Financial Management and Ratio Analysis for Improved Business Performance

This article discusses financial management, including planning, organizing, directing, and controlling. It also covers financial statements, ratio analysis, and ways to improve business performance. The article includes a case study and appendix with balance sheets and calculations. The subject is applied business finance, and the course code and college/university are not mentioned.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Section 1...........................................................................................................................................3
MAIN BODY...................................................................................................................................4
Section 2...........................................................................................................................................4
Section 3...........................................................................................................................................6
iv) Analysis of company's profitability, liquidity and efficiency with the help of ratio analysis
.....................................................................................................................................................8
Section 4...........................................................................................................................................9
Process through which the company can improve its financial performance.............................9
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
Section 1
Definition of financial management: According to Guthman and Dougal, Financial
management is concerned with the activities such as planning, acquiring, controlling and
administering the financial resources of the business.
Financial management is a practice adopted to manage the financial resources associated with
the organisation. Financial management is a concept comprises with various features that involve
planning, implementing, controllability such like factors.
Planning
Planning is a initial stage belong to the financial management as a concept. This is an
initial stage of the financial management practice adopted by the organisation. Planning involve
analysing the need of the business entity in context to financial resources and on the basis of the
needs analysed this is about to plan the use of financial resources at the organisation. Planning
play a significant role in the entire financial management related practices adopted by the
organisation (Yang, 2021). This stage of the financial management practice support both the
aspects or elements such as analysing the financial requirements of the business entity along with
identifying or planning about the right sources to mitigate the respective financial requirements.
Organizing
Organising is among the core financial management practice adopted by the organisation.
This is about to organise all different funds available with the organisation. The role of
organising is very crucial in respect to the business venture when it comes conducting the
financial management practice at the company. This involve identifying the sources and on the
basis of the identification done this is about to organise all different funding requirements of the
company. All different sources of funds are also analysed in this which comprises with long term
sources along with short term sources of funds identified by the business entity.
Directing
Directing is among the core area of practice related to the financial management practice
adopted by the organisation. Directing is about to guide the financial professional to make a best
possible use of the financial resources adopted by the organisation. The role of directing is to
ensure the most optimum level of utilisation related to the financial resource obtain by the entity

(Ferdiana and Sulistyo, 2019). Directing is the use of different techniques like budgeting and
such like practices to make a best possible use of the financial resources adopted by the firm.
Role of directing is very significant in respect to the business venture to support the organisation
in consuming financial resources in the best way possible. This is done byt the head of finance
team and professional contain experience and good knowledge about the financial resources and
its utilisation.
Controlling
Controlling is among the core area or practice that support the business entity to improve
the utility of the financial resource adopted by the organisation. This is a process that involve
taking suitable decisions to manage and control the financial resources entertain by the venture.
The above stated factors are a part of the different concepts related to the financial
management adopted by the organisation.
Importance of financial management
 It improve the financial stability at the organisation.
 Financial resources are get to utilise in the best way possible through the use of best level
of financial management practices adopted by the company.
 Financial management support the financial stability at the organisation.
 This also play role in improving the liquidity situation at the organisation.
MAIN BODY
Section 2
Financial statements are all about the documents that demonstrate about the different
areas related to the financial management practices adopted by the organisation. All these
statement demonstrate about the all different areas and tactics related to the financial stability
uphold by the organisation.
Income statement
Income statement is among the core record associate with the financial management
practice adopted by the organisation. This is a statement demonstrate about the income and
expense record belong to the venture (Chmutova, Vovk and Bezrodna, 2017). The role of the
income statement is to project about the income business venture entertain against delivering
business operations and the expense that could be incurred against delivering the business

practices. This is a basic projection related to all income and expenses incurred by the company
in the respective financial year.
Balance sheet
Balance sheet is a summarise statement related to the assets hold by the organisation and
liability owe by the organisation. This demonstrate about all the assets such as current and long
term assets undertake by the venture (Karadag, 2017). Along with this liabilities such as current
liability and long term liabilities are projected in this record. Equity related details are also given
in this statement.
Cash flow statement
Cash flow statement is a projection related to all cash inflow and outflow associated with
the organisation. This statement demonstrate all cash nature income and all cash form of
expenses incurred by the organisation. The aim of the statement is demonstrated about the
liquidity position of the organisation.
Use of ratio in financial management
Ratio is a technique that is used to analysis the financial performance and stability of the
organisation. This is a technique support the organisation to analysis the overall performance of
the venture in the respective financial year. The technique of ratio is to identify the different
performing areas like profitability, liquidity, efficiency and such like areas associated with the
financial management. The basic characteristic of the ratio analysis is to identify the performance
of the organisation and also to compare the ratios with previous financial years (Cashin and
et.al., 2017). The use of ratio is also undertaking decisions relayed to the financial management
at the organisation. In context to the financial management the basic role ratios play in to make
decisions in context o business operations. Ratios support the management to understand the
overall performance of the venture and based on that this is about to make important decisions on
the basis of the financial needs and requirements of venture. Ratio played a key role in
supporting the overall growth of the business entity by identifying certain opportunities or areas
that seek an improvement or development.

Section 3
Calculating profit for the 2016 financial year
Turnover with reference to 2016 – (cost of goods sold) - (total of overheads) = 189711 – 108586
– 38068 = 43057.
Percentage change in net profit between the year 2015 and 2016
= net profit associated with year 2016 – net profit associated with year 2015 / net profit for the
year 2015 (base year) * 100
= 43057 – 18987 / 18987 * 100 = +126.77%.
Equity of the Shareholders in 2016
= Equity of shareholders with reference to 2015 / 100 * 132.9 = 83803.
Current assets as percentage of current liabilities in the year 2016
= Current assets as a percentage of current liabilities in year 2015 * (100 - 82) %
= 304% or 3.04 * 18% = 0.5472%.
Gross Profit in 2016 = Turnover – cost of goods sold = 189711 – 108586 = £ 81125
Net Profit in 2016 = Gross profit in 2016 – total of overheads = 81125 – 38068 =
£43057

Increment in Net Profit in 2016 by 126.77 % during the year.
Increment in Shareholders’ equity by 32.9% comes out as 83803 – 63057 = £20746.
The “quick ratio” of the company, that is (Current Assets (less stock) / Current
Liabilities) = 0.005472
The “current ratio” of the company, that is, (Current Assets / Current Liabilities ) =
0.005472
NOTE: The reason behind similarity between current ratio and quick ratio is that the case study
is silent about the amount of inventory or closing stock.
ii) In Appendix
iii)
Balance sheet as at
31 December 2016
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 83,815
iv) Analysis of company's profitability, liquidity and efficiency with the help of ratio analysis
Profitability analysis of a company: The financial performance of the company as indicated
within the case study is quite stable in terms of gross profit margin. Whatever the fluctuations are
reflected are minor and also a favourable one (Rocchi, Ferrero and Beadle, 2021). As the
company's sales has increased as indicated by turnover of the company, there are increments in
the gross profit margin of the company. Also, there are huge increments in the amount of net
profit generated by the company due to lower overhead costs incurred within the company in the
current year as indicated by lower operating and non-operating costs (interest expenses).
Liquidity analysis of a company: Liquidity of the company can be well seen through its current
and quick ratio. With reference to the company in the case study, there seems a very sharp fall in
the liquidity position of the company. These ratios are indicating company inability to meet their
obligations that are going to arise within a period of one which necessarily required enough
liquid assets against the balance in current liabilities. Both in the previous and current year,
company doesn't have a favourable liquidity position (Salman and Jamil, 2017). As the current
ratio of the company get lowered by 82% in the current year than what it was in previous year
leads to the condition where a company is having a very high current ratio than required to meet
its current liability in the previous year; and in the current year, the current ratio of the company
has lowered down to such low level making it unsuitable for meeting its short term obligations.
Efficiency analysis of a company: The major reduction in the company's non-operating and
operating expenses is the biggest indicator of company's improved efficiency. Lower cost of
operations allows for higher efficiency within the company due to which there are chances of
higher profitability (Maxwell, 2017). In the case study given, it can be seen that the company's
net profit has increased due to higher efficiency in terms of reduced non-operating and operating
costs. Thus, it can be concluded that there are improvements in the overall efficiency of the
company. Also, an increased satisfaction to customer is an indicator of improved efficiency
within the company, as now with reduced costs the company can offer its products in the market
at lower rates which would accordingly results in higher benefits and higher satisfaction to
customers.

