Business Finance and Economics: Determinants of Business Performance, Role of Accounting, Financial Statements, Management Accounting

This report discusses the external and internal determinants of business performance, the role and importance of accounting, the major financial statements, and the calculation of financial ratios for XYZ Plc. It also highlights the importance of management accounting in decision making. The subject is Business Finance and Economics, the course code is BFE101, and the course name is Bachelor of Business Administration from XYZ University.

Business finance and
economics

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
1) The external and internal determinants of business performance...........................................3
2) The role and importance of accounting..................................................................................4
3) Distinguish between the major financial statements...............................................................5
4. calculation of financial ratio for XYZ Plc for the years ended march 31 2019 and 2020......7
5) Management accounting and its importance..........................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Business finance plays a vital role for the company as it means that funds availed by the
owners of the company in order to meet their organisational goals and requirements that may
involves obtaining finance to buy assets and to deal with any uncertainty related to cash which
has been faced by the firm. With the help of study related to business finance and economic the
company is able to understand and analyse corporate financing and economic both together and
make investment related decisions which helps them to achieve their goals in the business world.
The present report will be based on economic factors that determine the competitive business
environment and provides details on roles and importance of financing reporting and accounting
in terms of planning and decision making. In addition, the report will calculate ratios for the
company named as XYZ plc.
1) The external and internal determinants of business performance
As we all know that there are various types of factors that can influence the business
performance and also impact the culture of the firm. While setting goals and doing business
operations companies have to focus on these controllable and uncontrollable aspects.
Factors such as political, economic, customers and competitors of the firm are macroeconomic
while on the other hand employees, processes, systems and finances and organisational culture
are internal factors.
(external, macro) politics and Economy- if the economy is not properly maintained, the
business may not be able to survive in the world. Due to changing policies related to tax and
interest rates, the customers will not be able to spend more on luxury products, sports items and
gifts. This can influence the performance of businesses and also buying behaviour of clients.
However, company can’t control this macro factor but understand it properly which can help
them to know about opportunities and threats.
(internal) Staff members and managers- as we all know that employees are the main part
of the internal environment of business. It is essential for the company to provide facilities and
enhance job satisfaction of employees. Any new change in system and process can create
resistance among staff members which can influence their performance. Managers have to be
good at managing lower level of staff members, it is their duty to look after the needs of staff and

focus on internal environment. if there is a conflict between employees then it may hinder the
performance of business and can wreck a good organisation.
(External, micro) Competitors- unless the company have unique products or service, they
will have to deal with strategies used by their competitors. Nowadays, in the same industry there
are lots of new players in the markets who are providing varieties of offers and discount and
selling products at affordable price which can attract more customers. It is a threat for the
company which can influence the buying behaviour of customers. Competition in the market can
break the company’s performance or it can motivate to use effective strategies.
(internal) Resources and money- even in a stable and great economy, lack of money and
resources can determine whether the organisation is performing well or not. If the resources and
money of the firm are too limited, it can impact the performance of employees, number of staff
the firm can hire, tools and equipment’s quality etc. on the other side, if the company have lots of
saving and enough balance in the accounts with full of cash availability, they can have a lot more
flexibility to expand their business in the competitive world and grow effectively even in
economic downturn.
(External, micro) Organisational culture- internal culture consists of priorities, needs,
attitudes, behaviours and values that staff members live by. If the company have positive and
healthy culture it can create a strong relationship between employees and managers and build
teamwork and collaboration (Seo and Lee, 2019). The staff members of the firm infer the value
of firm based on the type of staff company recruit, promote and select. A negative culture can
hinder the performance of business and also create negative impact on teamwork.
2) The role and importance of accounting
In business context, accounting plays an important role as it helps the business to achieve
goals. If accounting is properly maintained, then the business can run smoothly its operations.
Financial information- With the help of accounting, the managers can track expenses
done by firm and income earned. It helps them to provide detailed information about company’s
financial health and position (Rikhardsson and Yigitbasioglu, 2018). The accounting can provide
investors about the financial information which can be utilized in making informed and
important business related decisions. by having proper accounting in the books, the managers
ensure statutory compliance.

