Financial Decision Making Report: Techniques and Ratio Analysis

This report delves into the realm of financial decision-making, utilizing Asda Stores Ltd as a focal point to illustrate key concepts and techniques. The report begins with an introduction to financial decision-making, emphasizing the significance of the finance and accounting departments. It explores the role of financial and management accounting, tax and auditing functions, and the investment, financing, dividend, and working capital functions within a business. The report then transitions to management accounting techniques, including master budgeting, zero-base budgeting, and cash budgeting, highlighting their utility in sound business decisions. Furthermore, the report undertakes a detailed analysis of financial ratios, such as Return on Capital Employed (ROCE), Net Profit Margin, and Current Ratio, providing insights into the financial performance and efficiency of companies like ALPHA Ltd. The analysis includes the calculation and interpretation of these ratios for different periods, offering recommendations for improvement and highlighting the impact of various financial factors on overall profitability and financial health. The report concludes with a comprehensive overview of the financial decision-making process and its implications for business growth and sustainability.

FIANANCIAL
DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
Task 1...............................................................................................................................................1
Importance of finance and Accounting department ....................................................................2
Task 2...............................................................................................................................................4
Techniques of management accounting for making sound decision...........................................4
Calculation of ratios ....................................................................................................................5
CONCLUSION................................................................................................................................8
REFERENCE...................................................................................................................................9

INTRODUCTION
Financial decision is the ending decision which is taken by a responsible person in order
make sound decision. The manager of the company prepares financial statement with the help of
financial information. Every business organisation collects financial information that is used to
show the financial position of running industries. The main purpose of this report is to
understand how business concern make financial decision and how to grow the business
(Abubakar, 2015). For this Asda stores Ltd has been taken that is British super market retailer
company provides different types of products and services. This report will covered various
topics such as difference between finance and accounting department and importance of
accounting and finance function. Moreover, this report discusses about accounting ratio like
return on capital employed, current ratio, debtor collection period and creditor collection period
of ALPHA Limited that is used to to take financial decision of company. It used a slogan that is
most popular “Save Money, Live Better” which influenced the people.
SWOT
Task 1
Company's introduction: Asda stores Ltd is British super market retailer company who
sales variety of products. It was founded in 1949 when super market owned by Asquith family
and merged with Associated dairies industry of Yorkshire. It was listed on London stock
exchange until 1999 when it was acquired by the American retail giant Walmart for 6.7 GPB. It
is dealing in grocery, general merchandise and financial services. Its annual turn over is £ 791. 7
million and number of employees are 165,000 who are working with Asda company (Ahmed,
2015).
SWOT analysis of Asda Ltd that shows opportunities and threat of company for growing
the business.
Strength:
It has wide range of products and services that
helps to attract the customers.
It is British amazing market also provides
financial services and customer delight.
Asda has 150,000 employees and 500 stores at
Weakness:
It has global presence rather than other
competitors.
Lack of choice give a new competitor at
market place.
Asda is not able to accept the challenges
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global level.
It also provide online and offline services.
This is able to build a successful track record
to develop new products.
present by new entrants.
Opportunities:
New trends in customer taste can open new
market for Asda.
Acquisition of small industries that help Asda
to grow further.
Threat:
Conflicts among Asda and other retailer
regarding prices.
Pressure of reducing the prices of products and
services.
Rules and policies changed by government that
may be a bigger challenge for Asda.
Importance of finance and Accounting department
1. Accounting department :
Financial accounting: It is important in each business organisation that help to keep
records of financial transaction and maintain it properly. It is maintain by the manager of the
organisation who collect information and prepares financial statement. Such as Asda Ltd is
supermarket retailer who prepares financial statement that provides financial position of the
company. By using this statement investors and creditors can evaluate the financial performance
in order to make reinvest decision. Hence, financial accounting is important to get accurate
financial statement which can not be underestimate (Gardiner and et.al., 2015).
Management accounting: This means organisation used managerial accounting that is
used to preparing management reports and accounts who provides actual and accurate financial
information. Such as Asda's manager prepares management reports by using financial
information and make long term decision. The managers can get financial decision that helps to
run further business in order to growth of business. It is important because the manager can make
long term business decision and can expand the business by managing accounts.
Tax function: This is important function for economy and organisation where companies
contribute a fixed percentage of earned incomes. This amount is used to built schools, poor
education, hospitals, roads and other things that help to grow the economy by providing services.
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The manager of Asda pays annually tax that helps to increase the goodwill of company and
customer loyalty. Tax amount is collected by government and used for economical development.
