Managing Financial Resources

This document discusses the management of financial resources, including ratio analysis, cost classification, and job cost cards. It also explores the limitations of financial ratios and provides recommendations for selecting the best quote. The subject is finance management, and the document type is a study material.

MANAGING FINANCIAL
RESOURCES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Task 1...............................................................................................................................................1
a. Computation of ratio...............................................................................................................1
b. assessing the performance and comparing both the companies .............................................2
c. Analysing limitation of the financial ratios in the process of decision making......................4
Task 2...............................................................................................................................................5
a. Determining the types of cost classification in manufacturing goods and the services .........5
b. Preparing job cost card ...........................................................................................................6
c. Recommending selection of best quote to the finance manager.............................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Management of the financial resources includes the details of the money available to the business for making expenses in form
of the cash, credit lines and the liquid securities. Prior to entering into the business, an organization requires to secure enough financial
resources for the purpose of achieving operational efficiency and effectiveness in promoting its success. The present study is based on
ratio analysis of Jones Ltd and Millet Ltd that depicts the financial performance and position of the company. Furthermore, it includes
framing of job cost records for Benns Ltd that produces bespoke furniture’s.
Task 1
a. Computation of ratio
Comput
ation of
Financi
al
Analysi
s Formula/Workings Jones Ltd Millet Ltd
1
Operating Profit
Margin:
Operating Profit x 100 23.73% 25.96%Revenues
2
Return on
Shareholders' fund
Operating Profit
x 100
31.21% 31.05%
(Total Equity+ Non-
Current Liabilities)
3 Return on Equity Profit After Tax x 100 27.96% 25.43%Total Equity
4
Inventory
Tournover
Inventory x 365 9.09 9.26Cost of Sales
1

5
Accounts
Receivables
Collection period
Accounts
Receivables x 365
27.71 25.76Revenues
6
Quick Ratio
(Current Assets -
Inventory )
0.80 1.21Current Liabilities
7
Gearing Ratio
Total Equity
x 100
21.36% 4.58%
(Total Equity + Non
- Current Liabilities)
8 Interst Cover Ratio Operating Profit
8.91 43.83Interest Expenses
9
Dividend Cover
Ratio
Profit After Tax
12.2 6.41Dividend Paid
10 Dividend Per Share Dividend Paid
490 3280Number Of Shares
b. assessing the performance and comparing both the companies
Operating profit ratio- It is the ratio that indicates the amount of profit earned by the companies after paying their expenses or
variable cost in the process of production like wages, material etc (Shao and Billington, 2020). Higher the operating ratio, depicts
profitable business for the company. The operating margin of Millet Ltd is higher resulted as 25.96% than Jones Ltd equated to
23.73%. This means that Millet is performing better and earnings more profits after meeting its routine expenses.
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Return on shareholders funds- This ratio reflects the proportion of money returned to owners of an enterprise in percentage
value that they had been invested in their business (Netreba and et.al., 2018). Greater the percentage means more amount of the money
is returned to the stakeholder or investor. The ratio of Jones and Millet evaluated as 31.21% & 31.05% which clearly indicates that
both the company is facilitating good amount of returns to their respective investors.
Return on equity- It referred as the profitability ratio that measures an ability of the company in generating the profits from the
investment made by their shareholders. Higher the ratio of return on equity indicates better performance of the company (Jiang and
et.al., 2019). As the ROE of Jones Ltd is higher or better equating to 27.96% as compared to Millet Ltd resulting as 25.43%. This
reflects better returns gained by Jones on its shareholders investment.
Inventory turnover ratio- It means number of times an entity's average inventory is been sold during the account period. High
ratio indicated a fast moving inventory and the low ratio reflects obsolete or the slow moving stock (Almohamad and et.al., 2018). The
ITR ratio of both the companies accounted as 9.09 and 9.26 which does not show a large difference that means Jones and Millet both
convert their inventory into cash as 9 times.
Accounts receivable days- This shows the number of days customers or the debtors of the firm takes in paying off their
receivables (Peng and et.al., 2017). The customers of Jones takes 27.71 days in making payment on the goods purchased by them
whereas, debtors of Millet takes 25.76 days for paying their invoices. This depicts that trade debtors of Millet are taking less time than
customers of Jones in making their dues clear so it shows better performance of the Jones.