Record daily transactions- with the help of accounting, people can easily keep record on
their daily routine transactions and helps them to control on their expenses. By having
accounting, company can systematically record books of accounts which helps them decide
where to spend money and where to save it.
Preparation of financial statements- with the help of up to date records of accounts and
business transactions, the company can compare their current position with others and make
necessary changes if required. It is helpful in making of financial statements such as cash flow,
profit and loss and balance sheet from which firm can get an idea about assets and liabilities,
income, expenditure and debts etc.
Assessing the financial health and position- in the business context, the major goals of
accounting is to report a performance of finance related to firm. By having this accounting in
books, can assess the position in the marketplace.
Helpful in decision making- with the help of proper accounting, the company can provide
details to investors as it can easily foster the confidence whether to invest in the firm or not.
They may be deciding to buy shares in the firm or not while on the other side lenders may be
analysing the risk in deciding to lend (Rikhardsson and Yigitbasioglu, 2018). It helps them to
take important decisions which can increase their financial stability. Provide financial data and
information from which company, investors and lenders can communicate results.
Helpful for internal users- the management of the company perform function such as
planning, directing, organising and control. Basically, accounting is especially designed and
important for the internal users such as management team, managers, owners and staff. By
having this they can easily improve operational efficiency.
3) Distinguish between the major financial statements
The major purpose of financial statements is to analyse the financial position and strength
of the organisation. With the help of financial statements, the firm can get the quick picture and
details about the financial health of the firm.
Balance sheets- this financial statement of the company shows about liabilities, assets and
equity. As we all know that liabilities are the amounts of money that a business owner owes to
other people or company. It involves all type of obligations such as payroll, amount owned to
suppliers for raw materials, maintenance costs, money borrowed from a bank, rent etc. while on
the other side, assets column is maintained in which fixed assets, plants, trucks, tools and

equipment’s, trademarks, goodwill and patents are taken into consideration. By maintaining
balance sheet company’s management can know about current value of its business. When the
managers look at the balance sheet properly on regular basis then they can easily understand if
they are able to meet their financial obligations or not.
Cash flow statements- on the other hand, this financial statement can show details about
cash inflows and outflows of business. The managers can decide about investments and make
other informed and important decisions and see what they have available as working capital. It is
very important financial statements for the company as it shows how rapidly the firm could
source amount of money if required. If this statement is maintained properly them managers can
easily control their unnecessary expenses. Activities such as investing, financing and operating
are included in it.
Income statements- as we all know that every business needs to know about what profit
they are earning and keep track on whether they are making enough profit or not for the survival
in the business world. So, for this they are preparing income statement and keep a very close eye
on money coming in and profitability they are earning (Financial statement, 2022). The another
name of this financial statement is profit and loss statement because it can give quick idea about
loss they are going bear and profit they are making. In short, with the statement management can
know about income and expenses over a set period.
Statement of shareholder’s equity- on the other side, with the properly maintaining of this
statement, company can know about what changes made to share capital, reserves and retained
earnings. Every business show different changes such as for partnership firms it shows the
changes between equity of both the partners. While on the other hand, for sole proprietorship it
shows changes to the equity of owners.
In this way, one cannot get a full overview about the financial position of a firm with just
maintaining single type of statement. By maintaining all important financial statement company
get a clear picture of a finances and financial health of the organisation.

4. calculation of financial ratio for XYZ Plc for the years ended march 31 2019 and 2020
particulars formula 2019 2020
operating profit margin Operating profit/net sales*100 9.6 1.27
operating profit 240 35
net sales 2500 2750
gross profit margin gross profit/net sales*100 26 13.64
gross profit 650 375
net sales 2500 2750
current ratio current assets/current liabilities 3.13 2.34
current assets 595 690
current liabilities 190 295
acid test ratio current assets-inventories/current liabilities 1.29 0.95
current assets 595 690
inventories 350 410
current liabilities 190 295
EPS Total earnings/ outstanding shares 5.225 6.025
2090 2410
400 400
Operating profit margin- with the help of this financial ratio calculation, the company can
easily measure its profit after paying for variable production costs (Langemeier and Yeager,
2018). By calculating this ratio, XYZ Plc is able to know about its overall productivity from
business operations. In the year 2019, Operating profit was 9.6 and in the year 2020 it was 1.27
which is lower as compared to 2019. If the company have lower ratio, then it is not favourable as
this shows that the firm is not making enough money from its ongoing business operations in
order to pay for its fixed and variable costs.
Gross profit- with the help of GP ratio calculation, the company is able to know about its
profitability ratio from that they make comparison of company to its revenue generation
(Evmenchik and et.al., 2021). For XYZ Plc, the company have 26 GP ratio in the year 2019 and
in the year 2020 it was 13.64 which states that firm is in healthy position.