Auditing function: Every business enterprises need to get audit of business organisation
that help to maintain the operational efficiency. Company get done internal and external audit
every year in order to reduce the risk and show the financial reliability. This is important because
through auditing managers and auditors can assess the material risk and profitability situation.
Asda company is retailer company who get does internal and external audit to know the business
risk and prepares auditing reports. Without audit a business organisation can not check the
upcoming risk and could not prepare financial reports (Grable, 2016).
2. Finance department:
Investment function: This is most important for business organisation, investors,
creditors and other stakeholders who make solid investment decision. It is based on strategy that
help mangers to make investment decision after analysing the requirement and advantages.
Manager of Asda Ltd, analysis the market to investment funds at different places that provides
highest return and low risk. In this company, the finance manager invests money on specific
projects which are more beneficial for organisation. Moreover, it is important to get marginal
efficiency through investment.
Financing function: It is important in all business organisation to utilize the funds
properly in order to operates internal functions. Such as Asda company used this function to
operate the functions in well manner and increase the productivity. It help finance manager to
complete the goals by using fixed amount and prepare the fixed budget for running business.
Dividend function: Dividend is the amount which is used by managers of the company
to distribute among shareholders. This function is important because through this investors and
shareholders can make further investment decision that help to expand the business. Such as
Asda Ltd distribute the dividends among shareholders that increases interest of more investment
for getting higher returns. Moreover, it is important to show the reflection of industries value
(İşseveroğlu and Sezer, 2015).
Working capital function: It is needed to fill the daily needs of business organisation
such as obligation, financial insolvency, debts and other needs. This is useful to measure the
industry's ability to pay off expenses or debts. Asda's manager measures company's ability in
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order to pay the liability, debts and expenses. Moreover, it help to increase the capital of
company for running a business.
Task 2
Techniques of management accounting for making sound decision
Management accounting are helpful to make solid business decision by analysis the
financial information. Such as the managers of ALPHA Ltd collect financial information and
prepares financial reports that help to know the financial position of industry ( Kumar and et.al.,
2017). Moreover, ALPHA Ltd uses different management accounting techniques in order to
planning and making business decision-making-
Master budget: This is superior budget of any organisation which is prepared by the
business organisation to know the income and expenses of company. ALPHA Ltd prepares
master budget by including all incomes and expenses that help to forecast and making financing
plan. It is useful for company because a company can evaluate the performance of company and
can ascertain the profitability situation.
Zero base budget: This is useful in new start up company or new business that give an
estimation of actual cost. It does not includes any past year information in order to prepares this
budget. The manager of ALPHA Ltd can use this management accounting technique that will
help to start a new business in new accounting period. The managers can use this budget to get
the exact amount of expenses and can make future planning (Lee and Lee, 2015).
Cash budget: This is the estimation of all cash transaction which are happening in
business organisation. It is useful for small size of organisation that help to establish the amount
of credit. ALPHA Ltd can prepare the cash budget that can help to avoid the cash during
accounting period. The main purpose of cash budget is to define the cash inflow and outflow that
states how much profit an organisation is earning in order to run a business.
From the above mentioned management techniques ALPHA Ltd should adopt Master
budget that will help to calculate incomes and expenses of the organisation. Moreover, by
preparing master budget ALPHA Ltd can identify the problems and make planning foe solving
the upcoming problems. The manager need to set pricing policy that will help to reduce the cost
and increase profits.
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Calculation of ratios
Return on capital employed:
This is an accounting ratio that is used to analysis the required of finance, valuation and
accounting. It help companies to measure the returns or profit margin during using capital.
Moreover, it is used to know the efficiency of company in order to expand the business. The
manager of ALPHA Ltd get the returns and compare with previous information that help to get
exact profits. It indicates the company's ability to get returns after subtracting current liabilities
from total assets. Moreover, it indicates the industry's performance that shows how effectively
company use its capital to increase the profit margin (Mouna and Jarboui, 2015).
In 2017 the ROCE of ALPHA Ltd was 19.60 % and in 2018 is 14.10% that decreased
approximately 5% than past year. As higher ROCE gives higher efficiency that showed in 2017.
In 2018 ALPHA Ltd did not used capital properly that gave less profits as compare to 2017.
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The main reason of less ROCE in 2018 is reduction in operating profit and increased in
capital employed. Capital employed and current liability both are greater than 2017 but the
operating profit is not greater than 2017. That's why the ROCE of ALPHA Ltd is less than year
2017.
For improving the ROCE company need to reduce the cost that will help to increase the
operating profit. Moreover, it need to increase the total assets by selling high number of product
and services. After doing such ALPHA Ltd can improve ROCE and can increases the
profitability (Nofsinger, Patterson and Shank, 2018).
