Report on Financial Management and Business Performance Analysis

This report provides a comprehensive analysis of financial management, delving into its core concepts and significance for businesses. It explores the major financial statements, including the income statement and balance sheet, and explains the use of ratios to assess liquidity, profitability, and effici...Read More

APPLIED BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
SECTION-1.....................................................................................................................................1
Concept of financial management and its importance.................................................................1
SECTION-2.....................................................................................................................................1
Major financial statements...........................................................................................................1
Use of ratios in financial management.........................................................................................2
SECTION-3.....................................................................................................................................3
Income Statement.........................................................................................................................3
Balance Sheet...............................................................................................................................3
Liquidity, profitability and efficiency of the company................................................................4
SECTION-4.....................................................................................................................................5
Processes that can be used to improve the financial performance...............................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
APPENDIX......................................................................................................................................6

INTRODUCTION
Financial management refers to the planning, organizing, directing, monitoring and
control regarding the financial functions and undertakings of the business. It refers to managing
the financial assets through controlling the costs and expenses of the business. The project shall
show the basic understanding of financial management and its significance for the business. It
shall highlight the major financial statements used by the business to represent its profitability
and the financial position. It reflects the ratios that are depicting the liquidity, profitability and
efficiency position of the company. The project shall be depicting the income statement and
balance sheet of a company and also represent the processes that can be applied to improve the
financial performance.
MAIN BODY
SECTION-1
Concept of financial management and its importance
Financial management is an important aspect of the business where the financial
functions and undertakings are managed by incorporating the whole procedure starting from the
planning for arrangement of finances, directing, effective utilization in the business and
monitoring and control of the same (Nguyen, Viet and Loan, 2021). It assists in the critical
decision-making of the business regrading the capital structure, maintenance of the liquidity,
supply of funds, investment and the financial decisions. Since finance is the life blood of the
business and all the operations are dependent over it (What is the importance of Financial
Management, 2021). The finance should be used in a manner where the costs can be minimized
and the profits can be maximized. This shall also be helpful in fulfilment of the organizational
objectives like profit maximization, shareholder's wealth maximization and developing the future
growth prospects.
The most significant importance of financial management are:-
 Financial management helps in planning the finances for the future based on the trends as
shown by the ratio analysis. It helps in preparing a blue print regarding the need of
finance, time period, cost and respective returns that the project can determine (Jovanovic
and Vasicek, 2021).
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 The decisions related to financial management maintains the efficient supply of finances
in the organization avoiding delay due to short supply or excess availability or the idle
money.
 It plays major role in deciding the capital structure of the company by balancing the debt
and equity in the business. It should be such that does not dilute the control as well as
maintains leverage in the company.
 An efficient portfolio of investment is decided which maximizes the returns that are
generated by the company. For this the risk taking capacity is ascertained and accordingly
the equity debt ratio is decided and applied on the finance (Nabijonov, 2021).
 It sorts to maintain the liquidity position so that the company can smoothly manage its
short term and long term debt obligations with maintaining the credibility of the business.
 An efficient organization of the funds in the business helps in achieving the operational
efficiency which further leads to generating economies of scale and also reducing the cost
per unit (Cheuk, 2021). It also helps the business in developing competitive edge in the
market which enhances the growth prospects of the business.
SECTION-2
Major financial statements
The financial statements that are prepared by the company represents the financial health
and well-being of the organization. These are used by the internal and external users in the
process of decision-making. They show the performance of the company as outcome for the
operations that are undertaken throughout the year (Apridasari, 2021). There are majorly four
types of financial statements that are prepared by the company:- Income Statement:- The income statement also known as profit and loss account shows
the profitability of the business for a particular period. It is prepared by decreasing all the
costs, expenses and losses from the revenues earned by the company. It helps in
evaluating the profitable and non-profitable ventures of the business and the returns that
can be extended to the shareholders in the form of dividend. Balance Sheet:- A balance sheet containing the assets and liabilities of the business
shows the financial position of the company (Zhao and et.al., 2020). It is a snapshot of
the financial state of the company and facilitates comparison of the different entities in
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the market. The owner's equity represents the money left after settling the debts and
selling the assets of the company. Cash flow statement:- The cash flow statement that is prepared at the year end
summarizes the inflows and outflows of cash. It shows the liquidity position of the
company that can be used for meeting the short term debts and obligations of the
company. It reflects the cash generated and used in the operations, investing and
financing activities.
 Statement of shareholder's equity:- This statement prepared as a part of the balance
sheet shows the changes in the owner's equity of the company (Le and et.al., 2020). The
statement shall be affected by the issue of equity, withdrawals, profits or losses for the
period and the dividends that are extended as share of the profits earned.
