Analysis of Business Performance and Financial Position of T Shirt Ltd
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This report analyzes the business performance and financial position of T Shirt Ltd, including profit and loss statement, statement of financial position, and various financial ratios. It also discusses the concept of financial information and cash management.
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Contents Contents...........................................................................................................................................2 INTRODUCTION...........................................................................................................................2 PART 1 Analysis of Business Performance of the firm in detail....................................................3 1. Detailed research, analysis and evaluation of the profit or loss statement of the company....3 2. Determination of the financial position of the firm through statement of financial position. .6 PART 2 Understanding in detail the concept of Financial Information & Cash Management.......9 1. Explaining the concept of accrual and cash accounting methods in detail..............................9 2. Analysing and evaluating various aspects of Profit and Cash flows.....................................10 PART 3 Budget and finance of company......................................................................................10 1. Determining the meaning of budget and its purpose.............................................................10 2. Evaluating the benefits of creating a limited firm and getting it listed on the stock exchange ...................................................................................................................................................10 CONLCUSION..............................................................................................................................10 REFERENCES..............................................................................................................................11
INTRODUCTION Finance in business is said to be one of the most important aspects for the profitability and growth of the firm because if finances of the firm is allocated in an appropriate manner then it can result in more growth of the firm as compared to a business in which finances are not allocated in a precise manner(Boskov and Drakulevski, 2017). This report covers various aspects of a firm named T Shirt Ltd and its competitor that is operating in the similar industry that is T Shirt plc. Apart from this the report also covers various other factors of T Shirt Ltd as the firm is not performing up to the set standards and thus analysis and detailed evaluation of all the financial aspects are covered in this report. Further reasons and appropriate solutions are also mentioned in this report so that the company can perform well in the long run and in the market too in which it is doing its operations. PART 1 Analysis of Business Performance of the firm in detail 1. Detailed research, analysis and evaluation of the profit or loss statement of the company Statement of profit or loss is very crucial for each and every firm that is doing its operations irrespective of the industry in which it is operating as it helps in analysing and evaluating the financial performance of the firm so that necessary measures can be taken according to the needs, requirements, and demands of the organisation. The firm that is T Shirt Ltd statement of profit or loss was showing a profit of £372000 in the year 2018 and that is considered to be a pretty good amount but in the year 2019 it showed a loss of £500000 and that is not at all a good sign for the firm. The firm is not operating in an appropriate manner in the year 2019 and it can be seen through the statement itself and it have to take necessary measures so that it can add to the value of the firm rather than destroying the already existed one. There are many ratios calculated below that are very essential to determine the loop holes in the business and all are explained below briefly- Gross profit ratio-It is a ratio that possess a lot of importance from the firm’s point of view as it helps to identify the gross profit generated in the business while doing all the activities that a
firm does in the market to sustain itself(Boubaker, Cumming and Nguyen, 2018). This ratio can be calculated by subtracting the cost of goods sold from the cost of sales and the resultant will be gross profit ratio and this helps a firm to evaluate its financial position in the market. Below is the calculation of this ratio done with respect to the firm that is T Shirt Ltd- Particulars20182019 Gross profit ratio60.02%45.02% As it can be seen from the above that the gross profit ratio of the company was around sixty percent in the year 2018 but it had fell down by around 15 percent and came down to 45 percent in the year 2019 which is not a good sign for the company at all. There could be many reasons for this fall but mainly it can be decrease in sales amount that resulted in this sharp fall and the firm has to take necessary and appropriate steps so that it can achieve the rate that is decided at the time of formation of the business and these steps has to be taken as soon as possible to reduce any other future damages. Net profit ratio-This ratio is one of the most important from all of the ratios as it helps to determine the net profit that is generated by the firm while operating its business in the market. It is also very easy to calculate and it is preferred at a higher side and 10 percent net profit ratio is considered to be satisfactory while above that is said to be very good for the firm and below that is considered to be bad for the company(Currie and Pandher, 2020). This ratio is also very useful in analysing the effectiveness and efficiency of the firm so that necessary rectification measures can be taken if it is not up to the mark as it is expected to be. Below is the calculation of this ratio done on the basis of the company T Shirt Ltd-
