Financial Ratio Analysis and Reporting

This assignment focuses on analyzing financial ratios and their significance in assessing corporate performance. It delves into various ratio types, including profitability, liquidity, and solvency ratios, examining how they provide insights into a company's financial health and operational efficiency. The assignment also explores the reporting practices surrounding financial statements and the influence of stakeholders on these reports.

Managing Financial Resources

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK.1............................................................................................................................................3
1.1 Identification of source of finance:.......................................................................................3
1.2 Implications of the different source of finance.....................................................................4
1.3 Evaluation of different financial source................................................................................4
2.1 Cost of different source of finance........................................................................................5
2.2 Importance of financial planning..........................................................................................5
2.3 Information required for making decisions...........................................................................6
2.4 Impact of finance on financial statements.............................................................................6
3.1 Cash budget...........................................................................................................................6
3.2 Calculation of unit cost.........................................................................................................7
3.3 Assess viability of project.....................................................................................................8
TASK 2..........................................................................................................................................10
4.1 Financial statements............................................................................................................10
4.2 Comparison on appropriate format of financial statement in different businesses.............11
4.3 Interpretation of financial statements using appropriate ratios by using internal and
external ratios............................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
There is a need of enough capital for running any business. This is much required for
every kind of business from small running to large scale businesses. But the capital which is
needed by the firm, is to optimum implemented for effective running. But, there is strong
management of finance (Arthur, Cheng and Czernkowski, 2010). For management of finance is
not an easy as it requires vast knowledge for the handling of finance and makes decisions
accordingly. Strategically, financial management process starts from the raising funds to the
implementation into the most utilizing things in the business. The acquisitions of finance, cost of
funds, risk factors of raising finance, return on investment and so many things which are needs to
decides after deep analysis of financial factors, and then makes decisions (Managing Your
Resources, 2017). The decisions to be made after analysing the financial statements or other
relevant statements which are much required for decisions.
TASK.1
1.1 Identification of source of finance:
In order to start a new business company need to raise capital which is required at the initial
stages. It depends on the advantages and disadvantages of the different sources that which is best
suitable . Creations is a beauty saloon whose main aim will be providing the customers with the
best services of excellent quality.
Mission of business- To develop the physical appearance of the customers.
It is very important to keep the interior of the saloon very attractive and comfortable so that
costumer feel comfortable while taking the services. Selecting the best location is very important
as it will have major impact on sales.
The entrepreneur available balance is £20,000 and he is thinking to launch a project
which needs £300,000. To meet the rest demand, company needs to raise
capital, the capital is raised via equity or debts, it is depending on the
nature of the cost. The entrepreneur now need to know the cost of capital of
both ways; equity or debt. Normally, entrepreneur can raise finance via
various ways through which the the ambitious projects could be
implemented. Here, There are different sources of finance which the
entrepreneur could exercise. Which includes:

Internal sources:
Equity share: It is a type of share and it is also known as owner of the
company and the dividend should be provided to them in the cash but in last
after providing the dividend to preference shares. Those person who are
having the equity share having a right to take any type of decision for
betterment of the business entity. The equity dividend rate is not ascertain
(Bennouna, Meredith and Marchant, 2010).
Debenture: This is normally a kind of debts which shows the
indebtedness to the company. Under this, company would able to get the
finance for their ambitious purpose and meet out the requirements as per
their necessities. It is not connected with any banks. In this, those persons
who are having the debentures of the firm they can take the interest at a
fixed rate when the company earning maximum profit.
Retained earning: It is a process of reinvestment and it refers to the
percentage of net earnings and not paid as a dividends. It help the
employees of the business entity to do reinvestment in the core business
(Bodie, 2013).
External sources:
Bank loan: Banks and financial institutions issue loans to the the enterprise under this the
business plan is highly competent. Therefore, the owner of restaurant business could raise funds.
1.2 Implications of the different source of finance
There are different sources of finance which are stated above and
Balti Placehave to use these sources of finance so that they can not face any
obstacles in managing the different operational activities of the company.
Equity shares: Equity shares are also known as ordinary shares and
the person who having the company's equity shares they are the owner of
the firm and they can make any type of decision for the favour of the

business entity. For the owners of the equity share, they have to dividend
but not have any fixed rate when company is generated more revenue.
Debentures: It is a long term source of finance for Balti Placeand in
this the company have to pay the interest to the debenture holders on the
fixed rate and it can pay on the instalments (Bradbury, 2011).
Retained Earnings: It is also a source of finance which helps in doing
the internal use of finance for managing the working capital. It helps in
increasing the value of shares for the shareholders which assist in boosting
the financial stability of the firm.
Bank Loan: Fund raising via loan is much costly than others source of
finance. There are also need to make document formalities as well.
Moreover, these are getting the priority over the others, as this is the
secured payment which is to be made.
1.3 Evaluation of different financial source
The employees of the company have to use the financial and other
sources on an optimum level. So that they can earn more revenue and on
the basis of that they can expand the growth as well. These sources of
finance help the shareholders in making the correct decisions so that they
can increase their investment (Carballo-Penela and Doménech, 2010). For doing the
fundamental analysis they have to analyse the income statement as well as
balance sheet of Balti Placeso that they can increase the investment. In the
different sources of finance whether it is equity shares, debentures or
retained earning risk always there which helps in profit. The employees of
the firm have to analyse the risk by using the investment process and
according to that they can define the high investment along with the high
risk. When the shareholders do the less investment then there is low risk
and when there is high investments then they are facing high risk. In any
bank, if the owner of Balti Placeapply the loan then they can achieve more
finance by the bank. When bank provides the loan before that they have to
check the business opportunities in the market or whether any type of risk

involved in it. Under the given scenario, the enterprise can issue equity or
debentures as per their level of comfort and the cost of capital. If the
company would raise the equity then, it will ultimately distributes the
ownership among the prospectives shareholders. While on the other hand, if
the company raises, debentures then its only pay the interest and also it will
entitled the benefits of tax on the interest. While, the owner of restaurant
business could also raise funds form the external sources as well (Collier and
et. al., 2010).
2.1 Cost of different source of finance
The distinctive sources of finance which are stated above having the
different costs which helps in making the correct decisions to do the
investments. Various financial sources are:
Equity shares: When the company issue the equity shares and
shareholders purchase that on the different price then they have to pay the
dividend to them and the cost related to the equity shares are to be involved
in the working capital. Cost of equity shares can be measured by price ratio
method, earning per share etc.
Debentures: This source of finance is issues by the company so that they
can earn more money and by which they can do the investments (Collins,
Hribar and Tian, 2014). In this they can charge the interest cost. The debenture
holders of Balti Placeare the second bond holders and they are to be paid
interest on a specific cost. This can be calculated by using the formula:
Kd = I /Po
Retained earnings: It is a company's part which helps in providing the
sources so that the employees can so the more finance along with the
investments. In this they can calculated the opportunity cost. It can be
computed by using the formula:
Kr = Ke(1-t)(1-b)

2.2 Importance of financial planning
Financial planning is a process which helps in estimating the required
capital as well as assist in determining its competition. It is a process which
helps in framing the financial policies related to the investment along with
the administration of the funds. The main objectives of financial planning in
Creations Saloon is to determine the requirement of capital. Along with this
the manager of the firm have to ensure that the scarce of financial
resources are maximally utilised in the best manner so that they can get the
appropriate returns (Cui and Ryan, 2011). Financial planning helps in ensuring
to collect the accurate funds. Along with this it assist in maintaining the
balance between the outflow and inflow of the funds so that they can
maintain the stability in the market. Moreover, it also aid in expanding the
growth for the long term success in the marketplace. They have to reduce
the uncertainties with the changes in the market trends by using the
enough funds so that they can improve the productivity and profitability
(Stent, Bradbury and Hooks, 2010).
2.3 Information required for making decisions
The employees of Saloon have to use appropriate financial statements
so that they can manage their accounts and on the basis of that they can
make proper financial planning which them in making the appropriate
decisions. When the company is huge or also larger in size then they require
large amount of money in investing in the different projects. This will help
in attaining the success along with the expansion in growth (Drivelos and
Georgiou, 2012). The staff members of Saloon have to manage their cost of
capital along with the opportunity cost so that they can accomplish the good
and best outcomes which help them in improving the performance of the
company in the marketplace. The employees of the firm have to provide
their financial statements to the stakeholders in a attractive way so that
they can make the correct decisions that whether they have to do
investments or not in the business entity (Smith, 2014).

2.4 Impact of finance on financial statements
The employees have to manage the financial statements of the
company as it is a process of interchanging the funds between the lenders
and borrowers. There are mainly three financial statements which can be
used by the staff members of Creation Saloon
Balance sheet: In this statement, the workers includes the assets,
liabilities as well as share capital of Creation Saloon which helps in
explaining the financial situation of the firm in the systematic and efficient
manner. It helps in analysing the true image of the business entity in front
of the shareholders so that they can make the investments in the enterprise
(Gervais, 2010).
Income statement: It is a part of the financial statements and also
known as profit and loss account so that they can record the data or
information about the income along with the expenses which are related to
the operational activities of the business entity (Serafeim, 2011).
Statement of retained earning: It can be computed on the basis of the
profits of Creation Saloon in a specific time. Along with this it is divided by
the dividend which is provided by the entity to their shareholders as well as
retained earnings. It is included in the balance sheet under the owner's
equity (Healy and Palepu, 2012).
3.1 Cash budget
Table 1: Budget for J Siansbury PLC for six months
Particular May June July August September October
Opening balance 200000 207700 92900 72400 8900 95900
Cash Inflow
Credit Sales 50000 60000 50000 70000 120000 60000
Cash Sales 20000 30000 20000 15000 22000 24000
Total 270000 297700 162900 157400 150900 179900
Cash outflow
Credit Purchase 30000 60000 50000 80000 60000 50000

Cash Purchase 20000 60000 20000 10000 10000 5000
Loan repay 0 9000 5000 7000 7500 7500
Interest 0 300 200 300 300 300
OD interest 300 500 300 200 200 200
wages 10000 30000 10000 20000 30000 30000
Capital Expenditure 40000 30000
Bill 3000
Allowance 2000 5000 2000 1000 1000 1000
Total 62300 204800 90500 148500 55000 94000
Surplus/ deficit 207700 92900 72400 8900 95900 85900
Each and every company have to make cash budget as it helps in identifying the inflow
along with the outflow of cash. Along with this it also involves the expenses as well as incomes
of the business entity. By making the upcoming cash budget it has been interpreted that Sains
burry is going to earn or gain surplus in every month (Hodge, Hopkins and Wood, 2010). If
company wants to increase the position of cash then the employees of Sains burry to use
management technique of cash.
3.2 Calculation of unit cost
Unit cost is the total expenditure which is incurred by the company so that they can
produce the best product at a reasonable price and on the basis of that they can produce, store as
well as sell the one unit of a specific product or services (Kirkham, 2012). Calculation of the unit
cost of the product helps in managing the cost of merchandise so that they can not face nay
issues in delivering the products and services and attain the targets.
For instance, computation of unit cost of Sains burry for the month of June by using
some relevant information in a specific time period. Suppose:
Units produced is 8000
Direct material cost is £ 20,000
Direct labour cost is £ 16,000
Fixed cost is £ 12,000
Profit margin = 10%
To solve this, use that formula Uc= c/u
Uc = ( £20000+£16000+£12000) / (8000 units)

Uc = £48000 / 8000 units
Uc = £6 unit
Assuming that how much unit produced is £8000, direct material cost is £20000 and direct
labour cost is £16000. Along with this the fixed cost is £12000. By doing the computation, it has
been interpreted that unit cost which is calculated as £6/unit as well as profit margin is 10%.
Along with this, when employees of Sains Burry calculate the unit cost by adding the profit
margin which helps in computing the selling price of merchandise. So,
Profit = £6* 10% = £0.6
Selling price = unit cost + profit
SP = £6+ £0.6
SP = £6.06
Thus, selling price of the product is £6.06, profit is £0.6 where as unit cost is £6.
3.3 Assess viability of project
The employees of Sains burry have to use appropriate tools and techniques of the
investment appraisal techniques so that they can assess and measure the viability as well as
reliability of the projects (Kumbirai and Webb, 2010). The instruments which they can use that is
Pay Back Period method and Net Present value method.
Year Project A
(£)
Project B
(£)
1
2
3
4
5
Salvage value
Initial Investment
50000
40000
30000
20000
10000
20000
100000
20000
25000
40000
50000
60000
20000
100000
Net Present Value:
Table 1: NPV of Project A
Year Project A (£) PV at discount
factor rate of
Present Value (£)

10%
1 50000 0.91 45500
2 40000 0.83 33200
3 30000 0.75 22500
4 20000 0.68 13600
5 10000 0.62 6200
Resalable value 20000 0.62 12400
Total Present Value 133400
Initial Investment 100000
NPV 33400
Table 2: NPV of Project B
Year Project B (£)
PV at discount
factor rate of
10% Present Value (£)
1 20000 0.91 18200
2 20000 0.83 16600
3 35000 0.75 26250
4 30000 0.68 20400
5 40000 0.62 24800
Resalable value 20000 0.62 12400
Total Present Value 106250
Initial Investment 100000
NPV 6250
NPV stands for net present value and it is a tool which helps in assessing the viability of
the project. By doing the calculation of NPV, it has been analysed that Project A is better to do
investment.
Payback Period:
Table 1: Payback period of Project A

