Financial Management and Ratio Analysis for Business Finance

This report explains the concept and importance of financial management, discusses financial statements, and highlights the usage of ratios in FM. It also presents income statement, balance sheet, and profitability, liquidity & efficiency ratios. The report suggests processes that businesses might use to improve their financial performance. Subject: Applied Business Finance, Course Code: N/A, Course Name: Business Finance, College/University: N/A.

Business Finance

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
SECTION 1......................................................................................................................................3
Explaining concept and importance of financial management....................................................3
SECTION 2......................................................................................................................................4
SECTION 3......................................................................................................................................5
1. Business Review Template......................................................................................................5
2. Income statement.....................................................................................................................6
3. Balance Sheet...........................................................................................................................7
4. Ratio analysis of the following information............................................................................8
Section – 4......................................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13
APPENDIX....................................................................................................................................14

INTRODUCTION
Business finance is money required and gathered by a company to carry on with its
operations smoothly. Majorly, it is required to conduct its operations, finance and marketing
functions in any type of organization. The present case scenario will outline basic concept of
financial management along with its importance. Report will discuss main financial statements
that a company usually prepares at year-end and will also highlight usage of ratios in FM. In
addition to this, report will also present income statement, balance sheet and profitability,
liquidity & efficiency ratios. Lastly, the report will describe processes that business may use to
improve their financial performance.
SECTION 1
Explaining concept and importance of financial management
Financial management is defined as a process of planning, organizing and controlling
financial activities. It relates to taking decisions of acquiring funds at least cost and utilizing it in
the best possible ways (Singh, 2021). FM is concerned with ensuring regular supply of funds,
providing sufficient returns to investors and planning sound and stable capital structure.
Importance:
 It estimates amount of finance that is required by business to function effectively and
efficiently.
 FM identifies sources that can be tapped to raise funds, that is, raising funds from share,
debentures, bonds, long term loans, etc.
 Optimum capital structure i.e. portion of external funds and owners' funds is decided by
financial management (Delkhosh and Mousavi, 2016).
 It makes sure that financial resources acquired are fully utilized by organization. It is
done by calculating risk and return associated with a particular capital asset.
 Another benefit of FM is that it provides Cost control by preparing different budgets to
allocate resources carefully and taking remedial measures in case of deviation arising.

 Further, it provides insights on how to use surplus or profit earned by company. They
decide whether to distribute excess money in the form of dividend to investors or to
retain it back in business.
 In addition to this, it also manages cash flows of firm by recording activities that result in
cash inflow or outflow. This makes sure that there is sufficient cash availability to run
business.
SECTION 2
Income statement :
It is the report which reveals the financial performance of the organization. It helps the
organization with sales and then it subtracts the expenses of the given period. This helps this
statement in the calculation of the net profit or loss. In the income statement of the company the
earning per share is also calculated in this financial statement which is help publicly.
Balance Sheet :
This report helps in the analysation of the financial position of the business for the given
period. It is the information which is given aggregate to the general classification of assets,
liabilities and equity. These line items which are the part of the balance sheets are classified as
the order of the liquidity of the business. It is also said as the key document which shows the
assurance of the financial statements.
Cold Flows :
This report reveals the cash inflow and outflow of the organization which also suggests
the business different experiences of the organization in that given period. Cash flow explains
the operating activities, investing activities and financial activities.
Fund Flow :
It is the statement which shows the flow of fund in the forms of shares, dividends and
profit and losses. It is included when the financial statement are included internally.
Financial ratios helps in the measurement of the relationship between the two or more
components of the financial statements. Different financial ratios are,
Leverage Ratio :

