Financial Management and Use of Ratios in Business

This document discusses the concept of financial management and the use of ratios in business decision making. It explores the main financial statements such as balance sheet, profit and loss account, and cash flow statement. The document also provides insights into ways to improve the financial performance of a company. The subject is Applied Business and the course code is FINANCE.

APPLIED BUSINESS
FINANCE
Table of Contents

Section 1................................................................................................................................................3
Section 2................................................................................................................................................3
Main financial statement and use of ratios.........................................................................................3
Section 3................................................................................................................................................5
i. Completing the information on business review template.........................................................5
ii. Showing income statement as per the given template................................................................6
iii. Showing Balance sheet as per the requirement......................................................................6
iv. Describing the profitability, liquidity and efficiency ratio as per the case study...........................9
Section 4..............................................................................................................................................10
Describing the ways which can improve the financial performance of company............................10
CONCLUSION...................................................................................................................................11
REFERENCES....................................................................................................................................12
Section 1
Financial management is a process defined as managing and controlling the financial
resources associated with the business entity. The concept of financial management is about

to monitor and control all the financial resources associated with the business entity.
Financial resources are limited in number so the concept of financial management make it
more empowering for the company to utilise its financial resources in the most optimum way
possible. This report will discuss about different aspects associated with the financial
management concept. Henceforth, report will emphasis over different financial statement and
the focus will be on the use of ratios in financial management. Projection of certain financial
records will also do in this report. Furthermore, certain areas will be highlighted to strengthen
the financial position of the business entity.
Section 2
Main financial statement and use of ratios
Financial management process is supported with different types of financial
statements such as balance sheet, profit and loss account and all other financial records. All
these statements are the key document that is utilised in the best way possible to reflect te
actual financial situation or position of the business entity. All these are the main financial
records and document that can motivate and guide the business organisation taking best level
of business decision making.
Balance sheet
Balance sheet is among the prominent financial record that depict about the actual
position or situation of the business entity. This financial statement talk about the projection
of all different assets such as current asset and long term asset associated with the business
entity. All assets of company are projected at the book value in the statement. This is
considered as the main financial record of the business entity. The other side of the balance
sheet talk about the liability section (Dance and Imade, 2019). The statement segregate
liability into two different parts current liability and long term liability part of the business
operations of company. Liability is a key crucial financial record that needed to be coping up
by the company in any given situation. Along with the liabilities this section of balance sheet
also reflects the capital value invested in the business. Balance sheet is a finaial record that
clearly depicts the overall financial position of the organisation. Financial stability is also
disclosed with support of the balance sheet of the organisation.
Profit and loss account

Profit and loss account is another key financial record that is prepared by the financial
team. These financial records depict the profitability of the company for the respective
financial year. This is a financial document that clearly states all the income belongs to
respective financial year. On the other hand this document depicts all the expenditure both
direct and indirect in the income record so that actual position of the profitability of company
could have been measured by the business entity. Profit and loss account is a crucial financial
record that clearly states the actual financial or profitability position of the business entity.
Business decision making always influence the profitability of company. Profit and loss
statement clearly indicates all the respective financial statement of the business entity. This is
considered as the core financial record surrounded with the actual profit for the respective
financial year.
Cash flow statement
Cash flow statement is another crucial financial statement. This statement reflects the
position of cash and liquidity of the business entity for the respective financial year. Cash
flow statement project all the inflow and outflow of the cash in the respective financial year
(Siekelova and et.al., 2017). Cash inflow involves all types of income and other form of cash
inflow for the financial year. In case of cash outflow the factor depict about the entire cash
outflow for the respective financial year. This statement celery demonstrate the liquidity
situation of the organisation for the respective financial year ended.
The above mentioned financial documents are the prominent and key financial
records that clearly demonstrate the financial position and situation of the business entity. All
different financial statement talk about different aspects of the financial record associated
with the business entity. Company and its management assess the overall financial position of
the business with support of all different financial records so that overall position of the
business entity could have been depicted in the best way possible.
Use of ratios
Following are the points demonstrate about the utilisation of ratios. There are various
aspects are interpreted with support of ratios of the company. All different use of ratio can be
demonstrated in the following points.
 Ratios support in taking managerial decision making at the organisation level.

 The ratio also support the management in financial forecasting and planning
associated with the business entity (Ho, 2018).
 The ratio further supports the management and board of director in communicating
about the financial condition and business records of the business entity.
 Ratio further support in coordinating with other stakeholder group associated with the
business entity about the overall position of the organisation in the respective market.
 Ratio strengthens the control over business operations and decision making associated
with the company.
 Other than the mentioned above other use like for shareholder group n taking the best
level of decision towards transactions with the company are also analysed with
support of ratios.
 This can clearly stated that ratios are the core area that favours the overall decision
making involve in business.
Section 3
i. Completing the information on business review template
The Company’s key financial and other performance indicators during the year were
as follows:
2016
£’000
2015
£’000
Change
%
Profit for the financial year 43057 18,987 + 127%
Shareholder’s equity 83802.75 63,057 +32.9%
Current assets as % of current liabilities 54.72 % 304% -82%
Customersatisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
Gross Profit for the year 2016 = Sales - COGS
= 189,711 -108,586 = £81125

