Financial Decision Making: Evaluating Finance and Accounting - BM414

This report examines the critical roles of finance and accounting within an organization, emphasizing financial decision-making processes. It begins by defining accounting and its various branches, including financial, management, and cost accounting, illustrating their significance with examples. The report then explores the function of finance, detailing its involvement in managing funds, making investment choices, and financial planning, using Persimmon plc as a case study. The analysis includes an evaluation of financial statements through ratio analysis to determine the company's financial health. The report highlights the symbiotic relationship between accounting and finance in recording and analyzing business activities, providing insights for effective decision-making and organizational growth. It stresses the importance of financial planning, budgeting, and performance evaluation to achieve organizational goals. The report concludes by underscoring the necessity of both disciplines in maintaining financial control and ensuring compliance with regulatory standards.

PROJECT

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Evaluating the role of finance and accounting in an organisation...................................................1
TASK 2............................................................................................................................................6
a) Calculation of the following ratios for Alpha Ltd for two years.................................................6
b) Evaluation of financial performance of ALPHA Ltd..................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial decision making refers to taking decisions that improve the financial
capabilities of the organisation. It is concerned with taking decisions related to the finance. It
involved identifying the decision relating to the various sources through which finance could be
raised and the amount of capital raised for short term and long term. Management of the
organisation is required to analyse all the sources and to choose the best option. It extends to
roles of managing the internal finance of company for effective use of the financial resources.
Present report is based on British house- building company Persimmon plc. It is concerned with
evaluating the role of accounting and finance in the organisation. This will also cover the
analysis of financial statements using the ratio analysis. This shows the actual financial health
and position of the organisation. Study will enhance the understanding about the importance of
finance and accounting in the organisation.
TASK 1
Evaluating the role of finance and accounting in an organisation.
Accounting
Accounting refers to process used for recoding the financial transactions that pertains to
the business. Process of accounting includes recording, summarizing, analysing and reporting the
transactions as per the given reporting frameworks. These financial statements are related to
regulators, agencies and taxation authorities. Financial statements are used in accounting as the
summary of the financial transactions over the accounting period. There are mainly three types
of financial statements that are income statement, balance sheet and cash flows.
Accounting is the key aspect or function of the organisation. Accounting transactions are
recorded by the accountants as per double entry book keeping systems and following the
accounting standards issued by accounting boards (Melé, Rosanas and Fontrodona, 2017).
Accounting consists of various branches that accost accounting and management accounting.
These accounting provide important information to the management for business decision
making in Persimmon plc.
Types of Accounting and their importance in the organisational context.
Financial Accounting
In accounting financial accounting perform the function of preparing financial statements
for company. They are important for business as they represent the summarized information of
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all the events and transactions carried out by the organisations. These financial statements are
inspected by the auditors every year for identifying any errors or mistakes. They ensure that the
financial statements prepared are free from material misstatements and present true and fair view
of the financial position of the company(Ryszawska, 2016). Financial accounting is used by
external user of the organisation. This provides information related to the organisation to the
external user of the organisation. For example ; Persimmon plc is required to prepare financial
statement every year for presenting their yearly performance and positions as there are many
stakeholders associated with the success and failure of the business.
Management accounting
It is an another branch of accounting that is having equal importance as that of the
financial accounting. But there is a difference between the two accounting method. Management
accounting uses much of the same data but uses that data for a different purpose. It is concerned
with preparing reports periodically as per their requirement. Management accounting is an
important aspect for organisation that is concerned with managing the operation of company in
the cost efficient manner. It includes budgeting, forecasting, financial analysis and such other
function for keeping the cost and expenditures under control.
