Financial Management and Ratio Analysis for Business Growth

This report discusses the concept and significance of financial management, the primary financial statements, and how financial ratios are used in financial management. It also includes calculations of different financial data using a case study and different ratio calculations that interpret the profitability, liquidity, and efficiency of the business. Finally, it defines the business framework used to drive business growth using illustrations from the case study.

Applied Business
Finance

Contents
INTRODUCTION...........................................................................................................................3
SECTION 1.....................................................................................................................................3
Describe the concept and the significance of financial management..........................................3
SECTION 2.....................................................................................................................................4
Explain how financial ratios are utilised in financial management and what the primary
financial statements are?..............................................................................................................4
SECTION 3.....................................................................................................................................5
(i). Calculations of different financial data using the case provided...........................................5
(ii) Income statement prepared using Excel................................................................................6
(iii) Prepare balance sheet with the help of Excel.......................................................................7
(iv) Different ratio calculations which interprets the profitability, liquidity and efficiency of
the business..................................................................................................................................8
SECTION 4.....................................................................................................................................9
Using illustrations from the case study, define the business framework that is used to drive
business growth...........................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
Financial management is the process of coordinating and controlling a corporation's
economic activities in helping organizations obtain higher returns. It uses a number of
accounting statements and methods to track the firm's productivity and the efficacy of the finance
executive team (Aifuwa and Embele, 2019). The concept and relevance of financial planning, as
well as a variety of statements related to accounting and ratio analysis, are all explained in this
report. The income statement in the appendix goes into more detail about an organization's
performance in terms of profitability, solvency, and reliability.
SECTION 1
Describe the concept and the significance of financial management.
Finance is necessary in order for the business to run smoothly and properly. The branch of an
organisation responsible for the preparation, scheduling, supervising, and administering of
financial activities is classified as financial management. It assists in satisfying the demands of
stockholders while also boosting sales, profit, and growth for the organisation.
 Profitability: It analyses the company's productivity improvements in order to increase
profitability and develop a long-term approach.
 Financial Decisions: It assists in the formulation of critical financial decisions inside the
company. A bad decision might put the entire firm in jeopardy. It alerts the enterprise to a
variety of threats and opportunities, as well as helps it in establishing the proportion of
shareholder capital and secured loans (Block, Hirt and Danielsen, 2018).
 Fund Allocation: Profits can be used to distribute monetary resources and payouts in the
most efficient way possible. It boosts the company's operating viability while improving
the functional ratio and lowering the cost of capital.
 Formation of the capital structure: It must be implemented in order to calculate the
required capital. Every business initiative is dependent on how much capital a company
already has or how much it wants to raise coming from external investors.
 Economic stability: It creates a safe environment to the firm since it represents a solid
financial structure. By eliminating degrading practises, it can enable the firm earn more
money.

SECTION 2
Explain how financial ratios are utilised in financial management and what the primary financial
statements are?
Accounting Records are the information that must be kept by the company. It represents the
economic activity and position of the company. Internally and externally audited by public
officials, auditors, and firms to assure the tax's trustworthiness and validity, as well as for
investment purposes (Brigham and Houston, 2019). Some of the vital statement which are
mostly used are:
 Balance Sheet: It depicts a corporate resource, obligations, and shareholder equity all
across the duration of a fiscal year. Both the assets and liabilities parts should be
equivalent; and if they are not, the transaction is not being recorded correctly. It also
shows the cash and bank balances for the current fiscal year.
 Income Statement: It concentrates on the industry's income and expenditures in order to
calculate the profitability, which is referred to as net earnings or profit. It is preserved to
demonstrate how often money the business makes. To obtain at the annual year's
earnings, add up the revenue and deduct the expenses incurred over the fiscal year. It is
divided into two parts. First, gross profit is calculated using operational income and
expenses. Non-operating expenses are subtracted from net profit, while non-operating
income is added (Ingale and Priya, 2018).
 Cash Flow Statement: It assists in identifying the need for outside funding. It
determines the cash intake and outflow for operations, investments, and financing.
Operating transactions include modifications in existing liabilities and the assets, along
with interests and tax payments. Investing operations include the buying or selling of
capital expenditures, and also any payments made in connection with a merger or
acquisition. Financing activities include the issuing of capital reserves, debt instruments,
mortgages, and dividend payments.
Ratios: It is utilised to compare the position of two or even more sections of a financial
statement. It is a summary of the financial information found in the accounting records. It
evaluates the economic performance of the organisation and allows it to be proactive. It

