Business Finance: Analysis, Accounting, Budgeting & Benefits of Limited Company

This document provides an overview of Business Finance, covering topics such as analysis of profit & loss statement, accrual and cash accounting, budgeting techniques, and benefits of a limited company. It explores the financial performance of T-shirts Ltd, analyzing the statement of profit & loss and statement of financial position. The document also discusses the importance of budgeting in business and the advantages of forming a limited company and listing shares on the stock exchange.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Part 1............................................................................................................................................1
Part 2............................................................................................................................................3
Part 3............................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business Finance refers to the funds and credit which has been employed within a
particular business (Canales, 2016). In it, there are diverse topics which have to be covered
properly so that the companies are able to assess and understand their financial situation and take
actions accordingly. It refers to the overall situation of the finance in an organization and also
includes the actions which are needed for maximizing the profits of a particular company so that
it can attain competitive advantage in the market. For this report, T-shirts Ltd has been
considered. In this assignment, detailed focus will be made on Business Performance Analysis,
Understanding Financial Information & Management of Cash. Additionally, focus will be made
on Budget techniques and Company Finance as a part of this assignment.
MAIN BODY
Part 1
Analysis of Statement of Profit & Loss-
T-shirts Ltd.'s Statement of Profit & Loss shows contrasting figures for two different
years. In the year 2018, the revenue of the company was 2101 which reduced to 1,366 in the year
2019. This means that the revenues of the organization have seen a decline. Cost of Sales have
reduced from 840 to 751. This means that the cost incurred in sales have reduced. The Gross
Profit of the company stands at 1,261 in 2018 and it has reduced to 615 in the year 2019. This
means that Gross Profit of the company has seen a decline in the last one year. The Other
expenses were 820 in the year 2018. They have increased to 1,009 in the year 2019. The Profit
before interest and tax was 441 in the year 2018. It has reduced to 394 in the year 2019. The
Finance Costs have increased from 69 in the year 2018 to 106 in the year 2019. In 2018, the
profit incurred by the organization was 372. However In 2019, the loss of the organization is
500.
The reduction in the revenues of the organization means that the sales have seen a decline
(Cox and Nguyen, 2018). Decrease in the cost of sales means that the expenses which are
incurred during sales have reduced which means that the company has been able to reduce its
expenses. Reduction in Gross Profit is not a good sign for the financial position of the company
as it means that the overall profitability has reduced. Increase in the Other Expenses means that
the company has not been able to control these expenses. The Profit before interest and tax has
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reduced which means that the firm has not been able to maintain its rate of profit. The finance
costs have increased which means that costs of obtaining funds have increased for the company.
The profit of the company has reduced and thus the company is facing loss within a year which
means that the financial position of the firm is not good to maintain the profitability level.
Thus from the Statement of Profit & Loss it can be analysed and interpreted that the
company was earning profits in 2018. However in 2019 it is incurring a loss. Thus it can be said
that the financial performance of the organization has been impacted which has pushed it
towards loss within the space of an year. Thus the management has to take appropriate steps
which will ensure that the company is able to return back to the level of profitability.
Analysis of Statement of Financial Position-
From the analysis of Statement of Financial Position of T-shirts Ltd. It is clear that
Property, Plant and Equipment which were 1,282 in 2018 have reduced to 1,274 in 2019. In
Current Assets, Inventory have increased from 89 to 121. Trade and other receivables have
increased from 218 to 305. Cash and cash equivalents have reduced from 45 in 2018 to 0 in
2019. Thus the Total Assets have increased from 1,634 in 2018 to 1,700 in 2019. In Equity and
Liabilities, Share Capital has remained constant as it stands at the figure 310. It has not changed
between the year 2018 and 2019. Retained Earnings have reduced from 500 in 2018 to 0 in 2019.
The Long-term borrowings have increased from 688 in 2018 to 921 in 2019. The Trade Payables
have increased from 136 to 151 from the year 2018 to 2019. Bank Overdraft has increased from
0 to 318 from the year 2018 to 2019. The Total Liabilities have also increased from 824 in 2018
to 1,390 in 2019.
Thus from the analysis it is clear that the financial situation of the company has been
impacted which has reduced its overall profitability level (Cumming and Vismara, 2017). Thus it
can be said that influence of certain factors has impacted the financial position of the company
thereby resulting in loss for the company. This is so because a reduction has been witnessed in
the value of some of the assets. While there has been an increase in the value of certain
liabilities. Thus it can be said that the management of the company has to ensure that it returns
back to the profitability level so that the financial position of the company can be enhanced and
thus it can be made more strong in the future.
