Financial Management and Control

This document provides an overview of financial management and control. It covers topics such as ratio analysis, liquidity, gearing, asset utilization, and investment appraisal techniques. The document also includes calculations and interpretations of various financial ratios. The content is relevant for students studying financial management and control in college or university.

Financial Management and
control

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
1. .................................................................................................................................................1
b...................................................................................................................................................4
PART B............................................................................................................................................6
1 Calculation of investment appraisal techniques.......................................................................6
2 Evaluation of key benefits and the limitations of investment appraisal techniques...............10
3 Suitable sources of finance for funding the investments. .....................................................12
PART C..........................................................................................................................................12
1. Critically evaluating process of budgeting and the manner in which strategic plan,
objectives and the budgets are inter-related..............................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES .............................................................................................................................15

INTRODUCTION
It is vital activity of the organisation. This is process to plan, organise, control and to
monitor the financial resources with view of achieving the organisational goals & objectives.
This is related with the practice to control financial activities of organisation like funds
procurement, utilisation of the funds, payments, accounting, assessment of risks and other factors
related with money. It is the application of management principles to possessions of the
enterprise. Management of the organisational finance provides quality fuel & regular services for
ensuring efficient functioning. Present report will enhance the strategic financial statement of the
enterprise. It will analyse the use of qualitative and quantitative accounting information in the
organisation. Report will will provide the understanding and knowledge of the theoretical
frameworks and concepts to the range of practical situations for proposing the solutions to the
strategic business problems.
PART A
1.
Ratio Analysis
Particulars Formula Amount (£)
2018 2019
Profitability ratio
Gross profit 9100 12200
Net sales 18000 23000
Gross profit ratio
Gross profit/Net
sales*100 50.56% 53.04%
Net profit 3220 4060
Net sales 18000 23000
Net profit ratio
Net profit/Net
sales*100 17.89% 17.65%
1

Liquidity ratio
Current assets 4150 5160
Current liabilities 14000 19260
Current ratio
Current
assets/Current
liabilities 0.29 0.26
Current assets 4150 5160
Inventory 1800 2360
Quick assets
Current assets-
inventory 2350 2800
Current liabilities 14000 19260
Quick ratio
Quick assets/Current
liabilities 0.16 0.14
Gearing ratio
Debt 2000 3500
Equity 10000 10000
Debt equity ratio Debt/Equity 0.2 0.35
Earnings before interest
and tax 5100 6800
Interest expense 500 1000
Interest coverage ratio
EBIT/Interest
expense 10.2 6.8
Asset utilisation ratio
Net sales 18000 23000
Average total assets 12000 15760
2

Asset turnover ratio
Net sales/Avg total
assets 1.5 1.4593908629
Investors ratio
Net income 3220 4060
Average shares
outstanding 10000 10000
Earning per share
ratio
Net income/ Average
shares outstanding 0.32 0.41
Total dividends paid 200 300
Number of the ordinary
shares 10000 10000
DPS
Total dividend paid/
Number of ordinary
shares 0.02 0.03
Profitability- It refers to the class of the financial metric which is been used for accessing
an ability of the business in generating the earnings in relation its operating cost, revenue,
balance sheet and shareholders funds over the time by making use of the data at specific point
time period. It includes gross and net margin ratio that are considered as the major profitability
ratio which reflects the operational and overall performance of an enterprise. Gross margin
indicates the operational performance of the company by measuring capability of the company
in meeting its variable expenses by generating sales (Murad and et.al., 2019). Over the period of
2 years, GP ratio of Bitmap Plc is increasing which means that its revenue increases and this
shows better operations of company. However, net profit margin reflects ab ability of an entity in
gaining profits after making payment of all its income, expenses and tax obligation. The NP ratio
of Bitmap Plc is declining from one period to other which depicts that company is bearing high
operating expense that results to gaining of lower margins against the high sales. Overall the
3

