Business Finance: Importance, Financial Statements, Ratios, and Performance Improvement

This document provides an overview of business finance, including its importance in achieving strategic objectives. It discusses financial management, financial statements, and the use of ratios. The document also includes a business review template and processes to improve financial performance. Subject: Business Finance

Business Finance

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Financial Management and its Importance..................................................................................3
Discussing financial statements and use of ratios........................................................................4
Business Review Template:.........................................................................................................6
Processes to improve financial performance:............................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Business finance pertains to the funds as well as money that a corporation uses to achieve its
targets and strategic objectives. From the purchase of raw materials to the delivery of products
and services to customers, finance is critical to the success of a company. The study covers key
discussion on financial management concept and its major importance (Canales, 2016). Further
this cover explanation about financial statements and usage of ratio. In later part, study contains
calculation for given business review template as well as preparation of income statement and
balance sheet.
MAIN BODY
Financial Management and its Importance
Financial management term relates to the mechanism of an organization's funding and
finance-related operations being managed. It ensures that funds are available to fulfil regular
business requirements and that funds are used efficiently. Financial management entails making
decisions on investments, fixed asset purchases, and funding sources, among other things. It aids
in planning, coordination, and management of financial activities. This also requires decisions on
the returns on investment for shareholders. It includes data on the corporation 's profits or losses,
and costs, allowing the management to make informed decisions. Managers will be able to see
where their company's cash is being used and will be able to cut down on business expenditures
(Bendell and Doyle, 2017). Following are certain ley roles of Financial management and its
processes in success of an enterprise, as discussed below:
Financial Planning: Financial management aids in corporate financial planning. This
entails preparing for the corporation's source of revenues, budgets, and funding requirements,
among other things. It aids businesses in preparing for tough situations that arise as a result of
environmental changes. Financial preparation assists businesses in meeting their defined
objectives. It has power of the firm's costs, expenditures, financing, and profits.
Procurement of funds: Financial administration aids the company in obtaining funds
from less expensive sources that are appropriate for the organization 's requirements Funds are
vital for a corporation 's operations to operate effectively. It ensures that funds are accessible
whenever a corporation requires them. This is needed for day-to-day functions, investment, debt
repayment, and the procurement of raw materials, and plenty of other daily financial tasks.

Utilisation of funds: Financial management aids a business's executive in making the
best use of funds by allocating funds in efficient manner. It provides transparency on fund
distribution, allowing businesses to see where their money is going and lowering company costs.
Financial decisions: Financial management assists administrators in implementing
financial decisions that have an influence on the organization 's activities Financial decisions
would have an influence on other areas of an organization and any department's activities need
funding. These choices assist the company in achieving its longer-term objectives (Babajide,
Olokoyo and Taiwo, 2016).
Increase profitability: Financial accounting aids in the optimal utilization of
business funds in attempts to maximize a company’s overall fiscal performance. It improves
market performance through controlling costs via budgetary management, cost analysis, as well
as other tools. It also encourages employees to save, lowering the costs of borrowing money.
Discussing financial statements and use of ratios
Financial Statements: A business’s financial statement implies to written formal report type
record which exhibits actual position of business as well as business’s all key financial activities.
The primary contents within a business’s financial statements are set of standardised reports like
business’s balance sheet, profit and loss or income statement, Cash-flows statements and change
in equity statement. Businesses can opt to produce financial statements on weekly, quarterly, or
yearly basis, that will be presented in annual report by the ending of the fiscal year. Businesses
are expected to follow widely agreed accounting standards in part to ensure continuity and
integrity of the wording and interpretation of such financial reports. Financial statements
are essential reports for assessing the company's performance and finance position. Following
are key aspects of Financial statements, as discussed below:
 Income statements: Earnings and expenditures, as well as resulting net profits or deficit
over period attributable to receiving operations, are all included in income statement. The
financial statement tells analysts and executives whether or not the company earned profit
during the time frame under consideration. Income statement depicts actual profitability
position of business for a specific period ended (Jordà, Schularick and Taylor, 2016).
 Balance sheet: The closing balances of company's asset, debt, and capital accounts as
on date specified on report are seen on balance sheet. As a result, it shows what company
owns as well as owes, and also how much sum has been employed in it. Balance sheet is

frequently employed for financial reporting of a company's results. A business’s balance
sheet depicts overall fiscal position of business as on particular date.
 Cash flow statements: This is statement which comprehensively summarises sum of
actual cash which enters into business and goes out of business, provides more relevant
information regarding level of working capital fund which available during a particular
period. This involves aggregate amount of cash funds brought in through sales, but
ignores credit sales which haven’t been really paid. Likewise, this won’t depict different
raw materials as well as other key items which have been bought on credit-terms
although not paid. This statement shows how efficiently a business handling their cash
funds.
Use of ratio:
The study of different parts of financial details in a corporation's financial reports is
known as ratio analysis. They're also used by outside investors to figure out things like a firm 's
efficiency, leverage, and financial stability.
1. Comparisons
One of applications of ratio evaluation is to equate an organization 's financial results to
that of comparable companies in the sector in order to determine company's market positioning
Getting ratios from established rivals and comparing them to the corporation's ratios will assist
management in identifying market differences and examining the business's comparative edge,
capabilities, and disadvantages. The insight can then be used by executives to make decisions
aimed at improving the business's market positioning.
2. Trend line
Ratios may also be used by businesses to see whether there is pattern in their financial
results. Data through financial reports were collected over a wide range of reporting cycles by
established businesses. The resulting pattern can be employed to forecast future financial results
as well as classify any potential financial uncertainty that'd be difficult to foresee using ratios
for single reporting cycle.
3. Operational efficiency
The management of a business could also apply financial ratio study to analyse to assess
the level of effectiveness in management of business’s assets and liabilities. Unnecessary costs
are incurred as a consequence of inadequate asset usage, like motor vehicles, property, and

