Analyzing the Ratios of XYZ Co.

The assignment content discusses various aspects of business finance, including sole proprietorship, public and private limited firms, partnership firms, and non-profit making organizations. It highlights the importance of financial planning and statement preparation for these types of businesses. Additionally, it presents a case study on XYZ co., analyzing its liquidity, profitability, and efficiency ratios to identify areas for improvement.

MFRD

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
Sources of finance which are available to new and old as we as large and small sized
business organization.............................................................................................................3
1.2 Implications of the each source of finance which have identified above.........................4
1.3Three case study examples................................................................................................5
TASK 2......................................................................................................................................5
2.1 Analysis of the cost of different sources of finance.........................................................5
2.2 Importance of financial planning.....................................................................................6
2.3 Financial information which are required for the decision making ................................6
2.4 Key elements of the P&L and balance sheet with reference to finance sources and their
related cost..............................................................................................................................6
TASK 3 .....................................................................................................................................7
3.1 Evaluating cash flow forecast of ABC manufacturing ltd. and formal business report
based upon the findings..........................................................................................................7
3.2 Calculation of contribution, break even analysis and profit.............................................7
3.3 Use of investment appraisal techniques in the decision of ABC Engineering ltd............9
TASK 4....................................................................................................................................11
4.1 Purpose and use of prime entry, trial balance and final accounts..................................11
4.2 Difference between the financial statements of different business organization...........11
4.3 Analysis of the ratios to assess the financial position of XYZ co.................................12
CONCLUSION........................................................................................................................13
REFERENCES ........................................................................................................................15
APPENDIX..............................................................................................................................17

INTRODUCTION
Financial resources are the essential element of business which facilitates execution of
business plan in an effective manner. Financial resources can be defined as money or funds
which are available to business. Thus, finance manager of an organization has responsibility
to frame cost effectual strategies which help them in making optimum use of the fund to a
large extent (Orlitzky, Schmidt and Rynes, 2003). This project is based upon different
scenarios which help in understanding the sources through which business entities can meet
their financial needs. Besides this, it states cost of the different sources of finance which
closely impacts the profitability aspect of an organization. This report will helps in
understanding the importance of financial planning in the growth and development of an
organization. Further, it will discuss the ratio analysis of organization to assess their financial
health and performance.
TASK 1
Sources of finance which are available to different type of business enterprises
Sources of finance which are available to new and old as well as in large and small
organization are enumerated as below:
Type of
enterpries
Source Features Advantages Disadvantages
New business Bank loan Organization
who wants to
start up their
business can
fulfill their
financial needs
by approaching
bank for the
loan.
Tax deduction
is one of the
major benefit
which helps
organization in
increasing their
profitability
aspects.
Bank charges
high interest
rate for
providing the
financial
assistance in
comparison to
other
commercial
institutions.
Old or existing
firm
Retained profit It is the part of
profit which
company keeps
with itself
Instead of
issuing shares
organization
can meet their
If existing firm
makes use of
retained profit
then enterprise

rather than
giving dividend
to shareholders.
Through this,
company is able
to meet future
contingent
situation.
financial
requirements
from the
retained
earnings.
Through this,
organization
can prevent the
interruptions of
the new
shareholders in
the decision
making aspects.
is unable to give
dividend to their
shareholders.
This aspect
places a
negative impact
on the goodwill
or image of the
firm.
Large
organization
Issue of equity
shares
Large sized
organization
can meet their
financial needs
by issuing
equity share to
existing and
potential
shareholders.
In the case of
equity shares
organization
needs to give
dividend to
their
shareholders
only when they
get sufficient
amount of
profit rather
than
debentures.
Shareholders
have the right to
take active
participation in
the decision
making process
which is one of
the major
drawback of
issuing of equity
shares.
Small
organization
Leasing Small sized
organization
can meet their
financial needs
through leasing.
It provides right
to the
When business
enterprise
undertakes
leasing then it
enjoys tax
benefit. It is one
of the main
Company has to
pay high rent to
the owner from
whom asset is
taken on lease
by the firm.
Thus, periodical

organization to
make use of the
asset without
making huge
investment on it
(Jagman and
et.al, 2014).
factors which
compel small
business
organization to
make use of
asset on lease.
interest payment
imposes
financial burden
on the firm.
1.2 Implications of the each source of finance which have identified above
Different sources of finance have different implication which is enumerated below:
Sources of finance Legal aspects Cost Suitability
Bank loan Bank has the legal
authority to cease the
asset if organization
makes default in
payment of loan
amount and interest.
In bank loan,
company has the
obligation to pay
high interest amount
along with the
periodical
installment. Thus,
bank loan is also the
subject of high
financial cost.
Installment payment
system is one of the
main aspects which
attract organization to
raise their capital
through bank loan.
Leasing As per the legal
aspect company has
the obligations to
return back the asset
to the real owner
after the
predetermined period
of time (Caglayan
and Demir, 2014).
In leasing, company
has to pay periodical
interest in return of
the use of the asset.
Tax deduction and
obsolation of the
technology is one of
the factors which
compel organization
to make use of the
asset on leasing
rather than
purchasing it.
Retained earning
Issue of equity shares
1.3Three case study examples