it helps the financial management in the measurement of how much debt can the business
use for carrying out the business to invest the amount it owns (Kariyawasam, 2019). It is also
used for showing the percentage of the assets of the company which is financed by the creditors.
Liquidity Ratio :
It shows the financial management that the business has sufficient cash flow for meeting
the short term obligations which is helpful in analysation of the opportunities which attract
favourable credit. It also indicates the company's ability to pay the immediate creditor of the
organization which can be done only by the most liquid assets owned by the organization.
Profitability Ratio :
The financial management of the organization uses this ratio to understand the generation
of income with the help of each dollar of the sales (Khakbazan, Chaharsoghi and Mokhatab
Rafiei, 2018). Its analysation is important towards the reattainment of the company operating
expenses which is the interest and tax that can be paid. Financial management also considers it
important towards the indication of the amount of the tax which is made after the profit is
generated for each amount of equity.
Operations Ratio :
It is the ratio which is helpful in the general indication of the amount of which identifies
the quick payment of the customers. It is the indication of the time take for the payment of the
suppliers.
SECTION 3
1. Business Review Template
The total net profit for the year of 2016 is £43057 and in 2015 it was £18987000.
Therefore, as per the company's key financial and other performance the main indicators in the
years were as follows
2016
£’000
2015
£’000
Change
%
Turnover (continuing operations) 189,711 179,587 +5.6%
Profit for the financial year 43057 18,987 + 27.3 %
Shareholder’s equity 83815 63,057 +32.9%

Current assets as % of current liabilities 222.3 % 304% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
The turnover from continuing the increase in the operations has been 5.6% during the
year. It initially due to the acquisition of the business on 1st may 2015, which was considered for
the entire year as contribution in 2016.
Gross Profit = £81125
Net Profit = £43057
Rise in the Net Profit in 2016 was 27.3% in the year.
This increased the total shareholder's equity with 32.9% by £20758.
Thus, the following year the company's quick ratio amounted to 1.47 by dividing its current
assets excluding stock with its current liabilities.
In that year the current ratio of the business was 2.22 which was calculated by dividing the
current assets with the current Liabilities.
2. Income statement
Attached in appendix

3. Balance Sheet

4. Ratio analysis of the following information
Ratio analysis is a quantitative method which is utilized for in-sighting the company's
liquidity, operational efficiency and profitability. Following are the calculation to the financial
ratios of this organization.
Liquidity ratio :
Liquidity ratio is consists of two ratios, current ratio and the quick ratio. The current ratio
of this organization is 2.22 which is very positive as the idea current ratio is 2. This organization
has the current ratio which is more than ideal (Mubashir and Bin Tariq, 2017). This suggests
that the organization is more than capable of paying off its short term obligations. Quick ratio of
this organization is 1.47 which is also more that the idea quick ratio which is one that also shows
the liquidity of the assets and the firms capacity to turn its assets into cash.
Efficiency Ratio :

Efficiency ratio is the measurement of the company's ability to use the assets for the
generation of income (Nadar and Wadhwa, 2019). There are two efficiency ratios, the inventory
turnover ratio which for this organization is 3.80 this is slightly less than the idea ratio which
shows restock rate and sales which helps in balancing the business differently. Fixed asset
turnover ratio for this organization is 0.62 which is very low, the company would want to
develop a higher fixed turnover ratio which will indicate the company efficiency in the
generation of the sales or revenue from the assets.
Profitability Ratio :

The profitability ratio shows the amount of profit made against the total revenue of the
organization. Gross profit ratio of this company is 42.76% which is high and shows that the
company is generating profit, this organization to keep the same operations going so that it can
develop sustainability in the profit it is generating. The Net Profit ratio for this organization is
22.70% which is also very high considering the gross profit ratio of this organization. This
indicates that the organization is earning this percentage of profit from the revenue it is
generating (How to use financial ratio to improve the business, 2021).
Section – 4
The processes that businesses might use to improve their financial performance-
From the above analysis it is clear that the business must improve the financial performance of
the company to improve the overall operations of the business. The company's liquidity position
is quite good as both the current ratio and quick ratios are ideal. The different processes that
business might use to improve the performance are-
To increase the profitability, the organisation have to focus on improving the profitability
ratios. The company needs to increase its revenue by reducing the direct costs. The direct costs
can be controlled by eliminating unnecessary expenses of the company. They can also be
reduced by negotiating better prices of the products by offering discounts. The company should

