BMP3005 - Applied Business Finance: Improving Financial Performance

This report provides a comprehensive analysis of financial management concepts and their importance in enhancing business performance. It defines financial management, discusses key financial statements like the income statement, balance sheet, and cash flow statement, and explains the use of ratios in financial management. The report includes a business performance review using a provided template and analyzes profitability, liquidity, and efficiency ratios based on a case study, offering insights into areas for improvement. It also discusses strategies businesses can employ to enhance their financial performance, referencing the case study for practical examples. This assignment solution, available on Desklib, serves as a valuable resource for students studying business finance, providing clear explanations and practical applications of key financial concepts.

BSc (Hons) Business Management with
Foundation
BMP3005
Applied Business Finance
The concept and importance of financial
management and the processes
businesses might use to improve their
financial performance
1

Contents
Introduction 3
Section 1: Definition and discussion of the concept and
importance of financial management 3
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
4
Section 3: Using the template provided 5-9
i. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
5
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices 6
iii. Using Excel completing the Balance Sheet 7
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis 8
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance 9
Conclusion 10
References 11
Appendix 13
2

Introduction
Management of financial resources is one of the most critical and essential aspects of
running a business. It assure the activities in the organization run smoothly without the
disturbance in the allocation of funds (Egginton and McCumber, 2019). The report defines
the value of financial governance, few concepts of fiscal statements and the usage of ratios in
the operation a company. It has further discussed about certain ratios such as profitability,
liquidity and efficiency ratio by taking an example from the case study given with the help of
income statement and balance sheet. The business performance review is also done to
analyze the financial performance of the business. What are the strategies, the firm need to
refer for improving the performance of the enterprise. From the case study, what are the
factors that can help in analysing the performance.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management refers to a concept which refers to the directing, controlling,
planning, and organizing of the monetary undertakings in the business. It similarly integrate
utilizing the principles of management to the financial resources of a company, while
additionally having a momentous consequence in economic administration.
 Sustain adequate inventory of assets for the organization.
 Giving guarantee to the investors for the attainment of more benefits.
 Ideal and efficacious utilization of assets;
 Making authentic and harmless undertaking freedoms to put their resources into.
Importance of Financial Management:
1. Financial Decision: It assists in taking the critical money – oriented choices of the
organization. A decision which is can can take down the whole firms altogether. It tell
about the different risks and choices and helps in choosing the extent of the investor's
capital and the acquired assets.
2. Profitability: if the books of accounts and the resources are properly managed, it will
enhance the productivity of the organization. It will also ensure in analyzing the
efficiency and development opportunities of the company (Khera and et. al., 2020).
3. Funds allocation: The proper allocation of the fiscal resources are distributed as per
the profit of the company. It will improve the fiscal ratios and will help in reducing
the costs and increases the monetary state of the firm.
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4. Economic Stability: It gives the business an immovability, as it addresses the sound
monetary framework and can keep from the business activities which can be
corrupting for the association and help in maintaining and acquiring more benefits.
5. Capital structure formation: For the computation of the capital required, the design
should be formed properly. Any company which relies upon the measure of capital an
organization has and the amount it should be raised from the outside sources
(Seifzadeh and et. al., 2020).
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Financial statement are those records which are compulsory for every listed company
to maintain. It shows the monetary activities of firm. These statements provide the financial
data and shows the fiscal health of the company. These are mandatory to get them audited
and is the responsibility of the financial manager. These can be audited through the internal
and external sources. It guaranteed that the statement which are published by the company is
not forged and are authentic. The statements are as follows:
1. Profit and loss statement: It tell about the income, revenues, expenditures and the
accrued or outstanding expenses and incomes which have been occurred in the
financial period. It likewise shows the deals that have been done in the period and
what were the costs that have been faced by the corporate to yield and make the sales.
By deducting the costs and wages of the period the organization shows its net profit
for the period. It is end component in the income statement (Pantielieieva and et. al.,
2018).
2. Statement of financial performance: This is the most crucial financial assertion in the
organization as it gives comprehensive understanding to the clients of monetary
information about the firm. This statement tells whole assets and the liabilities which
the enterprise is committed to pay in future. It is additionally perceived as monetary
record which is fundamentally the primary concern of the organizations. In basic
words, this declaration reflects where the corporate stands monetarily at a specific
mark of time.
3. Cash flow statement: This fiscal report shows the net amount of inflow and outflow of
cash from the business in a period of time. It displays the fluctuation in the cash from
the investing, operating and financing activities during a time frame. Operational
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activities shows the deviations made in the current resources and current liabilities,
interests and duty expenses. Financing exercises shows the inflows and outflows from
the issue of the share holder's capital, debentures, advances and payment of dividend.
Uses of ratios in Financial management:
Monetary Ratios Analysis is a method in bookkeeping which helps managers analyze
the financial information that have been asserted over the whole fiscal year. It is an tool
which has no limit for the administration of the firm's resources, as it helps them survey the
monetary presentation of the organization (Saurabh and Nandan, 2018). It assists the top
management with taking short and long – term choices for the corporate and classifying the
trends of those decision by comparing them from the previous years. The principle
employments of proportion assessment are:
1. Financial ratios help the essential supervisors in decision – making: The monetary
reports, benefits, pattern of returns, capacity of acquisition and remuneration of the
business are utilized in computation of extents and after definite decisions of these
proportions. The decision – makers get a brief understanding about what is to be done
in the future to acquire benefits.
2. Operational Efficiency: The ratios aids in deciding the liquidity, solvency, and
productivity of the business. It assists the administration with keeping low expenses at
high skill to meet the authoritative objectives of the enterprise.
3. Comparative analysis: Comparison of various components in the reports of monetary
information is done through proportional analysis of the business. It assesses the
financial performance of the business and structure a base to compare it with different
organizations working in a similar industry (Kim and et. al., 2019).
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
The Net Profit for the year 2016 , is £43,057. (2015: £18,987,000).
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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.
(The calculation are shown in appendix)
vi. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study)
This is included within appendix
vii. Using Excel completing the Balance Sheet
6

