Bm414 Financial Decision Making Assignment

Introduction to Bm414 Financial Decision Making Assignment

Task 1: Accounting and Finance Functions

1: Introduction:

The Accounting and Finance (A&F) department is of growing importance as River Island Clothing Co. Ltd. prepares for a new cooperation with a celebrity. A&F is engaged in reporting as expected by laws and regulations and it also relies on data analysis to support key business decisions. This document details what the A&F team does, including their role in financial planning, compliance, controls within the company, monitoring results and assessing investments. The department supports the company’s financial stability and the smooth running of day-to-day operations during any expansion opportunities in the fashion retail sector.

2: Roles and Duties of Accounting and Finance Functions

Figure 1: Roles and Duties of Accounting and Finance Functions

(Source: Created by Learner)

2.1: Financial Reporting

At River Island Clothing Co. Ltd., the financial reports reflect the company’s financial state accurately and as required by UK GAAP. Starting in 2020, the company has shifted its operations, expanding in various overseas markets and selling more products online. As a consequence, using financial reporting allows stakeholders to see the company’s financial progress and position. The finance group publishes annual reports that contain the income statement, balance sheet and a cash flow statement. They give information about performance statistics for 250 stores in the UK and in other countries (riverisland.com, 2024). When companies report their activities accurately, this aids in governing and chalking out future strategies, most notably in projects with celebrities.

2.2: Management Accounting

River Island relies on management accounting for making choices within the organisation. Since 2020, more retail sales being made online has meant that the company needs to receive regular and thorough performance data. Each month and quarter, the finance team produces reports showing profits at the store level, updates on e-commerce trends and how well the company is operating. They enable managers to assess campaign results and better organise available resources. During Sofia Richie’s collaboration, management accounting kept track of advertising costs and compared them to expected earnings (theindustry.fashion, 2022). With this function, businesses can plan prices and discounts for their collections. Overall, management accounting helps businesses take actions based on information and trends from the market.

2.3: FP&A stands for Financial Planning and Analysis

River Island’s FP&A function has come to the forefront since 2020 due to shifts in retail trends and a rise in online shopping. The team works on building accurate models that help predict upcoming income, sales throughout the year and the company’s expenses. This allows for effective planning of events like celebrity collections, as it indicates how financially sound they are. Lately, FP&A has played a vital role in planning different scenarios such as predicting the company updates inflation on raw materials and delivery costs. The company updates its strategic plans using information from all its stores, both physical and online. With these predictions, top management can set adequate  sales goals and budgets for the whole company (Kulkarni, 2023).

2.4: Cash Flow Management

Good cash flow management plays a vital role for River Island, since it trades both online globally and in its stores. Ever since 2020, the World has faced supply chain issues and changed shopping habits which resulted in challenges with managing cash. Team members in finance regularly track all cash coming into and going out of the company related to sales, obtaining inventory and advertisements. Launching a key item like Sofia Richie’s collection, planning ahead ensures the capacity to design, manufacture and advertise the product. By managing cash flow, a company improves the coordination between invoicing, supplier invoices and the movement of items on hand. A high level of cash available supports the company and allows it to react swiftly to unpredictable market changes during busy and slow seasons (Ramli and Yekini, 2022).

2.5: Investment Appraisal

At River Island, capital is distributed effectively to fund new celebrity fashion lines and improve local shop outlet appearances. When deciding on whether to invest, the finance team checks the investment’s results using NPV and IRR. From 2020 onward, both e-commerce and mobile platforms have joined the company’s main focus on classic retail improvements (techinformed.com, 2022). Prior to introducing the Sofia Richie perfume in 2022, the company performed investment analysis to determine if the costs of marketing internationally were worth it. The results of these analyses serve to demonstrate the most important projects and ensure that the business remains competitive in the fast-changing fashion sector.

2.6: Internal Controls and Risk Management

Due to cyber threats, changes in the law and its growth worldwide, River Island now requires strong internal controls and risks systems. The finance team works on and monitors procedures that defend the company from fraud and data inaccuracies. For example, computer systems point out any transactions or stock differences that are not typical in UK stores as well as abroad. The register of risks is regularly updated to include new issues such as threats to the company and supply chain problems. When brands collaborate with well-known figures they make sure to also watch for any dangers to the brand’s reputation. When a risk framework is robust, the company keeps to rules, maintains business activities and earns the trust of its stakeholders in governing policies (Utami and Nugroho, 2022).