Management accounting ensures that the limited resources of the company are used in the
best possible manner. Motive of management accounting is to increase the productivity and
efficiency of the organisation. Reports generated by management accounting are for internal
users and contains the strategies of the organisations. They are not available for public use and
are kept with proper security. As these report are prepared for internal use, they are not required
to follow any accounting standards and reporting frameworks. They are prepared as per need and
requirement of the management. For example management accounting makes forecast about the
future incomes and expenditures of Persimmon plc based on previous trends for making the
budget. This is a spending plan that keeps cost and expenditures of the Persimmon plc under
control.
Cost Accounting
Cost Accounting involves the process of recording all the transactions and information
related with the costs. It is used by organisation for identifying the cost of production of the
products. Managers of the business conduct cost analysis for identifying the factors that are
related to the cost and are having direct impact over the cost of the product. Cost is an economic
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factor that is required attention of the management. Cost accounting all the cost such as raw
materials, labour and overheads cost associated with the products for calculating the cost of
product. From the information derived cost accountants decide the profits margins to be
calculated.
It plays an important role as the price of the product has direct influence over the
profitability and market acceptance. Therefore, the manager pays equal attention over the cost
accounting to decide optimum prices of the product analysing the market demand and other
factors. Managers of Persimmon plc strive for keeping the cost of manufacturing under control
by adopting effective cost control strategies and producing quality houses for the society
(Lawson, 2018). For example cost accounting helps in deciding the margin level to be kept after
covering the cost. It enables the managers to make decisions related to the adoption of various
pricing strategies that will be accepted by the consumers increasing and will help them to
increase its market share.
Finance
Finance could be stated as the elixir which assists the business since its inception and
helps it in taking advantage of the opportunities for future growth of business. Finance have an
essential role to play in company as it is related with the monetary funds of organisation. Finance
or finance department has the responsibility of monitoring all financial activities of company. It
monitors the inflow and outflow of funds from the company. Finance is the lifeblood for every
business and is required to be managed most efficiently (Delis and et.al., 2018). It is a function
responsible to overseen the acquired funds, manages the existing funds and make arrangements
for the future expenditures. Financial management helps the company in taking effective
business decisions for achieving the strategic as well as financial business goals and objectives.
Financial management involves deciding the most suitable option available for raising the
finance. There are various options available of finance such as term loans from banks and
financial institutions, equity and debenture capital from the market. It has to analyse the options
considering the capital structure of the organisation after raising the funds. Also, they are
required to take care of the internal financial requirements by different departments and
operation carried out by company.
Finance plays a critical role in Persimmon plc. Financial managers identify the strategies
using which it could save its expenditures and enhance its profitability(Paterson And et.al.,
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2018). Managers perform financial analysis that helps them to analyse the unproductive areas
that are consuming unnecessary costs. Areas that are productive and helping the organisation to
generate returns are given attention for enhancing its productivity. Finance department looks for
cutting the internal costs and to increase the profitability of business.
Financial planning helps the business in giving a well defined structure to the
organisation to follow. It analyses the funds requirements as per the budgets prepared in
accounting department and releases the funds according to the requirement of each operations. If
the sufficient funds are not available for carrying out the operation of business enterprise than
they are required to make arrangements for the required operation of the organisations.
Persimmon plc prepared budgets for the organisations for analysing the availability of cash
funds. It is essential for smooth flow of business processes without break due to non availability
of funds.
Financing also involves forecasting the future opportunities that company can attract. It
makes predictions for the future financial goals & performance. It analyses the rate of inflations
and other factors that could influence the business. It frames financial strategies for the
organisation to follow keeping its costs and expenditures under control. Financing analyses the
investments options available both on short term and long term basis that helps Persimmon plc in
generating short term or long term returns. Making choices between the different options
available, by conducting various techniques and making investments in the best option with
maximum returns. It has the role of managing the funds of company and increasing the value of
funds by making productive investments (DeFond, Hung and Li, 2019). Funds blocked in the
company decreases the value of those funds and therefore essential for manager to utilise those
funds in productive operations.
Accounting and finance play critical role in business.
