BM414: Financial Decision Making Report - ALPHA Limited Performance

This report provides a detailed analysis of financial decision-making, focusing on ALPHA Limited, a manufacturing organization in the UK. The report begins with an introduction to financial decision-making and the roles of accounting and finance within ALPHA Limited, highlighting their importance in achieving organizational goals. Task 1 explains the functions of accounting, including collecting and recording financial transactions, classifying transactions, and preparing financial statements. It also outlines managerial functions such as planning, budgeting, cost control, and information strategies. The finance section discusses capital determination, capital structure, financial policies, raising funds, international finance decisions, risk management, and investment decisions. Task 2 involves calculating key financial ratios such as Return on Capital Employed, Net Profit Margin, Current Ratio, Average Receivable Days, and Average Payable Days for ALPHA Limited for the years 2017 and 2018. The report then analyzes the financial performance of ALPHA Limited based on these ratios, comparing performance between the two years and identifying trends in profitability, liquidity, and efficiency. The analysis discusses the implications of changes in ratios, such as the increase in Return on Capital Employed, the decrease in Net Profit Margin, and changes in the Current Ratio, providing insights into the company's financial health and performance. The report concludes with an overall assessment of ALPHA Limited's financial position.

Financial Decision Making

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK1.............................................................................................................................................1
Explanation of role of accounting and finance in ALPHA Limited............................................1
TASK2.............................................................................................................................................1
Calculation of ratios.....................................................................................................................1
Analysis of financial performance of ALPHA limited................................................................1
CONCLUSION................................................................................................................................1
REFRENCES...................................................................................................................................1

INTRODUCTION
Financial decision making is a systematic process in which decision related to
investment, liabilities, shareholders equity, dividend, has been taken in order to achieve
predetermine goal. Financial decision of an entity relates to the choice of the proportion of
sources to finance the investment requirements Manager use this process for improve
profitability and performance of the organization. In order to understand this concept ALPHA
limited has been taken. It is a manufacturing organization which is situated in UK and famous
for their high quality of product and customer satisfaction service. In this report role of
accounting and fiancé sector in process of decision making has been identified and performance
of ALPHA limited and causes of changing of financial performance has been describe.
TASK1
Explanation of role of accounting and finance in ALPHA Limited
Account and fiancé both are different term for business. Accounting is a process of recording,
analysing, classifying collection and communication of data for interpret information to
stockholders, on the other side finance can be defined as management of the flows of money
through an organization whether it will be a corporation, school, bank or government agency.
With the use of accounting information mangers pre4praed financial statement through which
they take decision regarding their future target. Business organizations use both accounting and
financing tools both are interlinked part and to formulate effective strategies and polices both
play essential role in business planning process (Marson, Kerr, and McLaren, 2016). Usefulness
of account and finance regarding ALPHA limited has been described below:
Functions of accounting: It is a procedure which are used for maintain all financial
transactions. It will help in run day to day business activites. For ALPHA limited they hire
accountant which record all the transaction. Main role of accounting is to provide essential
financial information which help in decision making process. There will be two types of
functions
I. Basic function: Following are the basic function

 Collecting and recording all the essential financial transaction by formulating
journal.
 Classifying each transaction by maintain separate account
 Formulation of tra balance and brief summer of all transaction
 Formulating of balance sheet with the use of all accounts for determine financial
position
 Analysis all the data and communicate it to interest stakeholder
II. Managerial function: Managers use accounting function to formulate policies so that
they provides relevant information to their stakeholders following are the managerial
functions:
 Implementation plan: Accounting used to formulate plans and policies for controlling
polices of finance.
 Budget: With the use of various budgetary t. techniques and tools budgets are prepared
for identifying future income and expenses of business activites. To prepare budget,
activity budgeting, rolling budgeting, zero based budgeting process can be used manger
of this company use activity based budgeting method.
 Cost control: Accounting information used to formulate polices of controlling cost
through using various cost accounting process, like, jib costing, process costing, etc
 Information strategies: Main managerial function of accounting is to provides essential
information for evaluation of department performance. Manager of ALPHA use
accounting data in a relevant way (Al Balushi, Locke, and Boulanouar, 2018).
 Calculation of error: With formulation of trial balance accounting use various tools to
cut errors of in operational process.
Functions of finance: Financing is the procedure of identifying, and allocating funds in order to
fulfil day to day requirement for this purpose financial policies are implemented for investment,
procurement and administration of monetary fund’s of ALPHA limited. This organization hire
fiancé manger who formulate all the functions of fiancé, which are describe below:
 Determination of capital: Financial manger decides capital require for operating daily
business operations and also for saving and long term purpose uses.
 Formulating capital structure: It is composition of proportion of capital needed for
business. For this managers identify cost of equity, debts, dividends require.