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Particulars20182019 Net profit ratio17.71%-36.60 Asitcanbeseenfromtheaboveveryclearlythatthefirmwasperformeda commendable job in the year 2018 by keeping its net profit ratio at around 18 percent but the company performed horribly in the year 2019. But profits was converted into losses and the firm’s net profit ratio was negative at that time at around 37 percent and this is very bad sign from the business’s point of view and the firm has to take immediate steps to improve it otherwise it can prove very dangerous for the company in the long run. There could be many reasons for it but the main is the performance of the company and it must take appropriate steps to improve that aspect. Operating profit ratio-It is a ratio that analysis and evaluated the performance of the firm according to the profitability and growth of the company as it can be calculated by dividing the profits that are generated by the firm and are of operating nature by the total revenue that the business generates. It can be said that this ratio is good if a firm has 15 percent operating profit ratio while above that is considered to be exceptionally great for the firm whereas below 15 percent is considered to be worst(Dubey, Kothari and Awari, 2016). T Shirt Ltd operating profit ratio is calculated below from the details that has been given- Particulars20182019
Operating profit ratio20.99%-28.84% From the above it can be seen very clearly that the firm was on a right track in the year 2018 as the operating profit ratio was around 21 percent which is considered to be very good for a firm. Whereas the ratio of operating profit of the company came to negative 28.84 percent in the year 2019 due to various factors but main could be decreased revenue and it is a very serious aspect that has to be considered by the firm as soon as possible otherwise it has the potential to damage and destruct the working of the company in an adverse manner. 2. Determination of the financial position of the firm through statement of financial position Financial position statement is very essential as well as important for every firm that is operating in the industry because it is very helpful in analysing and evaluating various aspects that are related with the liquidity, performance, and aspects regarding financial issues of the business. It is also very useful as it helps in identifying the problem and then appropriate solution can be searches according to the problem(Heil, 2017). As it can be seen that the firm that is T Shirt Ltd is not performing well in the current year as per expected and it is incurring huge losses because of it and statement of financial position is the one that can help the company to solve the issues that the business is having by correctly identifying it and that too well within a limited period of time so that steps can be taken to correct it as soon as possible. Below are some ratios calculated which can prove very crucial from the firm’s point of view-
Current ratio-This ratio possess a lot of importance for each and every firm that is operating in the industry as it helps to analyse and measures the short term liquidity of the company that can prove very crucial for the firm in the long run. It is desirable to have current ratio two times which simply means that a firm’s current assets are two times than the current liabilities as the ratio is calculated by dividing current assets with current liabilities. If a business has higher current ratio it can be assumed that the assets of the company are capable enough to pay off its liabilities and vice-versa. Particulars20182019 Current ratio2.59 times0.91 times As it can be seen from the above firm was maintaining a decent current ratio till the year 2018 as it was around 2.5 times in the year 2018 but it has dropped drastically in the year 2019 to make it around .91 percent and it is not a good sign for the firm. There can be many aspects of it while it can be said that assets could have been decreased or the liabilities could be increased but the company has to pay serious attention to this aspect so that it does not become a barrier in the growth of the business in the long run(Khoshhal, 2018). Receivable turnover ratio-It is one of the most important ratio as it determined the average days the amount is struck in the market and it is also known as debtors turnover ratio as it can be calculated by dividing credit sales by average number of debtors. It is preferable at a lower side as it means that the company is collecting dues from its debtors and the amount
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received can further be reinvested so as to get a higher return in the future and it is also very helpful in maintain chain of supply. T Shirt Ltd calculation regarding this ratio is given below in detail- Particulars20182019 Receivable turnover ratio9.64 times4.48 times It can be seen from the above that the firm has improved this aspect as this ratio of the company was around ten days or times in the year 2018 but it has reduced it considerably and it has came down to 4.48 days or times in the year 2019. There can be many factors behind this and the main could be firm taking coercive measured to collect the dues from the debtors that are prevailing in the market(Lehner, 2016). Payable turnover ratio-It is also considered as one of the most essential as well as crucial ratio as it helps in determining the time period in which firm collect the amount from its creditors. This ratio is also known as creditor’s payment period and it can be calculated by dividing credit purchase by average number of creditors of the company. It is preferable at a higher side because it means that the amount is with the firm for a longer period and thus it can be invested at a higher rate of return as compared to a lower time period. Below is the calculation of this ratio done on the basis of the above firm T Shirt Ltd- Particulars20182019
