Business Finance: Analysis, Accounting, Budgeting

Business Finance
1

Table of Contents
Part 1 Business Performance Analysis............................................................................................3
1.1 Analysis of statement of Profit or Loss............................................................................3
1.2 Analysis of statement of Financial Position.....................................................................4
Part 2 Understanding Financial Information and cash management...............................................5
2.1 Concept of Accrual accounting versus cash accounting..................................................5
2.2 Difference between profit and cash flow..........................................................................6
Part 3 Budget and Company Finance...............................................................................................7
3.1 Budget and purposes of preparing a budget.....................................................................7
3.2 Benefits of forming a limited company and listing it on stock exchange........................8
Appendices.....................................................................................................................................10
Supporting Calculations.......................................................................................................10
Bibliography.........................................................................................................................12
2

Part 1 Business Performance Analysis
1.1 Analysis of statement of Profit or Loss
Statement of financial performance or income statement as it is popularly called, is one of
the final statements of the company which tells about its financial performance over a period of
time (Chandra, 2017). It is a statement of accounting summary of all of a company’s revenues
and expenses. It includes revenue earned from sales and other sources as well as operating
expenses, cost of goods sold, other expenses to result in net income for the organisation. Net
income can be both positive or negative i.e. can result in both profit or loss for the organisation.
To analyse financial performance of T shirts Ltd., summary income statement of the
company has been assessed and the first thing that is looked at is its revenue, profits and
margins. In the first look, it can be said that company has registered a decrease from £2,101,000
in 2018 to £1,366,000 in 2019 in its revenue which could be due to less demand due to instability
in economic environment. It has reduced its cost of sales from earlier year, which has helped it in
registering lesser reduction in gross profit. Moving forward, it has registered in increase in
operating expenses but since the increment does not look exceptional, it could be due to regular
increase in the operational cost like marketing and promotions to increase sales. Company has
registered a loss in 2019 before interest and tax which was at profitable state in previous year.
Company has registered more than 1.5 times increase in finance cost which shows that company
has taken new debt at higher rates this year. Resulting is net loss in 2019 which was at profitable
state in 2018. This loss would have been adjusted in retained earnings. No information had been
provided about dividend policy of the T shirts Ltd. To have a better comparative analysis of
financial performance of two years, various financial ratios are mentioned below:
 Interest coverage ratio – It is a solvency cum coverage ratio which is used to assess
company’s ability to meet its finance cost from its earnings (Greenbaum, Thakor and
Boot, 2019). Higher the ratio, better it is for company. T shirt Ltd. has reported 3.71
times interest coverage ability in 2019 while in 2018, it was 6.39 times. Reduction can be
owed to the high finance cost of bank overdraft which was absent in 2018 and also loan
amount has also increased which would be having interest cost. And, this should also not
be ignored that in 2019 company does not have profits to cover finance cost from it like
in 2018.
3

 Operating profit margin – It is a profitability ratio which assess a company’s efficiency
of generating profit on sales after paying of variable cost of production. T shirt Ltd had
reported operating profit margin of 21% in 2018 while in 2019, it has a operating loss
margin of 29% owing to factors discussed above.
1.2 Analysis of statement of Financial Position
Statement of financial position or Balance Sheet as it is popularly called is another final
statement of a company which reflects financial position of a company at a certain point of time
(Fazzini, 2018). It includes financial performance of business assets, liabilities and shareholders’
equity in the manner that assets are equivalent to latter two. Net income determined in income
statement becomes part of the shareholders’ equity.
To analyse financial position of T shirts Ltd., its statement of financial position has been
assessed. From first assessment, it can be seen that there is reduction in book value of fixed
assets which is supposedly owed to depreciation. Closing inventory balance has increased,
probably due to lesser demand and reduced sales, which means company has unutilised
inventory balance lying in its warehouse. It needs to increase its promotional measures otherwise
it will have obsolete stock soon. It is reported that company has relaxed its credit policy to attract
more customers which is being reflected in increment in accounts receivables from previous
year. Strange fact is that company has reported no cash and cash equivalents in 2019 which is not
a good sign for liquidity of the company. Company has reported same share capital both the
years which means that no new capital has been issued in 2019 by T shirts Ltd. Company had
reported closing balance of £500 of retained earnings in 2018 which must have been utilised to
square off the loss generated this year. Hence, this year’s retained earnings balance is zero. Long
term borrowings have also increased from 2018 which means new loans have been acquired in
2019. Trade payables have also increased but by looking at the percentage of increase, it seems
in regular business course. In year 2019, it has also reported availing bank overdraft which is at
much higher rate than loans as per information provided, which was being reflected in higher
finance cost in income statement. To have a better comparative analysis of financial position of
two years of T shirts Ltd, below mentioned financial ratios have been determined:
 Current ratio – It is a liquidity ratio which is used to assess efficiency of its working
capital (Samonas, 2015). Higher the ratio, better it is for liquidity of the company. T
shirts Ltd. has a reported current ratio of 2.58:1 in 2018 while in 2019, it slipped to only
4