Role of Financial Data in Business Decisions Assignment Sample

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ASSIGNMENT 1

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1. Assessing the different ways to use financial data for decision making

Financial data help in determining the profitability solvency and liquidity position of the company. This helps manager in deciding whether they need to invest in the particular project or disinvest their investment. Financial data of the company impacted the decision of an individual as when one decides to purchase the share of the company. In this regard, financial data helps in making proper evaluation or assessment before investment. This made them understand whether they are going to enjoy profit or not. This also helps individual in deciding whether they should sell their shares at this point or wait for longer time and this determination will help in minimize the loss and risk of an individual (Ren, 2022). In professional life, when an individual is searching for a company with which they need to do partnership then analysis the financial data is done and then allot the project to them. Financial data also help in comparing two organizations in the industry to identify their position in the market which helps individual in deciding which organization they should choose. Financial data also helps in taking decision regarding the allocation of budget and forecasting uncertainties (Miller and O'leary, 2019). Financial data has also been used by the supplier of the organization as this will help in deciding whether the company will able to pay their credit or not which will help in making decision regarding the credit sales.

2. Stating the importance of accounting standards/ principles

According to me accounting standards and principles are necessary as it help in following ways:

Comparable: Principle of consistency defines that organization should use same method of accounting for the life time which made the data comparable (Gujarathi, Dugar and Ruff, 2022). for example if in one year a manager use straight line method and in next year in written down method for calculating depreciation then It will be difficult to compare the performance in two years.

Reduces confusion: If some standards are not specific regarding the creation of financial report. It will create confusion as each one will create it in their own way which will be difficult for others to understand.

Increase reliability: Financial report which is prepared by following accounting principle and standard are more accurate and reliable (Importance of accounting principle and standards, 2023). This help in gaining trust of the stakeholder which will help in taking appropriate decision by them.

Reduce the scope for window-dressing: Companies use to manipulate the financial data to adjust the performance of their company according their needs. Accounting standard puts restriction on such act and reduce the scope for a company to misinterpret its financial data and aim at providing the actual position of the company.

Improving managerial accountability: Liquidity and solvency position of a company could be determined by the efficiency of its management decision (Miller and O'leary, 2019.). Accounting standard provided a base which help in measuring the actual performance of the management.

3. Explaining any 5 balance sheet items and analyzing the financial position of the firm

To determine whether the balance sheet should determine as good or bad various factors need to be analysis. A strong statement of financial position will have an appropriate mix of equity and debt which will help in maintain the balance between risks and return profile. A good balance will have adequate performance of all the assets which will help in generating efficient and effective return (Berger, et. al, 2022). Appropriate balance sheet will show an adequate amount of current asset which will help in determining the liquidity position of the company so that the entity could fulfill its working capital need on time. Five elements of balance sheet are as follows:

Cash and cash equivalent: this refers to the in-hand cash which is available by the company in the liquid form. They are low risk and highly liquid assets of the company such as money market funds, treasury bills etc.

Prepaid expense: It is shown under current asset in the assets side of the balance sheet. This is the expense which includes all the payment which company had made prior to the date of occurrence of the event.

Plant, property and equipment: These are written under fixed asset in the assets side of the company’s balance sheet (Slacalek, Tristani and Violante, 2020). These are the assets which an company purchase which help in increase the revenue of the entity.

Advance income: This is shown under current liability in liability side of balance sheets. It refers to as all the unearned income which company had received earlier but the actual service have not been provided to them.

Intangible asset: goodwill, copyrights, patents etc are the assets which cannot be touch as they do not have any physical existence. They are refer to as long term asset and come under fixed asset of the company

 Analysis of balance sheet

1. Gearing ratio

Particulars	Amount
Gearing ratio	54.7619
Long term liabilities	46
Capital employed	84

It is ratio calculated to identify the financial leverage of the organization. The ideal gearing ratio is 25% to 50% (Kim, et.al, 2019). Companies gearing ratio is higher than the ideal ratio which indicate that company is using more debt which could create difficulties at the time of recession and higher interest rate.