Section 4
Process through which the company can improve its financial performance
 Poor liquidity of the company can be improved by lowering down overhead costs and
managing better terms with creditors and debtors of the company. Company can extend
better discounts and offers to its debtors, so that whatever liquidity has been stuck with
the debtors can be obtained on time without going for financial support from external
sources to tackle day to day business operations (Schoenmaker and Schramade, 2018).
Also, by obtaining more time from creditors, the company can retain more liquidity in
terms of more working capital and liquid assets for making immediate payments. At last,
reduction in overhead costs allows for retaining higher cash balances with the company
and accordingly, both current and quick ratio can be improved.
 Company can make arrangement for liquidity by selling off its assets which are of no use
in the business and can save itself from creating extra obligations by arranging it from
external sources, so that additional loss of liquidity to interest payment can be avoided.
 Financial performance can also be improved through reducing and raising prices of the
product of the company (Smith, Smith and Bliss, 2020). If market allows then the
company can raise its prices while prices can be reduced to some extent if the cost per
unit is lower than the current market price to enhance customer base. Both raising and
reducing prices are suitable for higher profitability of the company.
 If the company resorts to owned fund rather than acquiring it from external sources, this
would be helpful in reducing financial risks and enhancing liquidity due to the
elimination of interest related costs.

REFERENCES
Books and Journals
Rocchi, M., Ferrero, I. and Beadle, R., 2021. Can finance be a virtuous practice? A MacIntyrean
account. Business Ethics Quarterly, 31(1), pp.75-105.
Salman, A. and Jamil, S., 2017. Entrepreneurial Finance and its Impact on e-Business. Problems
and perspectives in management, (15, Iss. 3), pp.24-41.
Maxwell, D., 2017. Valuing natural capital: Future proofing business and finance. Routledge.
Schoenmaker, D. and Schramade, W., 2018. Principles of sustainable finance. Oxford
University Press.
Smith, J. K., Smith, R. L. and Bliss, R. T., 2020. Entrepreneurial finance. Stanford University
Press.
Yang, L., 2021. Auditor or Adviser? Auditor (In) Dependence and Its Impact on Financial
Management. Public Administration Review. 81(3). pp.475-487.
Ferdiana, R. and Sulistyo, S., 2019. The role of information technology usage on startup
financial management and taxation. Procedia Computer Science. 161. pp.1308-1315.
Chmutova, I., Vovk, V. and Bezrodna, O., 2017. Analytical tools to implement integrated bank
financial management technologies. Economic annals-XXI. (163). pp.95-99.
Karadag, H., 2017. The impact of industry, firm age and education level on financial
management performance in small and medium-sized enterprises (SMEs): Evidence
from Turkey. Journal of Entrepreneurship in Emerging Economies.
Cashin, C. and et.al., 2017. Aligning public financial management and health financing:
sustaining progress toward universal health coverage (No.
WHO/HIS/HGF/HFWorkingPaper/17.4). World Health Organization.

APPENDIX
Section 3
ii)
Income statement for the year ended 31st
December 2016
2016
Turnover 3 189711
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labour Cost 50758
108586
Gross profit 81125GP % = 42.8
Less Expenses:
Administrative expenses 13751
Other operating overheads 22374
Interest 1943
Total Overheads 4 38068
Profit/(loss) for the financial year 43057NP %= 22.7