Types of business organization Sources of finance
Small business start up By approaching friends and family members,
business entities can easily fulfill their
monetary needs. Moreover, people who are
much closed to the business entity are always
ready to help them. In addition to this,
individuals can also start small business by
making use of their personal savings.
Large sized firm who is planning to expand
its business operations
By issue debentures large firm can fulfill
their financial requirements. It helps
organization in raising their finance without
providing right to make participation in the
decision making process.
Small group of people Small group of people who wishes to buy
medium sized company can meet their
financial needs through retained profit of
their existing company. In addition to this,
through bank loan they can meet their further
needs and requirements.
TASK 2
2.1 Analyzing the cost of different sources of finance
Different sources of finance place different cost such as financial and opportunity cost
upon the organization. If company raises their finance through retained earning then it is not
in position to make investment in the future productive activities. This aspect closely impacts
the sales and profitability aspect of business enterprise. In addition to this, when company
makes use of retained profit then it also places a negative impact on the mindset of
shareholders. Moreover, they think that company does not have sufficient amount of financial
resources to meet their financial needs or requirements. Further, if organization fulfills their
financial needs through bank loan then it has to give high interest on the amount of bank loan.
Thus, it may be the cause behind decrease in the net profitability aspect of firm. Moreover, it
is the expense for the organization so it has high level of influence upon profit and loss out of
it (Roseline and James, 2014). Besides this, if corporation issue equity shares to increase its

fund then company has responsibility to give dividend to their shareholders to build their
corporate image. Further, in leasing business, firm requires to pay interest on periodical basis.
Thus, interest amount is also recorded in the income and cash flow statement as an expense.
Therefore, organization needs to select the suitable source of finance after assessing the cost
of each.
2.2 Stating the significance of financial planning
Monetary planning may be served as a tool which provides deeper insight to the
finance manager about the fund which they required for performing business activities.
Through this, organization is able to make sensible finance decisions which aid in the growth
and development of the firm (What is Financial Planning?, 2015).
Financial planning is plays an important role in achieving achieves success in the
dynamic business environment on the basis of following aspects:
 It acts as a guide which helps organization in investing their money in the most
profitable project which gives higher return to them.
 By preparing effectual monetary plan, business organization is able to face contingent
liabilities or obligations more efficiently.
2.3 Essential Financial information required for the business decision making
Financial statements play an important role in the decision making aspects of an
organization. They provide assistance to the firm in making suitable decisions in relation to
the investment as well as other business decisions. Financial statements help organization in
making the suitable decisions (Hannam and et.al, 2015). For instance, if organization is
planning to expand its product chain then they need to make assessment of the cash flow
statement. It provides deeper insight to the organization about the fund which they need to
raise to execute their business plan. Thus, financial statements play a vital role in the
effective decision making which make contribution in attainment of goals.
2.4 Key elements of the P&L and balance sheet with reference to finance sources and their
related cost
Profit and loss a/c is the statement which provides information regarding the profit or
loss aspect of an organization. It includes expenses and income which are incurred or got by
them. In addition to this, balance provides includes assets and liabilities which clearly states
the financial position and performance of an organization. For instance: Organization takes

loan of 200000@12% per annum. In this situation impact of this sources of finance upon the
P&L and balance sheet are as follows:
TASK 3
3.1 Evaluating cash flow forecast of ABC manufacturing ltd. and formal business report
based upon the findings
Analysis of the sales budget: By analyzing the sales budget of ABC it has been assessed that
company fails to meet the budgeted sales amount. During the period of July to December,
company fails to meet the budgeted figures. It shows that company had not attained success
in attracting large number of existing and potential buyers to the products or services which
are offered by them. Thus, organization needs to undertake promotional strategies and
campaign in order to reduce the variances which occur in the sales performance of an
organization (Fabregat-Sanjuan, Ferrando and De la Flor, 2015).
Analysis of the cash flow forecast: From the cash flow analysis it has been evaluated that
sales of an organization shows fluctuating trend. Due to this aspect, profit margin of the firm
gets declined. Expenses such as wages, rent, light and heat, advertisement etc. shows
consistent trend which is good sign for the company. Fall in the revenue aspect is one of the
main causes behind decrease in inflow and increase in the outflow of cash. Hence,
organization needs to frame competent strategies and policies which help them in managing
their cash related business activities more effectively.
To
The director of ABC
Date…..

