Significance Of Accounting And Finance Departments, Financing Options For Panini Limited, And Analysis Of Financial Ratios

Discussion

The report aims to analyse the significance of the departments like accounting and finance and discuss their functions. The report also provides the options available to Panini Limited as a source of financing its expansion goals. The second portion of the report discusses in detail the financial ratios of the company for the years 2018 and 2019. Each ratio has been discussed with its reason for the change and the recommendations to improve the same.

The accounting department is responsible for recording the financial transaction in a business in a systematic way. The duties of the accounting department are to record, summarise and present the financial information (Schroeder, Clark and Cathey 2019). The department is responsible for preparing the financial statements that include the balance sheet, income statement and cash flow statement. The functions of the accounting department are as follows:

• Financial Accounting Function- Under the financial accounting function, there are six duties for the department like the keeping of records, monitoring, storage, analysis and summarising of financial data and reporting the financial statements. The financial accounting function is responsible for all the financial transactions that take place in the company. The data that is produced from the records are used to prepare the financial statements of the company for the period (Woods 2019). The financial function also includes the daily operation like the handling of cash, paying the bills and collecting payments from the debtors. Under this function, the department performs the financial duties to achieve the objectives set by the management accounting function of the department.
• Management Accounting Function- The management accounting function involves analysing the accounting and cost information of the company for managing the operations and cost. This function helps convert the raw data into meaningful information for the company. This function provides meaningful information to the managers to help in decision-making and planning. The function includes duties like planning, controlling, analysing the financial statements, communicating and coordinating with the other departments (Dahal 2019). The accounting department is responsible for planning for the future and forecasting the future performance of the business. The department sets targets for the various departments of the business and the key performance indicators of the business. The function also includes deciding on the options available for the business, like the financing and investing decisions to derive the maximum profits for the company. There is a need for an organisational framework in every business. The reports and information provided by the department help in regulating the operations of the business. The department also prepares the budget for the upcoming periods and communicates the budget with the other departments, and coordinates with them to achieve the organisational objectives (Koval 2020). The financial statements are analysed to compare the performance with the industry and the organisational objectives.
• Tax Function- The accounting department is responsible for compliance with taxation requirements and filing the financial statements. It ensures that all the statutory requirements are met, and the payment of taxes is made within the deadlines (Icaew.com 2022). The records maintained by the department are analysed under this function to plan the net tax liability for the business. The income tax and goods and service tax are an important portion of any business. The management function of the accounting department plans for the future of the business by keeping the tax liability in mind. It tries to minimise its tax liabilities as it forms a major part of the business expenses. The computation of tax liability and payment within the deadline, along with filing the income tax returns for the company, is a critical function of the department.
• Auditing Function- Audit is the examination of the internal process and transactions to detect the errors and frauds within the organisation. It is the duty of this department to audit the operations and the financial transactions continuously to avoid any losses due to not detecting them in time (Endaya and Hanefah 2016). Specific personnel are made responsible for auditing and reporting the discrepancies to the management. This allows an opportunity for continuous improvement and streamlining the operations. The audit is critical for a business as it can detect the loopholes in the process and the possible frauds that can occur in the company. This function makes the reports more reliable, and the decision-making is based on the accurate data that has been audited.

The finance department is an integral department of any business organisation. The department is responsible for sourcing and utilising funds managing the requirement of finance in the business, and planning for the expenses. It also decides on the various investment opportunities to make the optimal use of the funds. Management of working capital is critical for a business to operate on a daily basis without hindrance. This department looks after the working capital required in the business to continue smoothly and arrange for the additional working capital required. The dividend is another important decision for a business. The decision regarding the payment and sum of dividend is decided by this department. The functions of the finance department are discussed below:

• Investment Function- The finance department is responsible for making investment decisions for the company. It is the duty of this department to maintain the financial stability of the company in the long run. This activity is also referred to as capital budgeting (Michelon, Lunkes and Bornia 2020). It is the function of this department to look for the best possible investment opportunity and invest the resources of the company. There is always uncertainty associated with the future, due to which it gets difficult to ascertain the expected return. The risk that arises due to the uncertainty plays a vital role in finding the expected return and analysing the investments. Thus, both factors have to be considered before deciding on the investments. Apart from this, the department is also responsible for utilising the funds raised from the sale of assets or disinvestment in projects that are not generating profits for the business. The proceeds from these activities remain idle in the business, which must be invested in other assets or projects. Thus, it is important to assess the opportunity of assets and investments that are not beneficial to the company anymore.
• Financing Function- Another important function of the finance department is to decide on the financing options available for a company. Every business needs capital to operate and grow, which can be supported by either internal or external funds. The finance department has to decide which mode of financing it will choose for its objectives (Kimanzi and Gamede 2020). The department has to maintain an optimum capital structure in the business, which is a combination of equity and debt capital. The goal of any business is to maximise the wealth of its shareholders, which is possible by appreciation in the price of its shares in the market (Institute of Chartered Accountants of India 2022). The debt capital is considered to be riskier for a business. If it considers financing through debt, then the investors expect more return from the investment due to the increased risk. Thus, it is important to keep the risk minimum while increasing the wealth of the shareholders that is done by this department.
• Dividend Function- Dividend policy is another important function of the finance department. In the case of profits in a company, it is the function of this department to decide whether to pay a dividend or retain the profits in the business. Generating profits is the core of any business activity. The investors of the business expect a return from their investment in the form of dividends or appreciation in share price. Thus, the department has to decide how to use the profits. In case it retains the profit, it has to use the funds to generate higher returns (Driver, Grosman and Scaramozzino 2020). Therefore, the finance manager should try to maximise the value of the business by choosing an appropriate dividend policy.
• Working Capital Function- Working capital is the measure of liquidity in the business. Properly managing the working capital is critical as it is required to pay off the obligations of the business in the short run. A liquidity crunch is a situation in which the company falls short of the required liquid funds to meet its obligations from the regular business. On the other hand, investing too much funds in working capital will decrease the profitability of the business. The manager of this department has to make a decision between profitability and liquidity (Nastiti, Atahau and Supramono 2019). Working capital has to be managed to maintain a balance between the liquidity and profitability of the business.

The sources of finance for small and medium enterprises are limited. For the provided company Panini Limited, which is a medium-sized company, the sources of finance to expand its business are as follows:

• Capital Contribution- The first source of finance for any small and medium-sized entity is the capital contributed by the owner or the family and friends of the owner. This channel of funding is preferred by these companies due to the easy availability of the funds without any complications. The people in this group are ready to contribute to the company even at times of lower return to support the company and help it grow. The only limitation of this channel is that there is a limitation in the quantum of funds available with the people in this group (Accaglobal.com 2022).
• Bank Loan- Another vital source of funds for the company is a loan from a bank. Banks provide loans to companies with good financials, due to which large companies take the most benefit of this source. Panini Limited is a medium-sized company, due to which it has to have a strong balance sheet and income statement to approve a loan from any bank. Banks require assets as a security against their loan for ensuring the loan will be recovered, and in the case of small and medium-sized companies, banks also ask for the personal guarantee of the directors of the company, risking their personal wealth (Zhaofeng 2016).
• Venture Capitalist- Venture capitalists are large companies with huge cash holdings, which they invest in small and medium companies making them their subsidiaries. Such companies look for the huge potential of making profits by investing in the companies that are in their early stage of growth. As the companies are in the early stage, the risk associated with such investment is high, and the venture capitalist chooses their investments after proper analysis (Feld and Mendelson 2019). Thus, it is not easy to get finance from this source of financing. The decision to raise funds from such channels should be made after a proper understanding of the exit terms as there will be a dilution of equity and controlling power. The goal of the venture capitalist with their investment in the company should match with the objectives of the current owners of the company to move ahead with such financing.

A gross profit margin is a ratio between the gross profit and the total sales for the period (Institute of Chartered Accountants of India 2022). It shows how much profit the company can generate after paying the direct cost required for the sales. The gross profit margin of the company has reduced from 35% to 28.29% in 2019, a fall of 6.61%. This implies that the company is making a lesser profit on sales in 2019 than in 2018. The main cause behind the fall is the increase in the cost of sales which has grown at a rate higher than the growth of sales. The ratio can be improved by controlling the cost of sales, and an increase in prices will also drive the gross profit margin higher.

