Financial Management and Business Performance Analysis Report

This report provides a comprehensive overview of financial management, emphasizing its critical role in business operations. It delves into the core concepts of financial management, highlighting its importance in capital structure decisions, cost control, operational efficiency, and achieving organizational objectives. The report then examines major financial statements, including the balance sheet, income statement, and cash flow statement, explaining their significance in representing a company's financial health and performance. Furthermore, it explores the application of ratio analysis, such as net profit ratio, gross profit ratio, current ratio, and quick ratio, to evaluate a company's profitability and liquidity. Finally, the report suggests processes for improving business performance by analyzing key ratios and identifying areas for enhancement, such as cost reduction and operational efficiency. The report underscores the importance of financial management in making informed decisions to maximize returns and ensure sustainable growth.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
SECTION- 1....................................................................................................................................1
Concept and importance of financial management......................................................................1
Importance of financial management...............................................................................................1
SECTION- 2....................................................................................................................................2
Major financial statements...........................................................................................................2
Use of ratios in financial management.........................................................................................2
SECTION- 3....................................................................................................................................2
Ratio Analysis..............................................................................................................................2
SECTION- 4....................................................................................................................................2
Processes to be used in the improvement of the business performance......................................2
CONCLUSION................................................................................................................................2
REFERENCES................................................................................................................................3
APPENDICES.................................................................................................................................3

INTRODUCTION
Financial management is the process of managing a firm's financial resources such that
its operations could be smoothly and efficiently undertaken. It refers to planning, organizing,
managing and controlling its usage as finance is life blood of business. It begins with deciding
upon the capital structure, to arranging the finance from the cheapest available sources to its
efficient utilization in order to maximize the returns of the company. The current project shall be
providing conceptual understanding of financial management and its significance for the
business. It shall also be reflecting the major financial statements that are used to represent the
financial performance and position of the company. Further it shall be demonstrating the income
statement, balance sheet and the ratio analysis and on the basis of that the financial health and
well-being of the company shall be determined. Also, measures will be suggested in order to
improve the current position of the organization.
MAIN BODY
SECTION- 1
Concept and importance of financial management
Financial management refers to the process of managing the finances of the business
from the point of its acquisition to its successful utilization in the business. This shall be
governing the smooth and efficient functioning of the business through availability of funds
whenever they are required in the business (Madura, 2020). It involves making various financial
decisions in respect of the capital structure of the company, sources of finances, selection of the
investment proposal, dividend decision and the liquidity decision to manage the working capital
cycle of the business. Since the monetary funds are considered as the life blood of business so it
is necessary to maintain such funds so that unnecessary financial risk and losses could be
avoided. Such financial management is undertaken with the motive of maximizing the returns of
the company and to develop the future growth prospects through capital budgeting decisions.
Importance of financial management Optimum capital structure – Financial management assist in making certain financial
decisions in developing an efficient capital structure which strikes the balance between
the owned and borrowed funds of the company. The equity funds shall be diluting the
ownership and control of the business whereas the debt funds shall be imposing a fixed
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financial liability. So the financial manager of the company should decide upon a proper
capital structure which maximises efficiency for the business. Cost control – Another major importance of financial management is that it shall help in
controlling the costs of the company by using the alternative sources of finance whose
combination proves to be cheap and cost efficient for the business (What is the
importance of Financial Management? 2020). For example debt funds are less expensive
as compared to equity sources and the retained earnings is cheapest among all. Boosts operational efficiency – Some capital budgeting decisions are associated with
installing more efficient machines and technology which shall help in attaining
economies of scale thereby reducing the cost per unto for the company. Apart from that
also the working capital decisions ensures availability of finances in the day to day
operations which boosts the operational efficiency. Fulfils organizational objectives – The function of financial management that is
undertaken in an effective manner shall be significantly contributing in the achievement
of the organizational objectives like maximization of profitability, increasing
shareholders wealth and developing long term growth prospects of the business. Assist in investment decisions – The financial management process shall also be
supporting in making due diligent decisions in respect of investment decisions among the
various proposals that is available with the company (Shapiro and Hanouna, 2019). Post
the application of various tools and techniques the company shall be able to define the
investment opportunity that is generating highest returns for the company.