2. Net working capital ratio

Particulars	Amount
Net working capital ratio	0.074
Current assets	23.4
Current liabilities	16
Total assets	100

 It is the ratio which is calculated to identify the liquidity position of the company. The company is not capable to meet the ideal ratio as it is below 1.5. This indicates that the company will not be able to meet all the short term liabilities as they do not invested in enough current assets.

ASSIGNMENT 2

1.Calculation and analysis of the ratios

Current assets

Particulars	Figure
Current ratio	1.46
Current liability	16
Current assets	23.4

 Current ratio is calculated to determine the liquidity position of the company. It helps in identify how much current liability could be paid off by selling off the current assets. In the year of 2020, current ratio of ABC Ltd was 1.46. This considered as good because it is in line ideal ratio to some extent such as 2:1. Company should make an investment in purchasing current assets (Barker, et. al, 2020). Company should reduce its expenditure on buying capital goods which eventually lead to decrease in the amount of cash in the entity. They should sell the assets which are not generating nay profit and focus on reducing the drawing by the proprietor

Quick assets

Particulars	Figure
Quick assets	11.4
Current liability	16
Quick ratio	0.7

Quick ratio is calculated to identify the liquidity position on the company by identify the liquid asset of the company. Liquid asset are calculated by deducting inventories and prepaid expenses from the total current assets. Ideal quick ratio is 1:1 which company ABC is not able to attain. To improve the quick asset Ratio Company must focus on increasing the inflow of cash by deducing the expenses or increasing the sales. Adequate inventory control techniques should be used so that company did not invested excess cash in the inventory which lead to decrease in quick assets

Inventory turnover ratio

Particulars	Figure
Inventory turnover ratio	6.32
COGS	67
average inventory	10.6

This ratio indicates how much time it takes to sell the entire inventory and restock it again. Ideal ratio is between5- 10 and the company ABC is able to meet this ratio. The company ratio is 6 which mean that the organization is restocking it goods in every 2 month which is indicate that company sales is effective (Cashwell, Copley and Dugan, 2019). Company should focus on increase the ratio as higher the ratio better it is. For increasing the ratio company could focus on enhancing the market strategies which will help in increasing the sales

Debtor turnover ratio

Particulars	Figure
Debtor turnover ratio	8.89
Net sales	105
Average account receivable	11.8

This is the ratio which is calculated to identify the efficiency of the organization in converting the debtors into the cash. This ratio is calculated to identify the number of time in a financial year; organization is able to convert its debtor into cash. It describes the organization ability to collect entire revenue. Company ABC is working efficiently in collecting the revenue from its debtors as 8.9 is considered to be good ratio. This indicates that company’s collection procedure and credit policies are effectively implemented

Fixed assets turnover ratio

Particulars	Figure
Fixed assets turnover ratio	1.75
Net sales	105
Fixed assets	60

This ratio indicates the efficiency with which the company’s fixed asset has been used for generating the sales. Ideal fixed asset ratio is 2.5 or more and higher the ratio better it is. The ABC company is unable to attain the ideal ratio which means company need to take measures to increase its sales. Company should focus on increasing the revenue without increasing the investment in new assets. Company should attentive toward leasing the assets need rather than buying the asses as it increases the fixed assets of the company

Debt to equity ratio

Particulars	Figure
Debt to equity ratio	2.875
Debt	46
Equity	16

This ratio indicates the solvency position of the organization and help in determining the amount id debt a company has acquire in comparison to the total asset (Syukur, Novianti and Karim 2021). Foe better financial leverage less than 2 is considered adequate and greater than 2 ratios indicate high level of risk. This leads to increase in the cost of equity and the borrowing cost for the organization. Company should focus on improving the profitability of the organization and should try to pay some of the debt. This will help in decrease the debt to equity ratio leading to attaining the ideal ratio

Gross profit ratio

Particulars	Figure
Gross profit ratio	15%
Gross profit	16
Net sales	105

This is the ratio which helps in determine the profitability of the organization by dividing the gross profit by the total sales of the financial year. The gross profit of the company is considered to be very low in comparison to the ideal ratio. This percentage will not help the company in paying all its expenses in the upcoming time and making it difficult to work effectively. Company should focus on decreasing the operating cost and expenses which could increase the profit margin. The pricing strategy of the company should reconsidered to determine the whether there is need to change the price of the products.

