Applied Business Finance: Definition, Financial Statements, Ratio Analysis, and Improvement Processes

This article discusses the concept and importance of financial management, main financial statements, and ratio analysis in Applied Business Finance. It also explores the processes that businesses can use to improve their financial performance. The article includes a case study and a template for completing the information. The subject is BMP3005 Applied Business Finance for BSc (Hons) Business Management with Foundation.

BSc (Hons) Business Management with
Foundation
BMP3005
Applied Business Finance
The concept and importance of financial
management and the processes
businesses might use to improve their
financial performance
Submitted by:
Name:
ID:
Contents
Introduction p
1

Section 1: Definition and discussion of the concept and
importance of financial management p
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
p
Section 3: Using the template provided p-p
i. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
p
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices p
iii. Using Excel completing the Balance Sheet p
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis p
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance p
Conclusion p
References
Appendix p
2

Introduction
Businesses fund is the key point of all enterprises. It is related to the funds is
engaged in every company. It is used for running out all the activities or operations.
The money is required to acquire the assets, products and to execute all the
economic tasks of the organization. It is the process of converting the acquired
money in to capital sources for achieving the businesses financial desires or
objectives. It also required to expand, modify or develop the businesses. The fund is
used to meet the unexpected contingency or uncertain consequences (Ascarya,
2021).Company prepared the financial reports to know the performance of the entity.
The purpose of financial ratio is to measure the monetary results of the financial
events or evaluate the trend analysis.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management means to effectively manage the financial funds of the
organization. The department of the finance distribute the money in to the multiple
divisions to attempt the tasks of the money transactions in an profitable manner. The
profit can be maximised or attain the customer satisfaction by the financial
management administration. It helps to accomplish the financial goals of the
businesses. The accounting principles and the standards aids to record the money
transactions and to follow the dual concept of accounting. The financial records is
used by the stakeholders to conclude the certain results and for the interpretation.
Importance of financial management
 Planning or budgeting: The planning criteria of the funds coordination is
used to predict the organization cost, income or the profit. The owner of the
businesses used the budget technique to manage the businesses. It point out
the variances that is the difference between the businesses performance and
the standard actions of the organization (Dai, and Zhang, 2019). The
estimation of this variation helps to develop the strategies to resolve the
changes or bring back the enterprise on its operations to reach the targets.
 Perfect financial reporting: It is not the effort of one person but it is the
integrated work of all the finance staffs to take the decisions effectively. It is
essential for the company to check timely about the status of the reports and
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to operate the businesses effectively. It provides every piece of information
the users that gives the idea of the investment. The top level management
design the reports in a systematic format so it is easier to gain the relevant
information for the strategic decisions (Daugaard, 2020).
 Allocation of profit: The financial seniors has the responsibility of distributing
the profits in various areas. The manager determine that whether it is
allocated in the terms of dividend to owners or to used as the retained profit
for growing the businesses. If the company profit is higher then they issue
bonus to the employees to motivate them or rising the productivity of the
organization. The analyst consider the profit payout ratio for availing the
opportunities or to enlarge the businesses. The company also aside the some
proportion of income to meet the future contingency of the businesses.
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
The documents which includes the transactions or the events of the financial nature
to determine the stability or status of the organization is called the financial
statements. The intention of making the financial documents is to gain the content of
the businesses plan, actions, or the alteration in the monetary performance of the
company to cope up with the difficulties faced by the managers. It is the statement
that provides the broad, accurate, relevant or the certain data. It gives the
information to the financial analyst to deal with the concept and figures of the
accounting terms to bring detailed analysis of the reports. The clients should be
satisfied with the data and fulfill their several objectives ( Ferreira, and Dickason-
Koekemoer, 2020).