viii. Using the Case study information describing the
profitability, liquidity and efficiency of the company based on the
Profitability Ratio: These are a category of financial parameters that are used to
asses a company's ability to create earnings overtime in relation to different elements of
income statement and balance sheet of a fiscal year from analysing the performance of the
company.. Some of the major profitability ratios are: Gross Profit margin, net profit margin,
return on assets and return on equity (Lee, Lee and Kim, 2020).
 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 above ratios shows the percentage of profit in terms of the
revenue generated considering the operating and non operating expenses. Gross profit margin
is the proportion of funds left from the revenue and net profit margin means the percentage of
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income retained after cost from the revenue. Gross profit is 42.76% and net gain is 22.7,
which represents that the profit is decreasing by 20% approximately. So the company needs
to drop their overhead costs which in interfering in earning more net income. It is important
for the investor to compare the profits with the other companies of the same industry to
exactly know its position in the industry.
2. Efficiency Ratio: This ratio measures how well the company is using its assets and
liabilities. It measures how quickly the firm manages to collect its payment from the
customers and how long it takes to complete the debt repayment and also measures the
asset and equity turnover. The major ratios are asset turnover, stock turnover, receivable
turnover and accounts payable turnover ratio.
 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: The average customer takes approximately 51days to pay their debt
whereas the creditors take 52 days to receive their payments. So, the company pays and
receives their debts and payments almost in the same time- period. But it can be a limitation
also, because if the receivable days decrease then it may be a trouble for the organization and
there is very minor difference in the days. The inventory turnover is 3.8 that means that the
complete investment of stock flows around 4 times in a years, i.e., 3months in a year. The
total assets turnover ratio is 1.23, means that the firm is doing well and producing enough
revenue at the end of the fiscal year for sustaining in the industry.
3. Liquidity Ratio: It determines a firm's ability to pay its debt obligation and also tell us
about the solvency of the company. These ratios are based on the current assets, current
liability and stock. The main ratios are current ratio and quick ratio (Potrich, Vieira and
Kirch, 2018).
 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 tells about the liquidating position of the enterprise.
An ideal current ratio is 2:1 and quick ratio is 1:1. It can be observed that the current assets
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to the liability ratio is 2.22, i.e., the company is solvent. But, after excluding the stock from
the current assets, still the assets the quick ratio is 1.47 which means that the firm has enough
cash to pay-off their liabilities and possessing it impressively.
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
Financial Performance is a life-sustaining aspect of the business, because looking at
the business carrying into action the investors decides to invest in the company. So it is very
important to take the correct financial decisions while substantiating the funding decisions.
Though, the wealth maximization is the main concern since the existence and survival of the
company depends on the profits (Mangantar, 2018). For this, financial ratios helps the
manager and the financial organizations to take the correct judgment. From the calculations
performed, it has been evaluated that:
 The current assets to the current liabilities has declined by 82% from the previous
year, it means the outflow of cash is more and the company is losing its liquidity.
 The increase in the net profit is by 126.77% because the non operating cost such as
administrative expenses, and interest has reduced.
 Customer satisfaction proves that the undertaking is investing more and supporting
the growth of the firm, due to which the employee retention ratio has also increased.
 Figuring that shareholder's equity is increasing, implementing in a increase in
selling of shares, rising of revenues and decrement in the operating expenses.
