BM414 Importance of Finance and Accounting

The report includes the importance of finance and accounting in the context of company which is essential to reach the desired target. In regard to further understanding the value of making financial decisions with the aid of the ratio of financial reports, potential buyers are given the appropriate recommendations.

Overview of company

In 1899 William Morrison established Wm Morrisons which use to sell egg and butter stall on a domestic level.  But with the passage of time the company was able to held its business in superior manner and have total 498 superstore in UK (About Morrisons, 2019). there are different products such as food items, medical necessities, cloths, basic household things that are being sold in company. The total number of working employee in Morrison is 110000 and in 2018 the total revenue was 2018 £17,262 million with across £311 million net worth.

TASK 1

Role of the management accounting system and finance.

In present business environment it is observed that the procedure related with determining, evaluating, summarising the useful financial and non financial information for internal use is known as management accounting. There have been a variety of management reporting methods used in Wm Morrisons that help the system to handle and monitor various operations in order to achieve defined objectives. Such approaches will allow management to build more comprehensive strategies and tactics that will lead to improved development and growth. Some of the respective approaches are defined below in the context of selected company:

• Analysis of financial statements: In each type of company annual statement such as income statements, cash flow statement and balance sheet is prepared to evidence entire business dealing. This help to analyse the actual financial strength and status within a year and define the reason which impact the profitability (Wright, 2016). Financial Statements evaluation gives the actual figures of company to internal and external interested parties so that different decision such as investment or making better strategies can be performed. By using this method manager of Wm Morrisons  are able to identify the total net profit or loss in a year, current liabilities and total assets to write of these liabilities. This also support investors to overlook the overall performance of company and make specific decision of investing in Wm Morrison assets which would give higher results. Managers in company, conduct analysis of financial statements like balance sheet, P&L and cash flows by evaluation of present and past trend in each line items stated in financial statement. This analysis impacts company's decision-making and strategic approaches as it provide comprehensive and relevant information. 
• Financial planning: It is considered to be a conduct connected to a final decision in the context of financial operations, that is important in order to achieve the main objective of the enterprise in the respective period (Birt, Muthusamy and Bir, 2017). Financial planning develops short- and long-term goals and objectives in the business environment, as it lets management design and implement strategic strategies and develops certain techniques to help accomplish the objective. In Wm Morrisons, this approach is used to efficiently prepare for both short and long-term revenue needs so that optimum benefit can be achieved Leaders make use through current projections to call for appropriate funds for potential usage, culminating in the creation of useful consumer and outcome programs to improve the overall productivity. Under financial planning, managers prepares budgets and make financial projections. This impacts corporation's actions regarding fund allocation and utilisation.   
• Communicating: In large or small companies this has been found that main goals can be achieved with sound and efficient communication system. Good communication around management team as well as other worker helps to eliminate any major issue and create a safer work environment. It has been noticed that with more strong communication network company gaols can be attained in particular time. Effective communicating between manager and other worker help to remove any kind of problem and develop more healthier environment of working. In Wm Morrisons, this financial strategy method is very helpful to assist executives in interacting with the total workforce. This results in better implementation of strategies and reduction of any inequalities that aid to achieve the business's real goals. It also helps to plan accurate reports that provide detailed information regarding the current obligation of each worker to achieve the goal in a particular time. Managers under this technique adopts formal as well as informal communication approaches to transmit business information and maintain accountability in work. It support company's overall managerial structure by implementation of effective communication control system.
• Budgetary control: The system of budgetary regulation is used in every business firm that support management accountant to monitor and handle the separate business processes (Correia, Dussault and Pontes, 2015). It is a crucial method which really promotes manager to direct the entire workforce in carrying out the business activities in order to sustain profit margins. The respective firm manager uses this techniques to make sure that valuable activities are provided with respectful amount and resources that will generate more benefited results. This also support in controlling the over expenses of company due to which profit margin are decreasing and determine the issues which have negative impact on financial profitability. Manager keep updating the process on a routine basis so that unforeseen events that can increased total expenditures of company can be removed.  In Wm Morrisons, managers apply it in addition to budget preparation to control budgets by initiating appropriate budgetary controlling steps like cost optimisation, price optimisation etc. It affects company's overall profitability level and financial performance.  
• Standard costing: This is known as a costing approach connected to the estimation of all possible future costs relating to different operations that will become a business norm (Daher and Mohtar, 2015). This allows the company to make the comparison over a certain time period between the current level of spending and the normal spending on various tasks.  This method is deemed most benefited for company as it makes it easier for administrators to determine the issue that needs proper improvement in order to minimize expenses. Under this technique, Wm Morrisons' managers fix some standards and targets which help to define corporation's performance over a specific period. This techniques affects, company's objectives and goals as it set criteria for accomplishment of predefined targets.   

