Applied Business Finance: Improving Financial Performance Analysis

This report provides an overview of financial management, emphasizing its importance in fund procurement and utilization. It discusses key financial statements, including the income statement, balance sheet, cash flow statement, and statement of changes in equity, highlighting their role in assessing financial position and stakeholder information needs. The report also explains the use of ratio analysis for interpreting financial statements, covering profitability, liquidity, solvency, and efficiency. Through provided templates and ratio calculations, the report evaluates a company's financial performance and suggests improvements, such as cost reduction, asset optimization, and strategic planning, to enhance profitability and sustainability. The analysis underscores the importance of aligning financial strategies with market trends and internal capabilities to achieve better financial outcomes.

Applied Business Finance

TABLE OF CONTENTS
INTRODUCTION .........................................................................................................................3
SECTION 1 .....................................................................................................................................3
Discussing the concept and importance of financial management ............................................3
SECTION 2 .....................................................................................................................................4
Discussing the main financial statements and explaining the use of ratios pertaining to
financial management.................................................................................................................4
SECTION 3......................................................................................................................................6
Using the templates provided......................................................................................................6
Income statement ......................................................................................................................6
Balance sheet...............................................................................................................................6
Calculating ratios:.......................................................................................................................7
SECTION 4....................................................................................................................................10
Explaining the process to improve financial performance of company...................................10
CONCLUSION..............................................................................................................................11
REFERENCES .............................................................................................................................13
APPENDIX....................................................................................................................................14

INTRODUCTION
In the context of business unit, accounting and finance is considered as one of the most
important aspect as It helps in getting information about company’s performance. For gaining
deeper insight about the effectualness of company’s policies and strategic framework company’s
prepare financial statements at the end of an accounting period. By this company can assess the
extent to which performance is improved as compared to prior years. The present report is based
on case scenario which depicts the concept of financial management and its importance within an
organization. Further, it will develop understanding about the different types of financial
statements which organization drafts for evaluating performance. It also entails how ratio
analysis technique can be used for identifying the areas where business unit needs improvement.
SECTION 1
Discussing the concept and importance of financial management
Financial management may be defined as a strategic framework or tool which firm
undertakes for fund procurement and utilization (Bulturbayevich and et.al., 2020). In business
unit, finance manager plays a vital role in taking decisions about investment, cash management
etc by applying the theories and principles of financial management. Managerial finance
provides high level of assistance to the manager in maximizing organizational alue and
shareholder’s wealth.
Significance of financial management
 By undertaking the approaches of financial management firm can ensure smooth
functioning of operations. Moreover, it helps in making proper allocation of funds by
avoiding aspect pertaining overspending.
 It also provides high level of assistance to the firm with regards to planning and
acquisition of funds (Kembauw and et.al., 2020). By this, firm can decide about the
sources of funds which proves to be suitable for meeting financial requirements.
 Company can improve profitability through the means of effective financial
management. As, financial management practices such as variance analysis enable firm

to assess deviations take place in the existing performance. In this way, by taking
corrective measures on time business organization can improve profitability.
SECTION 2
Discussing the main financial statements and explaining the use of ratios pertaining to financial
management
Financial statements may be served as a formal record of financial activities and
transaction pertaining to specific business. There are mainly four statements which business units
prepare with the motive to assess financial position and satisfy information need of stakeholders
(Brigham and Houston, 2021).
Income statement
This refers to the statement which exhibits profitability gained over the expenditure
including both direct and indirect. It mainly furnishes information about revenue, gross and net
profitability pertaining to specific time period. By preparing income statement management team
can assess actions that need to be taken for controlling expenses and maximizing profitability.
Statement of financial position
Balance sheet is one of the main financial statement which firm drafts at the end of
reporting period for assessing assets and liabilities. It helps firm in recognizing ways through
which company can improve liquidity, solvency and other aspects through using assets &
liabilities (The four basic financial statements, 2021).
Assets = Current + Fixed
Liabilities: Current liabilities + Long term debt + Shareholder’s capital
Current assets section of balance sheet includes details about cash, debtors, prepaid
expenses etc. On the other side, machinery, furniture and other intangible aspects fall under the
category of fixed assets. Elements of liabilities section mainly includes long term debt, current
obligations (creditors, outstanding expenses etc) and shareholders’ equity (net profit + capital).