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Part 2
Accural Accounting-
Accrual Accounting is an accounting method in which the transactions are recorded in
the Books of Accounts as and when they occur (Hope and Vyas, 2017). Therefore this method
records the transactions. For example- If In a Company the receipts are recorded in the Books of
Accounts before they are actually received then it means that it makes the use of Accrual
Accounting method for recording the transactions.
Benefits-
 By making the use of Accrual Accounting an organization can get better insights into the
performance level of the business.
 When Accural Accounting is used in the firms it results in better planning made by the
organizations for the purpose of recording their financial transactions and analysing the
overall level of performance of the business.
Limitations-
 The use of Accrual Accounting method can lead towards certain difficulties for the
organizations. Therefore In this manner this can affect the recording of financial
transactions by them.
 Using Accrual Accounting method can lead towards a rise in deception because some
people in the organization can use it for fraud and other wrong purposes.
Cash Accounting-
Cash Accounting is a method through which the organizations record transactions only
when they actually happen (Klopotan, Zoroja and Meško, 2018). This means that receipts and
payments are not recorded until they have been received or the payment has been made. This is a
traditional method of accounting which can be used by the firms who have limited level of
transactions. For example- If In a company accrued incomes are not recorded until they have not
been received this means that it is making the use of Cash Accounting method.
Benefits-
 The use of Cash Accounting method can be made by the organizations because it is easy
to understand which simplifies various things in an organization.
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 Cash Accounting method is used by the firms so that they are able to ensure that they can
show their cash flow clearly. In this way they are able to keep a better track on the
movement of cash.
Limitations-
 In Cash Accounting method, Single-entry system is followed which is prone to more
errors. Therefore in this way this can create a disadvantage for the organizations who
make its use.
 Cash Accounting method is a short-term indicator of a company's overall performance
level. Thus it cannot be used as a basis for a firm's long-term performance.
Profit-
In Accounting, profit refers to the difference between the revenue and costs of an organization
(Kraemer-Eis and et.al., 2019). It is quite important for the businesses because it is the reason
because of which they operate in the market.
Cash flows-
In Accounting, Cash flows refer to the amount of inflows and outflows of cash during a
particular period of time (Kraemer-Eis and et.al., 2019). For the businesses, it is crucial because
by recording it they are able to manage their cash transactions effectively and efficiently and can
ensure that they are able to achieve a higher-level of efficiency and effectiveness.
Difference between Profit and Cash flows
Basis Profit Cash flows
Meaning Profit means the amount which
is being earned by an
organization after subtracting
the costs from the revenues
which have been earned by it.
Cash flows refers to the
assessment of inflows as well
as outflows of cash during a
particular period of time.
Calculation Calculation of profit is
generally made at the end of
the year by preparing a
Statement of Profit & Loss.
Calculation of Cash flows can
be be made at the end of the
year through the preparation of
a Cash Flow Statement.
Recording of day-to-day cash Profits cannot show day-to-day Cash flows can show day-to-
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transactions cash transactions as they are
figures which have been
arrived after deducting
expenses from revenues.
day cash transactions as the
inflows and outflows of cash
are recorded as a part of Cash
Flow Statement.
Part 3
A Budget refers to an estimation of overall revenues and expenses over a certain period
of time (La Torre and et.al., 2019). Thus by preparing it the organizations can make sure that
they are able to keep a track on their revenues and expenses and thus can estimate their surplus
or deficit. The main purposes for which a Budget may be prepared by an organization are as
follows-
 Planning- Through budgets planning can be done by the organizations in a highly
effective manner (Mian and Sufi, 2018). Thus it has to be ensured by the management
that they prepare budgets so that they are able to frame short-term, medium-term and
long-term plans for the future and can execute them which can result in ensuring that the
company is able to achieve higher-level of profitability in the future.
 Goals and objectives- Through the preparation of budgets the firms can frame relevant
strategies and methods so that they are able to attain the goals and objectives (Sauer and
Wiesemeyer, 2018). The management of an organization can set short-term, medium-
term and long-term goals and objectives to be attained by it and therefore in this manner
will ensure that the progress is made by a company towards their attainment.
 Comparison- By making the use of budgets, relevant comparison can be made by the
firms. Managers of a firm can make the use of budgets so that they are able to compare
their performance with the other firms or with the performance of previous year and can
identify deviations and variances in this manner. Thus it is important for the management
of the organizations to make sure that through comparison improvements can be made by
them effectively and efficiently.
