Financial Management Organization

Evaluation of different ways through which financial decision-making help in achieving long-term financial sustainability

Financial decision-making defined as process which is related with how and in which manner business funds or capital are invested in various resources. This decision-making process may be short-term or long-term (Bui and et.al., 2018). A long-run financial decision not only affects current business performance but also long-term fiscal sustainability of enterprise. This is primarily concerned with all the borrowings and effective allocation of necessary business funds for investment-decisions. Generally top management personnel takes organisation's financial decisions. This is crucial aspect which require use of detailed analysis of financial information and reports.

Main task in financial decision-making is thorough analysis of financial performance of corporation. It also require use of different investment-appraisal techniques/methods as these techniques enable managers to take accurate decisions. Managers at different level and from different divisions collects meaningful data and information for this purpose. Order assignment help from our experts! 

A systematic analysis of such data/information offers accuracy in decision-making process. Here in this context in Imperial Brands plc, managing staff generally applies ratio analysis as well as investment-appraisal techniques to enhance the effectiveness of fiscal decision-making. Data for this kind of analysis and application of methods are normally obtained through corporation's yearly financial statements.

Ratio Analysis: This is tool in which specific formula and computations are applied to assess the relationship between 2 or more variables or items stated in entity's balance sheet and profit & loss (Chand, 2019). Those ratios are measured on the basis of present year estimates and then contrasted to previous years, other businesses, sector and also sector to determine the corporation's performance.

In comparison, the ratio approach is commonly employed by financial analytics proponents. Based on the outcomes of ratios of corporation, managers take financial decisions as analysis of multiple ratios support managers in attaining long range sustainability in financial performance. In this regard, following is ratio analysis of corporation Imperial Brands, as follows:

Gross Profit:

Formula:

Gross profit ratio= Gross profit / net sales * 100

This ratio determines the corporation's abilities to generate gross-profits over a specific time-period. Gross profit is sum which is difference between sales and costs of sales. Here above table contains GP margin of Imperial Brands, which shows that corporation GP ratio in year-2018 was 21.13 percent that has been declined to 19.75 percent. This slight decline in GP ratio indicates that enterprise's abilities of generating GP, has been declined over the period. Need Assignment Samples?Talk to our Experts!

Net Profit:

Formula:

Net profit margin= Net profit / Net sales*100

This ratio shows how effective entity is in generating net profits after deducting all expenditures related to business (Hartikayanti, Bramanti and Gunardi, 2018). Corporation's net profitability ratio in 2019 is 3.2 percent which was around 4.48 percent in year 2018. This decline in organisation's net profit ratio pointing that entity's profit generation capabilities has been reduced.

Current Ratio:

Formula:

Current ratio= Current assets / current liabilities

This ratio represent the liquidity of the company in the short duration and how effective they can pay their obligations. In 2018, it was 0.65 and 0.90 in 2019, in both years company unable to meet with idea ratio that is 2:1.

Return on equity:

Formula:

Return on equity= Net income/ stakeholders' equity

Above mention table shows return on equity that is profitability ratio which helps the company to identify that how much company earn on equities. It is observed that, in 2018 return on equity was 0.24 and in 2019, it was 0.20. ROE deceases which means company's performance reduces in the market which affect the company.

Debt to equity ratio:

Formula:

Debt to equity ratio= Total liabilities/ Total stakeholders' equity

Above calculation indicated that debt to equity ratio of 2018 was 4.35 and 5.83 in 2018. This ratio increases over the period due to increase in total liability or decrease in stakeholders equity. Management should focus on overall results which helps in maximising overall results of the company in terms of production or profitability.

Investment Appraisal Technique:

Investment appraisal techniques used by organizations in order to identify attractiveness of investment and it is a collection of methods which helps in analysing viability of project or portfolio (Madura, 2020)(Okanazu, 2018). It include various techniques such as NPV, payback period, ARR, IRR etc. On the basis of these methods, managers will make decisions that they should invest or not.

