Case Study: Financial Management, Ratios, and Performance Review

This report delves into the concept and importance of financial management, using a case study to illustrate key principles. It discusses major financial statements, including the statement of financial performance, income statement, and cash flow statement, and their significance in understanding a company's financial health. The report includes a financial ratio analysis covering profitability, efficiency, and liquidity ratios, providing insights into the company's performance in these areas. It also suggests strategies for improving the business's financial performance, focusing on efficient resource utilization and working capital management. The analysis concludes that effective financial management is crucial for strategic decision-making and sustainable business growth.

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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Discuss the concept and importance of Financial Management......................................3
TASK 2............................................................................................................................................4
Discuss the theory of major Financial Statements............................................................4
What are the uses of ratios in Financial Management......................................................5
TASK 3............................................................................................................................................6
Calculate the different financial data required in the table.............................................6
Calculate different ratios which defines the profitability, liquidity and efficiency of the
company.................................................................................................................................6
TASK 4............................................................................................................................................7
How can the case business improve their financial performance....................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDICES...............................................................................................................................10
Calculations performed for the above case study.................................................................10
Income statement and Balance sheet....................................................................................11

INTRODUCTION
Applied business finance refers to the practice of financial aspect which are duly applied in a
business unit. These can refer to different tools which helps the management of the business to
determine their future course of action. Financial management is a that theory which helps the
management in determining various decisions for the business (Madhani, 2021). By using the
finance theory, the management can answer different issues that may arise in the life of an
organisation. In this report, the main highlight is given to the concept and importance of financial
management with regards to a case study. It further highlights the different financial statements
which are created at the end of the financial year which helps the business determine the its
position. A brief analysis is also done using the financial ratios.
TASK 1
Discuss the concept and importance of Financial Management
Financial Management is the procedure of prearranged preparation, arranging, guiding and
supervisory of the monetary events of a corporate enterprise. It refers to the attainment and
consumption of the fiscal incomes of the corporate (Dell’Erba, 2021). Its main emphasis is to
encounter the prospects of the stockholders of the commercial enterprise. It focuses on extension
of stockholder's capital, income and also upholding the development rate of the commercial
enterpirse. Financial management emphases on three main choices and these are conferred
below:
 Financing Decision- This component of financial supervision emphases on responding
the sources of the capitals that the corporation can raise funds from. It talks about the
short- and long-term sources of finance.
 Investment Decision- This is the additional decision that the commercial needs to take
which focuses on the quantity of the funds that are essential by the professional (de
Souza, Rissatti, Rover, and Borba, 2019). It is done by judgmentally scrutinizing the
apportionment of monetary funds and how much are essential for the corporate.
 Dividend Decision- This decision refer to the supplying of revenues to the stockholders
as dividend. This is a composite managerial decision as stockholders request high
dividends while directors would want to hold the amount in business for forthcoming
growth prospects.

IMPORTANCE OF FINANCIAL MANAGEMENT
1. Profitability: It examines the competence and the development chances of the firm that
will further help in the growing the productivity and delivers a sustainable approach to
the business.
2. Financial Decision: It helps in taking the perilous finance-oriented choice in particular
scenario of the business. A wrong verdict can bring down the entire corporate. It
communicates us about the numerous dangers and choices and assists in determining the
amount of the stockholder's wealth and the borrowed funds.
3. Allocation of Funds: The correct circulation of fiscal funds and bonuses can be assigned
as per the profit. It expands the useful share and decrease the cost of investment and
increases the monetary value of the firm (Goodell, Kumar, Lim, and Pattnaik, 2021).
4. Economic Stability: It offers the commercial a firmness, as it signifies the sound
monetary system and can avoid from the doings which can be corrupting for the
association and assist in sustaining and making more incomes.
TASK 2
Discuss the theory of major Financial Statements
Financial statements refer to the official records of the fiscal state and implementation accounts
of the commercial enterprise. These are inscribed archives that support the commercial enterprise
convey the vital fiscal position to the different stakeholders of the monetary info (Deshmukh,
Howe, and Gamble, 2021). These stakeholders include, investors, market analysts, creditors,
employees, owners etc. Here are 3 major economic statements in the field of business. These are
discussed hereunder:
 Statement of financial performance: This is the most vital fiscal statement in the
corporate as it gives understanding to the users of fiscal info about the monetary
performance of the corporate. This statement tells the entire assets the firm has and the
liabilities which the corporation is obligated to pay in future. It is also recognised as
balance sheet which is basically the bottom line of the businesses. In simple words, this
statement reflects where the corporate stands financially at a particular point of time
(Fairchild, and Hahn, 2020).

