Applied Business Finance: Concept, Financial Statements, Ratios, and Improvement Processes

This report covers the concept and importance of financial management, major financial statements, usage of ratios in financial management, and processes to improve financial performance. It includes subject, course code, and college/university information.

Applied Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
SECTION 1......................................................................................................................................3
Concept and importance of financial management-....................................................................3
SECTION 2 .....................................................................................................................................4
Explaining the major financial statements and the usage of ratios in financial management.....4
SECTION- 3 ...................................................................................................................................5
Business review template-...........................................................................................................5
Income statement........................................................................................................................6
Balance sheet ..............................................................................................................................7
Calculation of profitability, liquidity and efficiency ratios.........................................................9
SECTION- 4 .................................................................................................................................11
Processes that the business might use to improve the financial performance-.........................11
CONCLUSION..............................................................................................................................12
APPENDIX....................................................................................................................................13
REFERENCES-...............................................................................................................................1

INTRODUCTION
Applied business finance refers to the funds that are required by the owners of the
business to meet their needs including funds for commencing the business, purchase of capital
assets or to manage the shortage of cash faced by the organization. Financial management is the
practice of managing the company's finance so that the desired goals are achieved. The present
report will deal with the concept and importance of financial management. It will include the
main financial statements and computation of ratios (Bendell and Doyle, 2017). At last, the
report will also highlight the various processes that businesses might use to improve their
financial performance.
SECTION 1
Concept and importance of financial management-
Financial management includes planning, directing, organizing and controlling the financial
operations of an organization. The main objectives of financial management includes-
 Ensuring that enough funds are supplied to the organization.
 Efficient allocation and utilization of resources (Schoenmaker and Schramade, 2018).
 Creation of better investment opportunities for the investors. Expanding the wealth of the shareholders.Importance of financial management-
 It helps the companies in financial planning- Financial planning includes calculating the
capital requirement of the organization including formation of financial policies and
assessing whether the objectives are achieved or not. It helps in proper allocation and utilization of funds- After the acquisition of funds, it
must be ensured that they are allocated wherever necessary. It helps in improving the profitability of the company- By managing proper cash flow and
assessing business performance on time to time, financial management can lead to higher
profits. Management of taxation- Financial management help the companies to maintain proper
books and eliminating tax burden including finding the means to reduce tax burden of the
organization (
Financial Management Explained: Scope, Objectives and Importance.
2021).

 Controlling business costs- Sound financial management help in reducing costs through
proper budgeting. Predicting risks and mitigating them- Through forecasting future events, financial
management helps to understand the risks by comparing the actual results with the
forecasted results to identify if there are any areas that needs to be taken care of.

Creating capital reserves- Financial management is helpful in success of business as it is
beneficial in creation of capital reserves in the books of accounts of the company.
SECTION 2
Explaining the major financial statements and the usage of ratios in financial management
Financial statements are the official written records of all business operations that a
company undertakes in order to survive and earn profits. It provides vital information about the
financial performance and position of the company (Lessambo, 2018). There are three major
financial statements prepared by an organization which are discussed below:
Income Statement This statement records all the direct and indirect revenues and
expenses for a time period. It is prepared to calculate the profit
earned or loss incurred by the company in carrying out its
business operations. It depicts firm's performance over time.
Income statement can be used in many ways, that is, company
can examine the sales item which are most profitable, expenses
it can reduce, cash left after all expenses, etc.
Balance Sheet Balance sheet is the most important financial statement
because it shows financial health by calculating all assets,
liabilities and equity funds of a company on a particular date.
It helps in taking various business decisions like managing the
company's debt, maintaining the liquidity position, assessing
the net value, etc. (Bragg, 2018).
Cash Flow Statement CFS calculates funds that is flowing in and out of business
from different activities (operational, financial and investing)
during a particular period. Cash flow statement will provide