Management accounting techniques used in planning, controlling and decision making.

The above mention methods of management accounting are very much important for a company to get the suitable results. As it help in making the process simple and effective which increase the overall productivity of certain operation in the respective time frame. This also gives additional structure for developing the business operation approach that directly benefits in  creating more successful preparations, monitoring various activities and making decisions for potential development. The significance of each strategy in the planning, controlling and managing as well as decision-making are addressed below:

• Analysis of financial statements: Wm Morrisons' management will make informed decisions with the assistance of annual financial reports. Like the estimate of cash-flow from different activities i.e Investing, financing and operating is beneficial in monitoring the additional cash flow from company. It also aims to prepare better plans to boost cash equivalent capital flows. Balance sheet describes stock supply that allows managers to agree on increasing the supply which benefit to boost sales and gain higher income.
•  Financial planning:  It is critically measured that Wm Morrisons executives use proper financial planing and money management to track the use of financial resources (Keller, 2018). It also help to determine the economic resources needed to support the different project within a specific time. Effectively, they intend to assign the earned income to various departments to better achieve the right objectives. It also facilitates decision-making to determine the best level of investment that correlates in maximum return for various assets.
• Communicating: In the above discussion it is analysed the administrator uses this technique to formulate suitable strategies so that required information can be provide to entire staff (Kim and Upneja, 2014). . This help in better performing of business operations according to desired and  appropriate way that will lead to better outcomes and generate better results. Administrators must make effective choices to eliminate differences between staff members and supervisor that lead in a company's improved performance. Such methods are also used to monitor business activities when administrators demonstrate how to carry out business activities.
•  Budgetary control: It is compulsory for business firm to manage its budget so that profit can be maintained. By using this techniques manager of Wm Morrisons control all unwanted expenses that could lead to reduce in profit, they make better plans which support in increasing sales with a respective time frame. Businesses are obligated to control their budget in order to retain income that maintain sustainability during inflation. Manager of Wm Morrisons uses this strategy to plan and track any unnecessary costs that might result in a reduction in income. They also make sound full and better decisions that help in higher sales and increase the overall market share. This method can also be used to make better choices, like taking into account events that contribute to more revenue and designing plans to reduce operating expenses.

TASK 2

Computation of the ratios to examine corporation's performance from a potential investors perspective:

Return on capital employed: In financial terms, the ROCE is known as the valuable profitability ratio that supports the more efficient way of explaining the actual use of capital through enterprise to operate its various operations. Generally speaking, it primarily notes the company's total capacity to utilize its resources efficiently to achieve the intended goals. From the perspective of the investor, it is considered to be the most beneficial to be ready to know the actual position that the business is doing well and make investments will offer better outcomes or looking for other alternatives. In ROCE, the overall funds committed/invested in an organization is invested capital. Capital invested is usually aggregate assets minus external liabilities, or equity funds. On the other hand, EBIT is the income of an organization which involves net-income after costs but does not take into account tax amount and interest expenditures (Kliger and Gilad, 2012).

Interpretation: It has been derived from above displayed table that the ROCE corresponds to approximately 21% in year 2017, that in year 2018 falls to around 14.10%. It is noted that perhaps the ratio drop in the following year owing to lower sales generation in year 2018 was not acceptable for the business in year 2017. Due to less ROCE potential investors could shift to a different alternative for financial benefit. To attempt to enhance the Alpha Ltd's ratio, the excessive spending zone would be tracked and unsustainable or needless assets should be sold.

Net profit ratio: In the current business environment, all businesses ought to measure Net Profit Ratio in attempt to verify that the business is profitable or needs to be improved. This is also called the profit margin-percentage, a major fiscal ratio derive to calculate the total proportion profits company generated by its annual revenues. Here in ratio net profit of company is net amount of income remained after provisioning of all expenditures. A higher percentage of net-profit margin is indicator of higher efficiency of corporation to generate net profitability from business (Klinsukhon and Ussahawanitchakit, 2016). At a glance, this ratio shows actual profitability position of company over a specified financial year.    