 Identification of problems- By preparing the budgets, the firms can make sure that they
are able to identify their different problems. Thus it is important for the organizations that
they are able to identify their problems when they prepare the budgets so that they are
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able to make the use of certain techniques and methods through which these problems
can be solved.
 Controlling the expenses- With the preparation of a budget, there has to be a control on
the overall level of expenses. Thus from the point of view of the organizations it becomes
very crucial that they are able to control their expenses in the right way when they
prepare budgets. The management can identify the areas where the overall expenses are
being increased so that the use of techniques and methods can be used to reduce these
expenses.
Benefits of a limited company-
 By forming a limited company the tax which is required to be paid can be managed well
as there may be a reduction in the overall tax liability (Ylhäinen, 2017).
 Forming of a limited company ensures that there is a limited liability for the members.
Thus in this way the members are protected as their personal assets are not at risk in case
the company runs into a loss because their liability is limited to the number off shares
which are held by them.
 A limited company has a separate entity before the law and in this way it is quite helpful
because the company can take decisions on its own and is governed by its own structure
and is different from its owners.
 The limited companies have a professional status which allows them to have more
prestige and goodwill in the market as compared to any other company. In this way they
can be able to attract more customers and clients which can be highly beneficial for their
business in the future.
When a Limited Company wants to list its shares on the stock exchange it can create various
types of benefits for it. These benefits are explained as follows-
 A Limited Company can attract more capital for the purpose of growth when it lists its
shares on the stock exchange. Thus in this way it can attract more share capital which can
help it in identifying and making the use of growth opportunities in the future. This can
be made possible due to the higher amount of funds which can be made available for
these companies.
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 A Limited Company has enhanced visibility of its shares when it lists itself in the stock
market. Therefore in this manner it can make sure that it is able to improve its worthiness
in the market effectively and efficiently.
 There can be an increase in the liquidity level of a Limited Company when it lists its
shares on the Stock Exchange (Zhang and et.al., 2016). This is so because an opportunity
is made available to the shareholders so that they are able to realise the value of their
shares effectively and efficiently.
 Increase in employee morale can be made possible when a Limited Company lists its
shares for the public on a Stock Exchange. This is so because it will offer a company
more popularity and an increased public visibility which can be beneficial for a company
in the future.
 Listing a Limited Company on the stock exchange can lead towards a higher-level of
transparency and efficiency. The reason for this is that listing of stock exchange requires
a company to make more disclosures of the information which thereby helps in becoming
transparent.
CONCLUSION
From the above report, it can be concluded that Business Finance refers to the way a
business can arrange its different sources of funds and can can analyse and interpret its given
financial information. By analysing and interpreting Statement of Profit and Loss and Statement
of Financial Position conclusions and recommendations can be obtained. Accrual Accounting
and Cash Accounting Methods differ from each other and have their own benefits and
limitations. Profit and Cash Flow have difference between them and are quite useful in
Accounting. Budget can be prepared to keep a track of revenues and expenses and there are
various purposes due to which it is prepared. There are various benefits of forming a limited
company and listing it on a stock exchange.
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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.
Cox, J. and Nguyen, T., 2018. Does the crowd mean business? An analysis of rewards-based
crowdfunding as a source of finance for start-ups and small businesses. Journal of Small
Business and Enterprise Development.
Cumming, D. J. and Vismara, S., 2017. De-segmenting research in entrepreneurial finance.
Venture Capital. 19(1-2). pp.17-27.
Hope, O. K. and Vyas, D., 2017. Private company finance and financial reporting. Accounting
and Business Research. 47(5). pp.506-537.
Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
economics: Bibliometric and topic analysis. International Journal of Engineering
Business Management. 10. p.1847979018797013.
Kraemer-Eis, H. and et.al., 2019. European Small Business Finance Outlook: December 2019
(No. 2019/61). EIF working paper.
Kraemer-Eis, H. and et.al., 2019. European Small Business Finance Outlook: June 2019 (No.
2019/57). EIF Working Paper.
La Torre, M. and et.al., 2019. Business models for sustainable finance: The case study of social
impact bonds. Sustainability. 11(7). p.1887.
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.
Sauer, R. M. and Wiesemeyer, K. H., 2018. Entrepreneurship and gender: differential access to
finance and divergent business value. Oxford Review of Economic Policy. 34(4).
pp.584-596.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking & Finance.
77. pp.176-196.
Zhang, B. Z. and et.al., 2016. Pushing boundaries: The 2015 UK alternative finance industry
report. Available at SSRN 3621312.
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Appendix-
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