better insights about managing the finances in better ways. It
can also reveal the phase of business, whether a growing
company with increasing profits or stagnant one with declining
profits.Usage of Ratios in Financial Management
 Supports in decision-making process: Financial statements alone do not provide any
meaningful information. Ratios calculated from these statements give deeper insights
about financial condition and aids in making major decisions about the company (Titman
and Keown, 2018 ). Helps in future planning: Ratios provide a complete guidance for future forecasting and
planning. Sensible conclusions are drawn and strategies are adopted to enhance the
performance. Investor information: The investor wants security of his money and want to earn a good
return over his funds. Various ratios like EPS, return on shareholders' funds, etc. are
calculated to provide important information to investors. Ratios can be helpful for
shareholders, creditors, employees, government, and various tax audit requirements. Provide information to employees: Employees of company are interested in knowing the
profits of the company because if profits increases their salaries and fringe benefits are
also enhanced (Coulon, 2019). Comparing different types of businesses- Two businesses might differ in size, but they
can be compared in terms of profitability, liquidity, etc., by using the different financial
ratios. Helps in communicating- Through ratios, the financial strengths and weakness of a firm
can be easily communicated and understood. Thus, ratios help in communication and
increases the value of financial statements.

Helps in control and coordination-Ratios are helpful in making effective control as
necessary actions can be taken at the right time by comparing the actual with the
standards. Ratios can also help in coordination which is one of the most important in
effective management of the business.

SECTION- 3
Business review template-
Income statement
Attached in appendix

Balance sheet

Calculation of profitability, liquidity and efficiency ratios

Analysis of the ratios-
The company can evaluate the performance of the company using the ratios calculated
above. The current ratio shows the liquidity position of the company. Currently it is 2.22 :1
which shows that the company has enough current assets to pay its short term obligations as the
current asset of the company is twice its current liabilities. The quick asset of the company
shows the capacity of the company to pay its liabilities without disposing its inventory. The ideal
quick ratio is 1:1. Currently it is 1.47 which is quite good as it depicts that in order to pay one
current liability the company has 1.47 times one current asset. Overall the liquidity position of
the company is good.
The gross profit of the company shows the percentage of each unit of revenue that the
company earns. It is an indicator of the company's financial health. The ideal gross profit ratio is
65% and the company's current gross profit ratio is 42.76%. That means the gross profit ratio of
the company is not good. It can be increased by buying the inventory at cheaper prices as if the
company will get a large purchase discount, the ratio will automatically increase as the cost of
goods sold will be lowered. The net profit ratio shows how much profit is earned as a percentage
of sales. A good net profit ratio is 20% and 5% or below is bad net profit margin. Currently the
net profit margin is 22% which is good. The company should either maintain this ratio or
increase it. This can be further increased by selling more goods or by increasing the prices.

The efficiency ratios indicate the company's capacity to use its assets to generate
adequate revenues and it also depicts how efficiently, a company is managing its assets. The
inventory turnover ratio shows how well a company is managing its inventory to convert it into
sales. The ideal inventory ratio is between 5 and 10. The current inventory turnover is ideal as it
is 3.80. Higher inventory turnover ratio depicts quick sale of goods and increased demand of
goods (Coulon, 2020).
The fixed asset turnover ratio shows how efficient a company is generating sales from its
fixed assets. The good fixed asset turnover ratio is 2.5 or more and currently it is 0.62. which
shows that the company is not very efficient in using its asset to generate sales. This is either
because of low sales or the company has over invested in land or other equipment that is not
beneficial for the company.
SECTION- 4
Processes that the business might use to improve the financial performance-
With the above analysis, it is clear that the business must improve its financial performance to
increase the overall operations of the business. The company is having good liquidity position as
both the current and quick ratios are good (
Diversity improves performance and outcomes.
2021). The process that business might use so that the performance of the business might
improve are-
To improve the profitability ratio, the company needs to remove the unprofitable products and
services as the products that have good profit margin is important for the company and by
finding new customers, the company can increase the sales and increase the overall performance
of the company. The direct costs of the company is to be controlled by eliminating unnecessary
expenses and negotiating better prices or discounts for the products which the company buys.
The overheads of the company is to be improved by bench-marking the business with other
company's business (Madushanka and Jathurika, 2018).
To improve the efficiency ratios, the business must try to increase the revenue and reduce
the expenses. The inventory turnover ratio is ideal but the fixed asset turnover ratio is to be
improved. This can be improved by reducing the expenses related to fixed asset and liquidating
the assets which become obsolete. Another way to increase the fixed asset turnover ratio of the
company is to lease the assets instead of buying them as the leased asset is not counted as fixed

