Financial Decision Making Report

This report delves into the financial decision-making processes within ALPHA limited, evaluating the roles of accounting and finance in enhancing company performance. It includes a detailed analysis of financial ratios to assess the company's operational efficiency and profitability over two years. The report concludes with insights on the importance of financial statements and strategic decision-making in achieving business objectives.

Financial decision making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Evaluation of the role of accounting and finance........................................................................1
TASK 2 ...........................................................................................................................................4
Calculation of the ratios to analyse company performance.........................................................4
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
In business era, the management of an organisation take various crucial decision for
improving the overall performance and productivity. The process of taking valuable decision
related to financial resources within company by the upper level management on the behalf of
vital shareholder is known as financial decision making (Agarwal and et.al., 2014). In this
process several kind of liabilities and responsibility that are linked with business operation and
help to accomplish the financial goals. The entire process of financial decision making includes
the 3 main judgement that are helpful in better functioning these decision are dividend,
investment and financial decision. To better understand the importance of financial decision
making ALPHA limited is selected. The company is a manufacturing company that was
established in 1954.
In this report, accounting and finance function and their important role are discussed in
the context of selected company. In addition, with the help of financial statements ratio are
calculated to analyse the overall performance of company during an accounting year.
TASK 1
Evaluation of the role of accounting and finance.
The systematic method of determining, recording, analysing, measuring, distributing,
checking, summarising, calculating, interpreting and communicating valuable financial
information is known as accounting (Arnold, 2012). The maintaining of account according to the
specific standard helps to ascertain the profit or losses within a specific period of time that aid to
calculate the values and nature of companies assets, capital, equity and liabilities. It is stated that
accounting helps to give information on the different aspects of business such as total resources
available, means employed to finance those resources and the outcome attained by using these
resources. In ALPHA limited, manager use the method of accounting in comprehensive
recording of useful financial transaction that are related to business operation. They prepare
useful financial statements that contain the detail summary of company activities, actual
financial position and strength and cash flows on a certain time period. They use to generate
different streams of accounting like management and cost accounting that supportive for the
manager to take sound, appropriate and authentic business decision. Thus accounting is a reliable
process for recording, arranging and analysing financial substance which assist in the impressive
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management of the business activities. There are various important role of an accounting
function that bring advance decision making to an organisation. Some of these are defined
below:
 Financial accounting: This is mainly related to providing of useful financial
information to the manager at each level so that internal manager are able to make
meaningful decision to improve performance and gain profitability. In context to APLHA
limited, responsible accounts department are liable to report each and every dealing of
business activities in to appropriate financial statement so that future judgement can be
made and current financial strength and position of company can be determined. It is
critically evaluated that responsible manage of respective company use to make essential
determination so that desired goals and objective are attained (Baker and Ricciardi,
2014). Thus, it is stated that financial accounting assist companies to create assorted
statements so that internal and external party are able to take their decision as per the
information collected of that particular period. For example, account department use to
prepare income statements with the help of overall financial dealing in specific time
frame that help to ascertain gross and net profit. This statement help both internal
manager to make appropriate changes for better improvement and external stakeholder.
 Tax function: In business term, the concept of tax accounting is based on calculating
taxes for a particular period. It is stated the companies must follow the certain rules while
preparing for tax return. Accounting department follows the tax principle in order to
calculate the tax such as balance sheet items that are accounted while preparing financial
statements and tax payables. For example, if ALPHA limited prepare annual statements
by following the concept of FIFO in order to record their stock level for financial
purpose, thus they can implement LIFO method for calculating tax for specific time
frame.
 Management accounting: Management Accounting: This is the most important role of
accounting department as they connect finance authority of an organisation with other
functional departments. Essentially the role of accounting function in context to
management accounting is that it support the internal manager to make useful decision
for future growth and development. Manager of ALPHA limited, make various effective
strategies that aid to perform following task in most suitable manner resulting in
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improvement of efficiency and attainment of desired goals. It is evaluated that main
importantly the concept of management accounting are implemented for strategic
analysis, observation, controlling, balancing and making appropriate improvement on
regular basis.
 Account receivable and payable: The total of cash that comes into an organisation is
knows as cash receipts and cash that flows out is called cash disbursement. When
business firm separate section in accounting department maintain these kind of records.
In ALPHA limited account receivable department are entitled to collect money from
customer on due date of invoice. Similarly, the role of account payable department is to
make sure that bills to different supplier and vendor are paid on time without any gap.
