Business Finance Report: Performance, Budget, and Cash Flow Analysis

This report provides a comprehensive analysis of business finance, focusing on the financial performance of T-shirt Ltd. It begins with an introduction to business finance and then delves into business performance analysis using ratio analysis to assess liquidity, profitability, and turnover. The report includes an interpretation of the profit and loss statement and the balance sheet. It then explores the concepts of accrual versus cash accounting, detailing their advantages and disadvantages, and examines the relationship between profit and cash flows. Furthermore, the report covers budgeting techniques, emphasizing their importance for a company's financial planning, resource allocation, and performance evaluation. The report highlights the role of budgets in controlling expenses and enhancing overall profitability. The analysis also includes a discussion on the benefits of forming a limited company and getting it registered on a stock exchange. This report is a valuable resource for students studying business finance and provides insights into financial statement analysis, cash flow management, and budgeting.

Business finance

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
PART 1: BUSINESS PERFORMANCE ANALYSIS....................................................................1
Statement of profit or loss:..........................................................................................................1
Statement of financial position:...................................................................................................2
PART 2: UNDERSTANDING FINANCIAL INFORMATION & MANAGMENT OF CASH...2
Accruals vs cash accounting:.......................................................................................................2
Profit vs cash flows:.....................................................................................................................4
PART 3: BUDGET AND COMPANY FINANCE.........................................................................4
Meaning and purpose of budget:.................................................................................................4
Benefits of forming a limited company and getting it registered on a stock exchange:..............5
REFERENCES................................................................................................................................7

INTRODUCTION
Business finance is refers to reading financial statements such as profit & loss account,
balance sheet and cash flows (Sauer and Wiesemeyer, 2018). It provides information to external
factors of a business such as shareholders to meet its fund or monetary needs. It is a art and
science used for monitoring and managing the firm's money. The company which is selected for
this report is T- shirt Ltd. It is a garment related firm that struggling in the current economic
climate. The topics cover in this report such as analysis of business performance by showing
ratios, evaluation of profit & loss account and balance sheet and concept of accrual accounting
versus cash accounting including their benefits and limitations. Apart from this it also includes
budget techniques and purpose of preparing budget.
PART 1: BUSINESS PERFORMANCE ANALYSIS
Ratio Analysis is calculated to know overall business liquidity, profitability and turnover
within the year and helps to comparison with last years.
Ratios 2018 2019
Gross profit ratio 0.60019 0.45022
Net profit ratio 0.177 (0.366)
Interest courage ratio 6.39 (3.71)
From the above ratio analysis in T-shirt limited it shows decrease in gross profit in 2019
in against to 2018. It further decrease in net profit by (0.366) in 2019 that was 0.177 in 2018,
the result shows less sales in 2019 and increase in expenses rather than 2018 (Nyman,
2016). Apart from this interest coverage ratio also shows negative in 2018 that leads to
higher finance cost in the year.
Statement of profit or loss:
It is a financial statement that tells the summary of revenue, cost and expenses which are
used during the specific period. It records the income statement which tell that company is
able to generate enough profit that it can run their financial performance and increase their
market share by increase their revenue and profit. It is used by public company every
quarter. it begin with the revenue on the top line then cost of goods sold is subtract from
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there including operating expenses and interest expenses and then the result is come is net
profit.
Interpretation of P&L
 Revenue- the revenue is the sales which are done by company in the given period.
The sales figure of T-shirt ltd in 2018 is 2101 and sales in 2019 are 1366. It means
organization revenue is decline year by year which is bad for the entity. They have
to take measure for increase the profit and profit is increasing only when revenue is
increasing (Mian and Sufi, 2018).
 Cost of sales – the cost of sales means cost of goods sold which mean direct cost is
incurred by the company in the production of product. The cost of sales in 2018 is
840 and in 2019 it is 751. Which mean it is good for the organization, they can
reinvest their money into some new business.
 Gross profit- it is the profit come from after deduct cost of goods sold from revenue. Gross
profit of the T-shirt ltd of 2018 is 1261 and profit of 2019 is 615, which mean it is
declining year to year.
Statement of financial position:
Balance sheet means the statement which shows the reports of company assets and liability
and shareholder equity. It is the summary of the financial balances that show the trends which
are running over a longer period. The purpose is to give an idea related to financial position
through this all investors analyze the balance sheet to see that organization is running properly or
not they can invest their money in that entity or not. It is useful for shareholder, investor and
creditor to measure the performance of the entity.
In context to t- shirt limited firm Prepares its balance sheet in the end of every year. This
report shows financial position of T-shirt Ltd. for the year 2018 and 2019 that shows its current
or non current assets and short term and long term liabilities. This firm shows its non current
asset for the 2018 that was 1282$ and in year 2019 it was decrease by 1274$ that shows firm has
sale its plant & machinery or depreciated in 2019 Li, 2019). In 2018 firm's current asset
decreased by 1634 that is increased by 1700 in 2019. This shows firm has less current assets or
lack of liquidity with it. Earning on its equity shows 0 in 2019 that shows lack of capital in
organisation. Firm’s short term and long term liabilities increased over a period of time that is
not positive sign for it because firm has less asset or liquidity to pay its liabilities. Firm should
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increase its current assets so that it can generate its operations that helps it in increasing
productivity and profits as well.