Thus, by analyzing all these aspects manager can ascertain company’s position and performance
more effectually.
Cash flow statement
It furnishes information about cash inflows and outflows under the category of operating
investing and financing activities. Company can find problems in cash management by preparing
the concerned statement and thereby would become able to take measures for improvement.
Statement of changes in equity
SOCE presents summary of changes which took place in owner’s equity during an
accounting period (Hasanaj and Kuqi, 2019). It depicts details about the sale as well as
repurchasing of shares, dividend, changes in profit or loss.
Ratio analysis helps in interpreting and analyzing financial statements of firm from
several perspectives such as profitability, liquidity, solvency and efficiency etc. By applying the
tool of ratio analysis business entity can identify and evaluate the trend of business performance
or position.
 It assists firm in analyzing performance trend over the period and in against to the
competitors as well. By this, company can identify how far its performance from the
predetermined goals and objectives (Palepu and et.al., 2020). Through assessing this firm
can develop competent strategic and policy framework for improvement.
 Facilitates operational efficiency as it clearly indicates how effectively business unit has
used its assets and liabilities during the concerned time period.
 Along with this, company can identify the level to which performance in terms of
profitability aspect has been improved over the time period. By this, firm can assess
strategies which it needs to undertake for the maximization of both sales and profitability.
 In addition to this, business unit can develop competent financial structure by evaluating
aspects pertaining to debt and equity under the category of solvency ratio. Moreover,
ratio analysis tool helps in identifying how cost can be reduced by setting suitable
combination of debt and equity.

SECTION 3
Using the templates provided
Income statement
from the evaluation of the income statement it can be evaluated that organization has enough
capability to maintain profitability by incurring several expenses. There are number of expenses
which are incurred by organization like administration, other operating overheads, interest, etc.
these all are leading firm to give emphasis on having significant estimation of profitability
margin to gain higher gross profitability which is 42.8%. the net profitability is 22.7% which is
reflecting positive performance of specified organization.
Balance sheet

The specified balance sheet has been formulated by applying accounting equation. It is
reflecting that company has proper assets equals to liabilities plus equity. It can be mentioned
that sound position is maintained by firm which involves both current and fixed assets such as
stock, debtor, deposit, investment, etc. On the others side liabilities and equities comprises bank
loan, trade creditors, income tax payable, etc. it can be specified that there is good financial
performance.
Calculating ratios:
Profitability:
Gross profit

Particulars Formula Ratio
GP 81125
Sales 189711
Gross profit
(gross
profit /
sales) *
100 42.76
From the above provided table it can be specified that gross profit of the company is
42.76% which is basically higher than the ideal margin. It is indicating good perform of
company to generate profitability by declining cost of goods sold.
Net profit ratio
Particulars Formula Ratio
net profit 43057
Sales 189711
Net profit ratio
(Net
profit /
sales)*10
0 22.7
From the evaluation of presented ratio it can be specified that net profitability is concerned with
assessing efficiency to generate revenue by making sales (Perszyk and et.al., 2021). The obtained
outcome is basically greater than standard bench marking of profitability. This is presenting
higher efficiency to maintain liquidity to give greater return to investors.
Liquidity
Current ratio
Particulars Formula Ratio