 Statement of income/ statement or profit or loss: This fiscal report reviews the
incomes, expenditures and charges that have been incurred in the financial period. It also
displays the sales that have been finished in the period and what were the expenses that
have been confronted by the corporate to yield and make the sales. By subtracting the
expenses and incomes of the period the company shows its profits for the period. This net
profit is end element in the statement of income.
 Statement of cash flows: This financial statement displays the net sum of inflow/outflow
of money from the corporate in a period of time. It shows the fluctuations in the cash
from operations, investing and financing activities during a period of time. Operating
activities shows the fluctuations made in the current assets and current liabilities, interests
and tax expenditures. Financing activities shows the inflows and outflows from the issue
of equity capital, debentures, loans and dividend paid.
What are the uses of ratios in Financial Management
Financial Ratios Analysis is a means in accountancy which aids administrators examine the
monetary data that have been claimed over a period of time. It measures the relation amongst
two or more fundamentals of the monetary statements (Zhai, 2020). It is a boundless tool for the
administration as it aids them assess the financial performance of the corporate. It helps the
executives to take short- and long-term decisions for the corporate and classifying the trends in
the corporate. The main uses of ratio examination are:
 Financial ratios help the strategic managers in decision-making- The financial
reports, profits, trends in returns, borrowing and remunerative capacity of the business
are used in calculation of proportions and after detailed judgements of these ratios,
executives get the understandings as to what is desirable to be done in the future to gain
more profits.
 Financial ratios help in Operational efficiency- the ratios help in determining the
liquidity, solvency, and profitability of the business. Proportion analysis helps the
management to keep low costs at high competence to meet the administrative goals of the
corporate.
 Financial ratios help in comparisons: Comparison of different elements in the reports
of financial data is done through ratio analysis of the business. It evaluates the fiscal

performance of the business and forms a base to compare it with other businesses
working in the same industry.
TASK 3
Calculate the different financial data required in the table
The Net Profit for the year 2016 , is £43,057. (2015: £18,987,000).
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
(Calculations are shown in appendices)

Calculate different ratios which defines the profitability, liquidity and efficiency of the
company.
Profitability Ratios: These ratios determine the ability of the business to earn profit. It is
calculated in relation to the revenue which is earned by the business.
 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: Profit margins show the proportion of actual profit earned in relation to the total
revenue. The difference between gross profit margin and net profit margin is approximately 20%
which means that this much of the profit has been eaten up by different indirect costs.
Efficiency Ratios: These ratios help the business decide the rate at which the business is being
efficient in its working. It calculates at what rate the assets are able to turn raw materials into
finished goods.
 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 above computation displays the time which is seized up the institution to
pay and acquire their debt and payments. The time is mostly same which means they can acquire
and boost these costs to the creditors. The client takes approximately 51 days to pay the concern
and the creditors are salaried in about 52 days. This may create a deterrent for the enterprise if
the owed time period decreases in the future day, the enterprise will not be able to meet its cost
obligations. The asset turnover is 1.23 which means the organisation is making well to prolong in
the diligence.
Liquidity Ratios: This ratio shows about what rate the liquidity is maintained in the business.
These proportions govern the company's capacity to pay back its liability duties and also gives
visions to the users of monetary info about the creditworthiness of the business
 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 talk about the payoff situation of the association. An ideal
current ratio is 2:1 and quick ratio is 1:1. It can be determined that the current assets 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 sufficient cash to pay-
off their obligations and have it notably.
TASK 4
How can the case business improve their financial performance.
Financial Performance is a life-sustaining feature of the corporate, since it appears at the
corporate carrying into act the investors decides to invest in the firm (Srinivasan, and Thangaraj,
2021). Financial ratios help the tactical administrators and the financial parties to take the correct
judgement. From the above ratio calculations, it can be concluded that:
 The current ratio of the business has declined by 82% from the previous year. This means
the business is losing its liquidness.
 The managerial expenses and interest payments of the company have condensed due to
which the net profit of the corporate have increased by 126.77%.
 shareholder's equity of the business is increasing, which is serving in more revenue
generation
The improvements that can be taken up by the strategic managers are:
 Using the resources more effectually and efficiently which will lessen the costs and
leverage the incomes of the business.
 Working capital requirements can be leveraged by reducing the inventory.
CONCLUSION
From the above-mentioned report, it can be concluded that the financial management is an
significant feature in the arena of corporate. It helps the tactical executives take healthier and
analysed choices concerning diverse features of the professional. The main drive of fiscal
organisation is to exploit the stockholder's wealth while letting down the prices of business. The
report discourses the different fiscal statements that are created and calculations of diverse ratios.

These ratios are then taken with recommendations. It is analysed that the business is making a
high net profit but it can lower its inventory cost which will help in growing the incomes and
also in the net incomes.

REFERENCES
Books and Journals
Madhani, P.M., 2021. Lean Six Sigma in finance and accounting services for enhancing business
performance. International Journal of Service Science, Management, Engineering, and
Technology (IJSSMET). 12(6). pp.141-165.
Dell’Erba, M., 2021. Sustainable Digital Finance and the Pursuit of Environmental
Sustainability. In Sustainable Finance in Europe (pp. 61-81). Palgrave Macmillan, Cham.
Goodell, J.W., Kumar, S., Lim, W.M. and Pattnaik, D., 2021. Artificial intelligence and machine
learning in finance: Identifying foundations, themes, and research clusters from bibliometric
analysis. Journal of Behavioral and Experimental Finance, p.100577.
Deshmukh, S., Howe, K.M. and Gamble, K.J., 2021. Implications of Short Selling for Corporate
Finance. Journal of Applied Corporate Finance. 33(1). pp.85-97.
Fairchild, C. and Hahn, W., 2020. Accounting and finance majors outperform other majors on
the major field test in business and the Comprehensive Business Exam: An analysis of exam
performance drivers. Journal of Education for Business. 95(6). pp.345-350.
Zhai, N., 2020, October. Practical Teaching Methods of Finance and Economics Based on
Information Technology. In 2020 International Conference on Computers, Information
Processing and Advanced Education (CIPAE) (pp. 98-101). IEEE.
Srinivasan, S. and Thangaraj, R., 2021. Essential employable skill sets in management graduates
for finance job roles in India. Higher Education, Skills and Work-Based Learning.

APPENDICES
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 and Balance sheet