Financial Management and Use of Ratios in Business

This article explores the importance of financial management in business and discusses the use of financial statements and ratios. It covers topics such as budgeting, determining market value, and the role of financial management in achieving a firm's goals. The article also provides insights into net profit ratio, gross profit, current ratio, and quick ratio. Students can find study material and solved assignments on financial management and ratios at Desklib.

Business

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
SECTION 1.....................................................................................................................................1
Financial Management and its Importance..................................................................................1
SECTION 2.....................................................................................................................................2
Discussing financial statements and use of ratios........................................................................2
SECTION 3.....................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................10

INTRODUCTION
Investment banking refers to the investment and technology which a company employee in
order to achieve its goals and objectives (Anwar, Shah and Hasnu, 2016). Companies receive
money for everything from the purchase of raw ingredients to the distribution of products and
activities to customers. Business financing refers to the transfer of commodities with the goal of
supplying consumer demands. It provides funds for the corporation's capital expenditures and
also financial stability. This article explores budgeting and determining a market value.
Variations can be observed in the financial statements and the use of proportions in financial
reporting.
SECTION 1
Financial Management and its Importance
Financial management relates to the procedure of administering an organization's finances and
accounting systems. It ensures that funds are available to meet day-to-day company's needs and
also that funds are funded properly. Among several other things, money management entails
determining on purchases, lasting fiscal stimulus, and income sources. It aids in central policy,
architecture, and management. It also includes decisions on shareholder revenues and profits. It
provides pertinent information regarding the company's income statement and expenditures,
allowing managers to conduct informed decisions. Organization would be enabled to see where
company's revenue is being spent and save costs. Financial management is important to the
achievement of a firm for the aforementioned purposes-
Financial Planning: Financial management aids in the arrangement of a company’s
financial position. It includes, among other things, planning for strategic performance, planning,
and financial requirements. It assists businesses in preparing for unfortunate events that arise as a
result of various influences. Financial management assists businesses in reaching its intended
goals. It is in charge of the corporation's price, spending, receivables, and profits.
Procurement of funds: Money management supports a company in receiving funding
from less income that is appropriate for the financial strength. Investment is available for a
company worker to function well. It ensures liquidity funds are available whenever a company
needs it. It is essential for daily operations, acquisition, financial obligations, and the purchase of
intermediate products, among many other things (Crick and Crick, 2020).

Utilisation of funds: Wealth management supports a company's management in making
the efficient use of time by allocating money in an effective manner. It elements that improve
dispersion information, allowing businesses to understand where their money is being spent and
cut expenditures.
Financial decisions: Financial accounting supports businesses in ensuring financial
regulations that affect the operations of the corporation. As a result, all aspects of the company
demand funds, and financial decisions would have an influence on the entire. These choices aid
the organisation in achieving its long-term objectives.
Increase profitability: Investment banking aids in the efficient allocation of energy in
terms of improving a corporation's efficiency of the economy. A monetary strategy,
socioeconomic appraisal, and other strategies are being used to boost a stock profits through cost
minimization. Employees are likewise urged to save more, which lowers the amount of acquiring
finances (Frishammar and Parida, 2019).
SECTION 2
Discussing financial statements and use of ratios
Balance sheet:
Amount
2016
Total
£0
Non Current assets
Intangible assets 5,793.
Tangible assets 52,812
Investments 10,693.
69,298
Current assets
Stocks 28,571
Trade debtors 26,367.
Short term deposits 14,779
Cash at bank and in
hand 14,632
84,349
Current liabilities
Bank loans and
overdrafts 9,610.
Trade creditors 19,493

Other Creditors 678
Income tax payable 3,585.
Other creditors
including tax and social
security
4,562
37,928.
working capital 46,421
Total assets less
current liabilities 1,15,719.
Non-Current
Liabilities
Bank loans and
overdrafts 16,506
Other Liabilities 7,304
23,810.
Provisions for
liabilities 8,094.
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322.
Retained earnings 43,057
Total equity 83,802
Business review:
2016 2015 Change
£’000 £’000 %
Turnover (continuing operations) 1,89,711. 1,79,587. 5.60
%
Profit for the financial year 43057 18,987 126.7%
Shareholder’s equity 83802. 63,057 32.9
0%
Current assets as % of current liabilities 222% 304% -