Use of ratios in financial management
The ratio analysis conducted by the company can be used in managing the finances of the
company more efficiently and improving the liquidity position of the business. The ratios shall
be showing the operational efficiency, liquidity and profitability of the company which can be
used in the decision-making process of the financial management (Zavadskas and et.al., 2018).
The decision can be related to capital structure, arranging finance and its utilization in the growth
and development of the business. Comparison- The ratio analysis facilitates comparison of the business with that of the
competitors in the industry. This shall help in taking financial management decisions like
acquiring finance in minimum cost and producing maximum benefit, to generate
competitive advantage. Trend line- On the basis of computation of the various ratios, the trend regarding the
future financial performance can be ascertained and accordingly the finances can be
arranged which shall avoid shortage as well as idle money in the business.
 Operational efficiency- It can also assist in the building of economies of scale and
simultaneously reducing the cost per unit of the company. This develops operational
efficiency for the business (Pavone, Migliaccio and Simonetti, 2021).
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SECTION-3
Income Statement
The income statement of the company shows that it has earned a gross profit margin of
about 43% after reducing the cost of sales from the revenues earned during the year.
It shows that net profit of 43057 is earned on the sales after deducting the operational
costs of the business. It is averagely 22.7% of the revenues.
Balance Sheet
The balance sheet of the company shows the assets, liability and the owner's equity as
possessed by the business. It is showing the financial well-being of the company based on which
the decision-making shall be done. The total amount of assets is 83815 in the business which can
be sold to its financial liabilities.
Liquidity, profitability and efficiency of the company
The Company’s key financial and other performance indicators during the year were as
follows:
2016
£’000
2015
£’000
Change
%
Turnover (continuing operations) 189,711 179,587 +5.6
Profit for the financial year 43057 18,987 +126.8%
Shareholder’s equity 83802.
7
63,057 +32.9
%
Current assets as % of current liabilities
54.72?
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 126.8 % during the year.
Shareholders’ equity increased by 32.9% by £20745.7
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is 1.47 times
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The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is 2.224
times
The various ratios that are calculated above shows the liquidity, profitability and
efficiency of the company operations. They also can be used for the comparative analysis
with the other competitors or determining the trend line that is followed by the company
(McCosker, 2021). The ratios are generally used for knowing the financial performance
of the company in comparison to last year, other departments or the competitors in the
business.
The liquidity ratios reveal the liquidity position which is the capability to meet the
debts and obligations of the company. This can be calculated by the current ratio and the
quick ratio which shows the availability of the current assets to pay the debts arising
within a time span of one year.
Current Ratio= Current assets/ current liabilities
84349/37928= 2.224 times
Quick ratio= Quick assets (current assets- stock)/ current liabilities
(84349-28571)/37928
55778/37928= 1.47 times
The current ratio being more than two, specifies that the availability of the current
assets is more than two times the current liability which shall ensure smooth meeting of
the obligations of the company.
Apart from that quick ratio is also efficient as it ought to be approximately 1:1 but
for the company it is more than that.
The profitability of the company is reflected by the gross profit and net profit
ratio. This shows the margin of profit that the company is able to capitalize over the sales
revenue. The higher such ratio the better it is for the performance and efficiency of the
company (Bartkova, Palochova and Pomp, 2021).
Gross profit ratio= Gross profit/ Revenue*100
81125/189711*100
42.8%
Net profit ratio= Net profit/ Revenue*100
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43057/189711*100
22.7%
The gross profit margin of the company is excellent as it is earning approximately
43% returns on the sales. The net profit is also good as company is earning above 20% of
profits on the sales. This happens when the costs of the company are managed efficiently
by the management.
Also, it can be seen that the net profits of the company has increased over to more
than double the amount it was in the last year. And so it can be analysed that the overall
efficiency of the company has boosted.
SECTION-4
Processes that can be used to improve the financial performance
The financial performance of the company can be boosted if further certain loop[holes
are being found and the company applies certain processes to attain better results and growth
prospects for the company.
 If the company has certain idle money or additional finance then it can utilize it in
enhancing the investment portfolio (Bataineh, Alrjoub and Shwiyat, 2021). The current
ratio and quick ratio of the company are high which shows it has excess liquidity with
them. This excess funds can be considered for investment which shall further drive better
results for the company.
 Revising the pricing strategy of the product is also one of the alternatives that shall
improve the financial performance by capturing the market share. Since the company has
capitalized over the economies of scale and reduced cost per unit. The reduced cost can
be used to set the pricing strategy as the market penetration and capture the larger
proportion of the market.