evaluates productivity and profitability over the short and long term, enabling in the recognition
of company trends. It denotes the association or comparison made between the different statistics
with in income statement and the statement of financial position (Perini and et., al., 2018). These
ratios can be used to compare a company's performance to previous year's outcomes or to the
progress of all other firms in the same sector. It also aids in recognising and forecasting existing
and future trends. Businesses can use a number of different ratios to monitor their working
capital.
Use of Ratios:
 Comparisons: It evaluates the firm's financial position and comparing it to those of other
similar businesses.
 Decision- making: Financial statements can be used to examine productiveness,
movements, spending and borrowing capacity, which can help you make the best
decisions.
 Efficiencies in Operations: It contributes in determining the liquidity, stability, and
profitability of a corporation. It also demonstrates management's capacity to maintain
minimal expenses while generating revenue and profit.
 Utilization of fiscal resources: This metric gives quantifiable data about a corporation
that may be used to assess resource excess and underutilization (Rey and et., al., 2022).
SECTION 3
(i). Calculations of different financial data using the case provided.
The Net Profit for the year 2016, is £43,057. (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as
follows:
2016
£’000
2015
£’000 Change %
Turnover (continuing operations) 189711 179587 +5.6%
Profit for the financial year 43057 18,987 +126.77%
Shareholder’s equity 83802.75 63,057 +32.9%
Current assets as % of current liabilities 222 % 304.00% -82%

Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
Turnover from continuing operations increased by 5.6% during the year, primarily due to the
acquisition of the Extinguishers business on 1 May 2015, which made a full year’s contribution
in 2016.
Gross Profit = £81,125
Net Profit = £43057
Net Profit increased in 2016 by 126.77% during the year.
Shareholders’ equity increased by 32.9% by £20,745.75.
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 are shown in appendices)
(ii) Income statement prepared using Excel.
Included in appendix.

(iii) Prepare balance sheet with the help of Excel.

(iv) Different ratio calculations which interprets the profitability, liquidity and efficiency of the
business.
Financial Ratio analysis refers to the interpretation which is done of the financial
information of the business. The financial information which is present in the financial
statements of the business are taken up to determine the relationship between these two or more
factors. Different ratios are used in the business to determine position of the business in different
aspects (Terdpaopong and et., al., 2020). Following are the calculations related to the
profitability, efficiency, liquidity ratios of the case business.
Profitability Ratios:
These ratios determine how capable the business is to earn profits on its sales. The profitability
of the business is measured at different levels of the operations of the business. Two of these
ratios are calculated below:
 Gross Profit Margin= (Revenue – Cost of sales)/ Revenue* 100
= (189,711 – 108,586)/ 189,711* 100 = 42.76%
 Net Profit Margin= (Net profit/ Revenue) * 100
= (43,057/189,711) * 100 = 22.70%
Interpretation: The profit margin of the business shows how much earnings are left in the
business after paying the different costs incurred by the business. The gross profit margin of the
business is 42.7% which shows that the business is able to save this much of the revenue on its
operating costs. The net profit margin of the business is 22.70 % which means that 20 % of the
profit is eaten up by the non-operating expenses of the business.
Efficiency Ratios:
These ratios of the business highlights how efficient the operations of the business is in using the
assets they are provided with to make the profits of the business. This measures the business's
ability to collect the cash from the debtors and spend and invest these amounts for different
expenses of the business (Torkashvand and et., al., 2021). Following are the calculations of
same:
 Asset turnover Ratio= Total Sales/ Total assets = 189,711/153,647 = 1.23
 Stock Turnover Ratio = Cost of Sales/ Stock = (108,586/28,571) = 3.8
 Accounts receivable Days = 365/ Debtors Turnover Ratio =365/ 7.19 = 50.77 days