2.7: Audit and Compliance

Since 2020, being compliant with laws and regulations has depended a lot on the compliance and audit teams at River Island. As the company works in over 125 global markets (matt-haycox.com, 2024). Internal audits are conducted regularly to assess compliance with financial protocols, supplier agreements, and ESG disclosures. During the planning and execution of celebrity partnerships compliance checks ensure ethical sourcing and marketing standards were upheld. By fostering transparency and accountability, these functions help protect the brand’s reputation and support its commitment to responsible fashion business practices (Kasper and Alm, 2022).

3: Summary

The key roles and duties of accounting and finance functions are identified as financial reporting and cash flow management which are critical on part of companies to state accurate financial results and facilitate ways of liquidity growth. Furthermore, river Island relies on accurate accounting and finance sanctions to aid in reporting, planning and decision-making. The company intends to support growth, celebrity collaborations and handle new trends by efficiently managing accounts, by managing investments and by addressing risks associated with compliances and regulatory barriers potentially experienced.

 

Task 2: Analysis of Financial Statements

a) Explanation of Financial Statements

i) Profit and Loss Account

The preliminary items listed under the profit and loss account for River Island Co includes turnover and cost of sales. Both contain values of GBP 578.1 and GBP 550.6 in 2023 as well as GBP 715.3 and GBP 663.7 respectively and results in gross profit of GBP 27.5 and GBP 51.6 in 2023 and 2022. Examples of cost of sales can include raw material purchases contemplated by the company in both financial years. Based on the above trends, all three items have decreased in 2023 when compared to 2022. As per critical observations of Haralayya (2021), a decreasing trend of “gross profit” is deemed to be an adverse feature for a company due to which future manufacturing reliance for a company decreases.

The distribution and administration expenses for 2023 and 2022 recognises an increasing trend, while “operating profits” also experiences a decreasing trend in recent times. Examples of distribution costs include shipping, storage and insurance costs incurred by a company as part of key operations undertaken. The trend of profit before and after taxes in 2023 for River Island Co. also demonstrates a loss-making trend as compared to 2022 while a decreasing trend is also noticeable for interest payable and similar income. Raju (2022), critically idealised that a decreasing trend of “profit after taxes” is considered as an adverse feature due to which overall business dominance in the markets are potentially affected.

ii) Balance Sheet

The balance sheet for River Island Co is categorised into assets, liabilities and equity where the trend of “fixed assets” is deemed to be decreasing in recent times. Additional examples of tangible and intangible fixed assets further involve building, equipment, goodwill and patents. On the other hand, “current assets” detect a decreasing trend in recent times as compared to 2022 while the total assets identified for River Island Co. determines a significantly decreasing growth pattern. As per critical observations and narratives of Rao (2021), the decreasing pattern of assets is deemed to be a disadvantage due to which companies are likely to experience future market instability.

Additionally, in the liabilities and equity section of the balance sheet, “current liabilities” are observed to increase marginally in 2023 as compared to 2022. Additional examples of “current liabilities” further involve accruals and bank overdraft. Similarly, provisions and post-employment benefits indicate decreasing and increasing trends for the company in 2023 respectively. The trend of “equity” is further deemed to be decreasing in recent times and additional examples include dividends paid and retained earnings held by a company. Overall, a decreasing trend of liabilities and equity is also observed for River Island Co. in 2023 as compared to 2022. As Akbar et al. (2022), critically explained and idealised that a decreasing liability and equity can affect future valuation of a company due to which creditor participation is also likely to be affected.    

b) Calculation of Ratios

The calculation of ratios for River Island Co. will be performed for the applicable financial years of 2023 and 2022. The following is an individual demarcation of ratios which are developed with the help of an input data table [Refer to Appendix 1].

i) Return on Capital Employed

Figure 1: Return on Capital Employed

The “return on capital employed” (ROCE) from the above figure has been calculated as -25.13% and 1.15% in 2023 and 2022 for River Island Co. According to Rashid (2021),the formulated conceptualisation of ROCE is determined by dividing “capital employed” from “operating profits” in which the former is the difference between “total assets” and “current liabilities”.

ii) Net Profit Margin

Figure 2: Net Profit Margin

The “net profit margin” (NPM) from the figure above has been measured as -4.26% and 0.21% in 2023 and 2022 respectively. The formula applicable for finding NPM is examined by dividing revenues from “net profit” where the latter is also alternatively known as “profit after taxes” (Arsyad et al. 2021). 

