Business Finance Report: Financial Statements and Ratios

This comprehensive report delves into the critical aspects of financial management, financial statements, and ratio analysis within a business context. It begins with an introduction to finance, emphasizing its importance in business operations and its role in generating income and managing funds. The main body explores financial management, defining its strategic planning and importance, discussing financial planning, decision-making processes, and the functions of a financial manager. The report then examines the significance of financial statements, including the cash flow statement, balance sheet, and income statement, and their use in assessing a business's financial performance. Ratio analysis is explained as a tool to measure a company's financial liquidity and performance, with examples of liquidity, turnover, and profitability ratios. The report includes a business review template with calculations for net profit margin, gross profit margin, current ratio, and quick ratio, along with an income statement and balance sheet analysis. It concludes with a discussion of why financial management is important, highlighting its role in financial planning, decision-making, and enhancing profitability. Finally, the report provides a business review that includes key financial data and ratio analysis, offering a detailed overview of the company's financial performance and position. This report is designed to provide students with a clear understanding of these key financial concepts.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
Financial Management and its Importance..................................................................................1
SECTION 2......................................................................................................................................2
Discussing financial statements and use of ratios........................................................................2
SECTION 3......................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................6
APPENDIX......................................................................................................................................7

INTRODUCTION
Finance is about where various businesses using financial performance for businesses.
Businesses uses finance for running its activities. Finance gives information for generating
income for businesses. There is advantage for financial department it manages funds & using it
for getting higher benefits. Finance is element which gives higher profitability for businesses.
Financial department helps various activities by gives funds for manages those activities. It is
about it helps for financial planning, organising, analysing, managing, budgeting etc. This report
is about important of finance in business. It includes various concepts of financial management
& its importance.
MAIN BODY
Financial Management and its Importance
Financial management is defined as the strategic planning, planning, directing, and
managing the financial performance of an organization or institution. It includes applying the
principles of management of financial assets of the respective organization, that plays important
role in management of finance. Some goals are defined below:
Maintaining adequate funding of business entity
Ensuring that shareholders get a good return on their investment;
The efficient and effective utilisation of financial funds.
Creating real and safe finance investment opportunities for you to invest money.
Financial management builds various factors that are discussed below:
Financial planning: Financial planning is defined as the process of assessing and calculating the
amount of money needed by an organization and allocate it according to demand. The financial
plan includes some important objectives that are defined below:
Assess the amount of finance required;
Analyse capital requirement and building planning;
Fencing the organisation's financial planning and effective regulations
Financial management: financial management is one of the important aspects that plays vital role
management of finance. Its main function is to analyse that whether the organization meets its

defined goals or not. Financial management provides appropriate answer of these questions that
are discussed below:
Are organisations assets are used in effective manner?
Are the organisational assets are safe?
Are the executives acting financially organization and role major stakeholders?
Financial decision-making process: This includes investing as well as funding in relation of
organization. The financial department decides the methods that are used by the organization to
raise money, there are various alternatives are available such as the organisation sell new shares
in open market and how the profit on shares are shared among shareholders.
The financial department of company is managed by the chief financial officer. There are various
functions are performed such as:
Assessing the required amount of finance: The financial manager must assess as well as analyse
the amount of finance that is required by the organization. This depends upon policy of
organisation on the bases of expected costs and benefits. The required finance should measured
by number of way such as organizational power of the organization increases.
Construction of capital: When the required finance amount is determined by the organisation, a
financial statement will need to build. This includes short-term as well as long-term debt
analysis. It depends on cash that the company owns, as well as determine the finance that need to
be taken by various external financial sources.
Investing: Each and every organization or firm invest finance in various activities to make more
finance and earn a continue profit. Therefore, it is the responsibility of financial manager to
invest money in safe investments.
Profit distribution: Once an organization has received a fair amount of total profit, it is the
responsibility of the finance manager to distribute it properly. This may include keeping part of
all profits for events, improvement as well as expansion purposes, and rest of profit is distributed
to the shareholder of organisation.
Financial management: The department of finance is responsible for the management of
organisational finances. Funds are required for various activities and purposes in organisations

such as paying salaries to employees, keeping stock, meeting bills, and purchasing any
equipment.
Finance management: It is not covered only financial planning as well as receiving funds, but it
includes various activities in which finance manager analyse as well as evaluate all existing
financial funds of organisation and plan all goals and objectives accordingly. There are various
financial instruments are used by the organisation like forecasting finance, price, evaluate all
factors that are related to the risk management, enhancing profit and controlling cost.
Why is Financial Management Important?
Importance of financial approaches:
Assists financial planning of organisation
Evaluate all factors such as planning and fundraising;
Assists organizations to use and distribute revenue;
Guide organizations to make effective financial decisions
Facilitates organisation to improve profitability
Enhance the total number of organisations
Help organisation to gain economic stability
It motivates employees to save a amount of money that facilitates them plan their finances.
Why learn financial management?
Multi-job opportunities: Learning financial management opens up many opportunities of job
enhancement. Public as well as private sectors are included in this this function. There are
various career development options include in finance such as banking, investment, analysation
of finance, accounting and management, and management of financial strategies. It helps people
who have a desire to established their own business. There are various financial management
programmes and getting degree in the field of finance facilitate people to get better jobs in
finance department.
Develop interpersonal skills: Studying in this field facilitates the individual to make better
connections and collaborative skills through maintaining effective relationships with partner.

