Financial Management Report: Business Finance Project Analysis

This report provides a comprehensive analysis of a business finance project focusing on financial management. It begins with an introduction to business finance and its importance, followed by a detailed examination of the accounting equation, including calculations of changes in balance sheet components and a comparison of capital at the beginning and end of the year. The report then delves into the effects of incorrect identification of capital and revenue expenditures, the differences between net and gross profit, and the distinctions between cost of sales and turnover. Further, it explores the interpretation of cash flow statements and explains discrepancies between bank statements and cash books. The report concludes with an analysis of benchmarking in measuring performance, including its benefits and limitations, and an analysis of ratios for ShowerPak Ltd, such as debtor's payment period, creditor's payment period, inventory turnover period, and cash operating cycle. Overall, the report provides a thorough overview of key financial concepts and their practical application within a business context.

Business Finance project 5
Financial Management

Table of Contents
INTRODUCTION................................................................................................................................3
MAIN BODY.......................................................................................................................................3
LO 1 .....................................................................................................................................................3
1.1 Discussion of Accounting Equation ..........................................................................................3
1.2 Calculation of changes in the Balance Sheet Components and their effects on those
components......................................................................................................................................3
1.3 Comparison of Capital at the beginning of the year to end of the year.....................................5
LO 2......................................................................................................................................................5
2.1 Effect on profit of incorrect identification of capital and revenue expenditure.........................5
2.2 Difference between net Profit and Gross Profit of Shower Pak Limited...................................5
2.3 Difference between Cost of Sales and Turnover of Shower Pak Limited.................................5
LO 3......................................................................................................................................................6
3.1 Interpreting meaning of cash flow statement.............................................................................6
3.2 Explaining reasons for discrepancies between bank statement and cash book.........................6
LO 4......................................................................................................................................................7
4.1 Analysing use of Benchmarking in measuring performance along with benefits and
limitations........................................................................................................................................7
4.2 Analysis of Ratio of ShowerPak Ltd .........................................................................................7
CONCLUSION....................................................................................................................................8
REFERENCES.....................................................................................................................................9

INTRODUCTION
Business finance has been considered as one of the most important business aspect without which
no business function can be carried out. Financial management is related with the process of
managing, planning, organising and controlling the financial activities of the business for making
better allocation of available and limited business resources. By conducting effective financial
management process, it can help in smooth business functioning thereby achieving the set defined
business goals in a cost effective manner. The present report is based on ShowerPark limited whcihc
is a family owned manufacturer of moulded shower room units. It will define better understanding
of accounting equation and its concept. It will elaborate reason which brings changes in the capital
at starting and ending of year. How net profit is different from gross profit will be explain along
with cost of sales and turnover difference. Further, cocnept of cash flow statements will be
discussed. At last, efficiency measures by assessing the current trend and benchmarking comparison
will be define.
MAIN BODY
LO 1
1.1 Discussion of Accounting Equation
Accounting Equation is the base of double- entry accounting system (Juárez 2015).
According to this equation, Balance Sheet is are prepared in Shower Pak Limited. The equation
shows the two sides of Balance Sheet in which assets and liabilities of Shower Pak Limited should
be equal. Both the sides of the balance sheet should made in equal amount. This system should
ensure that both the debit side and credit side should match with each other. In Balance Sheet, assets
are the valuable resources which are owned by Shower Pak Ltd and liabilities are their obligations.
Both liabilities and owner's capital represents that how the assets of a company are financed. The
Accounting Equation can be represented as :-
Asset= Shareholders Fund + Liabilities
1.2 Calculation of changes in the Balance Sheet Components and their effects on those components
Calculation of changes in Income Statement of Shower Pak Limited
Income Statement
2017
£ 000
2018
£ 000 % change
Revenue 9482 11365 19.86%
Less: Cost of Sales 4912 5896 20.03%
Gross Profit 4570 5469 19.67%

Less: Operating Expenses 3656 4427 21.09%
Operating Profit 914 1042 14.00%
Less: Interest payable -22 -81 268.18%
Net Profit before tax 892 961 7.74%
Less: Taxation -358 -386 7.82%
Net profit after tax 534 575 7.68%
Shower Pak Limited Income Statement shows a positive change in the increase of net profit
after taxes of 7.68%. Company's gross profit is showing more increase as compared to the increase
in the net profit. It is because of the high increase in the operating expenses of 21.09% and also high
increase in the financial charges which were increased by 268.18%. The company should mainly
focus on two items of Income Statement i.e. interest expenses and operating expenses of Shower
pak Limited.
Calculation of Balance Sheet of Shower Pak Limited
Statement of Financial
Position 2017 2018 % change
£0.00 £0.00 £0.00 £0.00 %
Non-Current Assets (Fixed
Assets)
Premises 5240 7360 40.46%
Plant & Equipment 2375 4057 70.82%
7615 11417 49.93%
Current Assets
Inventory 2386 3420 43.34%
Trade Receivables 2540 4280 68.50%
4926 7700 56.31%
TOTAL ASSETS 12541 19117 52.44%
Capital
Share Capital 2000 2000 0.00%
Reserves 7813 8268 5.82%
9813 10268 4.64%
Current Liabilities
Trade Payables 1157 2245 94.04%
Overdraft 351 2929 734.47%
1508 5174 243.10%
Non-current liabilities
Loans 1220 3675 201.23%
Total Liabilities 2728 8849 224.38%
TOTAL CAPITAL &
LIABILITIES 12541 19117 52.44%
Shower Pak Limited shows the positive change increase of Balance Sheet items of 52.44%.
It shows that due to the increase in the assets net profit of the company also increased. This shows

that the company should more invest in its productive assets in order to increase the sales of the
company.
1.3 Comparison of Capital at the beginning of the year to end of the year
Shower Pak Limited capital increased by 4.64% which shows the positive sign for the
company. It shows that the company is retaining back its profits rather than giving dividends to the
company. Company's retained earnings are increased which shows that for funding purpose
company is using its own profits to purchase the assets of the company.
LO 2
2.1 Effect on profit of incorrect identification of capital and revenue expenditure
Shower Pak limited incorrectly recognises the capital expenditure as revenue expenditure
than the profits of the company will be understated and expenses will be shown more and non-
current assets of the company will also be understated (Sandford 2015).
Shower Pak Limited recognising revenue expenditure as capital expenditure than the profits
of the company will be overstated and revenues will be increased and non- current assets will be
overstated.
2.2 Difference between net Profit and Gross Profit of Shower Pak Limited
Net Profit Gross Profit
Net Profit is calculated after charging all the
direct and indirect expenses of Shower Pak
Limited (Amar 2018)
Gross Profit is calculated after charging only
direct expenses i.e. cost of goods sold of Shower
Pak Limited.
Net Profit shows the each dollar earned by the
company as revenue translates into profit.
Gross Profit shows the absolute dollar amount
revenue generated by the company.
2.3 Difference between Cost of Sales and Turnover of Shower Pak Limited
Cost of Sales Turnover
Cost of Sales is the total cost charged by Shower
Pak Limited that includes all the cost from
conversion of raw material into finished goods.
Turnover is known as the revenue of the Shower
Pak Limited which shows the sales of the
company (Skiba 2016).
It represents the cost of the company. It represents the revenue of the company.
LO 3

3.1 Interpreting meaning of cash flow statement.
A Cash flow statement is also known as Statement of cash flow, is one of the essential
financial statement which depicts the effectiveness of changes in the amount of balance sheet and
income for a relevant accounting period thereby affecting the position of cash and cash equivalents
of the business operations. It further breaks down the amount of cash and cash equivalents into
different activities named as Operating, Financial and Investing.
The main purpose of cash flow statement is that it helps the investor, business management,
other stakeholders in assessing the current cash positions, flow of cash and money amount taking
place during a specific time period. It provides deep insight about receipts, payments and changes
which has taken place in the cash position because of several business transactions taking place in
an accounting year under the heading of operational, investing and financial business activities
(Reid and Myddelton, 2017). It defines the position of cash which the company is having at the
financial year starting and at the ending i.e. Financial position of company for that year.
3.2 Explaining reasons for discrepancies between bank statement and cash book.
Bank statement is a record either in printed or written form which defines the balance of
amount remaining in the bank account. It also defines the amount which has been withdrawn from
bank account and amount that has been deposited or paid into such account. It is issued or made on
the periodical basis to the bank account holder for better understanding. On the other hand cash
book is a type of financial journals which contains all the information about receipts and payments
of cash nature thereby including all the withdrawals, bank deposits. Possibilities are there that
balance of bank statement and cash book can match because of following reasons:
1. Outstanding cheques – The amount for which cheque has been issued has not yet made its
recording in the books of company can bring such discrepancies.
2. Bank service and cheque printing charges – Amount as deducted by the bank for
rendering banking services such cheque book printing, atm cards etc. Can bring difference
in the amount of bank statement and cash book (Berger, Imbierowicz and Rauch, 2016).
3. Error made on the company's book – At the time of making recording of business
transactions, there can be error or mistake in relation with maintaining correct record of any
business transaction.
4. Omission – In case of electronic charges, deposit made as appearing on the banl statement
but not yet recorded in the record of company book.