profitability performance of Bitmap Plc is seen as good but is required to take measures like
increasing price, ensuring control on expenses etc. it could improve its NP ratio.
Liquidity- This ratio referred as an important or crucial class of the financial metric for
identifying ability of debtor in paying off its short term debt without raising outside funds. This
ratio measures an ability of the firm in paying its debt by making use of its assets. The two main
types of ratio through which the liquidity of the company can be measured includes current and
quick ratio. CR is the ratio that measures an ability of an enterprise in paying short term
liabilities and those which gets due within a period of one year (Wen and Zhu, 2019). As the
current ratio of Bitmap Plc is declining and is seen as lower in comparison to ideal ratio, this
clearly states that an entity is not making an effective use of its assets for paying its current
debts. Quick ratio is counted as an indicator of an entity's short run liquidity position & measures
an ability of the company in paying off its short term debts by using its most liquid type of
assets. The QR of Bitmap Plc is lower than 1 which depicts that the firm does not have enough
assets for paying its immediate liabilities. Conclusively, liquidity position of Bitmap Plc is poor
and need to seek for appropriate steps for improving its current and quick ratio such as it must
make optimum use of its resources and must look for increasing its short term assets so that its
liabilities can be met off adequately.
Gearing- This ratio makes comparison between the owners and borrowed funds of an
enterprise. It measures company's financial leverage that demonstrates an extent to which
activities of company are been funded through shareholders' equity over creditors funds. Debt
equity ratio reflects the proportion of the debt that an entity is utilizing for financing its assets to
shareholders fund value (Ardalan, 2017). The D/E ratio of Bitmap Plc lied between 1 and 1.5
and is decreasing which sees as a good ratio as it indicates that borrowed funds are much lower
than compared to equities. Interest coverage ratio measures the number of time a firm could
cover its interest payments through its available earnings. Referring to analysis, it has been
interpreted that ICR of Bitmap Plc is greater than 2 which that it is earning sufficient amount of
profits to pay-off its interest obligation.
Asset utilization- It is the ratio that computes total sales earned by utilizing the assets
owned by the corporation (Dong and et.al., 2020). Asset turnover ratio of Bitmap Plc seems as
decreasing from one accounting period to another that is from 1.5 to 1.45. This indicates that an
entity is not making effective use of its assets in generating higher amount of revenue or sales.
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Investors potential- It reveals an ability of business for earning sufficient returns for
owners of business. EPS is seen as an essential financial measure that indicates profitability of an
organization. Higher EPS reflects that a company is earning better amount of profits by
increasing wealth of shareholders (Bragg, 2018). EPS of Bitmap Plc is increasing which clearly
states that it is earning high profits on its shares. On other side, DPS reflects the amount of
divided distributed by the company to its shareholders as per their holding. As the ratio is rising
over 2 the period, it means that it is distributing the dividend with higher value every year.
b.
Working capital cycle
Particulars Formula Amount (£) Amount (£)
2018 2019
Efficiency ratio
Average inventories 1800 2360
Cost of goods sold 8900 10800
Inventory days
Avg.
Inventory/COGS 73.82 79.76
Trade debtors 1600 2300
Revenue 18000 23000
Debtor collection
period
Trade
debtors/Revenue*365 32 37
Trade payable 1500 1100
Cost of sales 8900 10800
Creditors payable
period
Trade payable/cost of
sales *365 61.5 37.2
5