Net profit ratio

Particulars	Figure
Net profit ratio	9%
Net profit	9
Net sales	105

Net profit help in determine the actual profit of the Organization after deducting all the expenses. Company aim at increasing the ratio it will help in increasing the overall profitability position of the business (Purba, Nuzula and Sugiastuti, 2023). Company net profit ratio is below the ideal ratio so company should focus on increasing the ratio by decreasing all the cost. Company should focus on attaining the economics of scale which will help in decreasing the expenses and increasing profit.

Return on shareholders’ equity

Particulars	Figure
Return on shareholders' equity	56%
Net profit	9
Shareholder equity	16

This ratio is calculated to identify the efficiency of the organization in using its shareholders fund. This ratio helps us in determine whether the company is generating enough profit by using shareholder fund or not (Giraudo, Giudici and Grilli, 2019). Company is heaving a very high ROE which indicate that company is able to use its shareholder fund efficiently to convert into profits

Average collection period

Particulars	Figure
Average collection period	42 days
Account receivables	11.8
Net sales	105

This is the ratio which is calculated to identify the efficiency of the organization. This ratio is calculated to identify in how much the payment has been received from the debtors and how efficiently the company is able to collect be cash from them. if the collection period id below 60 days than it is considered to be good and helps in maintaining the liquidity of the company. This shows that company ABC ltd has been successful in collecting the payment and maintains the liquidity of the company.

2. Evaluating the source of finance for the startup - Debt / Equity or both?

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For company ABC ltd they should opt for both debt and equity as to maintain the risk profile of the company. Debt and equity should not used in same proportion as during startup face company do not strong base for regular income which may lead to nonpayment of interest on debt. Equity should be used more than debt. Company should maintain the ratio 70:30 of equity and debt so that it does not create too much obligation on the company. Indulge too much of debt will create financial difficulties for the owner as they need to provide regular payment and which sometime create a situation of bankruptcy. Company should not only take equity as they lead to dilution of the company share and rights (Ewens, Gorbenko and Korteweg, 2022). Venture capitalist, angle investors, owner fund are the sources which company should adopt for the funding. This type of funding reduce the credit liability on the company as at the initial level if the firm id attaining lower profit and also their chances of survive in the Market. Funding through venture capitalist or angle investors helps company in providing advices and helps in business expansion. They help in establishing networks and providing consultation and guidance which will create scope for the expansion. Saving from the owner should be included as it is owner’s fund which does not create any type of obligation and does not include transfer of the ownership.

3. Detailing on the external source of funds that company should undertake

After 2 year if the working if company want to expand its business they could opt for issue of share, debentures, and bank loan. The company is successful running that mean firm has established good reputation and create goodwill in the market. Now they can opt for issue of the share from secondary market as they have created awareness their company so investors will be interests in purchase the share (Yusopa, 2020). At this stage company should focus on the adopting more debt than equity as it will provide tax benefit to the company. Debentures could be issued by the company as they are less risky and did not dilute the power and right of the owners.

At this stage company will have enough financial and liquidity position so they could pay interest to the debentures holders on time and does not lead to crisis of nonpayment. Interest on the debt is tax deductible amount which made it cheaper them the equity. Indulging more debt also improve the company reputation and goodwill as timely payment of the interest and principle amount improve the credit score which made it easier for the company to raise fund in the future firm any sources. Funding could be taken from by the bank as bank provide loan after having any collateral. Now the company has assets which they can easily mortgage as they have confidence to again gain their assets by providing full payment. So the company should opt for issue of share and debenture at the expansion level as they can easily pay off all their obligations.