 Accounts Payable Days = 365/ Creditors Turnover Ratio = 365/7.04 = 51.84 days
Interpretation: From the above calculations it can be seen that the business is taking up too
much time to receive the debts and make payments to its creditors. Even though the time taken
up is almost same, the business may face some complications as there is no significant gap in
these two. The asset turnover ratio of the business is 1.23 which shows the business is using up
its assets well to sustain in the industry.
Liquidity Ratios:
These ratios show how the business is able to maintain and repay its debt obligations and
maintain the liquidity requirements of the business (Zhang and et., al., 2020). These ratios are
related to the short term assets and liabilities of the business.
 Current Ratio = Current Assets/ Current Liabilities
= 84,349/ 37,928 = 2.22:1
 Quick Ratio = (Current Assets- Stock)/ Current Liabilities
= (84,349 - 28571)/ 37,928 = 1.47:1
Interpretation: The above ratios determines the payoff position of the business. The ideal
current ratio is 2:1 and the quick ratio is 1:1. From the above calculations it can be seen that the
business is solvent and the current and quick ratio of the business is above the ideal ratios and the
business is able to meet its short term payment obligations efficiently.
SECTION 4
Using illustrations from the case study, define the business framework that is used to drive
business growth.
In order to increase the company's economic performance, it is necessary to review all of
the corporation's strategy and valuation aspects. Its productivity is affected by revenues, resource
optimization, working capital approach, accountancy staff efficiency, as well as other things. The
sales and finance divisions constitute two of the major components of the company's success.
At distinct stages of operation, numerous financial considerations should be created with
the aim of minimising expenses. It could be a manufacturing fee, an asset purchase cost, or any
other type of fee. The agency may also modify its data capture software to avoid any issues with
this technology. Unpaid debts have a negative impact on the company's financial flow. To avoid

any cash flow problems, the company has to make sure that it receives payments from creditors
on time.
The sales department must also ensure that its strategies are implemented to increase sales
and extend the customer base of the organisation. They should employ a marketing mix strategy
that permits them to find new customers. This division is in charge of increasing the firm's
inventory turnover and profitability ratios (Zimmermann and et., al., 2019).
CONCLUSION
According to the aforementioned report, a successful business requires a strong financial
management system. It organises and plans all of the money in order to generate sales and utility.
It uses a number of financial accounts to examine a corporation's performance and identify ideas
for improving the firm's status using approaches such as accounting ratios. By creating a relation
between different statistics in the financial statements, these ratios aid in the assessment of the
profits, effectiveness, and liquidity condition.

REFERENCES
Books and Journals
Aifuwa, H.O. and Embele, K., 2019. Board Characteristics and Financial Reporting. Journal of
Accounting and Financial Management. 5(1). pp.30-44.
Block, S.B., Hirt, G.A. and Danielsen, B.R., 2018. Foundations of financial management.
McGraw-Hill Education.
Brigham, E.F. and Houston, J.F., 2019. Fundamentals of Financial Management 15th.
Ingale, D. and Priya, M., 2018. To Study the financial position of steel authority of India Limited
by using ratio analysis technique. South Asian Journal of Marketing & Management
Research. 8(4). pp.4-13.
Perini, M., and et., al., 2018. Stable isotope ratio analysis of different European raspberries,
blackberries, blueberries, currants and strawberries. Food chemistry. 239. pp.48-55.
Rey, F. and et., al., 2022. Fatty acid ratio analysis identifies changes in competent
meroplanktonic larvae sampled over different supply events. Marine environmental
research. 173. p.105517.
Terdpaopong, K., and et., al., 2020. The 2011 floods’ impact on the Thai industrial estates’
financial stability: a ratio analysis with policy recommendations. Environment,
Development and Sustainability. 22(3). pp.1991-2014.
Torkashvand, M., and et., al., 2021. DRASTIC framework improvement using stepwise weight
assessment ratio analysis (SWARA) and combination of genetic algorithm and entropy.
Environmental Science and Pollution Research. 28(34). pp.46704-46724.
Zhang, N., and et., al., 2020. Predictive value of neutrophil-lymphocyte ratio and platelet-
lymphocyte ratio in non-small cell lung cancer patients treated with immune checkpoint
inhibitors: A meta-analysis. International Immunopharmacology. 85. p.106677.
Zimmermann, T., and et., al., 2019. Matrix separation of Sr and Pb for isotopic ratio analysis of
Ca-rich samples via an automated simultaneous separation procedure. Spectrochimica
Acta B. 151. pp.54-64.

APPENDIX
Income Statement:

Calculations: