Financial Management and Control Report - University of Sunderland

This financial management report offers a comprehensive analysis of Pinehurst Plc's financial performance over two years. It begins with a detailed examination of various financial ratios, including liquidity, asset utilization, profitability, gearing, and investor potential ratios, calculated from the provided financial statements. The report then delves into the working capital cycle, comparing the cycles of 2018 and 2019 and discussing the implications of the findings. Furthermore, it addresses the limitations of ratio analysis in both cross-sectional and time-series comparisons. The second part of the report focuses on investment appraisal techniques, explaining and evaluating methods like the payback period, accounting rate of return, and net present value. The report concludes by assessing the company's financial health, offering insights into its strengths and weaknesses, and providing recommendations for improvement based on the analysis of financial data and industry best practices.

Running head: FINANCIAL MANAGEMENT AND CONTROL
FINANCIAL MANAGEMENT AND CONTROL
Name of the Student:
Name of the University:
Author Note:

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Table of Contents
Part A.........................................................................................................................................2
Different Financial Ratios......................................................................................................2
Working capital cycle............................................................................................................4
Limitations of ratio analysis for both cross-sectional and time-series comparisons..............5
Part B..........................................................................................................................................6
Different investment appraisal techniques.............................................................................6
Part C........................................................................................................................................10
Zero-Base Budgeting (ZBB)................................................................................................10
References................................................................................................................................13
Appendix..................................................................................................................................14
1) Ratio Analysis...........................................................................................................14

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Part A
Different Financial Ratios
Liquidity ratios
Ratio analysis as a quantitative assessment tool has been well deployed for the
purpose of assessing the financial position of the company. The ratio analyzed refers to the
usage of various ratios to determine the liquidity position of the business. Lenders and
creditors are mainly interested in the liquidity ratios of the companies, as they want to know
some idea regarding the financial situation of the customer before giving him anything in
credit. Mainly this analysis deals with the short-term assets and liabilities that can be easily
converted into cash to pay off certain current obligation of the firm (Atrill P. & Mclaney,
2017). Current ratio and quick ratio are two of the most important and widely used liquid
ratios adopted by the firms. Current ratio includes all current assets and current liabilities for
the calculation purpose. Even though inventory is not liquid in nature then also it is included
in the current assets. Quick ratio also known as the acid test ratio includes all current
liabilities and quick assets to reflect the liquidity position of the business. Quick assets
includes all current assets except inventory and marketable securities. For 2018, the firm’s
liquid position is 1.71, which means the firm can meet its debt obligation. To remain solvent
the current ratio of the firm should be one and in this situation, the firm is having extra funds.
Even after paying off its current debt there will be some funds left with the firm, which
means the firm is in good position. In 2019, also, the firm’s current ratio is 1.50, and it can
easily pay off its current debt obligation and remain solvent in the market (Appendix 1).
However, the current ratio is decreased over the year and the firm needs to work on
increasing its current assets to become more secured. In case of quick ratio, the firm is not
able to meet its current debt obligation for the years, as the ratios of both the years are less

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than one (Watson & Head, 2013). To become solvent the ratio should be one or more than
one, thus the firm needs to increase its current assets to become liable to pay off its debt.
Asset utilization ratios
This ratio reflects the total sales revenue earned with respect to the total assets of the
company. It is one type of efficiency ratio, which shows how a company is using its assets in
an effective manner to generate revenue. Usually company calculate this ratio to find out the
ability of the firm to leverage its assets. The total asset turnover of the company is decreasing
over the year as in 2108, it was 0.77 and it decreases to 0.69 in 2019, thus it reflects that the
company is unable to manage its total assets efficiently and its asset turnover is declining
over the time (Appendix 1). The company needs to increase its sales revenue and the asset
turnover ratio is to be analyzed properly to increase the turnover ratio. In case of fixed asset
turnover ratio the result comes to one for the years, the main objective of the company should
be to manage the fixed assets of the firm and to increase the turnover ratio as a higher ratio
implies that fixed assets of the company are being used in an efficient manner.
Profitability ratios
Mainly investors used this ratio to measure the company’s ability to generate profit
and to evaluate whether the company will able to give maximum return in terms of the
investment that the investor are going to do (Holmes, & Sugden & Gee, 2008). In this
situation, gross profit margin and operating profit margin ratios are evaluated to determine
the profitability of the business. The gross profit margin deals with how the firm manage its
inventory and manufacturing costs. The higher the margin ratio, the better for the business.
However, in 2018 ratio was 38% and gradually it decreases to 28% in 2019, which is not
profitable for the firm. Similarly, the operating profit margin decreases to 8.27% in 2019
from 20.84% in 2018, leading to decrease in profitability ratio of the firm (Gowthorpe, 2005).

