Applied Business Finance: Analyzing & Improving Performance

This report provides an analysis of applied business finance, emphasizing the importance of financial management and its application to a provided case study. It identifies key financial statements, including the statement of financial performance, income statement, and cash flow statement, and discusses the use of financial ratios in evaluating a company's profitability, liquidity, and efficiency. Through calculations based on the case study data, the report assesses the company's financial standing, interpreting ratios such as gross profit margin, net profit margin, asset turnover, and current ratio. The analysis reveals areas for potential improvement, such as reducing inventory and overhead costs, and suggests strategies for enhancing financial performance, like more efficient resource utilization and strategic equity management. Ultimately, the report underscores the significance of maintaining stable financial performance for investor confidence and business survival.

Applied Business
Finance

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
Concept and Importance of Financial Management ..................................................................3
TASK 2............................................................................................................................................4
What are the main financial statements and discuss the use of ratios in financial management 4
Use of Ratios in Financial Management: ...................................................................................5
TASK 3............................................................................................................................................5
Calculations of different financial data using the case provided ...............................................5
Calculation of Different ratios and describing the profitability, liquidity and efficiency of the
company......................................................................................................................................6
TASK 4............................................................................................................................................8
How can the business in case study improve their financial performance..................................8
CONCLUSION ...............................................................................................................................8
REFERENCES..............................................................................................................................10
APPENDICES...............................................................................................................................11
Calculations performed for the above case study.....................................................................12

INTRODUCTION
Financial management refers to managing the business plan regarding the financial decisions of
the firm. It helps business stay on track. Applied business finance is the practice of managing the
financial resources of the business and put them to optimal use (Albizri, Appelbaum, and
Rizzotto, 2019). This report highlights the concept and importance of financial management. The
report is based on a case study provided. It also highlights the main financial statements that are
used by the business to ascertain different financial data. Different calculations are done in this
report to calculate missing data in the case and financial statements are prepared from that
information.
TASK 1
Concept and Importance of Financial Management
Financial management refers to the strategic planning organising, directing and controlling of the
financial activities of a business enterprise like acquisition and utilisation of the financial
resources of the business (Amanova, 2020). General management principles are applied to
financial resources. It is a vast concept with many specifications and decisions to be taken up by
the management. According to J.F. Brandley, “Financial management is that area of business
management devoted to a judicious use of capital and a careful selection of the source of capital
in order to enable a spending unit to move in the direction of reaching the goals.” The scope of
financial management includes taking three main decisions which are as follows:
 Financing Decision: This decision mainly takes into account the sources of funds that a
company can raise funds from. The managers can take into account the long term and
short term sources of funds.
 Investment Decision: This decision takes into account the amount of funds that the are
required by the company (Camilleri and Camilleri, 2017) . It also decides the amount of
investment available in the market.
 Dividend Decision: this decision involves the distribution of profits to the shareholders
as dividends. This is a complex managerial decision as shareholders demand high
dividends while managers would want to retain the amount in business for future growth
prospects.
Financial management is important for a various aspects and some of them are discussed below:

 it helps a business in financial planning
 it helps the business in improving its profitability.
 It gives businesses a stable environment in the markets (Yang and Lin 2017)
 it assists the managers in making critical financial decisions.
 It gives the managers a good understanding on the sources of acquisition of funds.
TASK 2
What are the main financial statements and discuss the use of ratios in financial management
Financial statements refers to the formal records of the financial activities and performance
records of the business entity. These are written records that help the business convey the
important financial position to the different stakeholders of the information. These stakeholders
include, investors, market analysts, creditors, employees, owners etc. There are three major
financial statements in the field of business. These are discussed hereunder:
 Statement of financial performance: This is the most important financial statement in
the business as it gives insights to the users of financial information about the financial
performance of the business (Albizri, Appelbaum, and Rizzotto, 2019). This statement
tells the total assets the firm holds and the liabilities which the company is obligated to
pay in future. It is also known as balance sheet which is basically the bottom line of the
businesses. In simple words, this statement reflects where the business stands financially
at a particular point of time.
 Statement of income/ statement or profit or loss: This financial statement summarizes
the revenues, expenses and costs that have incurred in the accounting period. It also9
shows the sales that have been made in the period and what were the expenses that have
been faced by the business to produce and make the sales (Zenuni, 2021). 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 shows the net amount of
inflow/outflow of cash from the business in a period of time. It shows the changes in the
cash from operations, investing and financing activities during a period of time.
Operating activities shows the changes made in the current assets and current liabilities,
interests and tax payments. Investing activities includes the sales and purchases of fixed