Interpretation: In year 2018, Alpha has reported net profitability margin of around 8.75 percent as shows in above table. While in year 2017 this margin was around 12.5 percent. There is a decline in 2017 to 2018 has been reported by company which is negative sign for company's profitability margin. Company has to improve this ratio to maintain their market share in industry. This decline also shows that corporation's efficiency to generate net profits has been declined over the period. This decline can reduce the trust of shareholders or investors in company. Company can improve this ratio by put their efforts towards increase in overall revenue and minimise operating costs. Also by identifying processes which are cause of excessive expenditure, company can boost their net profitability level.

Current Ratio:

It is described as crucial proportion between the current assets and liabilities which help in the assessment of corporation's credit worth. This is a kind of short range liquidity ratio which demonstrates that corporation is up to the task of fulfilling all its financial commitments though its current assets. Here no specific criteria has been defined for current asset but in a corporation current assets must be twice of total current liabilities (Pang, 2016). This measure actually compares the total current assets that can quickly be liquidated within twelve-month period with liabilities due for repayment in the same year. To hold the balance of current assets greater business focused primarily on reducing its short-term obligations in that fiscal year and approximately calculating current financial performance.

 

According to the above measurement, current ratio in year-2017 is around 2.34, however in the coming year has been reduced to 0.93. This shows that corporation Alpha Ltd is not sufficiently robust or able to repay its all current liabilities in year 2018 especially compared to previous year. This also mentions that company Alpha's financial situation is worse in year 2018 and there is a reduction in overall current assets as well as an rise in current-liabilities due to debts. In addition, the business maintains excess surplus cash that could decrease profit with inferred interest cost owing to which percentage of current liabilities is higher. Above-mentioned company should strive in this circumstance to raise its current assets in order to allow themselves to make quick-term debt payments. Furthermore, if this level is smaller, merely meeting the appropriate ratio criteria will be easier for them and corporation will be more capable of paying their all the short-term loans and obligations/liabilities.

Debtors collection period: The phrase Debtor Collection Period relates to average duration required to recover commercial obligations in finance. A shortened time span is an indication of increased efficiency. This allows the company to equate the real repayment period with credit period given. It reflects the no. of days that collecting their liabilities requires a company on avg  (Tridimas, 2012). Companies also give their clients a grace duration, although it is crucial that they will not take too much time to recover their liabilities because of the cash-flow. The calculation of debt recovery duration is determined by dividing debtor amount (included on the financial statements) by the revenues (from the income statement account) and multiplying by 365-days to give the company the total number of days it took to recover its all debts.

 

Here above presented table it has been analysed that average debtor collection period of company Alpha in year 2017 and year 2018 are around 68 days and 73 days respectively. This increase in debtor collection period indicates that company's capabilities to recovers their debts from debtors has been declined. Company in year 2018 takes around 73 days to collect amount form debtors. In order to improve this period Alpha Ltd has to focus towards restructuring of debtors and amend the credit period given to its debtors. Control over this period is necessary for company to maintain adequate working capital in business,      

Creditor collection Period:  This period shows how much time company generally takes to make payments to its creditors. In this ratio aggregate payable balance and trade creditors are divided by total credit purchases, then in order get results in days multiply outcome by 365 days . This ratio also reflects short-term liquidity position of company over a specified duration. This is crucial ratio which also has direct impact on company's overall working capital position  (Vučijak, Kurtagić and Silajdžić, 2016).

From presented table and figures it has been evaluated that there is significant increase in creditor collection period from 2017 to 2018. In year 2017 creditor collection period of company was just 60 days that has been increased to 170 days in year 2018. This increase in period of creditor collection period is not good for company's financial performance. As this reflects that company's efficiency to pay out its payable amounts towards creditors has been decreased. For improve this ratio company should try to make payment of their creditors within reasonable period.

Through above analysis of different financial ratio, it has been recommended to company's potential investors to opt for any other investment option or hold shares in company as current liquidity and profitability position of company Alpha is not so much good.

CONCLUSION

It has been articulated from above study that financial decision-making is a broader and fundamental mechanism that supports the effective control as well as management of fiscal resources. This helps to run various business activities in a more lucrative manner and maximizes the company's entire profitability. This has also been revealed that the corporation will have to evaluate different kinds of financial ratio in order to evaluate the aggregate financial performance of company as demonstrated in financial reports. Multiple accounting management strategies are successful in providing internal managers with useful advice to ultimately produce the desired outcomes.

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