From this report it is can be concluded that sales of an organization is continuously
decreasing. Besides this, outflow of organization is higher than the inflow which is not good
sign for the company. These aspects will place negative impact upon the growth and
development aspect of an organization. Thus, organization requires making review of its
strategic framework. By this, company is able to perform its business functions and
operations in an effectual manner. Further, company requires making control upon the
expenses in order to improve their profitability aspects. Through this, business entity is able
to get desired outcome or profit.
3.2 Calculating of contribution, break even analysis and profit
Contribution per unit (CPU) = 21.55£
Particulars Calculation
Contribution to sales ratio 161625£/900000£*100
= 17.96%.
BEP ( In units)= Total FC / CPU 120000/21.55
= 5568.45 Units
BEP ( In £) 5568.45Units *120£
= 668213.46£
Margin of safety (MOS) ( In £)= Actual sales
- BEP Sales revenue
9000000£ - 668213.46£
= 231786.54£.
MOS (per unit) 231786.54£/7500
=30.90£
Calculation of profit under two proposals from different customers
According to the case scenario company have got have got proposal from Southwod
Electricals and Westbrook Engineering in relation to sell their products and services to them.

In this, company get different margin if they sell their product to two different customers
which are given below:
Name of the organization Calculation of selling price
Selling price = Cost + (Cost * profit %)
Southwood Electricals 120£ - 120*15%
= 120£ - 18£ = 102£
Westbrook Engineering 120£ - 120*25%
= 120£ - 30£ =90£
Computation of total gross profit or margin
Particulars Southwood Electricals Westbrook Engineering
Sales revenue 951000 990000
Cost of raw material 420000 446250
Cost of labor or human
resources 286000 303875
Variable overhead (VO) 81600 86700
Total Variable cost 787600 836825
Contribution 163400 153175
-FC 120000 120000
Gross margin 43400 33175
On the basis of the above analysis it has been assessed that organization £ 43400 as a
profit if they sell their product to Southwood electrical. If organization accept the proposal of
Westbrook electrical organization then they will get £ 33175£ in form of profit. Thus,
organization should accept the proposal of Southwood electrical which gives higher return to
them.
3.3 Utility of investment appraisal techniques in the decision making of ABC Engineering
ltd.
Capital budgeting tools or techniques help organization in evaluating the viability of
the investment (Capital Investment Appraisal / Appraisal Techniques, 2015). It acts as a
guide which helps organization in selecting the most profitable investment which gives
higher return to them.

Net present value (NPV):
Calculation of Payback period and NPV (In £)
Project A Project B
Year
Cash
inflow
(1)
Cumulativ
e cash
inflow
Discount
ing
factor
@6% (2)
Discount
ed cash
inflow
(1*2)
Cash
inflow
(3)
Cumulativ
e cash
inflow
Discount
ed value
@6% (4)
Discount
ed cash
inflow(3
*4)
1 180000 180000 0.943 169740 60000 60000 0.943 56580
2 230000 410000 0.89 204700 120000 180000 0.89 106800
3 280000 690000 0.84 235200 250000 430000 0.84 210000
4 120000 810000 0.763 91560 250000 680000 0.76 190750
Total
discount
ed cash
inflow 810000 701200 680000 564130
Less-
Initial
Investme
nt 450000 450000
NPV
(Total
discount
ed cash
inflow –
initial
investme
nt) 251200 114130
Payback period
Project A = 2+ 40000/280000
= 2+.14
= 2.14 years
Project B = 3+ 20000/250000

= 3+.08
= 3.08 years
Internal rate of return (IRR):
Computation of IRR
Year Project A Project B
0 -450000 -450000
1 180000 60000
2 230000 120000
3 280000 250000
4 120000 250000
IRR 29.20% 15.02%
Average rate of return (ARR)
ARR = Average profit / Initial Investment*100
Mean Profit = Total Profit/number of year
Projects Calculation of ARR
A Average gross margin = 810000£/4
= 202500£
ARR = 202500£/450000£*100
= 45%
B Mean Profit = 680000£/4
= 170000£
ARR = 170000£/450000*100
= 37.78%
On the basis of the above calculation ABC Engineering Company should make
investment in Project A as compared to Project B. If company invests in the project A then
they are able to recover their initial investment within 2.14 years as compared to project B.
Besides this, ABC Engineering will get higher return by investing money in the project A

