The primary source of information that gets recorded in any business entity are accounting functions
Accounting is generally termed as language of business. Accounting is an important function for business entities. The accounting process used in any business entity records all the financial transactions occurred in the business entity. Hence, to make appropriate reporting of economic situation of an entity accounting functions are important (Wan 2021). The below paragraphs are describing the importance, roles and duties of accounting and finance functions of the Panini Limited.
Accounting functions are the primary source of information that get recorded in any business entity. The most important accounting functions that get used in any business entity are:
- Accounts payable
- Accounts receivable
- Payroll management
- Inventory cost management
- Cash collection and payment recording
- Reporting of financial statements
- Legal compliances and finance controls
Importance of Financial Accounting Functions
Without maintaining proper accounting record of business transactions keeping track of expenses made, revenues earned, assets and liabilities acquired or incurred by a business entity would not be possible. The importance of accounting functions is given in the below paragraphs including the importance of the same for Panini Ltd:
- Accounts Payable – Accounts payable function of accounting, records all business transactions related to purchases of inventories made by an entity in credit terms. Without maintaining a proper accounting record for accounts payable, a business entity would not be able to pay creditors incurred by it in timely manner. Similarly, Panini Ltd must maintain a proper account payable function.
- Accounts Receivable – Accounts receivable function of a business entity records all the revenues earned by the entity in credit. Without maintaining the same, the entity would not be able to recover the revenues earned by it in timely manner. Panini Ltd must maintain an appropriate accounts receivable function to realize the debtors on timely manner.
- Payroll Management – Employees are the most important element of a business entity. The primary motivation for employees engaged in the business entity is their salary. Without maintaining proper payroll records satisfying employee need is not possible. Panini Ltd’s employee details must get maintained through payroll management for satisfaction of employee motivation.
- Inventory Cost Management – Inventory cost management should be done with highest priority in order to achieve increased profitability. Financial accounting functions are the primary source for inventory maintenance and cost management. Panini Ltd’s inventory details should be effective through proper inventory management function. Without the same, the entity profitability will get negatively impacted.
- Cash Management – Without proper cash management strategies no entity will be able to operate the entity functions in the effective manner. Financial accounting functions plays a critical role in this process.
- Financial Statements – It is an obligation on a business entity to prepare and report financial statements at regular intervals. Without maintaining the accounting data in the appropriate manner with help of financial accounting process, preparation of financial statements is not possible. Similarly, Panini Ltd should prepare and report financial statements with the help of financial statement functions of the entity.
- Legal Compliances – Several government rules, regulation and obligations are required to be followed in the operations of every business entity. Similarly, accounting financial functions plays a critical role in this process for Panini Ltd.
Expansions projects with positive results are important for every business organization to survive and thrive the in the long run. Further, positive business expansions are important for gaining competitive advantages. There can be multiple business expansion alternatives available to a business entity. From these alternatives most important and financially successful expansion projects should get selected and proceeded with. Management accounting functions helps in selecting the most profitable and important business expansion alternative for a business entity (Hertati, Nazarudin and Fery 2020).
Management accounting functions provides details and basis for determining expected future financial results from existing or potential business operations. The different functions that get assisted through management accounting is provided below:
- Future Forecasting – Management accounting functions helps in determining the expected future results from a business activity. Depending upon the expected results derived from management accounting the acceptability of a future project get determined by the management. To make investments in future projects, Panini Ltd must maintain management accounting function of future forecasting to avoid any negative situation.
- Make or Buy Decision – Business organizations often face a position where business resources become limited in comparison to business opportunities available for the entity. In such situations, business management requires to take decisions for production of its own requirement or outsourcing the same. Management accounting plays a critical role in eliminating such issues. Hence, Panini Ltd must maintain a system of management accounting to eliminate such business conflicts.
- Cash Flow Forecasts – Acceptability of future projects depends upon the future cash flows associated with the project. Management accounting functions helps in determining these expected cash flows after considering necessary adjustments. For making any business expansion, Panini Ltd must maintain an effective management accounting function with cash flow forecasts.
- Variance Analysis – Budgets are the primary source of evaluating performances. Budgets are prepared in the initiation of a period and then the actual performances achieved during the period get compared through calculating and evaluating variances with help of management accounting. Panini Ltd can use the same for calculating variances.
- Rate of Return – Investments are required to provide appropriate rate of return, otherwise the profitability from the project may get impacted at the highest level. Appropriate rate of return from a project can be determined through the use of management accounting functions.
Payment of taxes at an appropriate rate, on timely manner is the responsibility on the management of a business entity. Further, non-compliance of tax obligations can lead to legal repercussions of penalties on the entity. To avoid this, Panini Ltd must use an effective and appropriate tax function in the entity for compliance of tax obligations applicable on the entity (Shaffer, Gaumer and Bradley 2020).