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The firm needs to improve its profitability ratio to attract more investors as if the ratio margin
will be decreasing over the years then no investors will show interest in any type of financing
decision in the firm.
Gearing ratios
The ratios, which reflects all types of interest bearing liabilities in the capital
framework of the business is known as gearing ratios (Glautier & Underdown, 2010). It
evaluates the financial advantage of the company. By evaluating various types of gearing
ratio, the capital structure of the company can be analyzed in an efficient manner. Debt to
equity ratio and debt to total asset ratio are important and popular ratio that are used by
entities to measure the financial leverage of the business. In case of debt to total asset ratio
the gearing ratio is coming to 43% for both the years and in debt to equity ratio in 2018, the
ratio is 87% and in 2019, it increases to 97%, thus increasing the level of gearing leverage of
the firm.
Investor potential ratio
This ratio analyses how well the company is using the shareholders’ funds and
providing them return on their investment. The main aim of the firm is to use all the sources
efficiently, to generate revenue for the firm and to provide profitable result that will be
fruitful for the shareholders and even for the business. It is the responsibility of the
management to generate maximum revenue from the equity available in the firm. The ratio
decreases to 0.01 from 0.11, which is not favorable for the firm. The management needs to
focus on the equity management decision and should try to improve the ratio percentage, by
which the shareholders can get maximum returns.
Working capital cycle
It is known as cash conversion cycle.

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Cash Conversion Cycle = Days’ Inventory + Days’ Receivables – Days’ Payables
Days’ Inventory = Inventory/ Cost of Goods Sold x 365 days
2019 = 1300/ 6630 x 365 = 72 days
2018 = 1150/ 5500 x 365 = 76 days
Days’ Receivables = Accounts Receivables/ Annual Sales x 365 days
2019 = 1100/ 9250 x 365 = 43 days
2018 = 450/ 8900 x 365 = 18 days
Days’ Payables = Accounts Payable/ Cost of Goods Sold x 365 days
2019 = 1155/ 6630 x 365 = 64 days
2018 = 1010/ 5500 x 365 = 67 days
Working Capital Cycle
2019 = 72 + 43 – 64 = 51 days
2018 = 76 + 18 – 67 = 27 days
From the above analysis, it can be concluded that the working capital cycle of 2019 is
51 days whereas in 2018 it comes to 27 days. Shorter working capital cycle is favorable for a
company as if the duration is shorter the company is able to release its cash that has been
stuck in the working capital process of the firm (Weetman, 2013). Thus, 2018 shows a more
beneficial situation for the firm.
Limitations of ratio analysis for both cross-sectional and time-series comparisons
In this competitive market world companies needs to analyze and keep records of the
various trends within the company. One of the popular financial analysis used by companies

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is financial ratio analysis methods (Atrill & Mclaney, 2017). This technique is popular
amongst the small companies. Business owners gets information about the current trends of
the organization by evaluating different types of financial ratios. The analysis done within the
company is known as time-series analysis and analysis within the industry known as cross-
sectional analysis. Usually benchmark companies are taken into consideration for calculating
the ratios and to obtain a fruitful result the calculated ratios needs to be compared with
previous year trends. Benchmark companies assumed to provide most accurate results
relating to industry financial ratios (Atrill & Mclaney, 2017). As ratio analysis based on past
events data, it does not provides any future company performance. Inflation can affect the
trend of ratio analysis as it is calculated at the end of the year and if inflation occurs in
between periods the ratios; calculated will not reflects the accurate trend of the company. The
ratio analysis might not reflect the accurate result as all data are taken from financial
statements and the management may manipulate the statements to obtain a profitable result
than its actual performance (Gowthorpe 2005). Seasonal effects may lead to inaccurate
interpretations of the ratios evaluated.
Part B
Different investment appraisal techniques
The senior executives of the management always try to identify long-term investment
opportunities for the business to ensure maximum profitability. For this purpose the
management depends on some investment appraisal methods to ensure that costs incurred are
justified (Watson & Head, 2013). Various techniques are applied to know the reliability of
the project and to measure what value they will generate in future. Some of the important
techniques applied by companies are as follows:
1. Payback period method

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It refers to the techniques, which identifies the recovery time for an investment until
the cash inflows become equal to the cash outflows of the project. The length of the
time is known as payback period. Usually it recognizes the total number of years a
company takes to recover the costs of the entire investment (Atrill & Mclaney, 2017).
The project having shortest payback is chosen by any company and this method
assumed to be the first screening technique. Measurement of profitability and liquidity
of the business is possible by using the payback period method.
Merits
 Investor’s gets an indication by what time their invested funds will be repaid
to them and even future rates of interest are not taken into consideration.
 This method is a risk indicator as this method is profitable when the future is
uncertain and in business most of the facts depends on uncertainty. The
selected project is less risky when the payback time is shorter (Dyson, 2010).
Demerits
 It does not provide any information regarding acceptance or rejection of
the project and the total life span of the project is not considered.
 More importance is given to return on investment than on the actual profits
incurred from the project. Calculating percentage related to return on
capital invested is not identified in this method.
2. Accounting Rate of Return Method
This method is also known as return on investment or return on capital employed. It
measures the return, obtained from net income of the capital investment (Weetman,
2013). It is usually calculated in terms of percentage. Accounting rate of return is
measured by dividing the average annual profit by average investment.
Merits

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 It is used to evaluate performance on the operating results of an investment
and management performance. Consistency factor is achieved by adopting this
technique. All net incomes over the entire life of the project is considered and
provides a measure of investment profitability.
 To acquire high profits from any investment project, accounting rate of return
method is applied and it is extremely easy to calculate as all information are
taken from the financial data already available in the company.
Demerits
 It only uses straight-line method of depreciation; once this method is
changed, the results calculated will not be accurate. This method is not
appropriate for the short-term projects.
 Accurate measurement basis for the term investment is not present and there
are numerous ways by which accounting rate of return is calculated for an
investment.
3. Net Present Value Method
It refers to series of cash flows taking place at different period. Discounting rate is
taken into consideration for the calculation of net present value. This method
measures whether the company should expect a positive return or negative return
from the investment project (Dyson, 2010). The present value of a project is part of
the net present value where certain rates are applied for discounting the cash flows of
the business concern.
Merits
 Time value of money is considered in the process of calculating net present
value. This method considers the total life span of the venture to calculate the
total profits arising out of the investment.

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 It maximizes the shareholders wealth.
Demerits
 It is an absolute measure as when there is two projects available, this
technique will be beneficial for the project with higher NPV.
 Calculation of cost of capital is essential for obtaining the desired rates and
even cost of capital measurement is complicated, the rates will differ from
year to year. The project having shorter economic life is not given
importance in net present value method.
4. Internal Rate of Return Method
The other name for this method is discounted cash flow rate of return, discounted rate
of return, time adjusted rate of return, yield method and trial and error yield method. It
is a modern technique of capital budgeting that takes into account the time value of
money. It is known as the rate of discount at which the present value of cash inflows
is equal to the present value of cash outflows.
Merits
 All cash flows in the project are considered and this method takes into
account the time value of money.
 The main aim of this method is to maximize wealth of the shareholders
wealth. This technique is simple and easy to use as proper understanding of
desirability can be achieved by comparing it with the cost of capital.
Demerits
 In this method, all future cash inflows of a venture are reinvested at a rate
equal to the internal rate of return however, this situation will not present
in any business condition.