rather than project B. In addition to this, company gets 29.20% return if they invest in the
project A where as they get 15.02% if they invest in project B. Besides this, average rate of
return is 45% where as it is 37.78% if they make investment in the project B. On the basis of
all the invest appraisal techniques such as payback period, NPV and ARR Project A proves to
be more fruitful for the firm.
TASK 4
4.1 Purpose and use of prime entry, trial balance and final accounts
Prime entry: According to the prime entry system, organization needs to record every
transaction in primary books of accounts namely sales book, purchase book etc. Book
keeping system entails that for every debit there must be a credit with the same amount
(Fraser, Bhaumik and Wright, 2015).
Trial balance: Trial balance is the prior step of preparation of the financial statements which
has two sides such as debit and credit. It is the statement which summarizes the debit and
credit balances of the ledger accounts (Meyer and Kiymaz, 2015).
Final accounts
 Profit and loss a/c: One of the main purposes behind the preparation of the P&L a/c is
to assess the profit or loss aspects of the business (Shul'ga, 2014). It helps
organization in improving their profitability aspects and their financial position with
the help of sound strategic framework.
 Balance sheet: Each and every organization prepares balance sheet to identify the
position of their assets and liabilities at the end of the financial year. It helps
corporation in framing cost effective strategies and policies (Erasmus and et.al, 2015).
Through this, organization is able to make contribution in the organizational growth
and development.
 Cash flow statements: It is the statement which provides information regarding the
inflow and outflow of the cash related activities. Through this, organization is able to
make further investing and financing decisions.
4.2 Difference between financial statements of various kinds of business firms
Several types of business organizations prepare and maintain different statements in
accordance with their needs. Some of them are as follows:

 Sole traders: They prepare only income and expenditure account which provides
deeper insight about the gross margin generated by them by making expenses in the
business activities (Sinclair, Northcott and Hooper, 2014). Moreover, in the sole
proprietorship firm business is owned and run by the individual person. Thus, they are
only concerned with the revenue generated by them during the accounting year.
 Public and private limited firms: These kinds of firms need to prepare income
statement, cash flow statement and balance sheet. They prepare all these financial
statement to assess their financial heath and performance (Götze, Northcott and
Schuster, 2015). In addition to this, public and private limited firm also have legal
obligation in relation to the publishing of financial statement at the end of financial
year.
 Partnership firm: Partnership firm also prepares all three financial statements which
are prepared by the private and public limited organization. Nevertheless, they also
prepare the partners capital account which contains the information regarding the
business activities of the partners.
 Non-profit making organization: NGO refers to those who make use of financial
resources for the welfare of backward people of society. Therefore, non-profit making
organization prepares receipt and payment account to assess the aspect that whether
fund is invested in the suitable activities or not (Gertler and Kiyotaki, 2010).
4.3 Analyzing the ratios of XYZ co.
Ratio analysis is the tool through which one can make analysis of the financial
statements of the firm in an effectual manner.
Liquidity, profitability and solvency ratios of XYZ co. is enumerated below:

 Profitability ratio: By undertaking ratio analysis, it has been identifying that
profitability aspect of XYZ co. is not good. In 1996, gross and net profit margin of
XYZ co. is decreased as compared to 1995 which is not good sign for the company.
Therefore, company needs to make competent marketing plan which helps them in
maximizing the sales as well as profit.
 Liquidity ratio: Current and quick ratio of the organization is decreasing in 1996 but
they still exceeds the idea ratio to the large extent. In order to build strategic
advantage organization needs to invest their current or liquid assets in the further
productive activities (Nahmias and Olsen, 2015). Through this, corporation is able to
improve their sales and gross margin.
 Efficiency ratio: In 1996, company laid back to make optimum utilization of their
assets in the generation of sales in comparison to 1995. In order to overcome this
situation, organization needs to frame effective strategies and policies so, they
become able to make use of the assets more efficiently.

CONCLUSION
On the completion of this report, it can be concluded that organization needs to opt
sources of finance after making assessment of their cost and implications. Financial planning
gives direction to the corporation in expanding their business activities and operations.
Bedsides this, it can be inferred that profitability and efficiency aspects of XYZ is not good
as compared to the previous years. Thus, organization needs to employ cost effective
strategies so as to run with sustainability.

REFERENCES
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Online
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APPENDIX
3.2
Calculation of profit and BEP by varying the sales price

Calculation of BEP by varying the fixed cost

Calculation of BEP by varying the material Cost
Calculation of BEP by varying the labor cost