Years Cumulative cash flow
Initial investment 100000
1 50000 50000
2 40000 90000
3 30000 120000
4 20000 140000
5 10000 150000
Payback period for project A=
3+20000/30000
= 3.67 years
Table 2: Payback period of Project B
Years Cumulative cash flow
Initial investment 100000
1 20000 20000
2 20000 40000
3 35000 75000
4 30000 105000
5 40000 145000
Payback period for project B=
4+5000/30000
= 4.16 years
After calculating the Pay back period, it has been interpreted that Project A is best for Sains
burry it helps in investment.
TASK 2
4.1 Financial statements
The main financial statements which Sains burry use for managing their accounts are:

Balance Sheet: It is a type of financial statements and it includes all the assets and
liabilities of the firm (Minnis and Sutherland, 2017). It is based on the accounting equation and
this equation is to be followed by the employees of the business entity so that they can manage
their accounts. Equation is:
Assets = Liabilities + Capital
Income statement: It is included in the financial statement and it includes the income and
expenditure of the operating and non operating activities. It helps in showing the performance of
Sains Burry the basis of their financial statements. Along with this it helps in identifying and
analysing the profit and loss of the firm which they are earning (Müller, 2011).
Cash flow statement: It is a part of the financial statements which company can use as it
helps in managing the cash flow whether it is inflow or outflow. Along with this it helps in
managing the distinctive activities which includes operating, investing and financial activities
which assist in showing the sources of cash and uses of cash (Petzke, Fuller and Metges, 2010).
4.2 Comparison on appropriate format of financial statement in different businesses
There are different type of businesses and they have to follow appropriate and relevant
financial statements which help them in maintaining the data along with the information.
Different type of businesses are:
Sole Proprietorship: It is a type of business which is run by the single person. In this business,
the owner of the firm can make the income statements which helps in managing the income as
well as expenses. Along with this they can make balance sheet also so that they can manage their
assets and liabilities (Purce 2014).
Partnership: It is also a type of business and it is run or owned by two or more person. In this
business, they can make income statement, statement related to partner's capital as well as
balance sheet (Financial Resources Management (FiRM), 2017). Along with this they have to
use accounting equation while making balance sheet.
Corporations: It is owned as well as run by the separate legal person. In this type of business,
they can make the different financial statements which includes Profit and loss account, cash
flow statement along with the balance sheet (Rana, Islam and Kouzani, 2010).

4.3 Interpretation of financial statements using appropriate ratios by using internal and external
ratios
Ratios Formula 2014 2015 2016
1.Profitability ratio
Gross profit ratio (Gross profit / Net
sales)*100
5.8% 5.1% 6.2%
Operating profit ratio (Operating profit / Net
sales)*100
4.2% 0.3% 3.0%
Net profit ratio (Net profit / Net
sales)*100
2.99% -0.70% 2.00%
2. Liquidity ratio
Current ratio (Current assets / Current
liabilities)
0.64 0.64 0.66
Quick ratio (Quick assets-stock /
Current liabilities )
0.49 0.48 0.50
3. Total assets turnover
ratio
(Net sales / Average total
assets)
1.64 1.44 1.40
4. Inventory turnover
ratio
(Cost of goods sold /
Average inventory)
22.65 22.54 22.44
The employees of the cited company have to calculate the ratio whether it is profitability,
liquidity. Along with the total assets turnover ratio and inventory turnover ratio (Financial
Resource Management, 2016) . In the year 2014 to 2016, gross profit ratio is increasing to 5.8%
to 6.2 % but operating profit ratio is 3%. Current ratio of the company is increasing every year
and in 2014, 0.64 where as in 2016, 0.66. but on the other side, in 2014 quick ratio is 0.49 and in
2016, it is 0.50.
CONCLUSION
From the above report it has been interpreted that the owner of Creation Saloon have to
use appropriate sources of finance so that they can not face any obstacles. Along with this they

have to take high risk as it helps in improving the performance as well as generating more
revenue. The staff members of the business entity have to produce more and more unit which
helps in managing the cost of the products and services. It also has been concluded that in the
different type of business they have to use appropriate financial statements so that they cannot
face any issues in making the correct decisions.

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