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 This approach creates a peculiar condition if we compare two projects
with different inflow or outflow patterns.
5. Profitability Index Method
In this method, we have to compare a number of proposals each involving different
amounts of cash inflows. It is also known as desirability index or present value index
method. Profitability index can be calculated by dividing the sum of discounted cash
inflows by initial cash outlay or total discounted cash outflow. This index factor helps
in ranking various projects.
Merits
 It is a relative measure of a proposal profitability as present value of cash
inflows is divided by the present value of cash outflow.
 It is a better project evaluation technique than NPV method and takes into
account the concept of time value of money.
Demerits
 Projects having capital rationing issues cannot be solved via profitability
index.
 Various situation might arise where a project with a lower profitability
index selected may generate cash flows in such a way that another project
can be taken up one or two years later.
Part C
Zero-Base Budgeting (ZBB)
It is one of the latest technique of budgeting and used as a managerial tool by the
business entities. This method starts from the scratch. Usually in every business, budgeting is
to use previous year cost level as a base for preparing the budget of the current year. In this

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budgeting method previous year inefficiencies are taken into consideration as a guiding factor
and deciding what is to be done in the current year when this was the performance of the last
year. In ZBB, every year is assumed a new year and no previous year is taken as a base year.
In this method, every expense needs to be justified before adding it to the official budget.
Business adopt ZBB techniques to eliminate the dependence on the past costs. The budget of
this year should be in accordance with the present situation. Zero is taken as a base and future
activities are decided that will justified the present conditions. If an organization is applying
ZBB, the management needs to justify the accurate reason to show that it will be profitable
for the company. More importance will be given to the areas based on the justification and
priority as mentioned by the management. Proper justification regarding implementation of
ZBB and reason why this technique is to be taken should be mentioned.
Verification should be done regarding an activity that needs to be implemented by the
organization and even the amounts asked for carrying out that activity is reasonable or not
should be checked. The main goal of the organization is to reduce costs and works towards
profit maximisation of the company. In zero base budgeting method each manager in an
organization needs to justify his or her entire budget request in details that is from scratch.
Justification should be given why spending is required for that particular activity and by what
means this activity will reduce costs and proves to be beneficial for the company. All
activities should be analysed in decision package, which are efficiently evaluated by
systematic analysis and ranked in order of importance. Before adopting any budgeting
technique, the objective should be determined and the objective should be clear then only the
technique will be profitable for the business. Various business have different objectives some
organization wants to reduce costs on the manufacturing process while some wants to reduce
labour costs, another may try to discontinue one project which is not essential for the business
at time period. Therefore, to make every efforts fruitful for the business and to achieve the

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ultimate aim, objective should be clear then only implementation of other steps will be
possible and effective for the business.
Even though zero base budgeting is more time consuming it can be favourable for the
business as it is done from the scratch and new innovative strategies can be implemented that
are profitable for the business. For the small businesses, this method is a way to improve and
allocate efficient budget to different activities. If an organization is into retail business and it
is acquiring all raw materials from outside to complete the manufacturing process (Weetman,
2013). The senior management of the company identifies that the raw materials required for
the production process can be manufactured in the industry only and by implementing this
idea expenses can be reduced to certain level. While implementing zero base budgeting, areas
where it should be implemented and what will be its outcomes should be decided beforehand.
Whether it should be used for all operational areas or for some important selected areas
should be decided and efforts should be made according to the objectives. A decision
package is to be developed which is a document that identifies a specific activity through,
which the management can evaluate and rank each activity as per priority basis. Even the
management can decide which activities are important for the business and which activities
needs to be accepted. Only those projects should be approved where profits will be more as
compared to costs incurred.
If a company is making cost benefits analysis then it will help in fixing priority for
various projects based on their ranking of decision package (Atrill & Mclaney, 2017).
Consideration regarding cost incurred and the benefits that will arise should be made
beforehand. Zero base budgeting is concerned with selecting appropriate areas where this
method can be used to reduce costs, approving decision packages that will be profitable for
the business and finalising the budget for all the selected areas or for the whole organization
whichever is more favourable for the business (Dyson, 2010).

