Financial Management: Statement Analysis & Performance Improvement

This report provides a comprehensive overview of financial management principles and their application in enhancing business performance. It begins with a discussion of the core concepts of financial management, emphasizing its importance in strategic decision-making and profitability. The report then details the main financial statements—income statement, balance sheet, and cash flow statement—explaining their use and the significance of financial ratios in assessing a company's financial health. A practical section involves the calculation and preparation of these statements using provided data, followed by an analysis of profitability, efficiency, and liquidity ratios. The report concludes with recommendations on how the business can improve its financial performance, focusing on debt management, cost optimization, revenue enhancement, and asset utilization. This analysis aims to equip stakeholders with the insights needed to make informed financial decisions and drive sustainable growth, and is available with other solved assignments and study tools on Desklib.

Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
SECTION 1......................................................................................................................................3
Discussion related to the concept of Financial Management.................................................3
SECTION 2......................................................................................................................................4
What are the main financial statements? Explain the use of financial ratios in financial
management............................................................................................................................4
SECTION 3......................................................................................................................................5
Calculation and preparation of financial statements using the template provided.................5
Income Statement Included in Appendix...............................................................................6
Statement of financial position included inAppendix............................................................6
Calculation of Financial Ratios..............................................................................................6
SECTION 4......................................................................................................................................8
Describe how the business may enhance its financial performance.......................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................10

INTRODUCTION
Financial management is a major concept for a business and the management of the business is
required to deal with the management of the finance and its different financial assets in the
organisation. The business acquires different funds from various sources and these are done to
achieve certain objectives of the business (Hernández-Julio, and et.al., 2020). The financial
management applies the principles of management to effectively and efficiently manage its
financial assets. The following report deals with the concept and the importance of financial
management for a business. It shows the preparation of income statements, statement of financial
position, different ratio analysis of the business following a recommendation as to how the
business can do better and perform competitively in the market.
SECTION 1
Discussion related to the concept of Financial Management
Financial management is a crucial part of the business and the strategic managers of the business
are required to have a detailed knowledge about the financial management and how practicing it
will make the business more and more profitable. By the definition, financial management is the
process of planning, organising, controlling and directing the different monetary and fiscal
undertakings of a given enterprise over a period of time. The financial department of the business
handles all the activities related to the management of the financial aspects of the business unit.
The functions that the department is responsible are:
 Formation of the capital structure of the business in terms of equity and the debt.
 Investment of the financial funds of the business in the most profitable venture of the
business.
 Allocation of the profits of the business in a way which would guarantee the growth of
the business.
 Effectively using the resources if the company and controlling the activities related to
finance of the business.
Financial management is a vast yet crucial aspect in a business organisation. It is important to the
business in many ways (Xu, Yuan, and Rong, 2022). It helps the business to generate profits and
does not make the business move into bankruptcy. Following are the different importance of the
financial management:

 Safeguarding the business and its funds- With the use of F M, the business is able to
allocate its financial funds and this safeguards the business in the competitive market.
 Creating investment opportunities for the organisation- there are different investment
opportunities present with the business. The financial management of the business
provides insights to the managers about the different factors available where the business
can invest its unused funds (Song, Yu, and Lu, 2018).
 Planning for the taxation of the business- Tax management is essential as if not planned
decently then enterprise may have to pay to government more tax that finally affects
profitability of business unit.
 Creating valuation for the organisation- financial planning increase the production of
firm with corresponding expansion of business to other countries also that ultimately
increase valuation of enterprise.
 Financial planning- Financial planning considers crucial and critical areas of business so
as to ensure their effective support in working cycle. The success and failure of firm
completely depends upon effective financial planning.
SECTION 2
What are the main financial statements? Explain the use of financial ratios in financial
management
Financial statements refer to the reports which are prepared by the financial managers of the
business. These report gives insights to the users of the same about the financial aspect of the
business. Profitability, financial position of the business are the excerpts of these reports.
Following are the main financial statements of a business with the importance of financial ratios:
 Income Statement- This statement of the business is the first report which is being
prepared by the financial managers of the business. This statement provides information
related to the different expenses and incomes which have been occurred in the business
enterprise. These expenses and incomes are duly reported in these and after critically
analyses, profits and losses of the business are ascertained (Chen, and Sivakumar, 2021).
These shows the profitability of the business using a logical and structured manner and
the different elements of the business like, operating activities and the non-operating
activities of the business are duly segregated here in this report.

 Balance sheet- This statement is also known as the statement of the financial position of
the business. It provides information about the different assets and the liabilities of the
business over a given period, mainly of one accounting year. The major information and
elements of this statement are shareholders' funds, current assets and liabilities, non-
current assets and liabilities of the business unit. It is mainly prepared yearly but due to
some reason the business may also prepare it quarterly.
 Cash Flow Statement- This statement of the business shows the inflows and the
outflows of the business. This report aids the business to measure the net amount which
has been generated by the business in a given period of time.
Financial Ratios of the business refers to a tool which is used by the strategic decision makers
who require to critically analyse the performance of a business before making a decision. These
produce effective results about the different elementrs of a financial statement by comparing it
with the last year's information (Drake, and et.al., 2022). These financial ratios of the business
help in the monitoring of the financial performance of an enterprise. These also give insights
about the potential threat to the working of the business and hence these are also considered as
the strategic tools of the business. Following are the purposes of the financial ratios:
 These help in developing a detailed understanding of the relationships with the items in
the statements of the financial performance.
 Helps in the identification of the strong and the weak parts in the organisation
 Aids the strategic decision makers in analysing and taking required decisions.
 Comparison of the results with the competitors and with the average of the industry.
SECTION 3
Calculation and preparation of financial statements using the template provided.
The Net Profit for the year 2016, is £43,057,000 (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) 189,711 179,587 +5.6%
Profit for the financial year 43057 18,987 + 126.8 %
Shareholder’s equity 83815 63,057 +32.9%
Current assets as % of current liabilities 222.3 % 304% -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 = £81125
Net Profit = £43057
Net Profit increased in 2016 by 126.8% during the year.
Shareholders’ equity increased by 32.9% by £20758
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is 1.47
times
The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is 2.22 times
Income Statement Included in Appendix
Statement of financial position included inAppendix
Calculation of Financial Ratios
Profitability Ratio: These ratios of the business gives insights about the profitability of the
business and how much the business is able to convert its re revenue into its profits. This is
mainly used by the investors of the business (Pierrakis, and Owen, 2022).
The following is the calculation of profitability ratios for 2016: -
Gross Profit Ratio: -
= (Gross Profit/Sales) *100
= (81125/189711*100)
=42.80%
Net Profit Ratio: -
= (Gross Profit/Total Revenue) *100
= (43057/189711*100)
=22.70%
Interpretation- the above calculated ratio show that the business is able to earn high margin of
profits with their current sales. The business is able to convert 23% of its revenue into profits.

Efficiency Ratio: These ratios of the business shows the ability of the management to optimally
utilize the different resources which are used by the business. It measures the level of efficiency
that the business is currently enjoying and there is a direct relation with the efficiency and the
profitability of the business.
The following is the calculation of Efficiency ratio for 2016: -
Working Capital Ratio: -
= (Current Assets/Current Liabilities)
= (84349/37928)
=2.22 times
Asset Turnover Ratio: -
= (Revenue/Total Assets)
=189711/ (69298+84349)
=1.24 times
Interpretation- From the above calculated ratio it can be interpreted that the business is able to
repay its current obligations with the current assets they currently have. The current assets of the
business are twice the current liabilities of the business.
Liquidity Ratio: These ratios give insight about the liquidity position of the business. Investors
and creditor prepared to spend their funds in those organisations which are having 2 or 3 times
the liquidity ratio because their funds are safe in these concerns.
The following is the calculations of liquidity ratios for 2016: -
Current Ratio: -
= (Current Assets/Current Liabilities)
=84349/37928
=2.22 times
Quick Ratio: -
= (Current Assets-Stock)/Current Liabilities
= (84349-28571)/37928
=1.47 times
Interpretation- The current assets of the business are twice the current liabilities of the business.
The business is able to repay its current obligations with the current assets they currently have

SECTION 4
Describe how the business may enhance its financial performance
The significant stage for the business plan strategy is to advance the monetary position of
business. The enterprise genuinely should recuperate their exceptional obligation on due time to
work on their monetary execution over the long period. In orders to build the productivity it is
critical to classify and improve the working costs of the association (Budhwar, Cumming, and
Wood, 2022.).. This should be possible by increasing the time of instalment of the bigger costs
so that profits can be divided equally. To build the income, expansion in cost of items and
administrations can be done to match the expense which is increasing at quicker rate. The lenders
and their credit period should be screened occasionally with the goal that it is valuable for the
association on the grounds that a more ideal arrangement or bigger credit period helps in keeping
up with the liquidity of the business. Another significant recommendation made to advance the
association can consider to observe the inactive resources or assets that can be sold in market or
store in banks so that premium can earned that will support the company's benefit. By
considering the above idea, the organization can support their business for a long run and can
maximise abundance of resources for their financial shareholders which eventually expands
valuation of firm.
CONCLUSION
From the above mentioned report it can be concluded that the financial management of the
business is a major part which determines the sustainability of the business. It makes the
enterprise more profitable with the help of different tools of the financial management. The
financial manager of the business has to take certain decisions related to the verified aspects of
the business and to take these, the managers take use of tools like, financial ratios, trend analysis
to predict the future of the decisions that they may take. Liquidity, profitability, and efficiency of
the business is defined with the help of the financial ratios. The preparation of income statement
and the statement of financial position is also major for a business as without these the business
may not know where the business should head.

REFERENCES
Books and Journals
Hernández-Julio, Y.F., and et.al., 2020, June. Fuzzy knowledge discovery and decision-making
through clustering and Dynamic tables: Application in Colombian business Finance.
In 2020 15th Iberian Conference on Information Systems and Technologies (CISTI) (pp.
1-5). IEEE.
Xu, N., Yuan, Y. and Rong, Z., 2022. Depressed access to formal finance and the use of credit
card debt in Chinese SMEs. China Economic Review, p.101758.
Song, H., Yu, K. and Lu, Q., 2018. Financial service providers and banks’ role in helping SMEs
to access finance. International Journal of Physical Distribution & Logistics
Management.
Chen, Y. and Sivakumar, V., 2021. Invesitigation of finance industry on risk awareness model
and digital economic growth. Annals of Operations Research, pp.1-22.
Drake, P.P., and et.al., 2022. Business Finance. World Scientific Book Chapters, pp.147-167.
Pierrakis, Y. and Owen, R., 2022. Startup ventures and equity finance: How do Business
Accelerators and Business Angels’ assess the human capital of socio-environmental
mission led entrepreneurs?. Innovation, pp.1-25.
Budhwar, P., Cumming, D. and Wood, G., 2022. Entrepreneurial finance and the legacy of Mike
Wright. British Journal of Management, 33(1), pp.3-8.

APPENDIX
Calculation of different elements in the template:
Current assets as % of current liability: -
=Current assets/current liability*100
=84349/37928*100
=222.3%
Increase in net profit in 2016: -
= (43057-18987)/18987*100
=126.8%
Increase in shareholders’ equity: -
= (83815-63057)
=20758
Quick Ratio: -
= (84349-28571)/37928
=1.47 times
Current ratio: -
=84349/37928
=2.22 Times

Income Statement
Balance sheet