Positive third-party independent audit report is an important element for gaining confidence of the stakeholders of an entity. Hence, annual financial reports of an entity must get included with audit opinion. Audit functions are primarily responsible for providing independent audit opinion on a financial statement prepared by any entity. Similarly, Panini Ltd must maintain an audit function management system to compensate the requirement of stakeholder trust on the entity (Botha and Wilkinson 2019).
In addition to accounting department, finance department is an integral part of business operations of entities operating in any level. The accounting transactions recorded with accounting process are used in financial investment decisions for business expansions using the finance functions of the entity. Hence, to make expansion projects for business activities the finance functions of finance department are important. Various finance departments and their importance for Panini Ltd are described in the below paragraphs:
Additional funds available with any business entity can be used for business acquisitions or in other investment alternatives. Investment alternatives available with any business entity should get evaluated in an appropriate manner considering the risks and returns associated with each investment alternative. Investment functions critically evaluate the investment alternatives. Hence, for Panini Ltd investment functions can play a critical role in order to provide additional benefits to the entity.
Management accounting function assists in selecting the most profitable and important business expansion alternatives
An entity can use different types of financing strategies for accumulation of required funds. Further, listed entities can use finances from external investors from the securities market. The risk and cost of investments are different for different types of financing used in an entity. The goal of financing function should be minimizing risk and cost. Similarly, the objectivity of financing functions of Panini Ltd should be the same.
Equity and preference shareholders invest in an entity to earn returns in terms of periodic dividends. Though, often an entity can earn more in terms of investment return for investors than their required return. Dividend functions plays a critical role in evaluation of such conflicting situations. Hence, Panini Ltd must has an effective dividend function process to evaluating the optimum dividend strategy of the entity.
Working capital management provides window for optimum utilization of current assets held by any entity. Without optimizing working capital investments an entity can achieve its short-term goals. Hence, to gain competitive advantages through achieving short-term goals Panini Ltd must has an effective working capital function.
Entities in reference to its size of operation can obtain finances based on its fund requirements, cost of finance and associated risks. The risk and cost level associated with each type of finance are different. Hence, before selecting the method of finance an entity must analyze the pre and post financing risk and cost position. Further a listed entity can raise funds from public issue of securities. The different types of securities that can be raised by an entity to raise funds are described below (W?odarczyk et al 2018):
- Debt Funds – Debt funds can be raised by an entity for a fixed interest payment on periodic manner and for redemption of the debt value after a certain period. Listed or unlisted entities can raise debt funds irrespective of their scale of operation.
- Loan Funds – Banks or financial institutions provide funds for fixed interest charges. Further, the repayment of principal can be either in equal periodic payments or in one go at the end of the loan period. Listed or unlisted entities can raise funds through bank loans.
- Capital Contribution – Unlisted entities can raise funds for expansion project through capital contribution from owners.
- Public Issue – Listed entities can raise funds for expansion from public issue of equity or preference shares. Equity and preference shareholders are entitled for dividends.
Statement of financial ratios:
Table – 1
Source: Author
Gross profit margin compares sales revenue and cost of sales. In other words, gross profit margin shows the percentage of profit earned by an entity in comparison to the revenue generated. Panini Ltd’s gross profit margin in 2018 and 2019 were 35% and 28% respectively. This shows that Panini Ltd’s gross profit margin has been reduced in 2019 in comparison to 2018 despite of increase in the entity’s sales revenue. Hence, it can be said that, the cost of sales to earn revenues has been increased in 2019 in comparison to 2018. By increasing in sales revenue base by keeping the cost of sales at the same level, the entity will be able to improve its gross profit margin (Nariswari and Nugraha 2020).
Gross profit margin and operating profit margin are similar financial ratios for determining an entity’s financial health. Though, operating profit margin compares the sales revenue, cost of sales and operating expenses in addition. Similar to, gross profit margin, Panini Ltd’s operating profit margin has been reduced in 2019 in comparison to 2018. The operating profit margin of Panini Ltd for 2018 and 2019 were 27.65% and 20.04%. Further, similar to cost of sales, the entity’s operating expenses has also increased. Due to the same, the entity’s operating profit margin has been reduced in 2019. To improve the situation, the entity should keep the level of direct and operating expenses in par over years of operations (Langemeier and Yeager 2018).
Panini Ltd must use an effective and appropriate tax function
Return on capital employed determines the percentage of profit an entity earned from the usage of equity capital in its operations. Similar to gross profit margin and operating profit margin the Panini Ltd’s return on capital employed has been decreased in 2019 in comparison to 2018. The return on capital employed of Panini Ltd has been 40.93% and 28.42% in 2018 and 2019 respectively. The increment in operating and direct expenses has reduced the return on capital employed of Panini Ltd despite of increment in sales revenue. To improve the same, Panini Ltd must reduce the level of expenses in future operating years (Casielles 2019).