In an organisation there is a separate department those are responsible to manage the
money and make it proper use resulting better outcome for company. Th e crucial function of
finance department is to mainly include the process of effective planning, arranging, auditing and
controlling the finance sources of company. The are also responsible to arrange the data and
prepare essential financial statements for company during an accounting year. There are some
useful role that are part of finance department in APLHA limited that help them to make
effective use of available financial resources so that profit can be increased. Some of these major
roles are defined in detailed manner:
 Investment function: The main role of finance department is to prepare valuable reports
that support the manager of company to make accurate investment decision (Graham,
Harvey and Puri, 2015). They use to analyse the current market situation and financial
return of various project available in make and suggest the management of company to
make investment in those project for better future result and development. Finance
Manager of ALPHA are require to analyse the crucial area where investment can be done
that will deliver higher and better return at minimal risk in future. Thus it is evaluated
finance department provide manager with the most appropriate reports of market
condition and help them in investment decision for more benefit. For example, recently
there is a trend of trading in cryptocurrency, thus finance department analyse these
scenario and suggest the management of ALPHA limited to make adequate investment
that help in generating profit within specific time frame.
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 Financing function: This function is mainly relevant to impressive usage of monetary
resource so that companies are able to direct its internal functions in organised way for
better results. Within ALPHA limited the role of finance department is to segregate the
necessary funds for running and managing different crucial business activities and
operation. This assist management of company to execute plan and complete the entire
task in more profitable manner to increase performance. They are also able to prepare and
make authentic budges for other unit of company so they can improve functioning
resulting in high return (Collier, 2015).
 Dividend function: In business term, a dividend is defined as the distribution of actual
rewards from the companies revenues and earning to specific shareholder. The main role
of financial manager in order to maintain profitability is to make sure that weather to
dispense total profit to shareholder or to hold the entire profit or to allocate part of the
earning to shareholder and retain the remaining amount within business. Thus it is the
crucial function of manager to adopt and implement the bets dividend policy that will
maximise the total market share of company. So it is evaluated that manager of the
company will make valuable decision regarding distribution of dividend by calculating
dividend payout ratio that will affect the total cash flow of APLHA limited.
 Working capital function: The manager of companies are required to meet the essential
daily requirement to fulfil total needs and run business activities in effective manner that
support to attain the desired objective. Thus, it is significance for the financial manager of
respective company to maintain enough working capital that support in running business
activities. They make sure that money are sufficiently available within company to
increase the business efficiency of operation in order to accomplish actual goals and
objective (Doumpos, Zopounidis and Pardalos, 2012).
TASK 2
Calculation of the ratios to analyse company performance.
Ratios 2017 2018
Return On Capital
Employed (ROCE):
= 375 / 1912.50 *100
= 19.60%
= 412 / 2925 * 100
= 14.10%
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= (Operating Profit / Total
assets – Current Liability)
*100
Net Profit Margin:
= Net Profit / Sale * 100
= 300/ 2400 * 100
= 12.5 %
= 262.50 / 3000 * 100
= 8.75 %
Current Ratio:
= Current Assets / Current
Liability
= 757.50 / 322.50
= 2.34
= 1035 / 1110
= 0.93
Debtor Collection Period:
= Receivable / Sales *365
= 450 / 2400 * 365
= 68.43
= 68 Days
= 600 / 3000 * 365
= 73 Days
Creditor Collection Period:
= Payable / Purchase * 365
= 285 / 1350 * 365
= 77.05
= 77 Days
= 1050 / 2400 * 365
= 159.68
= 160 Days
Return on capital employed: It is a type of financial ratio that help to calculate the
actual profitability of company and total efficiency of complete capital used within specific time
period (Return on capital employed, 2019). In accounting term, it is defined as the ratio that
support to measure the functioning of company that help to grow profit from total capital
implemented within business operations. The ratio of ROCE is consider crucial for company that
is often used by particular investor when analysing the options of investment available in
marketplace. It is observed that better and high return on complete capital employed shows that
the proper use of capital in order to increase profitability of business. This also help manager of
company to measure the actual efficiency and profitability in specific time period and make
valuable improvement in case of dislike results.
From, the above calculation the return on capital employed of APLHA limited during
year 2017 is approx 19.6%, in year 2018 it is 14.10% and shows a major decrease of 5% in
consecutive year. In year 2018 the company capital shows a low efficiency as result are reduced
as compared to previous accounting period. Thus, it is stated that in 2018 the capital employed
by management of APLHA limited produced less profit and company lack to operate its business
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activities. There are different reason for reduction of ROCE and the main cause of decreasing
ROCE is total reduction in operating profit and increasing in capital employed that is determined
by total assets minus current liabilities. Therefore companies are needed to insure that, operating
profit must increased and there must be increase of capital employed with same proportion.
Respective firm is vital to manage cost for different products, reform financial policies, pay
outstanding debts and increase sale figure that help them to improve their return on capital
employed (ROCE).
Net profit Margin ratio: It is calculated by considering net income of company during
an accounting year that support manager to determine the complete profitability in context to
sales for specific period. It is observed that high net profit margin indicate that an organisation
are able to cover total expense and maintain adequate profit (Mukhametzyanov and Nugaev,
2016). This also means that company have enough funds to pay their debts and increase
profitability of other functional units.