PART 2: UNDERSTANDING FINANCIAL INFORMATION &
MANAGMENT OF CASH
Accruals vs cash accounting:
Accruals: The meaning of accrual in accounting is the accounts in the balance sheet that
represents the liabilities and noncash-based assets used in the accrual-based accounting. These
types of accounts include Accounts payable, Accounts receivable, Goodwill, Deferred tax
liability and Future tax expenses.
Importance of Accrual Accounting
Assessing performance
Compared to cash accounting, accrual accounting portrays a more accurate statement of the t-
shirt ltd health as it includes both accounts receivable and accounts payable.
Accuracy
Accrual accounting provides a more accurate depiction of a t-shirt ltd financial activity. Since the
income and debt are precisely outlined, this allows the business to manage the patterns of their
financial activities.
Future planning
Accrual accounting is done in real time making it easier for management to view a detailed
overview of the business finances at any given time. This will allow them to assess previous
progress, and create new plans for the future with an accurate budget (Chen and Bellavitis,
2020).
Receive funding
Accrual accounting is the more commonly used method, and potential investors and shareholders
may want to see reports using this method. Reports showing a good flow of income over a
specific period will entice potential investors.
Cash accounting:
The cash method of accounting also known as cash- basis accounting, cash receipts and
disbursements method of accounting or cash accounting. Records revenue when cash is received
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and expenses when they are paid in cash. As a basis of accounting, this is in contrast to the
alternative accrual method which records income items when they are earned and record
deductions when expenses are incurred regardless flow of cash.
Features of cash accounting
Simple clear and straight forward as accounting adjustments at the end of year not to be made.
This method is flexible as one has the option to switch from cash method to accrual basis of
accounting and vice versa.
It follows the single-entry system of accounting.
Advantages of cash-based accounting:
This system does not require expert accounting. It is just based on the receipt actual
payment of cash. So, t-shirt ltd can easily record and maintain their transactions in small
notebook without preparing separate set of systematic books.
This is cheaper than the accrual system as accrual system requires proper records and software
there is no such needs in the single system so t-shirt ltd can afford that.
Since it is simple and requires recording less no of transactions compared to accrual system, it is
less time consuming.
Profit vs cash flows:
Profit
Accounting profit is company’s total earnings, calculated according to generally accepted
accounting principles. It includes the explicit costs of doing business such as operating expenses,
depreciation interest and taxes.
Accounting profit also referred to as bookkeeping profit or financial profit, is net income earned
after subtracting all costs from total revenue. In effect, it shows the amount of money a firm has
left over after deducting the explicit cost of running business (Canales, 2016).
The cost that need to be considered include the following:
 Labour, such as wages
 Inventory needed for production
 Raw material
 Transportation cost
 Sales and marketing costs
 Production costs and overhead
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Importance of profit
Essential for survival
Profit is essential for the survival of the t-shirt ltd in the market.
Ability to borrow money
If the t-shirt ltd is making profit then it will enhance its borrowing ability in the market
Ability to pay down debt
Profitability if not used to grow assets, can pay down debt. T-shirt ltd without profit cannot pay
down debt
Hire better employees
Profitability is one of the few things that enable t-shirt ltd to hire people.
Builds cash
Profit is one of the few things that will enable a company to increase cash in the bank.
Cash flow
A cash flow is the net amount of cash and cash-equivalents being transferred into and out
of a business. At the most fundamental level, a company’s ability to create value for shareholders
is determined by its ability to generate positive cash flows or more specifically, maximize long-
term free cash flow.
Importance of cash flows
Make better plans and decisions
With an accurate cash flow statement t-shirt ltd will be able to know the exact amount of cash
they have at any moment of time. This information is vital because it will help in making better
plans for the future
Protect business relationships
If the t-shirt ltd having cash flow problems, then you may not have the funds available to pay to
suppliers. This can harm the business relationship
Set payment schedules to ensure that t-shirt ltd have finances available to pay suppliers.
Expand at the right time
Growth requires a lot of cash. Purchasing stock, renting buildings, hiring employees and
acquiring computers all takes place before the money starts coming in. if t-shirt ltd have the
funds available to match your growth (Burns and Dewhurst, 2016).
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PART 3: BUDGET AND COMPANY FINANCE
Meaning and purpose of budget:
Budget is estimation plan of revenue and expenses that is prepare over specified period of
time for efficiency and profitability of company. It is integral part of company and it has many
forms such as master budget, sales budget, production budget which are made by different
department of the company.
Importance of budget in T shirt company –
For a t shirt company, budget is very important as they help in forecasting and allocating
the money in right way which ensures proper utilization of capital.