Net Profit for 2016 = Sales- COGS- administration – operating expenses- interest
= 189,711 -108,586 - 13,751 - 22,374 – 1943
= £43057
Net Profit increased in 2016 by 127 % [(43057 – 18987) / 18987 *100] during the year.
Shareholders’ equity increased by 32.9% by £83802.75 (63057 * (1+32.9%).
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is £55778 / 37928 = 1.47.
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is £84349 /
£37928 = 2.22.
ii. Showing income statement as per the given template
In context to the income statement attached in appendix, there are increase in
turnover of the company in respect to the previous financial year and in addition to this, the
gross profit of the for 2016 is increased to 42.8% and the net profit by 22.7%.
iii. Showing Balance sheet as per the requirement
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 1,15,719
Non-Current
Liabilities
Bank loans and 16,506

overdrafts
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
Working note:
Total Assets
153,64
7
Less: Total Liabilities 69,832
Total equity 83,815

iv. Describing the profitability, liquidity and efficiency ratio as per the case study
The ratio clearly demonstrates that company is holding a strong liquidity position in
the respective financial year ended. Also the quick ratio maintained by company is good
which that clearly reflect that the business entity is holding sufficient current assets to meet
up its current liabilities. In respect to the profitability, the gross profit ratio is declined in
2016 but the net profit increased which is mainly due to rise in sales.
Particulars Formula 2015 2016
Gross profit 80612 81125
Net Profit 18,987 43057
Sales 179,587 189,711
Gross profit Ratio Gross profit/
sales*100
44.88 42.76
Net Profit ratio Net Profit/
sales*100
10.57 22.69
In terms of efficiency, the inventory turnover ratio is determined as given below, which is
very low and incurs the situation of risk for the company.
Particulars Formula 2016
Stock 28,571
COGS 108586
Inventory turnover
ratio
COGS /
Average stock
3.8

Section 4
Describing the ways which can improve the financial performance of company
On the basis of the ratio analysis, it is analysed that the liquidity position of the
organisation is attractive but when it comes to quick ratio it is weak even though it is above 1.
This denotes that the company has invested huge amount of resources in its inventory that
also resulted into blocking of cash and loose liquidity of the business entity. Company can
follow the strategy where it can reduce blocking its resources in stock (Mukhtaruddin and
et.al.,2019). This will allow the organisation to effectively utilise all its financial resources in
the best way possible. This will also support the company in achieving accurate ratio so that
right set of strategy can be implemented. The way to manage the quick liability by reducing
payment in trade payable. The management of trade payable in necessary for strengthening
any financial position or situation of the business entity.
In process of increasing gross profit margin, company needed to control its cost for
reducing its cost of goods sold which will result into increasing the gross profit and will
further boost the net profit margin of the business entity as well. The organisation can also
give emphasis over the budgetary control technique to maximise the use of the resources
associated with the business entity. In terms of efficiency, the inventory turnover ratio of the
company is very low that clearly indicate that the business entity is unable to sell its entire
inventory in a quick time frame. In process to improve the situation, the company should
restrict the product or supply of the good in process to avoid the overstocking like situation in
business. Apart from this business entity must ensure proper focus over marketing and
promotion like activities. This will further support the sales of company and will prominently
influence the growth potential or capacity of the business entity. This is indicated that the
profitability situation in any business entity is essential as all business operations are
channelizes in such manner that company get to maximise all its business revenue (Osadchy
and et.al., 2018). Digital and social media marketing campaign will further motivate the
business entity to maximise its revenue against the business operations delivered. Marketing
will support the business entity in taking forward the sales growth of company in best way
possible. This is essential for every business entity to maximise the sales of the organisation
so that overall growth of the company could boost up.

CONCLUSION
Financial management is defined as managing financial resources associated with the
business entity. There are many financial records part of the financial management practices
such as balance sheet, income statement, cash flow statement and many other financial
documents. This is projected that all these are the prominent financial records associated with
the business entity. Ratio allows the company to make crucial business decision making that
can favour the business entity in the best way possible. The key use of ratio is under taking
the best level of business decisions to maximise the worth of the company in the respective
market.
REFERENCES
Books and Journals

Dance, M. and Imade, S., 2019. Financial Ratio Analysis in Predicting Financial Conditions
Distress in Indonesia Stock Exchange. Russian Journal of Agricultural and Socio-
Economic Sciences. 86(2).
Ho, A.T.K., 2018. From performance budgeting to performance budget management: theory
and practice. Public Administration Review. 78(5). pp.748-758.
Mukhtaruddin, M., and et.al.,2019. Good corporate governance, corporate social
responsibility, firm value, and financial performance as moderating
variable. Indonesian Journal of Sustainability Accounting and Management. 3(1).
pp.55-64.
Osadchy, E.A., and et.al., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy.
Siekelova, A., and et.al., 2017. Receivables management: the importance of financial
indicators in assessing the creditworthiness. Polish Journal of Management
Studies. 15.
Online
Three Financial Statements. 2020. [Online]. Available
Through:<https://corporatefinanceinstitute.com/resources/knowledge/accounting/three-
financial-statements/>.