iii) Current Ratio

Figure 3: Current Ratio

In the above figure, “current ratio” (CR) has been measured as 1.57 and 1.69:1 for River Island Co. in 2023 and 2022. As expressed by Lalithchandra and Rajendhiran (2021), the formula applicable for CR is the division between “current assets” and “current liabilities” and this ratio helps a company to locate “working capital efficiency” available.

iv) Quick Ratio

Figure 4: Quick Ratio

As per the above figure, “quick ratio” (QR) for River Island Co. in 2023 and 2022 has been identified as 0.92 and 0.99:1 respectively. Blessing and Sakouvogui (2023), idealised that QR is formulated through contemplating division between “quick assets” and “current liabilities” where the former is the difference between “current assets” and “inventory”.

v) Asset Turnover Ratio

Figure 5: Asset Turnover Ratio

In the above figure of computations, “asset turnover ratio” (ATR) has been measured as 1.82 and 2.05 times for River Island Co. in 2023 and 2022. As Jebreel et al. (2023), explained that ATR is determined and formulated as the proportion between “revenues” and “average total assets”. 

vi) Inventory Days Ratio

Figure 6: Inventory Days Ratio

According to the above figure, “inventory days ratio” (IDR) has been numerically calculated as 73.62 and 62.50 days respectively. As narrated by Perdana et al. (2021), the IDR is formulated and measured by dividing “cost of sales” from “annual average inventory”.

c) Analysis of Financial Results and Investor Perspective

i) Analysis of Financial Results

From the above calculation of ratios, it is identified that ROCE and NPM for River Island Co. have  degrees significantly in 2023 as compared to 2022. This decrease is mainly caused due to higher operating and non-operating expenses incurred which results in operating and net losses during the recent financial year. As per critical observations of  Ciampi et al. (2021), the decrease in ROCE and NPM is identified as an unfavourable situation for a company which can implicate low future sustainability achieved. On the other hand, the trend of CR and QR is identified to be marginally decreasing in recent times as compared to figures identified during 2022. This can be reasoned to a steep increase in “current liabilities” experienced by River Island Co. in 2023.

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Furthermore, additional causes include decrease in “current assets” and “quick assets” experienced by the company in 2023. Kou et al. (2021), critically stated that a decreasing trend of CR and QR affects liquidity proposition for a company which can contribute to higher ”working capital” complexities in the long run. Simultaneously, the trend of ATR and IDR demonstrates decreasing and increasing trends in 2023 where the increase in IDR is perceived as an adverse feature. The trends are predominantly caused due to decrease in “revenues, cost of sales and average inventory” obtained by River Island Co. in 2023. As critically explained by Wira (2021), a decreasing trend of ATR and an increasing trend of IDR can lead to low asset utility for generating revenue scalability as well as leads to higher inventory blockage which thereby affects sales conversion.

ii) Investor Perspective

The investor perspective is determined for the fact that future planning is being thought of by River Island Co. by ensuring business expansion through celebrity collaboration. The estimated cost of investment to finance this collaborative expansion is estimated to be GBP 5 million and based on the profitability ratio trends detected above, an investor is recommended to reject future investment proposals. This recommendation is backed due to high losses incurred by River Island Co in recent times, due to which an investor is likely to lose invested capital let alone gaining a significant return proportion. The lack of returns from an investment to a prospective investor in favour of a company is considered as an adversity where investors are likely to decrease future portfolio values (Murè et al. 2021).

In terms of the liquidity ratios demonstrated through CR and QR, the performance of the company is also decreasing and hence, a prospective investor is also recommended to reject investment of GBP 5 million for business expansion of River Island Co. This is backed in terms of the fact that immediate liquid prospects available to an investor are less and can therefore create future financing challenges if urgent cash withdrawal is needed to be implemented. As per critical explanations of La Torre et al. (2021), the lack of liquidity for an investor can also create future issues relating to maintaining a constant cash flow growth which further relegates scope of maximising future portfolio values.

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In terms of the efficiency ratios measured as per ATR and IDR, it is also recommended to a potential investor to reject investments on behalf of the company in the foreseeable future. This rejection is backed in terms of low revenue scaling and conversion likely to be facilitated by River Island Co. in future due to which the business expansion is not expected to generate adequate values for an investor to be attracted. As critically illustrated by Chandra and Osesoga (2021), the lack of adequate revenues can further create operational challenges to a company which can pose greater risks for an investor to amplify future returns. Overall, it is recommended to a potential investor to reject future investments with regards to River Island Co. contemplating business expansion through celebrity collaboration.

References

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