Improvements that can be done are as follows:
 Marketing strategies which can be applied for the betterment of the firm id to drive
down the costs and doing efficient utilization of the resources which will help in
generating more income. Such as, promoting on social media is a smarter and cheaper
way of reaching out to the maximum people.
 Use of the resources effective and efficiently which will lower the cost and increase
the prices, and will result in leveraging the profits. It will also increase the
productivity and the efficiency of the firm.
 By reducing the inventory and increasing of the inventory turnover, will show the
leverage in the working capital requirements (Bongomin and et. al., 2017).
Conclusion
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It can be concluded from the report that financial management plays a very significant
part in the operation of the business. It allocates the funds, take business decisions, show the
profitability, economic stability and solvency on which the business depends. Financial
statements provide an summary of the company. These are obligatory for every undertaking
to maintain and get them audited by the authorized members internally and externally. It tells
all about the assets, liabilities, shareholder's equity, profits, revenues, inflow and outflow of
cash. Financial ratios helps in analyzing the solvency and the efficiency of the enterprise.
Hence, from the above calculate ratios of the case study, it is analyzed that the company is
earning a high net profit but it can lower its inventory cost which will help in increasing the
revenues and also in the net earnings.
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References
Egginton, J.F. and McCumber, W.R., 2019. Executive network centrality and stock liquidity.
Financial Management. 48(3). pp.849-871.
Khera, N. and et. al., 2020. Current practices for screening and management of financial
distress at NCCN member institutions. Journal of the National Comprehensive
Cancer Network. 18(7). pp.825-831.
Seifzadeh, M. and et. al., 2020. The relationship between management characteristics and
financial statement readability. EuroMed Journal of Business.
Pantielieieva, N. and et. al., 2018, October. FinTech, transformation of financial
intermediation and financial stability. In 2018 International Scientific-Practical
Conference Problems of Infocommunications. Science and Technology (PIC S&T).
(pp. 553-559). IEEE.
Saurabh, K. and Nandan, T., 2018. Role of financial risk attitude and financial behavior as
mediators in financial satisfaction: Empirical evidence from India. South Asian
Journal of Business Studies.
Kim, C. and et. al., 2019. Policy uncertainty and the dual role of corporate political
strategies. Financial Management. 48(2). pp.473-504.
Lee, J.M., Lee, J. and Kim, K.T., 2020. Consumer financial well-being: Knowledge is not
enough. Journal of Family and Economic Issues. 41(2). pp.218-228.
Potrich, A.C.G., Vieira, K.M. and Kirch, G., 2018. How well do women do when it comes to
financial literacy? Proposition of an indicator and analysis of gender differences.
Journal of Behavioral and Experimental Finance. 17. pp.28-41.
Mangantar, M., 2018. An Analysis of the Government Financial Performance Influence on
Community Welfare in North Sulawesi Province Indonesia. International Journal of
Economics and Financial Issues. 8(6). p.137.
Bongomin, G.O.C. and et. al., 2017. The relationship between access to finance and growth
of SMEs in developing economies: Financial literacy as a moderator. Review of
International Business and strategy.
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Appendix:
Calculations performed for the above case study
 Net Profit of 2016= Revenue- Cost of goods sold- non-operating expenses
= 189,711 – 108,586 – 38,068 = 43,05
 Change in profit %= (Current year– previous year profit)/ Previous year Profit
= (43,057 – 18,987) / 18,987 = 126.77%
 Shareholder's equity = 63,057*32.9% = 20745.75
= 63,057+20,745.75 = 83802.75
 Current assets as % of current liabilities = 324% - 82% = 222%
 Gross Profit = Net profit+ non-operating expenses
= 43,057+ 38,068 = 81,125
 Quick Ratio = Current Assets - Stock/ Current Liabilities
= 84,349 - 28,571/ 37,928 = 1.47:1
 Current ratio = Current Assets/ Current Liabilities = 84,349/ 37,928 = 2.22:1
 Debtors Turnover Ratio = (Net Sales/ Debtors) = 189,711/ 26,367 = 7.19
 Creditors Turnover Ratio = Cost of Sales+ Stock/ Creditors
= 108,586+ 28571/ 19,493= 7.03
Income Statement
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