In marketing department, they require planned budget from finance department to get sufficient
amount of capital where they can put in right place. In t-shirt company, budget is prepared to
identify how much money is available to invest in future event. In t shirt company they need to
maintain a detailed budget to restrict any future extra expenditure which might help to curb over
expenses. In t-shirt company, it helps to control finance expenses and helps the organisation in
reviewing and comparing with actual and allocate the funds in right place to utilize them
effectively and enhance the overall profit to the company (Boschmans and Pissareva, 2018) .
Purpose of budget in T shirt company –
For the company, it ensures proper planning of resources available and according to that
utilize them at their maximum capacity. That will increase the efficiency and operation of
company.
In the company, budget uses to evaluate the performance of company over specified period of
time and identify budgeted revenue and expenses of company. Budget uses in long term and it
should be prepared and maintain for long period of time.
For company budget tells them how much to be financed in any project and it consider all
the factor while preparing it so that it do not face any issue in future related to investment
purpose.
In t shirt company, budget is planned and evaluated for long period of time to forecast
cash flows and when it finds any deficiency so it improves through altering some resources by
assessing current situation of company. It helps in minimizing future expenses through allocating
the funds in proper place. Any future contingency, if occurred it proofs as a successful indicator
for the company.
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Benefits of forming a limited company and getting it registered on a stock exchange:
Limited company refers to the limits in amount of liabilities of shareholders of the company. It
is a type of business entity that legally incorporated in their own rights. Ownership of the
limited company is can be easily transfer. A limited company has less shares and less guarantee.
This type of firm runs by one and more shareholders and one director are there. The main thing
in this is separation of income and assets by its owners that indicates less liability (Bendell and
Doyle, 2017).
Benefits of forming a limited company:
 Minimizing personal liability: as limited company is separated income and assets from
owners it minimizes personal liabilities. This is because limited company follows
separate entity concept as business is separate from its owners. It shows any insvency,
creditors and debt all are responsibility of the mn company itself not by owners.
 . Professional status: Forming a limited company increases firm's professional status and
improve its brand image. A more professional image will give chance to business to gain
profits in such A way so that it can attract nee customers, assessing a larger range of
opportunity, expending business different markets and attracting the new investors also
creating new brand value.
 . Separate legal entity: A legal company itself a person with its sole rights because A
limited firm is separated from its owners and directors.
Stock exchange, According to securities Act 1956, stock exchange is an organization or a
individual that is established in order to buying and selling securities and helps in managing and
controlling securities. In T-shirt Ltd. Firm is deals with stock exchange that helps firm to
increase its capital and aware public about the firm that helps firm to getting fund and expand its
business.
Benefits of getting registered an organization in stock Exchange:
It allows firm to boosts and assess its capital and public image. In context to t-shirt Ltd. It allows
firm to generate funds for expanding its business that leads to increase in productivity as well as
profitability. Getting registered into exchange gives firm advantage to improve its brand image
make customers aware about the brand. The firm raise its capital by offering more shares to its
stakeholders that is possible by registering firm in stock exchange (Anderson, Chandy and Zia,
2018).
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.
CONCLUSION
From the above report it has been concluded that business finance is a source of
managing fund and financing activities that helps firm to expand its business and help to grow.
To plan and controlling of business organization’s used ratio analysis that helps firm to know
about its financial position. Firm prepares its profit and loss account in the every year ending.
Firm’s conversion into Limited company helps firm for maintain limited liability and getting
registered in stock exchange helps it to manage funds that helps it in expanding its business.
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REFERENCES
Books and journals:
Anderson, S.J., Chandy, R. and Zia, B., 2018. Pathways to profits: The impact of marketing vs.
finance skills on business performance. Management Science, 64(12), pp.5559-5583.
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Boschmans, K. and Pissareva, L., 2018. Fostering Markets for SME Finance: Matching Business
and Investor Needs.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of
Mexican small business finance. Organization Science, 27(6), pp.1548-1573.
Chen, Y. and Bellavitis, C., 2020. Blockchain disruption and decentralized finance: The rise of
decentralized business models. Journal of Business Venturing Insights, 13, p.e00151.
Li, G., 2019, August. Research on Innovation of Enterprise Management Accounting
Informatization Platform based on Intelligent Finance. In 1st International Symposium on
Economic Development and Management Innovation (EDMI 2019) (pp. 286-291). Atlantis
Press.
Mian, A. and Sufi, A., 2018. Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives, 32(3), pp.31-58.
Nyman, R.B.E., 2016. An Algorithmic Investigation of Conviction Narrative Theory:
Applications in Business, Finance and Economics (Doctoral dissertation, UCL (University
College London)).
Sauer, R.M. and Wiesemeyer, K.H., 2018. Entrepreneurship and gender: differential access to
finance and divergent business value. Oxford Review of Economic Policy, 34(4), pp.584-596.
Tenca, F., Croce, A. and Ughetto, E., 2018. Business angels research in entrepreneurial finance:
A literature review and a research agenda. Journal of Economic Surveys, 32(5), pp.1384-1413.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking &
Finance, 77, pp.176-196.
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