 Implement financial policies: Financing includes formulation of policies which describe
t sources of cash outflow inflow activites borrowing and lending policies etc.
 Raising funds of company: Financing includes increase funds it is essential for fiancé
manger to take decision through which they can raise fund. For this purpose manger
checks different sources of the company. And identify best sources of funding.
 International finance decision: Financial manger finds opportunities in international
financial decision . For these opportunities business organization identify contract of
credit default swap, interest rate, currency swap, foreign policy.
 Risk management: Financing play essential role in managing risk. Fiancé manger
estimate all the risk , and then formulating plan and strategise to control the risk.
 Investment decision: Finance help in identify net present value of each investments
source and choose best source through which they get maximum rate of return (Finke,
Howe, and Huston, 2017.).
 Taking maximum benefit of leverage: Finance manger use both operating and financial
leverage and try to use it for taking maximum benefit from leverage.
Importance of accounting and financing for ALPHA limited
Provides stability: With the uses of accounting and financing technique business organization
get sustainability and it maintain it position within the market area.
Risk management serve Analysis of financial statements and uses of capital budgeting tool help
in identify future risk it also help in environment scanning process. Manager of APLHA use this
theses process for controlling future risk.
Spreading essential information: Accounting journal and balance sheet help in gathering
essential information regarding business activites, each transaction show their impact on profit of
the company (Tang, and Baker, 2016).
Help in innovation: Accounting and financing process motivate employees for innovate and
introduced new products and services in market place.
Maximize profitability: Marginal amylases, ratio, capital budgeting techniques, cost technique
for calculation of cost and identify ways through which they can reduce the cost and maximize
profits it will help in increasing profit and built strong position of the company within the market
place.

Increase sales volume: With the use of effective manufacturing process , job costing method
and effective budgeting tool manger of ALPHA limited increase their sales volume. Rate of sales
increase over years and year. It show positive sign of growth to for the business organization
Planning and forecasting: Financing and accounting tools used for implementing effective
plans and policies with the use of financial statements mangers take decision and formulate
policies through which they can enhanced their performance or with the use of budget they find
their future profits and take decision to overcome errors which affect rate of profitability in
future.
Analysis efficiency of company: It will help indentifying performance of the company and
efficiency of the company, budgets are used for analysing actual target achieved and standard
target it will help in identifying perfomrance quality of departments and human resource of the
business organization. After identifying performance quality manger of ALPHA limited start up
training programs through which they can enhancing performance and efficiency of the
company,
Help in comparison: These tools used for comparison, manger use financial statement for
compare their performed with their rivalry company or identifying it with previous year
performance. Tools of managerial accepting loan help business organization to increases their
performance by cutting additional and wastage activities (Kumar, and Ravi, 2016).
Optimum utilization of resource: Accounting and finance tools and techniques will help in
utilized business organization resource efficiently. With effective costing process, and budgetary
tools and polices they can control wastage of resources.
Comply with accounting standard: Effective accounting and financing policies help in
compliance with accounting standard rules and regulation. Through which business organization
can follow ethical rights under the constitution
Help in auditing process: Auditor use financial and accounting transaction data as tool of proof
their internal and external auditing process for these statements and tools.