82%
Customer satisfaction 4.5 4.1 1
0%
Average number of employees 649. 618. 5
%
Gross Profit = £81125.
Net Profit = £43057.
Net Profit increased in 2016 by 126.7 during the year.
Shareholders’ equity increased by 32.9% by £83802.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities)
is 1.47:1
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22:1.
Calculations:
Gross profit = sales – COGS = 189711 – 108586 = 81125
Net Profit = Revenue – total expenses = 81125 – 38068 = 43057
Profit = 43057 – 18987 = 24070
Current ratio = current assets / current liabilities = 54349 / 37928 = 2.22:1
Quick ratio = (current assets- stock) / current liabilities
= (84349- 28571) /37928 = 1.47:1
Equity = 63057 / 20745 = 83807
Increase in profit = 63057 / 32.9% = 20745
Annual statements are statistics that assist a company in running a presidential election
process as well as offer a clear overview of the company's economical situation and
achievements. The following are some examples of earnings figures that can help with the
creation of programs and operations:
 Income statements- This remark exemplifies an organisation’s overall effectiveness as
well as its effectiveness and the funds necessary to achieve that goal. The working capital
certifies the company's capital structure by displaying specific incomes and expenditures.
It is an essential consideration of assessing revenue and expenditures since fluctuations in

capital expenditures, R&D prices, and primary commodity prices all have an impact on
the company's profitability (Fyke, Feldner and May, 2016).
 Balance sheet- It is an essential aspect of financial statements because it depicts the
company's eventual status by depicting management in a straightforward and obvious
approach. It includes assets and liabilities, as well as economic possession, all of whom
have to be equal at the end of the calculations. These findings demonstrated that items,
that represent economic means, are analogous to mortgages and investments. As a result,
the halves of an accounting records ought to be identical, in accordance with the core
notion of Asset = Liabilities.
 Cash flow statements- This document focuses on a company's financial receipts and
expenditures during a specified temporal frame. The operating, capital, and refinance
accountancy facts show how much money is being spent currently and how much money
is coming in here from three types of activities. These approaches calculate and analyse a
company's economic performance, rendering it relatively easy for specialists and
shareholders to make accurate evaluations of the results. It makes it possible to make
informed management opportunities and reduce unnecessary expenditure. The document
emphasises the buying power, which demonstrates how well the company would be able
to satisfy its financial obligations and operating costs.
Ratios are indeed a form of calculation often used measure the sustainability and liquidity of
a firm's earnings accounts. These span a broad and diverse range of calculations. The following
are some examples of how proportions are used in financial regime:
 Helps in comparison- Correlations are very useful in providing a corporation with a
broader context which can significantly facilitate better quick decisions. Prospective
buyers investigated whether it was essential to connect previous year though performance
to current year's performance.
 Useful in decision making- Professionals are prepared to assist management in creating
solid economic choices and putting them into action. Investigators can draw conclusions
based on these since they provide important information regarding the company's
accomplishments (McKenzie and Sansone, 2019).
 Supports in forecasting and planning- Through monitoring the couple of months, these
really are extremely beneficial in financial planning and also predicting impending events

and duties. It contributes to the provision of great focus to purchasers and investors in
order for them to create their investment strategy. This gives interesting content with such
a greater understanding of the company's financial situation, allowing them to engage in
it.
SECTION 3
Net profit ratio: Productivity, sometimes referred to as net ratio, describes how frequently
total income or cash is produced as a percentage of overall sales. The profitability margins are a
percentage of a company's or business segment's net income to revenues. It is commonly
measured as a proportion, although it can also be stated as a single integer. The operating
earnings margins a business makes after covering its expenses per dollar of revenue. It is a
revenue growth statistic used to assess an organizational value. It computes a corporation's
economic success by subtracting all of the firm's revenue against overall revenue.
Net profit margin = 43057 / 189711 * 100
= 22.69%
Gross profit: To assess an economic, condition of a corporation accountants compute the
working capital over after subtracting the value of things supplied from total revenue (COGS).
The gross profit margin, often referred as the operational asset value, is most commonly
expressed as a percentage of revenue. This significant component represents an organization's
income across all business functions. It is calculated by subtracting global financial expenditures
from net revenue (Park and Song, 2020).
Gross profit margin= 81125 / 189711 * 100
= 42.76%
Current ratio: The debt ratio is a liquidity measure that assesses a company's ability to
meet short-term obligations. The debt ratio is a liquidity measure used to determine an economic
condition of the corporation. The present percentages deemed acceptable vary per industry. A
creditor favours current assets than current liabilities over even smaller liquidity ratios in several
cases because a greater proportion implies that perhaps the business is much more likely to finish
the borrowing. High current percentages are often not available to investors. If the industry
average is exceptionally high, it may suggest that certain marketable securities or brief financial
institutions are underutilised. The financial leverage ensures that a corporation's creditworthiness
is assessed in terms of short-term obligations. It includes all financial obligations as well as