Net profit margin ratio:
This is the percentage of remaining revenues that is calculated after deducting all
expenses from sales. This is used to measure the profit by subtracting the expenses from total
sales. Such as ALPHA Ltd calculates net profit every year that help to run a business more and
take financial decision. It shows how much profit company is getting after reducing tax and
interest amount.
N.P. Indicates the company's performance such as it helps to know the whether company
should continue this business or not. If company is getting net loss then managers make decision
of liquidation of company. Additionally, higher profits shows high efficiency of business that
increases more profits (Pandey, 2015).
Such as net profit percentage of ALPHA Ltd in year 2017 was 12.50% which reduced in
2018 and remain 8.75% that means low ability and less efficiency of organisation. The net profit
ratio should be high that help to give high satisfaction in business organisation.
The reason behind this is net profit of year 2018 is less than 2017. such as in 2017 net
profit was £300 and in 2018 is 262.50 which is less than past year. Its main reason is its finance
cost is increased so company get loss.
For increasing the net profit margin ration ALPHA Ltd need to reduce the finance cost in
upcoming year and should make solid strategy that will help to increase the net profit. Moreover,
company should reduce operating expenses, tax amount and other expenses that will increase the
amount of net profit (Tang, Baker and Peter, 2015).
Current ratio:
It is also know as liquidity ratio that shows liquidity position of the company. It is used
to measures that do organisation has enough resources to meet with short term or long term
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goals. It also compares with company's current assets to current liabilities. The ideal current ratio
is 2:1 which is best for company and shows highest liquidity position of company.
The current ratio of ALPHA Ltd was 2.34 and in 2018 is .93 which is most less than
previous years. This means company has high current liabilities than current assets. According to
upper calculation highly capable to run a business or expand the business in 2017. on other side,
in 2018 its ratio reduced and capacity also reduced that may be a reason of low profitability.
Current ratio indicates industry's liquidity that help to make financial decision. Moreover,
it indicates how business organisation meet with short term obligations. If current liabilities will
be high than current assets, it means company can face problem and risk in order to meet with
obligations (Wald and Franco, 2016).
The reason of low current ratio in 2018 is ALPHA Ltd has increased its current liabilities
in 2018 than year 2017 that is a reason of low current ratio. If the current liabilities will be
increase of company that means company has to pay more amount.
For improving this ratio ALPHA Ltd need to increase current assets by selling number of
products and has to reduce current liabilities by paying to creditors. A manager should
concentrate on liquidity position of the company that help to increase the business.
Debtor collection period:
This means in how much time a business person can collect the money which is given. It
is used in small, medium and large size of enterprises to know the collection period time that
help to further expanding business activities.
The debtor collection period indicates the average time taken in order to collect debt
amount. Additionally, less period indicates high efficiency to collect money. So the debtor
collection period should be greater.
ALPHA Ltd has debtor collection period in 2017 is 68 days and in 2018 is 73 days. It
shows the money collecting capacity of company. Such as ALPHA Ltd could collect debts in 68
days where as in 2018 it collect debts in 73 days which is 5 days less than 2018.
Its main reason behind increasing the debtor collection period is the policies and standard
are fluctuating that increase the amount of receivables. It should be less to get the benefits, such
as it debtor collection period will be less then organisation will have more time to pay the
liabilities.
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It can improve by increasing the sale or revenues that will help to reduce the debtor
collection period time. Moreover, the manager need to reduce the receivable amount for reducing
the time period.
Creditor collection period:
This is an accounting ratio which is used to know the time period to pay off business
liabilities. It is important for every businessman to get the information about in what time they
has to pay the debts.
It indicates the company's performance which is based on creditor collection period
because if creditor collection period will be less then company can increase the business.
In year 2017, ALPHA Ltd has collection period was 77 days and in 2018 is 160days
which is good because it has time to expand the business (West and Bhattacharya, 2016).
The main reason is , its credit purchase and payables are greater in 2018 than 2017. In
2017 the payables was £ 287 which was less than 2018 because is has £ 1050 as payables.
It can improve this by reducing the credit purchase because credit purchase increases the
payment period as calculated in table . So company need to reduce credit purchase and increase
the payables.
CONCLUSION
From the above report it can be concluded that financial statement are valuable to know
the position of company. Financial statement helps to make financial decision by preparing
various statement. Moreover, it help to maintain the liquidity within organisation by including
financial information. This report has discussed about financial ratio such as current ratio, capital
employed, debtor collection and creditor collection period that help to get return by investing the
amount. Additionally, report will reveal about management accounting techniques that helps to
make different types of budget in order to get estimation of income and expenses.
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REFERENCE
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