1. Balance sheet: The document that is made in the end of annual year to
furnish the message of the liabilities assets and the capital of the owner. The
sum of the balance sheet should be match between the debts and the assets.
The investment ratio or the activity ratio is computed from the structure of the
balance sheet. The new concept of financial modeling that helps to build the present
model of the company with the past data figures of the sheet. The CFO of the
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businesses use the balance sheet to evaluate the performance of the commercial
enterprises. It is one of the best tool of the financial statements is build on the
financial year that interpret the book value of the businesses. It is used for the
internal or external evaluation of the company that how it has worked in the historic
time, working in the present period and how it will work future time. It is useful for the
investors or the creditors to see the condition of the company (Huang, and Teklay,
2021).
2. Income statement: The financial document that denotes the earning capacity
of the businesses, how much money spends on the expenditure and to make
the profit during the particular time period. It helps to analyze the financial
health or to study the financial product of the company that can impact on the
future of entity. It shows how the company can be sustainable and gainful and
the efficient staff management of the organization. In this there is the
calculation of the gross profit or the net profit. Gross profit is measured not
including he direct expenses from the revenue of product. There is deduction
of indirect expenses from the gross income is called net profit. There credit
side of the income balance should be more than the debit balance of the
expenditure. Through this profit can be increased in the continuously years.
3. Cash flow statement: The method of showing the outflow or inflow of the
cash and cash items is known as the cash flow statement. It ascertain the
capacity of the administration to produce the cash and the funds used by an
enterprise. It consists of the three tasks such as the operating, financing or
the investing activities. The tasks which is related to the primary sales
manufacturing or the sales from the principal operations. It is calculated by the
direct or the indirect method of cash flow operations. The sale or purchase of
the long term assets like building, property and the equipment is called
investing tasks (Hyz, 2019). The financing activities refers to the buying of
company shares, debentures, bonds, and the repaying the borrowed amount.
The positive part of cash flow means that it has sufficient liquid assets to
meet out the obligations and negative cash flow means the liquidity position of
the businesses has reduced.
Ratio analysis: It is the accompanying magnitude of two chosen mathematical
figures from an organization financial documents. It is employed to measure the
financial state of the businesses. This data is used to bring out the meaningful
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information in the practical aspects. The present or potential investors and the
external creditors of the firm used this financial ratios. It provides the company to
know the shares trend in the financial market or to compute market price of the
company ratios. It is measured in decimal, percentage, fractions and in the times.
The variations in the pattern of ratio is measured by the analysis of the ratio ( Liu,
2020).
Liquidity ratio: It is generally analyze the capacity of the cash to repay the debt. It
helps to know the cash liquidity of the businesses. It determine the status of the
businesses to meet out the current obligations of the shorter period. The businesses
that has more liquidity ratio means has better possibility to cover the outstanding
obligations.
Current ratio: It shows the relation of the businesses to adjust the debts from the
assets with in a shorter period. It is the way to know the repayment ability of the
liabilities.
Quick ratio: It is more liquid than the current ratio and the power of the entity to
convert the more liquid assets in to cash.
Efficiency ratio: the ratio that provide help in managing the regular activities or
tasks. It means how effectively company hired the assets and give back the short or
long term obligations. It indicates how quickly organization will receive the amount
from the debtors. It shows the rules and frames for the credit policies and showcase
the status of the finance in receivables that helps to affirm the level of sales.
Gross profit ratio: It is the relationship between the sales and the gross profit by
subtracting the cost of goods sale expenses from the product sold.
Net profit ratio: It is most crucial ratio that helps to know the profit before interest
and tax by subtracting the indirect operations in the gross income (Tett, 2019) .
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Operating ratio: This ratio is calculated to find out the operating profit of the
businesses. The operating cost is deducted from the gross income and operating
income is added to understand the profit figure. It is the written record of the daily
transaction of the businesses.
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
7