Accounting & finance is concerned with recording as well as analysing the business
activities. It analyses where the incoming and outgoing cash flows will be helping the company
in making effective decisions for achieving growth and moving forward avoiding the chances of
failure. Accounting and finance both are important for keeping a check and control over the
business operations. For example if Persimmon plc is not aware and not able keep track about
from where the money is coming and where it is going, than it may be at great risk of losing
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business or failures. Therefore accounting and finance helps the business to have proper record
of cash flows of the business.
A business has increased chances of growth and success when the incomes and
expenditures are managed properly. Accounting and finance includes identifying the loopholes
of business and taking corrective strategies for areas that are affecting its efficiency.
Accounting keeps the records of all the transactions carried out by the business during the
period. Records help in analysing the business operations and managing the financial structure of
the organizations. Managers through the records provided by accounting manage the business
efficiently.
Accounting and finance helps the business in keeping the records as per the requirements
of the regulatory accounting board. This helps in complying with the statutory requirements of
the regulatory authorities and also in filing the tax return of the Persimmon plc. Net profit of the
company after covering all the costs and expenditures are calculated. This is essential for
calculating the tax liability of the company for the give year. Errors and mistakes in accounting
can lead to major tax penalties and implications over the business. The proper records giving true
and fair of the financial position is kept using accounting and finance.
Most importantly it helps the business managers in keeping control over the costs.
Generally both accounting and finance uses budget. Budgets are prepared by understanding the
cash flows of the organisation. This helps the managers in keeping their business on track. It is
prepared considering the current position as well as the future trends and navigates the future
development and growth. In the preparation of budgets revenues, incomes, goals to be achieved,
unexpected adjustments should be considered (Bushman, Williams and Wittenberg‐Moerman,
2017). This is essential for the effective management of the organisation. Proper monitoring of
the budgeted plans and actual expenditures is essential for the business enterprise. Accounting is
the blueprint of management and lays foundation for the success and stability of the business
enterprise.
Accounting and finance are essential for analysing the performance of organisation.
Evaluation of the financial performance and health of organisation is very essential for framing
the strategies for future growth and success of organisation. Without proper evaluation company
cannot identify where it is lacking and what are the areas of improvement for th growth of
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organisation. Financial statements prepared by accounting consists all the information about the
financial standing of Persimmon plc.
Income statement of the company provides information about whether carrying out the
business in given period was profitable or not. It identifies the net profit or loss from the
business. Income statement contains about all the incomes and expenditures incurred for carrying
out the operations of business. Balance sheet provides information about assets and liabilities of
the firm. It provides information for assessing the wealth of the organisation. The obligations of
organisations and its assets could be identified. Capital structure of the company is also assessed
from the balances sheet. Important decision for payment of the obligations and reducing the debt
to decrease the financial risk is all taken by company on the basis of information from
accounting.
Cash flow statements contain the information regarding the inflows and outflows of cash.
Management identifies the areas where cash is flowing and sources of funds. These statements
help in performing the evaluation of financial position of company. Managers identify the
profitability of the business and returns generated. Also, the efficiency of the management in
running the business and using the limited resources of company is identified (Bouwens, 2017).
Business takes decisions regarding the liquidity position and capital structure on the basis of
information provided by the statements prepared by accounting and finance.
Accounting and finance provide the base for developing strategies after analysing the
performance of Persimmon plc after the preparation of the budgets. Proper evaluation identifies
the reasons of variations. Gap between the attainment of the goals and business structure is
identified by the management. Operational and strategic decisions that are essential for the
growth of the organisation are framed by the executives and are implemented. Accounting and
finance are the most critical part of Persimmon plc. It is not possible for company to run the
business effectively and achieve the objective of growth without effective accounting and
finance.