It develop character: Studying in this respective sector help to develop soft skills. People who
want to engage in financial field must be extroverts and have the effective knowledge about the
terms of finance that enhance their overall personality and knowledge.
Great job opportunities: According to the USA Bureau of Labor Statistics (BLS), the demand of
financial services manager jobs is increased in the US due to enhancement of financial products
and the need for more in-depth global knowledge of finance as well".
High pay packages: People working in this field are often well paid, either at entry level or at
management level. In addition, this is the role of the most skilled work that is always needed.
Discussing financial statements and use of ratios
Ratio Analysis:
Ratio analysis is the tool to measure company's current financial liquidity and financial
performance. Ratio analysis helps in estimating company's current financial situation. Company
uses different types of ratio analysis to understand company's current liquidity. There are
different kind of ratios which company uses for example turnover, profitability, market, activity,
liquidity etc. few of them are explained below.
Liquidity Ratio
Liquidity ratios reflects a ability of company to pay-off it's short term debts without
generating external capital. Financial liquidity of the company is measured with the help of this
ratio like in how many days a company can pay off it's creditors current ratio, Quick ratio and
operating cash flow ratio are some of it's types.
Turnover Ratio
There are different kind of turnover ratios such as employees turnover ratio, creditors
turnover ratio, debtors turnover ratio, inventory turnover ratio. This ratio shows company's
financial condition. For example inventory turnover ratio tells in how much time company have
to restock it's goods. This ratio gives the result in days .
Profitability Ratio
Profitability ratio defines the ability of profit generation of a company in a specific time
period. This ratio measures the percentage of profit generated by the company after deducting all
the expenses and cost occurred during earning that income. There are various kinds of
profitability ratio few of them are gross profit, earning per share, return on capital employed,
return on equity, price earning ratio etc.

Financial statements are using for collecting summary for transactions which businesses
generates which helps for financial performance, financial position & cash flows. It is useful for
determining ability for business for generating cash, sources for uses cash, to determine business
ability for paying back cash, to determine financial results for trend line for booming
profitability, to derive financial statements, to managing business transactions which
accompanying statements etc. financial statements includes cash flows, balance sheet & income
statement etc.
Cash flow statement: It is defined as how much cash businesses generates for running
its activities. It includes operating activities, investment activities & financial activities etc. It
provides information about the changes in finance in particular period of time.
Balance sheet: It includes assets & liabilities for businesses. There are various things are
represented in balance sheet such as assets and liabilities. It reflects the financial positioning of
business on a particular period of time.
Income statement: It includes various expenses & income which uses for running
activities for businesses. It provides the information about the all sources of income and
expenses that reflects the performance of organisation in particular finance year.
Business Review Template:
Computations:
Net profit margin = 43057 / 189711 * 100
= 22.69%
Gross profit margin= 81125 / 189711 * 100
= 42.76%
Current ratio = Current assets / current liabilities
= 54349 / 37928
= 2.22:1
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
Income statement:
Amount
Turnover 3 1,89,711.

Less cost of sales:
Material Cost 42,597.
Production Cost 15,231.
Labour Cost 50,758.
1,08,586..
Gross profit 81,125..
GP %
= 42.8
Less Expenses:
Administrative expenses 13,751.
Other operating overheads 22,374.
Interest 1,943.
Total Overheads 4 38068..
Profit/(loss) for the financial
year 43057.. NP%= 22.7
Balance Sheet:
Balance sheet as at 31 December 2016
2016
Total
£0
Non-Current assets
Intangible assets 5,793
Tangible assets 52,812
Investments 10,693
69,298
Current assets
Stocks 28,571
Trade debtors 26,367

Short term deposits 14,779
Cash at bank and in hand 14,632
84,349
Current liabilities
Bank loans and overdrafts 9,610
Trade creditors 19,493
Other Creditors 678
Income tax payable 3,585
Other creditors including tax and social security 4,562
37,928
working capital 46,421
Total assets less current liabilities 115,719
Non-Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,057
Total equity 83,815

Business review:
2016 2015 Change
£’000 £’000 %
Turnover (continuing operations) 1,89,711. 1,79,587. 5.60
%
Profit for the financial year 43057 18,987 126.7%
Shareholder’s equity 83802. 63,057 32.9
0%
Current assets as % of current liabilities 222% 304% -
82%
Customer satisfaction 4.5 4.1 10%
Average number of employees 649. 618. 5
%
Gross Profit = £81125.
Net Profit = £43057.
Net Profit increased in 2016 by 126.7 during the year.
Shareholders’ equity increased by 32.9% by £83802.
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.
Calculations:
Gross profit = sales – COGS = 189711 – 108586 = 81125
Net Profit = Revenue – total expenses = 81125 – 38068 = 43057
Profit = 43057 – 18987 = 24070
Current ratio = current assets / current liabilities = 54349 / 37928 = 2.22:1
Quick ratio = (current assets- stock) / current liabilities
= (84349- 28571) /37928 = 1.47:1
Equity = 63057 / 20745 = 83807

Increase in profit = 63057 / 32.9% = 20745