From the above table it is ascertained that Net profit margin for year 2018 is 8.75%
which was 12.5% in year 2017. There is a major reduction in net profit margin profit thus
manager of ALPHA limited are required to make valuable plans and implement them in proper
manner that aid to increase the net profit in particular time frame. The income statements shows
the total of net profit 300 pound in 2017 and it decrease to 262 in next year. The main reason for
the overall reduction is due to changes in operating expenses and high fixed cost in particular
period. Thus the manager of APLHA limited are required to reduce the fixed expenses and
variable cost so that net profit of company can be increased by lowering the cost of producing
goods and increasing profit margin in subsequent year. They are also required to prepare
valuable strategies that will help in controlling total expenses and improving the net profit
margin ratio.
Current ratio: This is consider to be a effective liquidity ratio that help an organisation
to measure the adequate monetary resources that aid to meet the basic requirement of business
activities and companies total obligation (Kou, Peng and Wang, 2014). Mainly, the focus of
manager is to maintain sufficient current assets within company so that they are able to pay off
its current liabilities in specific time frame. The idle current ratio is 1:1 that shows the total
liquidity of company.
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From the above calculation the current ratio for year 2017 is 2.34:1 that is much higher
and states that company have enough stock that is not a good sign from company perspective. In
year 2018 the current ratio is 0.93:1 which means that situation are well in control of APLHA
limited and they have enough resources to pay its current liabilities. Thus it is stated that in
present year the current ratio is much better as compared to previous and company is able to
meets its obligation in significant manner during an accounting year. It is observed that the more
difference between current liabilities and current assets the more better will be ratio to company.
To maintain the present current ratio in future management of ALPHA limited is required to
control and manage its total overhead expenses, cut down futile assets and more importantly
focus on long term debt rather rather than short term debt (Majercakova and Skoda, 2015).
Respective company is also needed to reduce the total level of inventory within specific time
frame because many a time business demo higher current assets and most of its part are engaged
in stock and due to this reason they are not to easily convert them into cash and pay its current
liabilities.
Debtor collection period: With the help of this ratio company are able to measure the
average time included in order to collect the total outstanding debt from debtors. It is observed
that higher debt collection time frame shows lower efficiency to business and low collection
display more efficiency to business (Lerner, Li and Weber, 2013). Thus when company have
lower period than they are able to invest again in different option giving their business more
chance to gain profitability.
From the above calculated ratio, the collection period in year 2017 is 68 days and in year
2018 it was 73 days. It simply means that in 2017 the company are able to increase the
receivable amounts and improve the sales figures as well as number of trader also increased for
APLHA limited. In 2018 the number of debtors increases and due to which the collection period
was also higher as company was not able to collect money from debtors. In order to improve the
collection period in nearby future company are required to maintain balance between receivable
amount and sales figure and also reduce the number of debtors for better profitability.
Creditor collection period: This simply means the actual period business required to
pay off their outstanding liabilities. Manager make sure that debtor collection period must be
lowered than creditors collection period so that company will be able to pay debt after gathering
sufficient amount from debtors (Magnan, Menini and Parbonetti, 2015).
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From the above calculation creditors period in 2017 was 77 days which rises to 160 days
in 2018. Thus it is stated that more time to pay the outstanding amount help company to invest
the same amount in other option and increase profitability. So, ALPHA limited to focus on more
credit purchase as they will get more time on repaying the same to credit. This help them to
increase the profitability of business in specific time frame.
CONCLUSION
From the above report it is concluded that types of financial statements aid company to
determine the essential needs of business and make valuable policies for improving performance.
The different department of company play crucial role in increasing business operation and raise
profitability. Apart this different financial ratio help company to analyse the overall productivity
and determine the financial strength and status in specific time frame.
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REFERENCES
Books & Journals
Agarwal, S., and et.al., 2014. Financial decision making when buying and owning a
home. Available at SSRN 2498111.
Arnold, G., 2012. Corporate financial management. Pearson Education.
Baker, H. K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Collier, P. M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Doumpos, M., Zopounidis, C. and Pardalos, P. M. eds., 2012. Financial decision making using
computational intelligence(Vol. 70). Springer Science & Business Media.
Graham, J. R., Harvey, C. R. and Puri, M., 2015. Capital allocation and delegation of decision-
making authority within firms. Journal of Financial Economics. 115(3). pp.449-470.
Kou, G., Peng, Y. and Wang, G., 2014. Evaluation of clustering algorithms for financial risk
analysis using MCDM methods. Information Sciences. 275. pp.1-12.
Lerner, J. S., Li, Y. and Weber, E. U., 2013. The financial costs of sadness. Psychological
science. 24(1). pp.72-79.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies. 20(1). pp.559-591.
Majercakova, D. and Skoda, M., 2015. Fair value in financial statements after financial
crisis. Journal of Applied Accounting Research, 16(3), pp.312-332.
Mukhametzyanov, R. Z. and Nugaev, F. S., 2016. Financial statements as an information base
for the analysis and management decisions. Journal of Economics and Economic
Education Research. 17. p.47.
Online
Return on capital employed. 2019. [Online] Available Through:
<https://strategiccfo.com/roce/>
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