Business Finance: Analysis, Accounting, Budgeting

Business Finance

TABLE OF CONTENTS
PART 1: BUSINESS PERFORMANCE ANALYSIS..............................................................3
1.1 Statement of Profit or Loss..............................................................................................3
1.2 Statement of Financial Position.......................................................................................4
PART 2: UNDERSTANDING FINANCIAL INFORMATION & MANAGEMENT OF
CASH.........................................................................................................................................6
2.1 Understanding the concept of accrual accounting vs cash accounting............................6
2.2 Meaning and differences between the profit and cash flow.............................................7
PART 3.......................................................................................................................................8
Meaning and purpose of budget.............................................................................................8
Benefits of forming limited company and registering on stock exchange.............................8
REFERENCES.........................................................................................................................10
APPENDIX..............................................................................................................................11

PART 1: BUSINESS PERFORMANCE ANALYSIS
1.1 Statement of Profit or Loss
For the purpose of effectively analysing the financial performance of the company
ratio analysis is being used which will help in gathering relevant information pertaining to the
current financial performance of the company. Ratio analysis is the most widely used
financial tool which helps in determining the performance of the company on account of the
various financial ratios in comparison to the previous year.
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%
Current ratio
The current ratio of the has been declined to 0.91 times in contrast to the past year of
2.59 times. This indicates that the liquidity position of the company is not good making the
situation for the company complicated in effectively dealing with its current obligations in an
efficient way (Easton and et.al., 2018). There are chances that the company might be required
to undertake additional funds for paying its short-term liabilities and other business
requirements. The company T-shirts Ltd requires implementing actions for either increasing
its current assets or minimizing its current liabilities in order to improvise its liquidity
position.
Quick ratio
This ratio has also declined which means that the company ahs invested huge
amount in its inventory which has resulted into further decline in the outcome. It is always
favourable to have higher quick ratio (Bjorklund, 2019). This also implies that if the T-shirts
Ltd is not able to increase its quick ratio then it will increase the chances of being bankrupt
and inability to meet the daily business expenses. Along with that, the company is required to
implement strategy for reducing the cash blocked in its inventory as well.
Gross profit margin
The GP ratio of T-shirts Ltd has shown a reduced in the percentage from the 60.02%
to 45.02% in the year 2019. This is mainly because of the fact that there is a huge decline in

the revenue of the company and this consequently results into decrease in the GP of T-shirts
Ltd. Therefore, the company requires come up with some new strategy in order to increase its
revenue and reducing the cost of sales as well. The company has already taken initiative for
improving its gross profit by changing its credit policy as from now on the company is
providing 60 days of credit to its debtors instead of 30 days which will result into increasing
the customer base.
Net profit margin
The ratio of NP margin has turned into negative from positive 17.71% to negative
36.60%. The core reason behind this is the decrease in GP along with increase in the
operating and non-operating expenses. Another important aspect is that there is an increase in
the interest liability of the company impacting the profits of the company. Therefore, in order
to effectively manage the business, it is important for the organization to decrease its costs
and other financial interest obligations.
Return on asset ratio
It can be clearly seen that the ROA of the company has shown a greater reduction in
the percentage. In the year 2018, it was 22.77% which decreased to -29.41%. This highlights
that the T-shirts Ltdis not effectively making use of its assets in gaining more revenue.
Therefore, the financial performance of the company is not sound enough (Firdaus and Endri,
2020). It becomes important for the company in effectively implementing the right strategy in
place as soon as possible in order to manage the business otherwise the situation can turn out
to be even worse.
1.2 Statement of Financial Position
Ratios 2019 2018
Debt to equity ratio 4.48 1.02
Proprietary ratio 18.24% 49.57%
Asset Turnover ratio 0.82 1.29
Inventory Turnover ratio 1.93 9.44
Debt to equity ratio
The D/E ratio of the has been increase in the one-year time span as it was 1.02 in the
year 2018 which rise to 4.48 which means that most of the funding is done through the debt
element. This has resulted into increase in the risk factor for the business as it brings along