Current ratio- with the help of current ratio calculation, the firm is able to measure the
ability to pay their short term obligations. For XYZ plc current ratio is more than 2 which is ideal
ratio it means that the firm have enough liquid assets to pay all its dues and cover short term
liabilities which is beneficial for their future performance.
Acid test ratio- by calculating acid test ratio the firm is able to compare its short term assets
to its short term liabilities. By this they are able to know about if the firm is having enough
money to pay it immediate liabilities. For the current year 2020, the company is having 0.95
which is less than 1 which means that firm needs to focus on its short term debts as they don’t
have enough on hand to quickly pay off short term obligations.
Earnings per share- by calculating EPS the company is able to know about its profitability.
Company can boost their EPS ratio with the help of stock buybacks as it can decrease the
outstanding shares.
5) Management accounting and its importance
Management accounting is a systematic process used by companies in order to measure,
identify, interpret and analysis all the accounting related information so that it can utilized to
help company’s managers make important decisions related to business activities and operations.
With the help of management accounting, the managers can easily make informed decisions
which helps them to be successful in the market (Maheshwari, Maheshwari and Maheshwari,
2021). in the business world, managers do proper process of analysing business costs so that
they can have detailed information about financial position of the firm through reports. By doing
so, they can easily achieve their business goals such as financial goals, operational goals and
objectives.
Enhance and increase productivity- As we all know that the major purpose of the
management accounting is to increase productivity of company by measuring accounting
information and maximize profit of the firm. The major focus of management accounting is to
reduce losses as it can be beneficial for the firm success. the scope of management accounting is
vast as it involves business operations, finance, data, detailed information (Ameen, Ahmed and
Abd Hafez, 2018). By using management accounting, the managers of the firm can improve
performance, support strategic goals and objectives and enhance finance related decision making
process which helps them to add value in the company’s activities.

Increase efficiency- The main aim of the management accounting is to guide and assist
the management of the firm so that they can perform well to achieve business functions and
goals effectively. As we all know that the major functions of the firm are controlling, organising,
planning and giving direction. With the help of managerial accounting, the managers have an
idea about what should the company do and how to achieve financial success (Maheshwari,
Maheshwari and Maheshwari, 2021). by using provisions of accounting information, the
managers can better decide about matters in the firm as it allows them to perform well while
doing business activities and functions. By having effective management of accounts, the firm
can easily accomplish their desired targets after doing planning which helps them to control the
performances effectively. By using management accounting, the managers can coordinate the
whole activities of business just by making the functional budgets which helps them to avoid any
unnecessary expenses. With the help of management accounting, the company can increase their
efficiency and motivate the whole workforce to achieve finance and accounts goals. By setting
goals, planning the best courses of action and collect information from various types of financial
records such as balance sheet, cash statement and profit & loss account and by managing and
measuring the staff member’s performance the management accounting can easily enhance the
motivation in firm as whole.
Decision making process- With the proper details of accounting data and statistical
information in the company, the management accounting enhances the decision making process
which helps business to achieve progress (Burritt and et.al., 2019). This accounting provides
analytical information about different alternatives to management team of the company which
helps them to make proper decision whether to continue with the particular work or not.

CONCLUSION
To conclude, in today’s business world, there are varieties of factors that can influence the
business performance such as competitors, customers, suppliers, employees, culture and
economy etc. by evaluating the report it has been concluded that management accounting plays a
vital role in the company as with the help of proper maintaining of accounting the managers can
know about financial health.

REFERENCES
Books and Journals
Ameen, A. M., Ahmed, M. F. and Abd Hafez, M. A., 2018. The impact of management
accounting and how it can be implemented into the organizational culture. Dutch Journal
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Burritt, R. L. and et.al., 2019. Diffusion of environmental management accounting for cleaner
production: Evidence from some case studies. Journal of Cleaner Production. 224. pp.479-
491.
Evmenchik, O. S. and et.al., 2021. The Role of Gross Profit and Margin Contribution in Decision
Making. In Socio-economic Systems: Paradigms for the Future (pp. 1393-1404). Springer,
Cham.
Langemeier, M. and Yeager, E., 2018. Operating profit margin benchmarks. farmdoc daily. 8.
Maheshwari, S. N., Maheshwari, S. K. and Maheshwari, M. S. K., 2021. Principles of
Management Accounting. Sultan Chand & Sons.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems, 29, pp.37-58.
Seo, Y. W. and Lee, Y. H., 2019. Effects of internal and external factors on business
performance of start-ups in South Korea: The engine of new market
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Financial statement. 2022. [Online]. Available through: <
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