 Monitoring and control – Financial management plays key role in the monitoring and
control function of the organization by governing the systematic usage of funds. It
matches the target usage with that of the actual usage and finds the deviations that are
occurring in the business. Further corrective actions are taken so that such deviations can
be removed to boost the financial position of the business. ss
SECTION- 2
Major financial statements
Financial statements in the business are used to represent the true and fair view as to the
financial health and position of the company. These statements are used by the internal and
external users of the financial information for the decision making purpose of the business. Apart
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from that it can be analysed that here are different sets of financial statements that are used to
depict the different positions of the business like the liquidity, profitability, solvency and the
financial position. These financial statements are prepared using the prescribed accounting
policies and procedures by the companies which makes it further comparable. Some major
statements that are prepared by the business are:- Balance Sheet- The balance sheet of the company can also be referred to the statements
of the financial position as it represents the financial health and well-being of the
company. It shows the strength of the company in terms of the assets available to meet
the liabilities of the company (Brigham and Houston, 2021). It can also show a glimpse
regarding the future growth prospects of the business. It contains the assets that are
owned in the name of the business and the liabilities that are to be met by the company.
The balance sheet of the company is prepared in the vertical format wherein the total of
assets side of the balance sheet matches with that of the liability side. This proves the
double entry system of accounting. Income statement- It is also known as the profit and loss statement that is prepared by the
company in order to represent their profitability position to the rest of the world. This
shows the earnings made by the company during the year by conducting the operations of
the business with efficiency. Maximization of profits is one of the major objectives of the
business and is required to be fulfilled so that the company can survive the competition in
the market and finance the growth operations of the business. It records all the incomes
and expenses of the business that are pertaining to the particular period. It follows the
revenue recognition concept where income and expenses of the company are recorded on
accrual basis ignoring the fact that they are paid or not. Cash flow statement- The cash flow statement is prepared by the management in order to
assess the cash inflows and cash outflows that are undertaken during the period. It
records all the transactions that are associated with the utilizations or acquisition of the
cash and cash equivalents (Atmadja and Saputra, 2018). This statements shows the
liquidity position of the company in terms of its capacity to meet the short term debts and
obligations of the business. It records all the transactions by dividing it into three major
categories which are operating activities, investing activities and the financing activities
according to the nature of the transactions.
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 Statement of changes in equity- The statement records the changes in the amount of
equity that takes place during the year. It can be in terms of additional issue of equity,
payment of dividend, creation of reserves, share premium account and the profit or loss
pertaining to the current year. All these adjustments are made post which the closing
balance of the share capital is found that is incorporated in the balance sheet of the
company. This depicts the liability of the business towards its owners that is to be settled
post the settlement of third party liabilities at the time of winding up of business.
Use of ratios in financial management
The ratios also assists in the process of financial management and helps in taking the
various decisions based on comparability either with the past performance or the data pertaining
to the competitors. For example the debt equity ratio shall be showing the proportion of the
owned and borrowed capital and based on this the financial managers of the company shall be
taking the decision associated with the capital structure (Kembauw and et.al., 2020). The other
ratio like the return on capital employed shall be showing the earnings derived from the invested
capital of the company. This can assist in making the investment decisions in order to maximise
the returns for the company.
Apart from that the ratios like the earnings per share, dividend payout ratio etc. shall be
used to make efficient decisions in respect of the amount that should be extended in the form
dividend to the shareholders and the remaining that can be retained in the company for future
use. The liquidity ratios like the current and quick ratio of the company shall be helping in
managing the working capital of the business so that the credibility of the business can be
maintained and all the short term obligations of the company are efficiently managed.
SECTION- 3
Ratio Analysis
Net profit ratio:- The net profit ratio of the company shows the profitability of the business post
the adjustment related to all the incomes and expenses be it direct of indirect for the period are
undertaken. The higher the net profit ratio the better it is for the business as it depicts the
operational efficiency of the business. It also fulfils the motive related to the maximization of the
shareholders wealth as better dividends shall be payable in case of higher earnings available o
the shareholders.