Current asset 84349
current liabilities 37928
Current ratio
Current
asset/
current
liabilities 2.22
From evaluation of given illustrated information it can be specified that current ratio allows
presenting efficiency of company to overcome short term obligation with usage of current assets.
The ideal current ratio is 1.2-1.5 times which is lower than obtained information. There is
requirement to decline particular ratio.
Quick ratio
Particulars Formula Ratio
Stock 84349
Stock 28571
current liabilities 37928
Quick ratio
(Current
asset-
stock)/
current
liabilities 1.47
On the basis of given information it can be measured that quick ratio is helpful for
different stakeholders to assess how effectively firm can overcome current liabilities with cash &
equivalent assets. The specified enterprise has enough capacity to meet its obligation.
Efficiency

Inventory turnover ratio
Particulars Formula Ratio
COGS 108586
Inventory 28571
Inventory turnover
COGS/
inventory 3.8
From the provided information it can be stated that inventory turnover ratio is lower than
5-10 times which is showing lower efficiency of replacing outcome.
Fixed asset turnover ratio
Particulars Formula Ratio
revenue 189711
total fixed asset 69298
fixed asset
turnover ratio
Revenue/
total asset 2.74
The above table presented is showing how organization is using fixed assets to
generate revenue. On the basis of obtained outcome it can be specified that organization is
having lower efficiency in managing all the practices which is required to be improved in order
to gain higher profitability and sustainably of organization.
SECTION 4
Explaining the process to improve financial performance of company
From the evaluation of the above presented information it can be specified that
organization require making few changes in overall processing of company. In the current era,
competition has increased which require firm to focus on identifying lacking areas in turn higher
profitability and sustainability can be derived.

The income statement of the enterprise is indicating good profitability in both gross and net.
There are several expenses which has been incurred by organization for gaining significant
ability to operate in sector (Ginting, 2021). In order to be successful in the present working
environment it is essential for the organization to give focus on having capacity to decline cost
through formulating appropriate structure. It can be improved by identifying non significant
components which can be eliminated to get higher profitability.
There are several assets possessed by organization which are helpful for the specified
organization to overcome its short term liabilities in turn higher efficiency can be achieved. It
can be useful in having greater amount of trustworthiness and credibility in market which can
aid in raising funds to meet requirement. The one of the crucial act that can be executed by
enterprise for improving its liquidity position is to focus on selling outdated assets in turn funds
can be raised to derive higher efficiency. Current and quick ratio of specified enterprise is higher
which need to be declined to increase profitability.
The other course of action which can be executed by firm for improving its performance is
having proper formulation of credit policy in turn accurate analysis of funds. It is helpful in
avoiding situation of bad debts via sending accurate reminders, good relationship building, etc.
it can be contributed in achieving higher ability to coordinate with changing situation. Inventory
turnover can be improved by making proper adverting and promotional technique (Lawson and
et.al.,2021. It can be helpful in attracting larger customers for increasing profitability &
sustainability. Inventory management & price optimization system can be largely taken into
practice for having depth insights to make gain competitive edge to achieve positive response
from customers.
Market analysis, application of artificial and business intelligence, etc can provide
company advantage to get proper information regarding changing taste & preferences so that
development of accurate product and services can become possible (Gale, Kahn-Troster and
Croll,2021). It as well lead firm to make strategic decision regarding application of policies and
structure to increase morale among employees in turn benefits like quality performance, higher
efficiency, etc can be derived. These processes can be helpful in making significant level of
improvement in turn favorable outcome can be derived. The other course of action which can be
utilized by firm for improving its overall performance is having strategic planning. It can be

exerted by implementing tools like financial governance balance scorecard, bench marking,
variance analysis and KPI. These methods are highly beneficial in gaining better productive
outcome through comparing current performance with previous. It as well permit eliminating
non crucial elements in turn higher profitability can be achieved
CONCLUSION
By summing up this report, it has been articulated that effective financial management
facilitates optimum use of monetary resources. It can be seen in the report that by managing
financial activities and other aspects business unit can enhance profitability to a great extent. It
can be stated from the evaluation that for evaluating profitability, assets and liabilities aspect
business organization prepares final accounts at the end of an accounting period. Along with this,
it can be inferred that firm needs to make significant modifications in the existing framework so
that performance can be improved.