Particulars Formula Amount (£) Amount (£)
2018 2019
Inventory days 73.82 79.76
Receivable days 32 37
Payable days 61.5 37.2
Working capital cycle
Inventory
days+Receivable
days-Payable days 44.32 79.56
Interpretation- Working capital cycle refers to an amount of the time the company is
taking for turning its current assets and liabilities into the cash. It is computed by adding all the
components of working capital that involves inventory days, payable and receivable days.
Longer the WC cycle, longer an entity is been tying up its capital in its WC without generating
return on it (Vander Zanden and Chesson, 2017). From the assessment, it has been represented
that the period under WCC is getting more and longer over the years that is from 44.32 to 79.56.
This shows that Bitmap Plc has tied its major capital in operations and not earning return from it.
This happens because the company is keeping its inventory for long period in its premises and is
not collecting its receivable on time though it is making payment within the time frame. This
shows that company need to focus on improving its WCC in order to make its business
operations effective and efficient that in turn helps the company in increasing its sales and
profitability.
PART B
1 Calculation of investment appraisal techniques
Investment Appraisal Techniques
Investment appraisal techniques are the methods that are used for assessing the
attractiveness of the possible projects or investments based over the findings of various capital
budgeting techniques. For the traders this is fundamental analysis as they help in identifying long
term trends and the perceived profitability of the company. They are meant primarily for
appraising the performance of new project. This is used by the management for assessing the
profitability and viability of the proposed project or investment. These techniques evaluate the
viability of the project from different angles and provides different insight (Milenković and et.al.,
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2016). There are different investment appraisal techniques used by the management and analysts
such as payback period, discounted payback period, IRR, ARR and the net present value.
a. Payback Period
Computation of Payback period Computation of Payback period
Machine A Machine B
Year Cash inflows
Cumulative
cash inflows Year Cash inflows
Cumulative cash
inflows
1 300000 300000 1 20000 20000
2 250000 550000 2 50000 70000
3 200000 750000 3 150000 220000
4 150000 900000 4 200000 420000
5 50000 950000 5 250000 670000
6 20000 970000 6 300000 970000
Initial
investment 500000
Initial
investment 500000
Payback
period 2
Payback
period 4
-0.2 0.4
Payback
period
1 year and 8
months
Payback
period
4 year and 4
months
b. Discounted Payback period
Computation of Discounted Payback period
Computation of Discounted Payback
period
Machine A Machine B
Year Cash Discounted Cumulative Year Cash Discount Cumulati
7

inflows CF @10% cash inflows inflows
ed CF
@10%
ve cash
inflows
1 300000 272727.27 272727.27 1 20000 18181.82 18181.82
2 250000 206611.57 479338.84 2 50000 41322.31 59504.13
3 200000 150262.96 629601.80 3 150000
112697.2
2 172201.3
4 150000 102452.02 732053.82 4 200000
136602.6
9 308804
5 50000 31046.07 763099.89 5 250000
155230.3
3 464034.3
6 20000 11289.48 774389.37 6 300000
169342.1
8 633376.5
Initial
investment 500000
Initial
investmen
t 500000
Payback
period 2
Payback
period 5
0.1 0.2
Payback
period
2 year and 1
month
Payback
period
5 year
and 2
months
c. Accounting Rate of Return
Computation of Average rate of return
Computation of Average rate of
return
Machine A Machine B
Year Cash inflows Year
Cash
inflows
8

1 300000 1 20000
2 250000 2 50000
3 200000 3 150000
4 150000 4 200000
5 50000 5 250000
6 20000 6 300000
Average profit or
cash inflow 161666.67
Average profit or cash
inflow 161666.67
Average initial
investment 500000
Average initial
investment 500000
average initial
investment [(initial
investment + scrap
value) / 2]
average initial
investment [(initial
investment + scrap value)
/ 2]
ARR 32% ARR 32%
d. Net Present Value
Computation of NPV Computation of NPV
Machine A Machine B
Year
Cash
inflows
PV
factor @
10%
Discount
ed cash
inflows Year
Cash
inflows
PV
factor @
10%
Discount
ed cash
inflows
1 300000 0.909
272727.2
7 1 20000 0.909 18181.81
9

2 250000 0.826 206612 2 50000 0.826 41322
3 200000 0.751 150263 3 150000 0.751 112697
4 150000 0.683 102452 4 200000 0.683 136603
5 50000 0.621 31046 5 250000 0.621 155230
6 20000 0.564 11289 6 300000 0.564 169342
Total discounted
cash inflow 774389
Total
discounte
d cash
inflow 633377
Initial
investment 500000
Initial
investme
nt 500000
NPV (Total
discounted cash
inflows - initial
investment) 274389
NPV
(Total
discounte
d cash
inflows -
initial
investme
nt) 133377
e. Internal Rate of Return
Computation of IRR Computation of IRR
Machine A Machine B
Year Cash inflows Year
Cash
inflows
0 -500000 0 -500000
10