Quick ratio- It is the ratio that acts as an indicator of the short run liquidity position of the company that measures an ability of
the firm for meeting their short term liabilities with the use of their major liquid assets (Yang and et.al., 2018). It has been stated that a
quick ratio higher than 1 reflects company is having sufficient quick assets for paying off their current obligations. As quick ratio of
Millet resulted greater than 1 that is 1.21 but ratio of Jones equates to 0.80, this clearly indicates that Millet is capable of the meeting
its short term obligations effectively with their immediate assets than Jones.
3

Gearing ratio- It is kind of financial ratio that compares the debt of the company in relation to different financial metrics like
total equity. It is counted as the measure of leverage position of the company that is the level of the liabilities present in the capital
structure of an entity that are interest bearing (Cleophas and Zwinderman, 2019). A gearing ration in between 25-50% is said as good
and reflects optimum for the well-established corporations. With respect to the evaluation it has been presented that gearing ratio of
Jones is much better than millet because its ratio resulted as 21.36% which is close to optimum ratio. However, Millet's gearing ratio
attained as 4.58% which reflects a bad leverage position of the company.
Interest coverage ratio- It is the measures that states for number of times the company can make its interest obligation through
its earnings. High ratio is considered to be better because it shows that an entity is having enough profits for paying their interest
expenses while low ratio indicates low profitability (Papista and et.al., 2018). The ICR of Millet is better as its ratio is higher with a
greater value that is 43.83 as its interest obligation are very low as compared to Jones Ltd resulting a ratio as 8.91.
Dividend coverage ratio- This ratio indicates capacity of an enterprise in paying off their dividends from the profit attributable
to their shareholders. A dividend coverage of the 3 implied that company is having enough earnings in paying off their dividends.
Jones has good capability in making the payment of dividend through their profits as its ratio is greater that is 12.2 as compared to
Millet equates to 6.41.
Dividend per share- The value of DPS of Millet is higher because the amount of annual dividends of Millet is greater than
Jones resulting as 3280 and 490. This shows the better position and performance of Millet as compared to Jones.
Overall the performance of Jones is better than Millet as its profitability ratios, gearing ratio and efficiency ratio are higher
than Millet so fro earning better returns, Benns Ltd must make investment in Jones Ltd.
c. Analysing limitation of the financial ratios in the process of decision making
Financial analysis tends to be useful as it highlights the relationship between different items in the final reports. There are
several limitations associated with financial ratios that are as follows-
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 Financial ratios are evaluated on the basis of accounting figures that are been provided in the final statements of the
company (Zhang and et.al., 2017). As the accounting figures contains deficiencies, estimations and subjected to
manipulation so ratios drawn from it are not counted as useful in order to infer accurate and reliable conclusions.
 It comprises of comparability problem as different company employs or chooses different methods of accounting, that
in turn causes problem in making appropriate comparison in key relationships.
 In some cases, inflation might limit the utility of the financial ratios as because of inflation, historical based final
reports and the accounting figures does not shows present value figures. Therefore, accounting ratios computed
contains distortions and becomes deceptive over the years.
 Accounting ratios are not considered as totally dependable and it should be utilised after facilitating the due weight to
the general economic conditions, position of the firm, industry situation, size of the company and product diversity
which in turn makes the corporation entirely dissimilar and impact calculation of the financial ratios.
 Various methods of calculating influences utility of the accounting ratios and various concepts that are been used in
identifying denominator and the numerator in the specific accounting ratio does not assist in drawing the reliable
conclusions in the identical situations.
Task 2
a. Determining the types of cost classification in manufacturing goods and the services
The cost is classified in this study based on elements, function and behaviour that are as follows-
Direct cost- It means the cost that is been directly mark up to specific cost like raw material, e labour cost involving operating
expenses and the other related cost.
Indirect cost- It refers to the cost that does relate directly with a department or the unit and could not be tracked for a particular
product (Papista and et.al., 2018).
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Prime cost- This cost means an adjustment of direct material, cost and labour. It is computed as the result all the three
components.
Factory overheads- It relates to all types of the indirect cost that incurs in manufacturing the product.