Current ratio compares the current assets position of an entity in comparison to its current liabilities position. Current ratio determines an entity’s ability to pay its current obligations without raising any external funds. Panini Ltd has a current ratio position of 1.21 and 4.12 in 2018 and 2019 respectively. The current ratio position has been improved in 2019 in comparison to 2018. The same is due to the increment in receivables position in 2019 in comparison to 2018. The current ratio of the entity is sufficient to pay its current obligations in the short run. Hence, it can be said that, Panini Ltd is managing its current position efficiently and the same should be maintained in future operating years (Irman and Purwati, 2020).
Quick ratio is an extension of the current ratio of an entity. Quick ratio considers only the liquid assets in the evaluation of entity’s ability to pay current obligations. Quick ratio higher than 1 is considered as sufficient for an entity to pay its current obligations without raising liquid funds from external sources. Panini Ltd has quick ratio of 0.85 in 2018, which is smaller than 1. Though, the same get improved in the year 2019 with 2.80 times holding of quick assets in comparison to current obligations. Hence, it can be analyzed that, Panini Ltd has improved its position in 2019 in comparison to 2018. Further, the entity should maintain this position in future operating years in order to maintain trust of external fund providers (Wijaya and Sedana 2020).
Inventory turnover days determines the level of inventory holding in reference to the sales days. In other words, inventory turnover days determines an entity’s inventory holding level to satisfy sales quantity without addition in the inventory level. Lower inventory turnover days shows an entity’s use of just in time inventory management approach. Panini Ltd has maintained an inventory turnover day of 19.65 days in 2018. Though, the entity has further increased this level in 2019 to 29.87 days. Hence, it can be said that, to increase sales level Panini Ltd required to increase its inventory holding level. The higher level of inventory holding requires higher inventory carrying costs. The increased level of inventory holding can be reason of Panini Ltd’s higher operating expenses in the year 2019. Panini Ltd must consider the same in future operating years to improve its profitability position (Amanda 2019).
Debtor’s collection period shows the days sales remain outstanding at the closing of an operating period. Lower debtor’s collection period is desirable as the same ensures the early realization of debtor’s value in cash. Debtor’s collection period has been increased in 2019 in comparison to 2018 for Panini Ltd. The debtor’s collection period was 27.74 in 2018 the same increased to 42.53 days in 2019. This shows that, the entity’s increment in sales has also resulted into increased debtor outstanding of the entity. The increased debtor amount will require additional working capital investment cost for the entity (Amanda 2019).
Creditor’s collection period shows the days value of cost of sales outstanding with creditors. Higher creditors collection period is desirable for entities. Though, Panini Ltd’s creditor’s collection period has been reduced in 2019 to 21.94 days than 51.66 days in 2018. The Panini Ltd was inefficient in managing the creditors by increasing purchase level. This decreased level of creditor’s collection period has made the entity’s working capital investment higher. To improve the same, the entity should convince its creditors for higher allowed credit period (Amanda 2019).
References
Amanda, R.I., 2019. The impact of cash turnover, receivable turnover, inventory turnover, current ratio and debt to equity ratio on profitability. Journal of research in management, 2(2).
Botha, L.M. and Wilkinson, N., 2019. A framework for the evaluation of the perceived value added by internal auditing. Meditari Accountancy Research.
Casielles, J., 2019. Return on Equity (ROE), Return on Capital Employed (ROCE), Economic Profit (EP) and Economic Value Added (EVA)(Presentation Slides). Return on Capital Employed (ROCE), Economic Profit (EP) and Economic Value Added (EVA)(Presentation Slides)(June 23, 2019).
Hertati, L., Nazarudin, N. and Fery, I., 2020. Top Management Support Functions in Higher Education Management Accounting Information Systems. Ilomata International Journal of Tax and Accounting, 1(4), pp.210-224.
Irman, M. and Purwati, A.A., 2020. Analysis on the influence of current ratio, debt to equity ratio and total asset turnover toward return on assets on the otomotive and component company that has been registered in Indonesia Stock Exchange Within 2011-2017. International Journal of Economics Development Research (IJEDR), 1(1), pp.36-44.
Langemeier, M. and Yeager, E., 2018. Operating profit margin benchmarks. farmdoc daily, 8.
Nariswari, T.N. and Nugraha, N.M., 2020. Profit growth: impact of net profit margin, gross profit margin and total assests turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96.
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Wijaya, D.P. and Sedana, I.B.P., 2020. Effects of quick ratio, return on assets and exchange rates on stock returns. Am. J. Humanities Soc. Sci. Res, 4, pp.323-329.
W?odarczyk, B., Szturo, M., Ionescu, G., Firoiu, D., Pirvu, R. and Badircea, R., 2018. The impact of credit availability on small and medium companies. Entrepreneurship and sustainability issues, 5(3), pp.565-580.
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