TASK2
Calculation of ratios
Return on capital employed:
Formula: Operating Profit / Capital Employed
Capital Employed: Total assets – Current liabilities =
For 2017
 Capital employed: 435
 Operating profit: 375
 Return on capital employed: 375/ 435= .862
For 2018
 Capital employed: 75
 Operating profit: 412.5
 Return on capital employed: 412.5/ 75: 5.49
Net profit margin : Net Profit / Sale*100 (Paiva, Cardoso,Hanaoka, and Duarte, 2019).
For 2017
 Net Profit: 300
 Sale: 2,400
 Net Profit Ratio: 300 / 2400*100: 12.5%
For 2018
 Net Profit: 262.50
 Sale: 3,000
 Net Profit Ratio: 8.75 %
Current ratio:
Formula: Current assets / Current liabilities
For 2017
 Current Assets: 757.50
 Current liabilities: 322.50
 Current ratio: 757.5/ 322.50: 2.34
For 2018
 Current Assets: 1,035
 Current liabilities: 1,110
 Current ratio: 0.93
Average Receivable days/ Debtors collection period
Formula: Trade debtors/ Sales* 365
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For 2017
 Trade debtor value:
 Sale amount:
 Average collection days: 450/ 2,400*365 : 68 days
For 2018
 Trade debtor value: 600
 Sale amount: 3000
 Average collection days: 600/3000*365 : 73 days
Average Payable days/ Creditors payment period (Lee, Yun, and Han, 2016).
Formula: Trade creditors/ Purchase * 365
For 2017
 Creditor : 285
 Net Purchase : 1,350
 Average payable days: 285/1350*365: 77 days
For 2018
 Creditor : 1,050
 Net Purchase 2,400
 Average payable days: 1050/2400*356: 160 days
Analysis of financial performance of ALPHA limited
In order to identify performance of the business organization manager of ALPHA limited
use comparison of their present financial statement performance with previous year
performance ,the main reason of comparison is to identify whatever their company is
reliable to expend their market in other area of UK or not. For this they use ratio analysis.
From the calculation of above ratios manger of ALPHA limited could easily recognize
business performance of their company.
1. Return on capital employed: This ratio is used to determine their rate of profits earned
with the use of capital assets and liabilities of the business organization. This will help in
determine efficiency position of the company. The higher the return of capital employed
ratio show strong position of the company. In the case of ALPHA limited in 2017 the
return capital employed ratio was .86 and it was increase in 2018 from 5.83 % this means
that company use their capital effetely in 2018 as compare to 2017.Higher capital
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employed ratio represent higher efficiency rate and it is identified business organization
profitability related to its common equity item. From this analysis it is clear that in 2018
commandment department use effective policies for using their resource for operating
their day to day transactions and maintain their profitability level.
2. Net profit margin: It is also known as net profit ratio it is the part of profitability ratio
which is used to identify and measure profitability rate of the company for particular time
period. Manger of ALPHA limited use this ratio to analysis performance % of their
company. In 2017 the net profit ratio was 12.5 % and in 2018 it was decline at company
earn only 8.75 % of profit although company earn 3000 profit as compare to numerical
value it is more than 2017 profits which was2400 but due to expenses and debt liabilities
the rate of net profit ratio is decline. Net profit ratio is used to identify the profitability
rate of the company, with the above calculation it is clear that the profitability rate has
been decline of the company as compare to 2017.
3. Current ratio: It is calculated by dividing current assets with current liabilities. It is part
of illiquidity analysis. Business organization se this ratio to identify their liquidity
position. Manager of ALPHA limited calculated this ratio to determine whatever they
have sufficient current assets or liquidity portion of capital to pay their current liability.
Current ratio of ALPHA limited in 2017 was .2.34 and it was decline in 2018 at .93. This
states that as compare to 2018 company have sufficient liquidity assets to pay their debt
liability. Ideal current ratio is 1:1 thus in 2017 company has over liquidity they did not
use it in sufficient manner but they are able to pay their day to day short liabilities. In
2018 it is less then 1whch means that company suffers from liquidy capital and they
suffers from problems to pay their debt liabilities (Dumitru-Alexandru, 2016).
4. Debtor’s collection period: This ratio is used to identify days customers of company pay
their debt liability. In other words debtor collection period is calculated to identify in hoe
many days company collect their due money from their debtors. Manger of ALPHA
limited use this ratio as it will also help in comparison of performance of the business
organization. In 2017 company needs 68 days to collect their money from their relatable
debtor and in 2018 this ratio increase and customers pay their debt amount to company
within 73 days. This data represent that companies performance has been decreases as
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they tool more time compare to previous year to collect money from their potential
customers
5. Creditors payment period: It is essential ratio, it is also known as payable collection
period ratio. Business organizations use this ratio to identified the time taken by them to
pay their debt liabilities. It will be calculated by dividing net purchase amount with the
creditors. Manager of ALPHA limited use this ratio in order to measure their
performance and analysis wheatear their company take more or less time as compare with
previous year. In 2017 the company take 77 days to pay short term debt to their creditors
it is increase at very high rate and in 2018 company needs 160 days average to pay their
current debt amount to their relevant suppliers or creditors. The difference among 2017
and 2018 is very high which m3eans that companies does not use effective policies for
their creditors thus they take more time to pay liability.
From the above calculation and analysis of all liquidity, profitability, and efficiency ratio
it is Cleary identified that ALPHA limited performance rate has been decline in 2018 as
compare to2017 performed, there will be many reason for this changes which are mention
below:
1. Poor strategy and implementation: Main reason of decline performance is that
company is not able to formulate effective policy regarding 2018 thus their rate of
performed decrees and they not even follow systematic procedure to impiemnt
theses polices (Brüggen, Hogreve, , Holmlund, Kabadayi, and Löfgren, 2017).
2. Lack of skills resource: It also play a big causes that due to retention of
employers and hiring new fresher they did not have any idea how to work
according to thus they suffers from decline performance rate.
3. Poor marketing and communication: Due to lack of effective marketing
strategies ALPHA limited is unable to attract new customers their promotional
strategy and tools also not effective thus they cannot hire skilled workers and it is
also the reason that their profit is not increase at high rate and this year they
earned profit but decline rate.
4. Low worker self esteem: Workforce of the company is not fully motivated and
satisfied, manger of ALPHA limited due to lack of communication skills unable
to motivate their employee and worker which directly impact on their
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performance rate and it will effect on profitability and sustainability of the
company.
5. Lack of attractive policy for debtor: It is also main causes of low performance
of the company that their mangers are not implemented attractive policy through
which their debtors get attracted and they pay their debt amount within short time
period. Mangers must need to focus on those strategies through which they can
increase their cash sales (Li, Su, and Liu, 2016).
6. Lack of goodwill: Due to lack of communication problems their brand value and
image is decrees and thy cannot get loan from financial institutions it is also the
main cause that company is unable to pay their debt liabilities to their creditors. In
order to improve business performance they need to
CONCLUSION
From the above analysis it has been concluded that accounting and financial tools used to
play important part in any business organization in order to improve performance and run
business effectively in competitive business world. For this purpose manger use various
accounting and financial management tools and techniques. In order to improve financial
performance on the basis of ratio analysis manager implement effective polices through
which they overcome error within given time period.
REFRENCES
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REFRENCES
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