 ASSIGNMENT 3

1.What kind of budgeting practice do you prefer for your company and why?

According to the current scenario, the company should opt for Zero-based budgeting practice as this will be best suited for the company. This budget method will help in identifying the entire external factor and internal factors which are affecting the business and plan accordingly which can help in effective allocating of the budget. This method of budgeting consume time as the company need to analyses all the current aspects of the business from the zero level and determine the future plans (Malenko, 2019). It ignores the historic data and focuses on the preparing of budget on the basis of future needs. For the company ABC they should opt this budgeting because of the following reasons:

• It will help in best control over the cost as it is not necessary that the previous year expenses will be cost at the same price as that of now. The company could identify various other ways through which it could be reduced which could improve companies provide. Through this company aims at attaining the economies of scale and analyses current expenditure method and identify the need and value of such expenses in the organization. This all help in better and effective control on the cost of the organization.
•  It will help in cope up with the Dynamic environment because unlike other method of budgeting that did not take under chances in the external environment of the business, rather this method help in evaluating the entire internal and external environment. For company ABC who is dealing in FMCG product they need to continuous evaluate the changes in the market prices as they keep on fluctuating.
• It aims at increasing efficient as Zero based budgeting method help in decrease the cost as they evaluate the current environment ever time. Which helps in identifying the way through which the efficiency of taking out every action could be improve that will lead to decrease in the cost for the firm.
• Zero based budgeting method help in increase the productivity as this method helps in identify the areas where the company is spend unnecessary and the value it is creating in the success of the firm (Miller, Hildreth and Stewart, 2019). Like other FMCG firm the company will also decrease it expenditure on the traditional method of marketing which are costlier and less effective and will aim at increasing investment in digital marketing.
• FMCG Company has too many different departments in the organization so zero based budgeting help in determine the efficiency of providing fund under each department. It will help in determine the actual need of fund for each year and It help in proper functioning of each department as it help in setting up of accountability for the managers of every department. This helps in identify whether the particular department is able to generate the profit according to the fund allocated or the company need to withdrawal the fund from that segment.

2. Discussing two capital budgeting methods along with the justification

Prior to taking investment decision every owner need to identify the worth of such investment and the return they could generate from such investments. The companies will implement two capital budgeting method which will help in determining the effectiveness and profitability of particular project. The two methods which company will be using are Net present value method and payback period

Net present value method: It is the method of capital budgeting which aim at indentify the difference in the present value of cash outflow and the present value of cash inflow. These help in identify the profitability scope by investing in particular project and help in determine whether to invest in the project or not (Net present value method of capital budgeting, 2022). The value of money which the company will invest today in the project will not be same in the future so this will help in understanding the actual value of the future income in the present. This is the most appropriate method as this take into account the concept of time value of money which helps in coming to the appropriate result and makes clear judgment regarding the investment.

 The company will opt for this method as it a comprehensive tool which includes all the aspects of the investment such as outflow, inflow, risk and the time involve in the investment. Rather than just describe whether the company will able to generate the profit or not it also help in determine the actual value of the profit that company will earn by discounting the cash flow.

Payback period: This is another method of the capital budgeting which aims at identify the time that would be taken for getting back the actual investment. It is the simplest method of capital budgeting. The company will employ this method of capital budgeting as this is modern method and include the concept of time value of money. This helps in identify the actual value of the investment after analysis the present and future value of money. This method is cost effective foe the company as they need not to employ new and skilled person to undertake the calculation as it is the simplest method of capital budgeting.

This will help me in identify the liquidity position of the company as the firm with shorter payback period indicates that they are going to recover their initial investment quickly. This indicates that investments will able to generate effective cash inflow that will reduce the liquidity risk for the company (Payback period method of capital budgeting, 2023). This method also indicates the risk associated with the particular project as longer the payback period higher the risk associate with the investment. This will also help me in capital rationing as this create a base which provide us information regarding whether to invest in this project now or not. If the payback period is longer I will not invest as they will stop me from the opportunities which could be come in future. This analysis can be used for generating the fund as payback period is the easy metric which help in proper communicating the investment potential to various stakeholders.