control the overhead expenses also through various ways such as benchmarking, comparing its
operations with other company's operations (Husain, T. and Sunardi, N., 2020).
To improve the efficiency ratios, the business should try to increase the sales. The
company has ideal inventory turnover ratio but the fixed asset turnover ratio is to be improved by
reducing expenses related to fixed asset and selling all those assets that become outdated. It can
also be increased by leasing assets instead of purchasing new assets. The company should
analyse how the asset can be used to increase the productivity of the company. Moreover,
company should focus on collection from debtors. This can be done by outsourcing the accounts
receivables to collection agency. The delivery system should not be slow as it will lead to delays
in reaching products to customers resulting in late collection of money from debtors. The
company can invest in appropriate technology to improve the billing process which will have a
positive impact on revenues and overall efficiency of the company is improved.
To improve the overall productivity of the organization, the company should try to reduce
loan and bad debts. This can be done by making early payment of loans or refinancing those
debts. Proper research is to be done by the company before committing any new agreement. The
organisation should give various payment options to its suppliers to boost its sales. The company
should raise the price of the products when there is excess demand and vice versa. This price rise
and fall strategy is most suitable to improve the efficiency and productivity of the company.
Money can be raised by the businesses through grants as no payment of interest is involved in
such grants (Madushanka, K. H. I. and Jathurika, M., 2018). This is an appropriate way of raising
funds if some innovative or new products are to be introduced. The company should work on its
marketing skills by various strategies such as social media marketing etc.
Overall the position of company is good and the company needs to focus on increasing sales
which will automatically increase profits.
CONCLUSION
By summing up the report it can be said that money or finance plays an important role in
success of any company because business operates with finance acquired and generates profit to
survive and grow in competitive world. It can also be said that financial statements so produced
by organizations furnishes important information which can be utilized by company and external
parties. Further, it can also be articulated that ratio analysis provides deeper information about

company position and performance. It aids company to facilitate inter-firm and intra-firm
comparison. At the end of report, several suggestions are put forward to improve the present
performance of business such as utilizing idle current assets in productive ways, controlling
indirect expenses to enhance net profit and reducing collection period to manage working capital,
etc.

REFERENCES
Books and Journals
Delkhosh, M. and Mousavi, H., 2016. Strategic financial management review on the financial
success of an organization. Mediterranean Journal of Social Sciences. 7(2 S2). p.30.
Husain, T. and Sunardi, N., 2020. Firm's Value Prediction Based on Profitability Ratios and
Dividend Policy. Finance & Economics Review.2(2). pp.13-26.
Kariyawasam, H.N., 2019. Analysing the Impact of Financial Ratios on a Company’s Financial
Performance. International Journal of Management Excellence. 13(1). pp.1898-1903.
Khakbazan, E., Chaharsoghi, S.K. and Mokhatab Rafiei, F., 2018. Presenting an Integrated
Value Based Supply Chain Model Considering Financial Ratios in Financial
Decisions. Modern Research in Decision Making. 3(1). pp.113-136.
Madushanka, K. H. I. and Jathurika, M., 2018. The impact of liquidity ratios on
profitability. International Research Journal of Advanced Engineering and Science.3(4).
pp.157-161.
Mubashir, A. and Bin Tariq, D., 2017. Application of financial ratios as a firm's key
performance and failure indicator: Literature review. Mubashir, Afeera and Bin Tariq,
Yasir, Application of Financial Ratios as a Firm's Key Performance and Failure
Indicator: Literature Review, Journal of Global Economics, Management and Business
Research. 8(1). pp.18-27.
Nadar, D.S. and Wadhwa, B., 2019. Theoretical Review of the Role of Financial
Ratios. Available at SSRN 3472673.
Singh, A. R., 2021. IMPORTANCE OF FINANCIAL MANAGEMENT FOR THE PROPER
FUNCTIONING OF AN ENTERPRISE WITH SPECIAL REFERENCE TO THE
MICRO AND SMALL ENTERPRISES (MSES) OF MANIPUR. EPRA International
Journal of Economic and Business Review. 9(9). pp.20-28.
Online
How to use financial ratio to improve the business, 2021.[Online]. Available through:
<https://www.bdc.ca/en/articles-tools/money-finance/manage-finances/financial-ratios-
what-are-how-use#:~:text=Ratios%20measure%20the%20relationship%20between,and
%20uncover%20signs%20of%20trouble.>

APPENDIX
Income statement