 Aggressive marketing strategies can be used by the marketing manager in order to
generate larger traffic over the website of the company. And then this traffic over the
website can be sort to make the purchase decision and thereby maximizing the
conversion rate (Mousanezhad and et.al., 2021). The digital marketing platforms can be
used to attract the customer base and achieve competitive advantage in the business.
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CONCLUSION
It can be summarized from the above project that financial management is an essential
part and plays crucial role in the company, since it assists in the managing of the financial
undertakings of the business. It is also important for the business in terms of maximizing the
operational efficiency of the business. There are different types of the financial statements that
are prepared for the usage of the internal and external users of the financial information. Ratio
analysis also facilitates comparison and trend analysis for taking the financial management
decisions. The case study shows the income statement, balance sheet and the ratio analysis on the
basis of which processes shall be applied to improve the financial performance of the business.
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REFERENCES
Books and Journals
Apridasari, E., 2021. Financial Ratio Analysis of Sharia Bank in Indonesia. International
Journal of Islamic Economics. 2(2). pp.100-109.
Bartkova, H., Palochova, M. and Pomp, M ., 2021. The process of economic integration and
globalization in the area of financial reporting, focusing on publication of financial
statements in the Czech Republic and in selected countries of the European Union. In
SHS Web of Conferences (Vol. 92). EDP Sciences.
Bataineh, A ., Alrjoub, A. and Shwiyat, Z . M ., 2021. Does privatisation improve financial
performance? Evidence from Jordan. Global Business and Economics Review. 24(1).
pp.1-20.
Bataineh, A., Alrjoub, A. and Shwiyat, Z . M., 2021. Does privatisation improve financial
performance? Evidence from Jordan. Global Business and Economics Review.24(1).
pp.1-20.
Cheuk, S., 2021. Financial Management Capacity, Accountability, Own Income Generation,
Revenue Diversification and Financial Sustainability in Charities Of Malaysia. Studies
of Applied Economics. 39(1 (1)).
Jovanovic, T. and Vasicek, V., 2021. The role and application of accounting and budgeting
information in government financial management process—a qualitative study in
Slovenia. Public Money & Management. 41(2). pp.99-106.
Le, N . H ., and et.al ., 2020. Multivariate ratio analysis and DNA markers reveal a new
Australian species and three synonymies in eucalypt-gall-associated Megastigmus
(Hymenoptera: Megastigmidae). Bulletin of Entomological Research. 110(6). pp.709-
724.
McCosker, P., 2021. Interpretation of Financial Statements. Financial and Managerial Aspects
in Human Resource Management: A Practical Guide, Emerald Publishing Limited.
pp.23-37.
Mousanezhad, S., and et.al ., 2021. Using contingency approach to improve firms’ financial
performance forecasts. Advances in Mathematical Finance and Applications. 6(2).
pp.1-23.
Nabijonov, B . V., 2021. METHODOLOGICAL FOUNDATIONS FOR THE DEVELOPMENT
OF THE FINANCIAL MANAGEMENT SYSTEM. Theoretical & Applied Science.
(1). pp.246-250.
Nguyen, T., Viet, H. and Loan, L., 2021. Factors affecting financial management: Case study of
educational manager training and fostering public institutions. Management Science
Letters. 11(6). pp.1861-1870.
Pavone, P., Migliaccio, G. and Simonetti, B., 2021. Investigating financial statements in
hospitality: a quantitative approach. Quality & Quantity. pp.1-25.
Zavadskas, E . K., and et.al ., 2018. A novel multicriteria approach–rough step-wise weight
assessment ratio analysis method (R-SWARA) and its application in logistics. Studies
in Informatics and Contro. 27(1). pp.97-106.
Zhao, S., and et.al ., 2020. Application of multi-element (C, N, H, O) stable isotope ratio analysis
for the traceability of milk samples from China. Food chemistry. 310. p.125826.
Online
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What is the importance of Financial Management. 2021. [Online]. Available through:
<https://www.lsbf.org.uk/blog/news/importance-of-financial-
management/117410>
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APPENDIX
Income statement for the year ended 31st
December 2016
2016
Turnover 3 189711
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labour Cost 50758
108586
Gross profit 81125 GP % = 42.8
Less Expenses:
Administrative expenses 13751
Other operating overheads 22374
Interest 1943
Total Overheads 4 38068
Profit/(loss) for the financial year 43057 NP %= 22.7
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
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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 1,15,719
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
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