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References
Atrill, P. & Mclaney, E. (2017). Accounting & Finance for Non-Specialists. 10th Edition.
Chapter 1 - Holmes, G. & Sugden, A. & Gee, P. (2008). Interpreting Company Reports &
Accounts. 10th Edition.
Chapter 10 - Atrill & Mclaney (2017). Accounting and Finance for Non-Specialists. 10th
Edition.
Chapter 12 & 13. - Gowthorpe, C. (2005). Business Accounting & Finance for Non-
Specialists. 2nd Edition.
Chapter 14. - Dyson, J.R. (2010). Accounting for Non-Accounting Students. 8th Edition.
Chapter 14. - Dyson, J.R. (2010). Accounting for Non-Accounting Students. 8th Edition.
Chapter 15. - Dyson, J.R. (2010). Accounting for Non-Accounting Students. 8th Edition.
Chapter 18. - Weetman, P. (2013). Financial and Management Accounting. An Introduction.
6th Edition.
Chapter 18. - Weetman, P. (2013). Financial and Management Accounting. An Introduction.
6th Edition.
Chapter 2 - Watson, D. & Head, A. (2013). Corporate Finance Principles & Practice. 6th
Edition.
Chapter 20. - Gowthorpe, C. (2005). Business Accounting & Finance for Non-Specialists.
2nd Edition.
Chapter 20. - Weetman, P. (2013). Financial and Management Accounting. An Introduction.
6th Edition.

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Chapter 21. - Weetman, P. (2013). Financial and Management Accounting. An Introduction.
6th Edition.
Chapter 24. - Weetman, P. (2013). Financial and Management Accounting. An Introduction.
6th Edition.
Chapter 6. Atrill, P. & Mclaney, E. (2017). Accounting & Finance for Non-Specialists. 10th
Edition.
Chapter 8. Atrill, P. & Mclaney, E. (2017). Accounting & Finance for Non-Specialists. 10th
Edition.
Chapter 8. Atrill, P. & Mclaney, E. (2017). Accounting & Finance for Non-Specialists. 10th
Edition.
Chapter 9 - Atrill & Mclaney (2017). Accounting and Finance for Non-Specialists. 10th
Edition.
Glautier, M.W.E. & Underdown, B. (2010). Accounting Theory and Practice. 8th Edition.
Gowthorpe, C. (2005). Business Accounting & Finance for Non-Specialists. 2nd Edition.
Read elements of both Chapter 7 & Chapter 12 - Atrill & Mclaney (2017). Accounting and
Finance for Non-Specialists. 10th Edition.
Watson, D. & Head, A. (2013). Corporate Finance Principles & Practice. 6th Edition.
Weetman, P. (2013). Financial and Management Accounting. An Introduction. 6th Edition.

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Appendix
1) Ratio Analysis
Ratio Analysis
Particulars 2019 2018
Ratio Pinehurst Plc. Formula Absolute
Absolut
e
Category $ Values $ Values
Liquidity
Current ratio
Current assets 2,400 2,160
Current liabilities 1,610 1,260
Ratio Ratio
1.50 1.71
Quick ratio
Highly liquid current assets 1,100 1,010
Current liabilities 1,610 1,260
(EXCLUDES INVENTORY AND PREPAID
ASSETS)
Ratio Ratio
0.68 0.80
Asset
Utilization
Total asset
turnover
sales/cost of goods sold 9,250 8,900
average total assets 13,340 11,510
Ratio Ratio
0.69 0.77
Fixed assets
turnover
sales/ cost of goods sold 9,250 8,900
fixed assets 10,940.0
0 9,350.00
Ratio Ratio
0.85 0.95
Profitabilit
y Ratio
Gross profit
rate/margin
Gross profit 2,620 3,400
Sales revenue 9,250 8,900
Ratio Ratio
28.00% 38.00%
Operating profit
Net profit 765 1,855
Sales revenue 9,250 8,900
Ratio Ratio
8.27% 20.84%
Gearing
Debt to Equity
Ratio
Non-current Liabilities 5,765 4,950
Shareholder's Equity 5,965 5,660
Ratio Ratio
0.97 0.87
Debt to total assets Non-current Liabilities 5,765 4,950

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Total assets 13,340 11,510
Ratio Ratio
43.00% 43.00%
Investor's
Potential Return on Equity Net Income/Shareholder's Equity
30 605
5,965 5,660
Ratio Ratio
0.50% 11.00%