These two aspects keep the business active and working for the achievement of their
goals and objectives. It provides base to every management decision related with every aspect of
business enterprise. They are associated with the business from the moment a person thinks of
running or establishing a business (Benlemlih and Girerd‐Potin, 2017). Without using them it
cannot make estimates about the needs and requirements and the involvement of funds in each
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operation. They are present at the time of liquidation of company. They are the lifeblood of
business and are associated with every type of business whether a small or big corporate. They
are associated with each and every event and transaction of the business.
TASK 2
a) Calculation of the following ratios for Alpha Ltd for two years.
i) Return on Capital Employed
Particulars Formula 2017 2018
EBIT 375 412.5
Total assets 2235 4035
Current liabilities 322.5 1110
Capital employed
Total assets - current
liabilities 1912.5 2925
Return on capital
employed 20% 14%
ii) Net Profit Margin
Particulars
Formul
a 2017 2018
Net profit 300 262.5
Sales 2400 3000
Net profit
ratio
net
profit /
sales *
100 13% 9%
iii) Current Ratio
Particulars Formula 2017 2018
Current assets 757.5 1035
Current
liabilities 322.5 1110
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Current ratio
Current assets / current
liabilities 2.35 0.93
iv) Debtors Collection Period.
Particulars Formula 2017 2018
Trade receivables 450 600
Sales 2400 3000
Debtors collection
period
Trade
receivable
s / Sales
*365 68 73
v) Creditors Payment Period
Particulars
Formul
a 2017 2018
Trade payables 285 1050
Purchase 1725 2250
Creditors payment
period
Trade
payables
/
purchase
*365 60 170
b) Evaluation of financial performance of ALPHA Ltd.
Return on capital employed of the company was 20% in 2017 that decreased to 14% in
2018. ROCE represent the return generated by company over its employed capital. It represents
the efficiency of management in utilising its available resources for generating the returns for
company. There has been significant decline in the return from the last year as the profits of the
company have gone down from last year (Palazuelos, Crespo and del Corte, 2018). Revenues
have increased in comparison to last year but proportionate increase of cost of sales is higher.
Also the return is decreased as company has made new purchases of the capital assets that have
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increased the capital employed in the company. This is the reason why return has gone down
from last year.
Net profit margin represents the net return left after carrying out the business for the
year. Last year it earned return of 13% that decreased to 9%. The decrease in profits is seen due
to the increased cost of sales but also the revenues of the company have raised from last year.
Company this year had a gross profit of 750 higher than last year. This year it incurred additional
operating expenses and mainly the finance cost. Company is operating effectively but is required
to have control over its costs and expenses.
Current Ratio of company represents the ability of the company to meet its short term
obligation from the current assets. Current ration of company is 0.93 which was 2.35 last year.
Current ratio of company has gone down significantly due to increase in current liabilities
(Schinckus, 2018). There are significant amount of trade payables outstanding this year. This has
led the liquidity position of the company to go down. Ratio shows that it is not having enough
current assets to meet its short term obligations. It has to take corrective measures for improving
its liquidity.
Debtors collection period is 73 which was 68 days last year. Collection period is
adequate it is increased to raise the sales. For building new customers they are required to
provide goods on credit.
Creditors payment period was 60 days that raise to 170 days. This led the payables to go
up significantly. This directly affects the working capital cycle affecting the cash requirements. It
is required to take effective steps for maintain a effective working capital cycle (De Villiers,
Dumay and Maroun, 2019).
Performance of the company has gone down from last year and is required to take immediate
steps to gain stability.
CONCLUSION
Carrying out the above study it could be concluded that finance and accounting are the two
important aspect without which it is very difficult to run the business. Accounting plays the role
of recording, summarizing and analysing the financial records of business. Finance is concerned
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with managing the financial funds of the organisation. It plays the role of reducing the costs and
expenditures and increasing the profitability of company. Accounting and finance plays a critical
role in the success and growth of company. They help the manager in evaluating the financial
health and performance of the organisation for framing effective strategies for the growth and
success of organisation. Accounting and finance are the lifeblood of organisation that are
associated with each and every transaction of the business.
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