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Gross profit ratio:- This is another profitability ratio which measures the profit margin of the
business in conducting its routine operations. It is measured by reducing the amount of cost of
sales from the revenue from operations of the company (Prihartono and Asandimitra, 2018). The
higher is such gross profit ratio the better is the operating capacity of the business and that
economies of scale has been attained by significantly lowering down the costs.
Current ratio:- The current ratio of the company shows the liquidity position of the business
showing the ability to meet the short term obligations through the use of current assets that are
available with the business. The timely and efficient disposing off the liabilities shall be
improving the credibility of the organization.
Quick ratio:- The quick ratio also measures the liquidity position but considers the highly liquid
assets which can be used directly without conversion for the fulfilment of the obligations that
arise within the period of one year.
SECTION- 4
Processes to be used in the improvement of the business performance
Net profit ratio= Net profit / Sales * 100
Net profit ratio= 43057 / 189711 * 100
Net profit ratio= 22.7%
This can be further improved by avoiding the unnecessary expenses of the business
which are lowering down its profitability margin.
Gross profit ratio= Gross profit / Sales * 100
Gross profit ratio= 81125 / 189711 * 100
Gross profit ratio= 42.76%
The gross profit ratio of the company is highly efficient as the company has attained the
economies of scale and thereby the cost per unit of the products has lowered down increasing the
profit margin of the operations in the business (Bulturbayevich and et.al., 2020). This can be
termed as the operational efficiency for the company which can be capitalized in the future to
expand the operations to newer markets.
CONCLUSION
It can be summarized from the above project that financial management is the key
function of the business and must be taken by the qualified professionals who are capable of
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undertaking the process. This involves the various decisions like the capital structure,
investment, dividend, working capital etc. Apart from that the various financial statements are
used to depict the position of the business in terms profitability, liquidity and the financial health.
Ratio analysis is also the critical function of the business which facilitates comparison and based
on this the company can improve the financial performance. This comparison can be either
within the company which is interdepartmental or as compared to the previous year. And it can
also be externally with the other competitors in the business. This shall help in achieving the
competitive advantage.
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REFERENCES
Books and Journals
Bulturbayevich, M. B. and et.al., 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development. 5(4).
pp.5-5.
Prihartono, M. R. D. and Asandimitra, N., 2018. Analysis factors influencing financial
management behaviour. International Journal of Academic Research in Business and
Social Sciences. 8(8). pp.308-326.
Kembauw, E. and et.al., 2020. Strategies of Financial Management Quality Control in
Business. TEST Engineering & Management. 82. pp.16256-16266.
Atmadja, A. T. and Saputra, K. A. K., 2018. Determinant factors influencing the accountability
of village financial management. Academy of Strategic Management Journal. 17(1).
pp.1-9.
Brigham, E. F. and Houston, J. F., 2021. Fundamentals of financial management. Cengage
Learning.
Shapiro, A. C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Madura, J., 2020. International financial management. Cengage Learning.
Online
What is the importance of Financial Management? 2020. [Online] Available through:
<https://www.lsbf.org.uk/blog/news/importance-of-financial-management/117410>
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APPENDICES
The Net Profit for the year 2016 , is £43057 (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 18,987 126.77%
Shareholder’s equity 83803 63,057 +32.9%
Current assets as % of current liabilities 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 years contribution in
2016.
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Gross Profit = £81125
Net Profit = £43057
Net Profit increased in 2016 by 126.77 % during the year.
Shareholders’ equity increased by 32.9% by £20746.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is 1.47
The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is 2.22
Balance sheet as at 31
December 2016
2016
Total
£0
Non Current assets
Intangible assets 5,793
Tangible assets 52,812
Investments 10,693
69,298
Current assets
Stocks 28,571
Trade debtors 26,367
Short term deposits 14,779
Cash at bank and in hand 14,632
84,349
Current liabilities
Bank loans and overdrafts 9,610
Trade creditors 19,493
Other Creditors 678
Income tax payable 3,585
Other creditors including tax
and social security 4,562
37,928
working capital 46,421
Total assets less current
liabilities 1,15,719
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Non Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,057
Total equity 83,815
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