resources. The liquidity amount is less than one and if payables outweigh retained earnings. If
the exact increase is less than one, the corporation may suffer to pay its immediate obligations.
Many companies, on either extreme, could function with current ratio as low as one. If prices
grow to stuff quickly then trade receivables are paid, the company's liquidity amount could
simply stay below this. The cost of acquisition is employed by individuals to obtain with the
purpose of promoting it for a higher price. As a result, the trade would produce much more
income than the gross profit reported on the balance sheet. Companies that can receive money
through purchases without compensating suppliers may be able to explain a reduced load
proportion (Samara and Arenas, 2017).
Current ratio = Current assets / current liabilities
= 54349 / 37928
= 2.22:1
Quick ratio: The quick proportion is a gauge of a company's ability to cover short-term
commitments with its most accessible assets so it offers guidance through its short-term
financing condition. This is also known as the acid test because it reveals an organization's
ability to quickly repay the debt responsibilities using relatively close assets. The phrase "acid
test" alludes to a rapid test that yields instant results. It reflects the economic health of a
company's short-term obligations and allows for an assessment of its creditworthiness a brief
loan. One term for that is the acid test proportion. One more ratio is a good small proportion.
Capital structure is a statistic used to determine a bank's profitability.
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
According to that ratio assessment, an organization's manufacturing output produces a
big return on investment in relation to its primary goal. It is possible to demonstrate this by
examining an institution's gross profit margins as the firm has a large total revenue percentage
But at the other hand, the firm should enhance its profit margin, that can be measured by
reducing excess expenses. Other than that, a company's financial status is stable. As a result, the
firm can improve security by cutting unnecessary costs while maintaining successful fiscal
administration, enabling it to improve its level of economic expertise (Wei, Song and Wang,
2017).

CONCLUSION
It may be stated that a lot of distinct variables must be precisely examined and assessed in
order for the firm to expand and succeed in the longer term.

REFERENCES
Books and Journal
Anwar, J., Shah, S. and Hasnu, S., 2016. Business strategy and organizational performance.
Pakistan Economic and Social Review, 54(1), pp.97-122.
Crick, J.M. and Crick, D., 2020. Coopetition and COVID-19: Collaborative business-to-business
marketing strategies in a pandemic crisis. Industrial Marketing Management, 88,
pp.206-213.
Frishammar, J. and Parida, V., 2019. Circular business model transformation: A roadmap for
incumbent firms. California Management Review, 61(2), pp.5-29.
Fyke, J.P., Feldner, S.B. and May, S.K., 2016. Discourses about righting the business←→
society relationship. Business and Society Review, 121(2), pp.217-245.
McKenzie, D. and Sansone, D., 2019. Predicting entrepreneurial success is hard: Evidence from
a business plan competition in Nigeria. Journal of Development Economics, 141,
p.102369.
Park, G. and Song, M., 2020. Predicting performances in business processes using deep neural
networks. Decision Support Systems, 129, p.113191.
Samara, G. and Arenas, D., 2017. Practicing fairness in the family business workplace. Business
Horizons, 60(5), pp.647-655.
Wei, Z., Song, X. and Wang, D., 2017. Manufacturing flexibility, business model design, and
firm performance. International Journal of Production Economics, 193, pp.87-97.

APPENDIX
Income statement:
Amount
Turnover 3 1,89,711.
Less cost of sales:
Material Cost 42,597.
Production Cost 15,231.
Labour Cost 50,758.
1,08,586..
Gross profit 81,125..
GP %
= 42.8
Less Expenses:
Administrative expenses 13,751.
Other operating overheads 22,374.
Interest 1,943.
Total Overheads 4 38068..
Profit/(loss) for the financial
year 43057.. NP%= 22.7