Business Finance: Analysis, Accounting, Budgeting

Business Finance

TABLE OF CONTENTS
PART 1: BUSINESS PERFORMANCE ANALYSIS....................................................................1
1.1 Analysis of Statement of Profit or Loss...........................................................................1
1.2 Statement of Financial Position........................................................................................2
PART 2: UNDERSTANDING FINANCIAL INFORMATION & MANAGEMENT OF CASH.3
2.1 Concept of accrual accounting vs cash accounting..........................................................3
2.2 Presenting meaning and differences of profit and Cash flow...........................................5
PART 3............................................................................................................................................5
3.1 Budget and purpose of preparing a budget.......................................................................5
3.2 Benefits of forming a limited company and listing it on a stock exchange.....................6
REFERENCES................................................................................................................................8
APPENDIX....................................................................................................................................10

PART 1: BUSINESS PERFORMANCE ANALYSIS
Ratio analysis
It is mainly is the tool which is being used by the organization for the purpose of
evaluating the financial statements of the company.
1.1 Analysis of Statement of Profit or Loss
Ratios 2019 2018
Quick ratio 0.65 1.93
Current ratio 0.91 2.59
Gross profit Margin 45.02% 60.02%
Net profit margin -36.60% 17.71%
Return on assets -29.41% 22.77%
Liquidity ratios:
Current ratio: As provided in Appendix, the current ratio of T-shirts Ltd has shown a
greater amount of reduction in the ratio to 0.91 in the year 2019 from 2.59 of 2018. This
reduction is mainly because of the huge increase in the current liabilities of the company which
is near to 3.4 time of current liabilities of year 2018 (Agustina and Suprayitno, 2020). Thus, it
becomes important for the company to take actions for reducing its current liabilities otherwise,
it will lead to the situation of cash crunch.
Quick ratio: This ratio has also decreased from 1.93 to 0.65 times at the end ofyear
2019. The main cause for it is that in 2019, the company has blocked it money in the inventory
is much higher which has resulted into increase in the current assets of the T-shirts Ltd.
Therefore, the company requires to reduce the huge amount it has stored in the form of
inventory and should make an increase in the current liabilities (Anandasayanan, 2017). Along
with that, the company should take appropriate steps for decreasing the amount of its current
liabilities as it has also increased at the higher rate. As provided in the cash study the company
has made use of bank overdraft facility in the 2019 amount to 318 (£'000) and it carried higher
interest rate as compared to the rate of interest on the loan.
Profitability ratios:
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Gross profit ratio: In this profitability ratio, the T-shirts Ltd has shown a fall in its GP
ratio which is mainly because of the bigger fall in the net sales of the company. This has resulted
into reduction in the gross profit as well as the GP ratio (Laitinen and Laitinen, 2018). Earlier, it
was 60.02% which decreased to 45.02% in 2019, thus, the company has taken step for
increasing its sales by the way of providing an increase in the credit terms to its customers. As it
has been increased to 60 days from 30 days which will help in attracting more customers
resulting into increase in sales.
Net profit margin: This ratio of T-shirts Ltd has shown a downward trend as the ratio
has decreased to -36.60% from 17.71%. The main reason behind this increase is the reduction in
revenue and the increase in the other expenses of the company (Bondoc and Dumitru, 2018).
Also, there was an increase in interest obligation as well affecting the profitability of the
company. Therefore, company requires to reduce its operating expenses and interest burden.
Return on asset ratio: It can be seen that the company is not able to effectively make use
of its assets in generating higher profits since the ratio has become negative which indicates that
the T-shirts Ltd is not effective enough in making proper and optimum utilization of its assets
(Rahman, Ibrahim and Ahmad, 2017). There has been an increase in the assets but a reduction in
the sales of the company.
1.2 Statement of Financial Position
Ratios 2019 2018
Debt to equity ratio 4.48 1.02
Proprietary ratio 18.24% 49.57%
Solvency ratios:
Debt to equity ratio: This is the solvency ratio for the purpose of measuring the capital
structure of the company. T-shirts Ltd in the year 2019 has shown a rise in the ratio as compared
to the previous year which is mainly because of the increase in the debt in the capital structure
(BRÎNDESCU–OLARIU, 2016). This indicates the risky situation for the company as it is
having greater proportion of debt against the equity financing. This might mean that the
investors are least interested in funding the business operation as the company is not performing
good which is why T-shirts Ltd is seeking additional debt financing.
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