1 300000 1 20000
2 250000 2 50000
3 200000 3 150000
4 150000 4 200000
5 50000 5 250000
6 20000 6 300000
Internal rate of return
(IRR) 35%
Internal rate of return
(IRR) 16%
Recommendations
The above analysis of the machines using investment appraisal techniques shows that
company should adopt for Machine A. Choosing machine A will be more beneficial as all the
outcomes are positive from the techniques used by the management. Payback period is shorter of
A than B as the initial cash flows are higher which will cover the cost of machine early.
Discounted payback period also shows that Machine will recover early in 2 year and 1 month.
Net present value of the Machine A is high which shows higher profitability for company.
Higher the NPV higher is the profitability. IRR of the two machines are 35% of A and 16% of B.
Return is higher in A as compared with B. ARR shows return of 32% for both the machines that
do not give reliable estimate of the two machines as they are not comparable. However, other
techniques shows beneficial results for machine A. It is recommended that company should
adopt for machine A than B as all the results show that the machine A is more feasible and
profitable.
2 Evaluation of key benefits and the limitations of investment appraisal techniques
Payback Period
The technique is used for identifying the time length within which the company will be
recovering its cost of investments.
Benefits
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Significant advantage of using payback period the the simplicity of the method. It is an
easy and simple way of comparing the projects and to take project having shortest payback
period (Ndanyenbah and Zakaria, 2019). The method helps in analysing the break even point.
Limitations
The method do not consider time value of money due to which cash flows of later period
gets higher weightage. It neglects the cash flows that are received after the payback period.
Discounted payback period
This is same as payback period which is used for measuring the time period which
project will take for break even and to recover the investments.
Benefits
This method involves break even in the calculation which enables company to identify
the cash flows after which it will earn profits (THAN,2018). This methods consider time value of
money unlike payback period and determines risk in project.
Limitations
Management is unable to make judgements whether investments will be adding value to
the firm or not. Method becomes complex in cases of negative cash flows from the investments.
Net Present Value
It is difference between current value of the cash inflows & current value of the cash
outflows over determined time length. This is used for calculating estimated profitability of the
project.
Benefits
The method accepts pattern of conventional cash flows for identifying the profitability of
investment. It considers all the cash flows of business and give more accurate estimate about the
feasibility of project using time value of money.
Limitations
Method involves critical estimation of the opportunity costs ignoring the sunk cost. The
projections could be optimistic and may not boost the ROE and EPS.
Internal Rate of Return
It is used for measuring rate of return on the projected cash flow generated by the capital
investments. It is discount rate which makes NPV from all the cash flows from the project equals
to zero.
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Benefits
This technique consider time factor even when cash flows are even or uneven.
Profitability of projects are considered over economic life of project (Archibong and Ogunba,
2018). It is better than NPV as do not requires pre determination of the cost of capital.
Limitations
It assumes that earnings from the project are reinvested at IRR for remaining life or
project. Profitability of project is not justified rate of return of the company is not closer to IRR.
Accounting Rate of Return
It is a technique of capital budgeting used for measuring profits expected from the
investments. It expresses net accounting profits arising from investments as percentage of capital
investment.
Benefits
It is simple and easy method to understand. It is based over accounting information that
does nit requires special reports to determine ARR (Pivorienė, 2017). It is based over accounting
profits which measures the profitability of investments recognising concepts of the net earnings.
Limitations
This method also ignores time value and results are different in calculation of ARR and
ROI which creates issues in decision making. Cash flows are not considered which are more
essential than accounting profits.
3 Suitable sources of finance for funding the investments.
There are different sources of finance available in the present time for funding the
requirements of the business. For funding the investments two sources of finance that could be
used are
Long term sources
Funds required for purchasing the fixed assets like plant and machinery could be raised
using long term sources. For assets having longer maturity funds should be raised from the
sources with longer repayment period (Albertijn, Drobetz and Johns, 2016). Capital required
for purchasing the assets is called fixed assets. Long term finance that could be used for funding
the investments are bonds, debentures, equity capital or preference shares. These sources will
provide the adequate funds for purchasing the machinery.
13