asset. The company should analyse how the assets can be used so that their productivity of the
company is increased. The company should focus on quick collection from debtors. This can be
done by outsourcing the accounts to a collection agency. The company should keep a track on its
inventory management to decide the time spent in movement of goods. If the delivery system of
the company is slow, will lead to delays in reaching the products to customers and collecting the
payment on time. The company should also invest in necessary technology to improve the order
and billing processes which will automatically improve sales and increase the efficiency of the
company.
To improve the overall productivity of the company, the business must look at the bank
loans and other debts. It is better for the company to make single payment to refinance the debt.
The company must do proper research by comparing various plans before commiting to any new
agreement. The company can also lower its prices to expand its business and improve its
financial position and raising the prices when it does not have an effect on customers. The
company should give various payment options to increase its sales such as some people prefer to
pay through personal cheques, Paypal etc. The company can accept bitcoin as well to expand its
business. This price rise and fall strategy is one of the best way to improve the financial
position(Husain and Sunardi, 2020).
The company can raise money through grants or crowdfunding as it might not involve
any payment of interest and best suitable if the there is any innovative products or services.
The company should improve its marketing skills by considering the latest marketing options
such as digital and social media marketing.
CONCLUSION
The report shows that finance is the most essential for the smooth functioning of every
business. There is a need for proper management of finance which is helpful in financial
planning of the company and increasing the overall profitability of the company. The main
financial statements of the company includes income statement, balance sheet and cash flow
statement. These are very important for the company as it is related to the profitability, financial
position and cash flows of the company. The various financial ratios are computed and analyzed.
The financial ratios are very helpful for different types of investors and also in financial
decision-making. The report highlighted that the company's liquidity and profitability is
recommendable. At last, the report has depicted the various measures to improve its financial

performance. It is concluded that the company should try to reduce costs and increased sales
through various means in order to improve its financial performance.
APPENDIX

REFERENCES-
Books and Journals-
Bendell, J. and Doyle, I., 2017.
Healing capitalism: Five years in the life of business, finance
and corporate responsibility. Routledge.
Titman, S. and Keown, A. J., 2018.
Financial management: Principles and applications. Pearson
Education, Inc.
Lessambo, F. I., 2018. Financial Statements.
Analysis and Reporting.
Coulon, Y., 2019.
Rational Investing with Ratios: Implementing Ratios with Enterprise Value
and Behavioral Finance. Springer Nature.
Coulon, Y., 2020. Efficiency Ratios. In
Rational Investing with Ratios .(pp. 31-45). Palgrave
Pivot, Cham.
Madushanka, K.H.I. and Jathurika, M., 2018. The impact of liquidity ratios on
profitability.
International Research Journal of Advanced Engineering and Science. 3(4). pp.157-
161.
Husain, T. and Sunardi, N., 2020. Firm's Value Prediction Based on Profitability Ratios and
Dividend Policy.
Finance & Economics Review.2(2). pp.13-26.
Schoenmaker, D. and Schramade, W., 2018.
Principles of sustainable finance. Oxford University
Press.
Bragg, S. M., 2018.
The Interpretation of Financial Statements. AccountingTools, Incorporated.
Online
Financial Management Explained: Scope, Objectives and Importance. 2021. [Online]. Available
through:<https://www.netsuite.com/portal/resource/articles/financial-management/financial-
management.shtml>
Diversity improves performance and outcomes. 2021. [Online]. Available
through:<https://www.sciencedirect.com/science/article/abs/pii/S0027968418303584>
1
A
u
t
h
o
r
l
i
n
k
s
o
p
e
n
o
v
e
r
l
a
y
p
a
n
e
l