buildings. Financial ratios may also be used to assess if finance resources are being used too
much or too little (Müllner, 2017).
Business Review Template:
Computations:
Net profit margin = 43057 / 189711 * 100
= 22.69%
Gross profit margin= 81125 / 189711 * 100
= 42.76%
Current ratio = Current assets / current liabilities
= 54349 / 37928
= 2.22:1
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
Income statement:
Amount
Turnover 3 1,89,711.
Less cost of sales:
Material Cost 42,597.
Production Cost 15,231.
Labour Cost 50,758.
1,08,586..
Gross profit 81,125..
GP %
= 42.8
Less Expenses:
Administrative expenses 13,751.
Other operating overheads 22,374.
Interest 1,943.
Total Overheads 4 38068..
Profit/(loss) for the financial
year 43057.. NP%= 22.7

Balance Sheet:
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
Other creditors including tax and social security 4,562
37,928
working capital 46,421
Total assets less current liabilities 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
Business review:
2016 2015 Change
£’000 £’000 %
Turnover (continuing operations) 1,89,711. 1,79,587. 5.60
%
Profit for the financial year 43057 18,987 126.7%
Shareholder’s equity 83802. 63,057 32.9
0%
Current assets as % of current liabilities 222% 304% -
82%
Customer satisfaction 4.5 4.1 10%
Average number of employees 649. 618. 5
%
Gross Profit = £81125.

Net Profit = £43057.
Net Profit increased in 2016 by 126.7 during the year.
Shareholders’ equity increased by 32.9% by £83802.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is 1.47:1
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22:1.
Calculations:
Gross profit = sales – COGS = 189711 – 108586 = 81125
Net Profit = Revenue – total expenses = 81125 – 38068 = 43057
Profit = 43057 – 18987 = 24070
Current ratio = current assets / current liabilities = 54349 / 37928 = 2.22:1
Quick ratio = (current assets- stock) / current liabilities
= (84349- 28571) /37928 = 1.47:1
Equity = 63057 / 20745 = 83807
Increase in profit = 63057 / 32.9% = 20745
Analysis:
Profitability: Profitability position of business shows how efficient a corporation is in generation
of profits. The analysis of gross and net profit ratio for 2015 and 2016 shows that there is
incremental trend in both gross profit ratio and net profit ratio of business. Such incremental
trend in gross profit implies that business’s efficiency has been increased in terms of generating
profits from their core business operations. While growing trend in net profit implies that
company’s overall efficiency to generate net profit after providing all the business expenses has
been improved (McLean and Zhao, 2014).
Liquidity: A business’s liquidity position states position of cash in business and how much liquid
funds are available in business to meet their current obligations. Current ratio of business during
2015 and 2016 shows that there is decline in current ratio of business which implies that
business’s short term liquidity position has been decreased.

Efficiency: This shows how efficient a business in handling their customers, employees and
other business operations. There is increment of 10% in customer satisfaction level during 2016
as compared to previous year. Further evaluation of level of average number of employees shows
that there is around 5% increment in average no. employees. This reflects that business is
efficient to retain employees. Also increase in customer satisfaction indicates that business’s
efficiency to retain and attract new customers while satisfying their requirements has been
improved over the period.
Processes to improve financial performance:
Expense reduction is one of most effective approaches to boost the financial
performance. Examine any aspect of the company to see if there are any better options for
products, tools, or facilities. Check out different savings accounts as well as insurance plans to
see how respective business can get decent rates. When business have a bigger bill, see if
business can make annual or deferred payouts and maintain more cash on hand.
Unpaid invoices will wreak havoc on business cash flows and company's financial health.
If this is persistent issue for business, a debt collection service might be necessary. Meanwhile,
guarantee the debtors are reminded of their commitments on a daily basis. Also, before
negotiating purchase deals, make sure terms specify when fees are due including what happens if
they are late (Mian and Sufi, 2018).
Using longer-term debt instead of shorter-term financing to buy assets or fund
developments is another way to improve a corporation's liquidity ratio. Reducing shorter-term
debt from balance sheet helps a business to conserve cash and bring it to greater use in short
term. Examining accounts receivables and payables can help increase company's liquidity ratio
in long run. Ascertain that business issuing invoices as soon as possible ensuring that the clients
are paid on schedule. When this comes to accounts payables, company will want to make sure
that reverse is true: longer pay times are better for a business looking to increase liquidity ratio.
Certain suppliers will also be convinced to extend payment terms.
CONCLUSION
From above study this has been analysed that Business financing contributes to the
acquisition of resources for the purpose of meeting business goals. It offers funding for a

corporation's working capital including liquidity requirements, as well as effectively
diversifying funds of business.

REFERENCES
Books and Journals:
Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of
Mexican small business finance. Organization Science, 27(6), pp.1548-1573.
Bendell, J. and Doyle, I., 2017. Healing capitalism: Five years in the life of business, finance
and corporate responsibility. Routledge.
Babajide, A.A., Olokoyo, F.O. and Taiwo, J.N., 2016. Evaluation of effects of banking
consolidation on small business finance in Nigeria. In Proceedings of the 23rd
International Business Information Management Association Conference (pp. 12522-
12540).
Jordà, Ò., Schularick, M. and Taylor, A.M., 2016. The great mortgaging: housing finance, crises
and business cycles. Economic policy, 31(85), pp.107-152.
Müllner, J., 2017. International project finance: review and implications for international finance
and international business. Management Review Quarterly, 67(2), pp.97-133.
Mian, A. and Sufi, A., 2018. Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives, 32(3), pp.31-58.
McLean, R.D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance. The Journal of Finance, 69(3), pp.1377-1409.