8

9

vi. Using Excel producing an Income Statement for the Sample
Organization (see Case Study)
10
Income statement for the year ended 31st December 2016
2016
Turnover 3 189711
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labour Cost 50758
108586
Gross profit 81125
Less Expenses:
Administrative expenses 13751
Other operating overheads 22374
Interest 1943
Total Overheads 4 38068
Profit/(loss) for the financial year 43057

vii. Using Excel completing the Balance Sheet
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12
Balance sheet as at 31 December 2016
2016
Total
£0
Non Current assets
Intangible assets 5,793
Tangible assets 52,812
Investments 10,693
69,298
Current assets
Stocks 28,571
Trade debtors 26,367
Short term deposits 14,779
Cash at bank and in hand 14,632
84,349
Current liabilities
Bank loans and overdrafts 9,610
Trade creditors 19,493
Other Creditors 678
Income tax payable 3,585
4,562
37,928
working capital 46,421
115,719
Non Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,057
Total equity 83,815
Other creditors including tax
and social security
Total assets less current
liabilities

viii. Using the Case study information describing the
profitability, liquidity and efficiency of the company based on the
results of ratio analysis
In this case study the turnover of the company has increased in the year 2016 as
compared to the 2015. It means the sales of the product has increased from the
past years. The profit earning capacity of the organization has increased by the
percentage of the 125% it means company has sufficiently controlled the cost. It
improves the performance of the businesses. The current ratio of the enterprise is
more than 1 it means owner has high quantity of current assets to meet the short
term obligations. It helps in taking the decisions in the easy manner (Woodford,
2019).
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
The businesses can improve its monetary performance through the several manner.
Company has to effectively utilize the all resources to prosper the company at higher
level. Company is not established for one time it has the objective to maintain the
stability for the longer time by having control on the trading operations of the
businesses. The two methods that is mainly utilized to gain the efficiency of the
entity.
 Manage the cost: The business determine the profitability by analyzing the
sources of fund is coming or the areas where the fund is spent. The focus of
this method to maintain the lower cost and improve the revenue. They always
tried that it should be matched with the budgeted cost.
 Monitor the financial events: It is related to examine the present financial
situation and to note down the areas there is the chance or opportunities to
flourish the company. It aids to further develop the extension of the entity. It
measures the indicators of funds and the financial health of the enterprise.
Conclusion
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It has been concluded from the above research that administration of the
finance is the major role of the finance manager. There is the evaluation of various
alternatives and choose the viable option for solving the problems of businesses
tasks. There should be the efficient distribution of the fund or to arrange the money
proper implementation of the strategy. It helps in the circulation of the money to
increase the liquidity and lower the flexibility of the operations. The next section is to
make the monetary reports to understand the status and the market value of the
assets and the obligations. Company has analyses multiple ratios to differentiate the
performance with the previous year and to maximize the profit.
References
Ascarya, A., 2021. The role of Islamic social finance during Covid-19 pandemic in
Indonesia’s economic recovery. International Journal of Islamic and Middle
Eastern Finance and Management.
Dai, L. and Zhang, B., 2019. Political uncertainty and finance: a survey. Asia‐Pacific
Journal of Financial Studies, 48(3). pp.307-333.
Daugaard, D., 2020. Emerging new themes in environmental, social and governance
investing: a systematic literature review. Accounting & Finance, 60(2).
pp.1501-1530.
Ferreira, S.J. and Dickason-Koekemoer, Z., 2020. The Influence of Behavioural
Finance Biases on Depositor Behaviour. International Journal of Business &
Management Science, 10(1).
Huang, W. and Teklay, B., 2021. Business Professors in the Boardroom: Can they
walk-the-talk?. Finance Research Letters, 39, p.101590.
Hyz, A., 2019. SME finance and the economic crisis: The case of Greece.
Routledge.
Liu, X., 2020. A visualization analysis on researches of internet finance credit risk in
coastal area. Journal of Coastal Research, 103(SI). pp.85-89.
Tett, G., 2019. Faith-Based Finance: How Wall Street Became a Cult of
Risk. Foreign Aff., 98, p.34.
Woodford, M., 2019. Finance, Instability, and Cycles. In Financial Dynamics and
Business Cycles (pp. 18-37). Routledge.
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Appendix:
Income Statement
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16
Income statement for the year ended 31st December 2016
2016
Turnover 3 189711
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labour Cost 50758
108586
Gross profit 81125
Less Expenses:
Administrative expenses 13751
Other operating overheads 22374
Interest 1943
Total Overheads 4 38068
Profit/(loss) for the financial year 43057