Financial Management and Ratio Analysis for Business Finance

This report discusses financial management and its importance in the business organization. It describes the main financial statements including balance sheet, income statements and cash flow statements and explains why ratio analysis is important in financial management. The report also includes a business review template and discusses processes that allow companies to improve financial performance including cutting expenses, recovering outstanding payments, and selling assets.

Business finance

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Describing and discussing the main financial statements and explaining use of ratio in the
financial management:.................................................................................................................3
Business review template.............................................................................................................4
Analysing the profitability, liquidity and efficiency of company on the basis of result of ratio
analysis.........................................................................................................................................5
Describing and discussing the process of improving financial performance:.............................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................1

INTRODUCTION
Financial management is one of the most important thing for every business organization, this
allows company to be stable and get competitive advantage. Financial stability provide pathway
to organization that allow them to achieve goals and objectives, managing surplus profit and
estimating losses is crucial part of financial management. This report will discuss concept of
financial management and explain use ratio in financial management. Later this report will
discuss income statements of sample organization and provide balance sheet. At last this report
will discuss processes that business can adapt to improve their financial performance.
MAIN BODY
Describing and discussing the main financial statements and explaining use of ratio in the
financial management:
Financial statements are properly written records of business financial activities, these statements
play vital role in business as this allows them to highlight stability. There are certain main
financial statements, these are:
Balance sheet: Balance sheet is one of the most important thing for the business that highlight
assets, liability and equity hold by the company. Balance sheet provide details of company's
financial stability as this is reviewed by external audit like government and investor. Every
business organization have to maintain this financial statements to get clear snapshot about
company's holding.
Income statements: Income statement is another main financial statements that highlight income
and expenses made by the company, this record is important for business because this highlight
whether company is making profit, or they are facing losses. Every investor analyse income
statements to get clear idea about financial stability of the business.
Cash flow statements: Cash flow statements provide aggregate data regarding all cash flows that
happened in the company during a financial year, this highlight how much cash was received by
the company and cash invested in operation process. Investor can track financial stability of
company just by analysing cash flow statements, they examine operating activities where cash
have been used.
Use of ratio is financial management:

Ratios allow company to measure relationship between component of financial statements, ratios
provide details of profitability, liquidity and solvency. There are certain use of ratio, these are:
Comparison: ratios are often used in comparison process where price and earning is compared
with competitor to identify financial stability. Ratios analysis allow company to get competitive
advantage and help them to position themselves in the market.
Trend line: trend line means company forecast financial stability of the company with the help of
statements over reporting period, in the process of financial management company often use
ratio analysis for future prediction and identify expected financial instability.
Operational efficiency: Ratios are often used in understanding degree of efficiency in the assets
and liability management, using ratio allow company to examine those extra expense and
provide solution to cut off them and gain financial stability.
Business review template
The Net Profit for the paticular year 2016 , is £? (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as
follows:
2016
£’000
2015
£’000
Change
127%
Turnover (continuing operations) 189,711 179,587 +5.6
Profit for the financial year 43057 18,987 127 %
Shareholder’s equity 83802 63,057 +32.9
%Current assets as % of current liabilities 222,4 304% -
Customer satisfaction 4.5 4.1 +10
Average number of employees 649 618 +5
%Turnover from consistent operations has been increased by 5.6% during this year.
Gross Profit = £81125
Net Profit = £43057
Net Profit increased in 2016 by 127 % during the year.
Shareholders’ equity increased by 32.9% by £20745

The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is 147:1
The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is 222:1
Interpretation: The business review template is clearly stating that, the company has
gained the profit in the year 2016. The profit has been increased up-to 127%. Also, the
shareholders equity has been increased up-to32.9%. The template is clearly stating that,
company has gain the profit and moving further towards expansion.
Analysing the profitability, liquidity and efficiency of company on the basis of result of ratio
analysis
Profitability analysation
Profitability analysation can be known with the help of gross profit margin. Thus, the standard
gross profit margin ratio has been considered as up-to 50 to 70 %. It has been considered as
healthy margin for the company.
Gross profit margin= gross profit/ sales x100
81,125 / 189,711= 0,427x100= 42,762= 42,8%
Interpretation: The gross profit margin of the company is 42,8% that indicates that, company
profitability is less than the standard profitability. Therefore, more focus needs to be apply over
increasing the profitability of company.
Liquidity analysation
This analysation presents the capability of company is terms of managing cash and assuring
payments. It can be measure with the help of current ratio analysation
Current Ratio= current asset/ current liabilities
84,349/37,928 = 2,22:1
Interpretation: The current ratio of company is 2,22 and the standard current ratio is among the
1.5 and 3. The current ratio of company is 2,22:1 which is more than 2. It depicts that company
is not using its current assets for short-term financing purpose. It may lead to create the problems
in context of working capital management as well.
Efficiency analysation
The efficiency of the company is measured within analysing the quick ratio of the company. The
Quick Ratio= current asset- stock/ current liabilities
84,349- 28,571 = 55,778/ 37,928= 1,47: 1

Interpretation: The standard ratio should be among 1:1 However, the ratio of the company is
near to the standard deliverables. Thus, in the context of efficiency analysation the company is
efficient in terms of meeting their short-term obligation and managing liquid assets.
Describing and discussing the process of improving financial performance:
Financial performance is one of the most important thing for every business organization as this
allow them to become stable. Almost every company want to achieve financial stability which
help them to get competitive advantage, but getting financial stability is one of the most
challenging task for the company. There are certain ways to improve financial stability, these
are:
Reducing expenses: reducing expense is one of the most common but effective method to
improve financial performance of the company. It is very clear that expenses is important part of
the process but reducing expense is more important. Business can cut off extra expenditure they
tend to make during financial year, for example; cutting off unnecessary expenses using energy
efficient appliance in office building.
Recovering outstanding payment: recovering of payment is the best way to gain financial
stability, company can improve their financial performance by recovering lost payment or
outstanding payment. Unpaid invoices are very dangerous of the business organization as this
impact wealth and expense, company should have effective strategies or legal process to regain
lost payment.
Selling assets: selling those assets of company which not have been used or no longer wanted by
the company, it is very clear that if business have ability to maintain assets can get good resale
value. Assets selling is risky for the company epically when they are growing, company need to
ensure which assets they will be selling because important assets might cause higher loss to the
company.
CONCLUSION
This report has discussed financial management and its importance in the business organization.
Later this report has discussed concept of financial management and describing main financial
statements including balance sheet, income statements and cash flow statements and explained
by ratio is important in financial management. Later this report has discussed business review
template and its element. At last this report has discussed processes that allow company to

improve financial performance including cutting of expenses, recovering outstanding payment
and selling assets.

REFERENCES
Books and journals
1