia: A
review and new model. Journal of elder abuse & neglect. 28(4-5). pp.320-344.
Online
Financial Decision Making. 2019 [Online]. Available through
<https://www.edx.org/course/financial-decision-making-usmx-umuc-af6010>.
12