Payable turnover ratio15.45 times9.05 times It can be seen from the above that the firm has done exceptionally well in the year 2018 to keep this ratio at around 15.45 times while it has reduced in the year 2019 and came down to around 9 times which is not very beneficial for the firm and it can prove very dangerous too in the long run so the company has to take strict and necessary steps to improve this ratio and that too within a limited period of time so that ait can add to the value of the business rather than destroying it (Motta, 2020). PART2UnderstandingindetailtheconceptofFinancialInformation&Cash Management 1. Explaining the concept of accrual and cash accounting methods in detail Accrual accounting method-In this type of accounting method in which transactions are recorded at the same time of the occurrence of the event and it is highly used in the current times as it is very feasible and is tried and tested approach that is backed up by a pretty good success rate too in the long run. The firm that is T Shirt Ltd uses this method to record their transactions and it has proved very beneficial too for the firm in increasing its profitability and growth. Cash basis accounting-It is a method of accounting in which transactions are recorded at the time of exchange of cash and it is widely used by the old firms but it is not very useful at times
because it can lead to duplication of work and at times fraud and errors too. The company T Shirt Ltd also used this approach at the time of starting of the firm but it has moved to accrual accounting method as it is more feasible and easy as compared to this method(Puck and Filatotchev, 2018). 2. Analysing and evaluating various aspects of Profit and Cash flows Profit is a term that involves profit in it irrespective of the type of profit and it is related with the well being of the organisation in terms of its profitability. While cash flow is a much bigger aspect than this as it includes the net cash flow in the business that is cash inflow minus cash outflow. A positive cash flow means that the is profit while a negative cash flow means outflows exceeds inflow and it is not a very good sign for a firm(Rogers and Clarke, 2016). PART 3 Budget and finance of company 1. Determining the meaning of budget and its purpose Budget is a systematic evaluation of all the incomes and expenditures of a company in order to analyse and evaluate the true and fair picture of the firm and it can also be used to reduce or allocate funds of a business in an appropriate manner. While the purpose of budget can be many according to the needs, requirements, and demands of a business its main purpose is to formulate such a plan that could help the company to organise, improve, and track its financial position that can prove very beneficial in the long run(Van Klyton and Rutabayiro-Ngoga, 2018). 2. Evaluating the benefits of creating a limited firm and getting it listed on the stock exchange Limited liability firm is a one in which owners have limited liability and it is one of the most important benefit of it too as it helps in separating the company and owner which is very important in the current scenario. While listing that company on the stock exchange is also very important as it helps the firm to get additional funds that can be utilised in the business as and when needed(Wang, Wang and Florescu, 2020). CONLCUSION Business finance is an important aspect as it helps a firm to identify all the aspects of allocation of funds in the business. From the above it can be concluded that the firm T Shirt Ltd is not performing well in the current year and thus it have to take necessary steps so that it can help the business to grow and prosper in the long run.
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REFERENCES Books and journals Boskov, T. and Drakulevski, L., 2017. Strategic and Finance Management–Determining Factors for the Success of the Companies in the Business World.Calitatea-acces la succes (Quality-Access to Success).18(157). pp.119-123. Boubaker, S., Cumming, D. and Nguyen, D. K. eds., 2018.Research handbook of finance and sustainability. Edward Elgar Publishing. Currie, R. R. and Pandher, G. S., 2020. Finance journal rankings: Active scholar assessment revisited.Journal of Banking & Finance.111.p.105717. Dubey, U., Kothari, D. P. and Awari, G. K., 2016.Quantitative techniques in business, management and finance: A case-study approach. CRC Press. Heil, M., 2017. Finance and productivity. Khoshhal, Y., 2018. The Role of Teaching Materials in the ESP Course: A Case of Business English (Finance and Economics).Journal of Humanistic and Social Studies.9(1). pp.85-99. Lehner, O. M. ed., 2016.Routledge handbook of social and sustainable finance. Routledge. Motta, V., 2020. Lack of access to external finance and SME labor productivity: does project quality matter?.Small Business Economics.54(1). pp.119-134. Puck, J. and Filatotchev, I., 2018. Finance and the multinational company: Building bridges between finance and global strategy research.Global Strategy Journal. Rogers, C. and Clarke, C., 2016. Mainstreaming social finance: The regulation of the peer-to- peer lending marketplace in the United Kingdom.The British Journal of Politics and International Relations.18(4). pp.930-945. Van Klyton, A. and Rutabayiro-Ngoga, S., 2018. SME finance and the construction of value in Rwanda.Journal of Small Business and Enterprise Development. Wang, D., Wang, T. and Florescu, I., 2020. Is Image Encoding Beneficial for Deep Learning in Finance? An Analysis of Image Encoding Methods for the Application of Convolutional Neural Networks in Finance.arXiv preprint arXiv:2010.08698.