Bank Loan
It refers to money which is borrowed by the organisation for defined period within agreed
payment schedules. Repayments are decided over size and the duration of loan and rate of
interest. It is highly used source of finance for meeting the requirements of business. Bank loans
are easy to get and have low processing cost as compared with other sources of finance. Bank
loans are provided on the basis of performance and credibility of the company over the period.
Company will also be available with tax benefits on the loan over interest.
PART C
1. Critically evaluating process of budgeting and the manner in which strategic plan, objectives
and the budgets are inter-related
Budgeting process is counted as crucial for all the organizations as it helps the managers
in planning for the actual operations as through budgeting, they could assess the manner in which
conditions might change & the steps which they are required to take (Bergmann and et.al., 2020).
It also allows the managers in understanding the way to address the problems when it arises by
applying appropriate solution. Budgeting process motivates managers in building up
relationships with that of other parts of operation and also enables them in understanding the way
in which several departments & the team interacts with one another and the manner in which
they support overall company. It helps in communicating the plans to the managers which
ensures that everybody is getting clear understanding of the manner in which they support the
company (Richard, 2016). It seeks to encourage communication of an individual goal, initiative
and plans that roll up in combination for supporting business growth. It ensures that appropriate
individuals are made as accountable for executing budget. Process of budgeting gets the
managers to emphasize on participating in process and facilitates a challenge or the target for an
individual & managers through linking their performance and compensation relating to budget.
Budgeting process assist managers in comparing actual expenses with that of budgeted figures
for controlling the financial activities. It provides the means for informing the managers about
the way they are been performing in achieving the target that they had set.
Strategic plan referred as the planning process that combines major action of an entity in
sequential form, goals and policies into cohesive as a whole. A strategy that is framed in well
manner helps in allocating & marshalling the resources of an enterprise into viable & unique
posture, founded on the comparative inside competencies and the shortcomings, contingent
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moves and predicted environmental changes through intelligent opponents. It has a role in
defining the directions and expectations of company which are been founded on the vision of
stakeholders (Grossi, Reichard and Ruggiero, 2016). On other side, budgeting means a forecast
of all the expenses & income that helps the business in determining future financial related plans
and requirement as per anticipated profits, cash flow & expenses. Budget is been used for
supporting strategic plan of an entity and thus it has been presented that budget is the reflection
of company's strategic plan whereby it highly influences the strategic planning.
The business concern is required to have budget and the strategic plan where the plan
lays out a direction and the goals of business & guidelines for the actions for achieving such
goals, whereas budget looks at money required to support in attaining the set goals (Gordon,
Osgood Jr and Boden, 2017). Moreover, relationship between strategic objective and budget
deemed as inter-linked because often times budget influences objectives which in turn induces
availability of the funds in company's budget. Although objectives are been planned without
considering budgeting, it could also been done in the reverse order. The objectives are often
planned without any consideration to budget so business owners set the long term goals which
might seem as unrealistic at times.
CONCLUSION
From the above report it could be concluded that financial management is very essential
for the business for decision-making. It helps company to evaluate the performance and
profitability of the company using various techniques. This provides the company to analyse the
feasibility and viability of investments using investment appraisal techniques. It enables the
management to move organization towards achieving the organizational goals & objectives.
15

REFERENCES
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Gordon, V., Osgood Jr, J. L. and Boden, D., 2017. The role of citizen participation and the use
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Grossi, G., Reichard, C. and Ruggiero, P., 2016. Appropriateness and use of performance
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Vander Zanden, H. B. and Chesson, L. A., 2017. Data Analysis Interpretation Forensic
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Wen, H. and Zhu, T., 2019. Interpretation of Financial Statements.
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