S&D overheads- It refers to the overhead that is included with an advertising expense and the cost of packing material like
marketing, advertising etc.
Administrative overheads- It means expense relating to office works such as rent, office lighting etc.
Variable cost- It means the changing proportion of the cost with change in the production like direct material and the
changeable cost.
Fixed cost- It is the cost that do not changes with change in production of process. It remains fixed for long period of time. For
instance- rent, insurance, equipment cost etc.
b. Preparing job cost card
Job cost statement
Particulars Total cost Cost per unit
Direct material 1041 15.8
Direct labour 2925 23
Direct expenses 1020 85
Prime cost DM+DL+DE 4986 123.8
Add: factory overhead 156.15
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Factory cost 5142.15
Add: Administrative
overheads 797.03325
cost of production 5939.18325
Add: selling and
distribution overheads 523.53
Cost of sales 6462.71325
Profit or loss 743.21202375
Working note:
Particulars Metres Per unit price Amount
Wood 120 6.3 756
fabric 30 9.5 285
Total direct material
cost 15.8 1041
Hours Price Per hour Amount
manufacturing 150 12.5 1875
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finishing 100 10.5 1050
Total direct labour
cost 23 2925
Weeks Price per week Amount
equipment cost 12 85 1020
Total direct expense 85 1020
DMC 1041
Factory overhead 15%*1041 156.15
production cost 5142
administrative
overheads 15.5%*5142 797.01
Prime cost 4986
selling and
distribution overhead 10.5%*4986 523.53
Total cost 6462.7
Profit or loss 11.5%*6462.7 743.2105
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c. Recommending selection of best quote to the finance manager
From the above evaluation it has been analysed that as the cost of sales resulting as 6460.7 after adding up all the cost. This
shows that finance manager must accept the quote of £7,450.99 from its customers as it will be a profitable proposal because after
deducting the estimated cost of 6460 from 7450, profit is gained of 988 by an enterprise. Therefore, cost report helps in identifying
accurate anticipations of the cost so that manager can compute accurate profitability that a company could be able to generate in the
future after meeting all of its expenses.
CONCLUSION
By summing up the above report, it is been identified that performance of Jones Ltd is better than Millet Ltd as its gearing,
profitability, leverage and efficiency ratios are showing better results. The job cost report helps Benns Ltd in making adequate
estimation of the expenses and the income that will be generated from its business activities and in selecting the best order which helps
in generating larger returns and low cost.
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REFERENCES
Books and Journals
Almohamad, T.A. and et.al., 2018. Simultaneous determination of modulation types and signal-to-noise ratios using feature-based
approach. IEEE access. 6. pp.9262-9271.
Cleophas, T. J. and Zwinderman, A. H., 2019. Benefit Risk Ratios. In Analysis of Safety Data of Drug Trials (pp. 129-134). Springer,
Cham.
Jiang, F. and et.al., 2019. Anti-corrosion behaviors of epoxy composite coatings enhanced via graphene oxide with different aspect
ratios. Progress in Organic Coatings. 127. pp.70-79.
Netreba, A. and et.al., 2018. Restoration of the protons spatial distribution for different types ratios of the biological
tissues. Molecular Crystals and Liquid Crystals. 673(1). pp.97-108.
Papista, E. and et.al., 2018. Types of value and cost in consumer–green brands relationship and loyalty behaviour. Journal of
Consumer Behaviour. 17(1). pp.e101-e113.
Peng, X. and et.al., 2017. Different responses of terrestrial C, N, and P pools and C/N/P ratios to P, NP, and NPK addition: a meta-
analysis. Water, Air, & Soil Pollution. 228(6). p.197.
Shao, Y. and Billington, S. L., 2020. Flexural performance of steel-reinforced engineered cementitious composites with different
reinforcing ratios and steel types. Construction and Building Materials. 231. p.117159.
Yang, Z. and et.al., 2018. Relationships between product ratios in ambimodal pericyclic reactions and bond lengths in transition
structures. Journal of the American Chemical Society. 140(8). pp.3061-3067.
Zhang, Z. L. and et.al., 2017. Cost-Sensitive back-propagation neural networks with binarization techniques in addressing multi-class
problems and non-competent classifiers. Applied Soft Computing. 56. pp.357-367.
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