References

Books and Journals

• Barker, R., Penman, S., Linsmeier, T.J. and Cooper, S., 2020. Moving the conceptual framework forward: Accounting for uncertainty. Contemporary Accounting Research, 37(1), pp.322-357.
• Berger, A.N., Guedhami, O., Kim, H.H. and Li, X., 2022. Economic policy uncertainty and bank liquidity hoarding. Journal of Financial Intermediation, 49, p.100893.
• Cashwell, K., Copley, P. and Dugan, M., 2019. Using ratio analysis to manage not-for-profit organizations. The CPA Journal, 89(5), pp.52-57.
• Ewens, M., Gorbenko, A. and Korteweg, A., 2022. Venture capital contracts. Journal of Financial Economics, 143(1), pp.131-158.
• Giraudo, E., Giudici, G. and Grilli, L., 2019. Entrepreneurship policy and the financing of young innovative companies: Evidence from the Italian Startup Act. Research Policy, 48(9), p.103801.
• Gujarathi, M.R., Dugar, A. and Ruff, M.F., 2022. Earnings management using “Carryovers”: Accounting practices in Toshiba’s Visual Products business. Journal of Accounting Education, 60, p.100796.
• Kim, W.S., Baek, S.Y., Kim, T.J., Kim, Y.S., Park, S.U., Choi, C.H., Hong, S.J. and Kim, Y.J., 2019. Work load analysis for determination of the reduction gear ratio for a 78 kW all wheel drive electric tractor design. Korean Journal of Agricultural Science, 46(3), pp.613-627.
• Malenko, A., 2019. Optimal dynamic capital budgeting. The Review of Economic Studies, 86(4), pp.1747-1778.
• Miller, P. and O'leary, T., 2019. ACCOUNTING AND THE CONS TRUCTION OF THE GOVERNABLE PERSON. In Management Control Theory (pp. 411-442). Routledge.
• Miller, P. and O'leary, T., 2019. ACCOUNTING AND THE CONSTRUCTION OF THE GOVERNABLE PERSON. In Management Control Theory (pp. 411-442).
• Miller, S.A., Hildreth, R.W. and Stewart, L.M., 2019. The modes of participation: A revised frame for identifying and analyzing participatory budgeting practices. Administration & Society, 51(8), pp.1254-1281.
• Purba, B.E.G., Nuzula, N.F. and Sugiastuti, R.H., 2023. The Influence of Working Capital to Total Asset, Debt to Equity Ratio, And Inventory Turnover Ratio towards Profit Growth In Indonesia. PROFIT: JURNAL ADMINISTRASI BISNIS, 17(1), pp.1-9.
• Ren, S., 2022. Optimization of enterprise financial management and decision-making systems based on big data. Journal of Mathematics, 2022, pp.1-11.
• Slacalek, J., Tristani, O. and Violante, G.L., 2020. Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area. Journal of Economic Dynamics and Control, 115, p.103879.
• Syukur, A., Novianti, A.S. and Karim, A., 2021. Financial Ratio Analysis of Pt. Semen Tonasa before and After Joining the Semen Indonesia Group. International Journal of Engineering Technology Research & Management, 5(1), pp.11-17.
• Yusopa, R., Mahmud, R., Sabli, N., Awang, N.F.A. and Ghazalie, N., 2020. Sources of funding for private tahfiz institutions in Kuala Selangor. International Journal of Innovation, Creativity and Change, 10(12), pp.21-35.
•  Online
• Importance of accounting principle and standards. 2023. Online available through < https://www.tickertape.in/glossary/accounting-principles/>
• Net present value method of capital budgeting. 2022. online available through< https://www.thebalancemoney.com/net-present-value-npv-as-a-capital-budgeting-method-392915>
• Payback period method of capital budgeting. 2023. Online available through < https://www.wallstreetprep.com/knowledge/payback-period/>