Imperial Brands wants to make an investment in the new project and its initial cost is 250000 and it will provide cash inflow for the next 5 years which is mentioned below. Discounted rate of this investment is 5%., so calculate that this project is beneficial for the company or not. Management should invest in this project, justify by using various techniques of investment appraisal. Given data are as follow:

Net Present Value: It is one of the most effective capital budgeting method which helps the mangers to evaluate that project is profitable for business or not. NPV is the difference of present value of cash inflow or present value of cash outflow (Rampini, Viswanathan and Vuillemey, 2019). Higher NPV is suitable as well as beneficial for Imperial Brands Plc. Its formula or calculations are mentioned below:

Formula:

Net Present Value = Present value of Cash Inflow – Present Value of Cash Outflow

Calculations:

From the above calculation it has been analysed that NPV of this project is £ 291133.58 or £ 291134. If company found positive value that means project is beneficial or company can invest. As per the given results, Imperial Brands can invest in this project which helps in generating revenue for the company.

Payback Period: In capital budgeting, payback period refer to time in which company recover their cost. It is essential method of investment appraisal which is used by the organizations to select best proposal to invest (Sumtaky, Chandrarin and Sanusi, 2018). It is very simple to calculate as well as understand because managers will take decisions on the basis of low payback period. Imperial Brands Plc use this method and evaluate that, it is profitable for the company or not.

Formula:

Payback Period = Year before recovery + ( Unrecoverable cost in the initial year / cash flow during the year )

Calculations:

It is observed that, if Imperial Brands invest in this project so they can recover their initial investment in 2.59 years which is goods. It is recommended that, managers should invest because company can recover their cost very fast that is beneficial.

Working Notes:

Payback Period = 2 + ( 161000 / 270000 )

= 2 + 0.59

= 2.59 years.

Accounting Rate Return: It is financial ratio which is used to calculate average return from investment which is used in capital budgeting. This method does not consider the concept of time value of money (Zietlow and et.al., 2018). This method used by the managers of Imperial Brands to identify that how attractive returns company received and how future benefits it will provide. Its calculation mentioned in below mentioned table.

Formula:

ARR = Average Cash Flow / Initial Investment * 100

Calculations:

Above data represent that, accounting rate of return on this project is 50.48% which is very impressive and it shows that investment will be feasible. It also indicate that, company will achieve desired profit through making investment in this project.

Also Read- Financial Management Role

Internal Rate of Return: This metric used in capital budgeting in order to estimate the over returns which company receive from their investments. Higher the IRR is beneficial for the company so they management will select project on the basis of investment returns. Managers of Imperial Brands Plc evaluate the data and identify that current investment is profitable for the business or not. Its calculations are as follow:

Calculations:

From the above table it has been analysed that IRR for this project is around 30 % which is good and it is suggested that Imperial Brands should invest in this project. Higher the IRR is beneficial for company and they can achieve profit what they desired.

Recommend that how role of accountant and system can improved to support decision making

Accountants of the company plays essential role which help the managers or stakeholders to understand financial information which is required to analysis to make further strategies. Basically, financial report it the base of making strategies which required to produce by organizations (Valaskova, Kliestik and Kovacova, 2018). Accounting control system also ensure that company protect their asserts, produce financial report which helps in providing accurate results or financial position of company. At the time of making financial statements, management of Imperial Brands should focus on corporation, compliances, , control system and should be accountable for every inflow or outflow of cash. don't worry get marketing assignment help from UK's leading assignment helpers.

Critically evaluated that financial decision making which support long term financial sustainability

It is been critically evaluated that, there are various ways which helps the managers of Imperial Brands to make their decisions in respect of the company. Such as net present value, payback period, accounting rate of return, internal rate of return etc. After evaluating these methods, managers will able to make decisions that project is profitable for company or not. Investment appraisal techniques help management to make decisions which is further support long term financial sustainability. Effective utilizing of financial resources provide success and assistance of sound financial decision making.

CONCLUSION

From the above discussion it has been concluded that financial management is essential for every organizations. It further helps in making strategic decisions which required to enhance overall perform in the operations. With the help of financial analysis, managers will evaluate overall performance as well as compare with previous one to identify that company having growth or not.

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