Accounting and Finance Departments

An operating profit margin is a ratio that measures the profitability of the business just from its operations (Institute of Chartered Accountants of India 2022). It is the ratio between the operating profit before charging interest and tax expenses to the total sales. The operating profit margin of 27.65% and 20.04% in 2018 and 2019, respectively, indicates that the company is generating such percentage of sales as the profit from its operating activities. There is a negative change of 7.61% in 2019 as the operating profit fell in 2019 from 2018 levels. The reason for this change is the fall in the gross profit margin and the overall increase in operating expenses by £195 thousand and an increase of 30% in a year. The operating profit margin can be improved by proper management of operating costs through reduction of cost of sales and streamlining the operations.

The return on capital employed (ROCE) is a measure of the efficiency of the company in generating profits against the total capital employed in the business (Lisek, Luty and Zio?o 2020). This ratio takes into consideration both equity and borrowed capital invested in the business. In the year 2019, a ROCE of 22.57% means the company has returned such percentage on the total capital that is invested in the business. There is a fall of 9.01% in 2019 from 2018 levels as the company has been less profitable in the latter year. The reason for the fall is the decreased net profit due to the increase in cost and the increased rate of tax paid in 2019. The ROCE can be improved by increasing the net profit, which can be achieved by managing the cost items and reduction in the tax liability of the company.

The current ratio is a ratio that measures liquidity. It indicates the short-term capability of a company to pay off the immediate debt obligations (Madushanka and Jathurika 2018). It is a ratio of the working capital and provides insights on improving the liquidity of the company. The current ratio of the company is 4.12 times in 2019 which means it can pay off its current liabilities 4.12 times. The current ratio has increased from 1.21 times in 2018 to 4.12 times in 2019. The improvement results from increasing current assets and a simultaneous decrease in current liabilities. The 2019 level is significantly high, which indicates the company’s assets are locked in current assets. This can be improved by reducing the current assets and investing in more profitable assets.

Financing Sources for Panini Limited

The quick or acid-test ratio is an absolute measure of the liquidity of the company. It considers the current assets that can be immediately changed into cash. It indicates if a company can pay its short-term debts without selling its inventory (Madushanka and Jathurika 2018). The quick ratio in 2018 was extremely low at 0.85 times, and the company could not pay its current liabilities without selling its inventory. The ratio improved in 2019 to 2.80 times, which means the company has enough liquidity to pay its current liabilities.

The inventory turnover days are an indicator of the efficiency of the company in managing its inventory and in how many days the inventory is turned into sales. It is calculated by dividing the inventory by the cost of goods sold and multiplying with 365 days (Tissen and Sneidere 2019). Inventory turnover of 19.65 days in 2018 indicates that the company takes this many days on average to sell its inventory. The inventory turnover days increased to 29.87 days in 2019, a positive change of 10.22 days. The company is selling its inventory slower in 2019, which can be improved by properly managing inventory and increasing sales.

The debtor’s collection period is the number of days the company needs to receive payments from its credit customers. It is a measure of the efficiency of the company in managing its receivables and maintaining the required liquidity in the business (Saifudin and Sa’adah 2019). The debtor’s collection period of 27.74 days in 2018 means the company takes this many days to collect money from its credit customers. The period increased to 42.53 days in 2019, and the company is slower in collecting its money. The increase is due to the high amount of revenue stuck in receivables. This can be improved by providing cash discounts to customers on early payment and pro-actively following up for payments.

The creditor’s payment period is the measure of the days that the company takes to pay off its creditors. It is also a measure of the efficiency of the company in managing its working capital by maintaining a reasonable payment period for the business (Ilter 2020). The creditor’s payment period in 2018 indicates that the company pays off its creditors in 51.66 days on average. This was reduced to 21.94 days in 2019, which means the company is paying its creditors faster than in 2018. This shows the good financial condition and high liquidity in the company.

Calculation of Ratios for Panini Limited

As per the observations in the ratio analysis of Panini Limited, the company performed well in 2018, but in 2019 its profitability decreased. It has huge capital locked in current assets, due to which the liquidity is high, but the returns have decreased. Thus, the potential investors should not invest in the company. In case the company continues in the same trend, the financial stability may be in danger due to decreasing profits and high current assets.

Conclusion

Therefore, it can be concluded that the accounts and finance departments have varied functions which are important for an organisation. Such functions are critical for the running of any business. In the following section, ratio analysis of Panini Limited, it can be observed that the company has deteriorating profit margins and the liquidity is high, losing out on investment opportunities in high return assets. Proper management of the costs and implementing strategies to recover money from customers faster will help in improving the overall performance of the company. 

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