LO 4
4.1 Analysing use of Benchmarking in measuring performance along with benefits and limitations.
Benchmarking is a tool which assist ShowerPark in measuring and comparing its business
performance with that business organisation which is considered as one of the best performing
industry in the market. It helps in assessing the level of company's business operations, processes by
comparing it will the most profit making company following best and better standards, norms and
concepts. Following are the benefits and limitations:
Advantages Disadvantages
 It focuses on bringing
improvements in the level of
performance of both the
employees and business ,
increasing its competitiveness.
 It assist ShowerPark in adopting
relevant changes by suggesting
best business processes.
 It only emphasises on measuring
performance of business operation
and not evaluate overall business
effectiveness (Bligaard and et.al.,
2016).
 It assess best standards as followed
by its competitor without
determining its applicability.
4.2 Analysis of Ratio of ShowerPak Ltd
1. Debtor’s Payment Period – In 2017, it was 98 days and in 2018 it reaches to 137 days. For
every business organisation, it is very important to focus on reducing this period for having
enough liquidity in the business. It is increasing which is not good for company as it may
have to face issue related to cash flow.
2. Creditor’s Payment Period – This ratio depicts time period in which company will pay
back all its due amount in case of credit purchase it has made. It is better for company to
increase this period for having cash and money in meeting currrent or upcoming business
obligtions.
3. Inventory Turnover Period – There has been increase in the inventory turnover period
from 2017 to 2018 i.e. By 177 days to 211 days respectively which is not good as it depicts
that company is not able to convert its inventory in sales effectively.
4. Cash Operating Cycle – It defines the time in which company will be able to convert its
purchase into cash. It is better for ShowerPark to focus on reducing this time period
otherwise it can result in decrease in customer retention base (Robinson and et.al., 2015).
5. Asset Turnover Ratio – It defines how effectively company has uses its assets in generating

profit. 0.59 times depicts that company is performing much better as compared to 2017.
CONCLUSION
The report is summarized of the basic accounting of Shower Pak Limited. It includes the
various evaluation and calculation of Income Statement and Balance Sheet and also interpretation
of the company using ratio analysis. Company's performance is overall good and shows the positive
sign and company should try to maintain the same position.

REFERENCES
Books and Journals
Amar, S.N., (2018). Pengaruh Gross Profit Margin (GPM), Net Profit Margin (NPM), Return On
Asset (ROA), dan Return On Equity (ROE) Terhadap Pertumbuhan Laba pada Perusahaan
property yang Terdaftardi Bursa Efek Indonesia (BEI) Periode 2012-2016.
Berger, A. N., Imbierowicz, B. and Rauch, C., 2016. The roles of corporate governance in bank
failures during the recent financial crisis. Journal of Money, Credit and Banking. 48(4). pp.729-
770.
Bligaard, T. and et.al., 2016. Toward benchmarking in catalysis science: best practices, challenges,
and opportunities. ACS Catalysis. 6(4). pp.2590-2602.
Juárez, F., (2015). The accounting equation inequality: A set theory approach. Global Journal of
Business Research. 9(3). pp.97-104.
Reid, W. and Myddelton, D. R., 2017. Cash flow statement. In The Meaning of Company
Accounts (pp. 16-16). Routledge.
Robinson, T. R. and et.al., 2015. International financial statement analysis. John Wiley & Sons.
Sandford, C. T., (2015). Economics of public finance: an economic analysis of government
expenditure and revenue in the United Kingdom. Elsevier.
Skiba, J., Saini, A. and Friend, S. B., (2016). The effect of managerial cost prioritization on sales
force turnover. Journal of Business Research. 69(12). pp.5917-5924.
Online
Bank statement and cah book discrepancies. 2019. [Online]. Available through:
<https://www.accountingcoach.com/blog/balance-bank-statement-difference>.
Pros and cons of benchmarking. 2016. [Online]. Available through: <https://brandongaille.com/10-
pros-and-cons-of-benchmarking/>.