assets or any payments related to the merger and acquisition of the company. Financing
activities shows the inflows and outflows from the issue of equity capital, debentures,
loans and dividend paid.
Use of Ratios in Financial Management:
Financial Ratios Analysis is a tool in accounting which helps managers analyse the
financial information. It measures the relation between two or more elements of the financial
statements. It is a great tool for the management as it helps them evaluate the economic
performance of the business (Li, 2018). It helps the managers to take short and long term
decisions for the business and identifying the trends in the business.
These ratios are important for various reasons and some of them are discussed below:
 Financial ratios helps in Comparisons: It evaluates the company's fiscal performance
and compare it with the companies of the same industry.
 Financial ratios helps in Decision-Making: With the help of the financial statements,
the gainfulness, trends, paying and borrowing capacity can be evaluated, which helps to
take the correct decisions.
 Financial ratios helps in Operational Efficiency: It helps is determining the liquidity,
solvency and profitability of the firm. And also represents the efficiency of management
at keeping low costs while generating revenue and income (Butterbaugh, Ross, D.B. and
Campbell, 2020).
TASK 3
Calculations of different financial data using the case provided
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 years 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
(Detailed calculations in the appendix)
Calculation of Different ratios and describing the profitability, liquidity and efficiency of the
company.
1. Profitability Ratios: These are a tool for the management to asses the company's ability to
create earnings overtime in relation to different elements of the financial statements.
Some of the major profitability ratios that would help in commenting on the company are
calculated below:
 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: Gross profit margin is the proportion of funds that are left from revenue and net
profit margin is the percentage of amount earned after paying all the costs. GP margin is 42.76%
and the total gain is 22.7% which means that 20% are paid for the different costs to company.
Company should focus on dropping its overheads costs to increase its profits margins.
2. Efficiency Ratios: This ratio highlights how well the company is using its assets and
liabilities (Jiaxin Nkundabanyanga, Akankunda,Nalukenge and Tusiime, 2017) . It is a
measure of the overall efficiency of the business. It ensures how quickly the firm

manages to collect its payment from customers and how long it takes to complete the
debt payments. Some of these ratios are calculated below followed by the interpretation.
 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: After looking at the above calculations, it can be interpreted that the company
pays and receives their debt and payments almost in the same time period. The average customer
take appx. 51 days to pay their debt and the creditors take 52 days to receive their payments. This
may create a limitation for the business if the receivable period decreases in the future, the
business will not be able to meet its payment obligations. The asset turnover is 1.23 which means
the company is producing well to sustain in the industry.
3. Liquidity Ratios: These ratios determine the firm's ability to pay back its debt obligations
and also gives insights to the users of financial information about the solvency of the
company (Hoque, 2017). These are based on current liabilities, assets and stock. Some of
these are calculated below following the interpretation of same.
 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 tells about the pay off position of the organization. An ideal
current ratio is 2:1 and quick ratio is 1:1. It can be ascertained 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 enough cash to pay-
off their liabilities and have it impressively.

TASK 4
How can the business in case study improve their financial performance
Maintaining Financial Performance at a good rate is in important aspect in the business. Having a
stable financial performance is a life-sustaining aspect for a business as it gives a good impact to
the investors of the company. Wealth maximization is an important goal of a business and it is a
great concern for the existence and survival of the company (Taylor, J. and Meschede, 2018). In
this, Financial ratios helps the management to take the correct judgement. The above calculations
are discussed below following the improvements that can be taken up by the organisaton.
 Employee retention rate has been increased due to the growth of the firm as more
customers are now supporting the business and investing in same.
 The net profit has increased by 126.77% due to reduction in the non-operating costs such
are administrative.
 The current assets to current liabilities has declined by 82% which means outflow of
cash is more and company is losing its liquidity.
 Shareholder's equity is increasing, which means that the company may focus on selling
of shares, while rising revenues and decreasing the operating expenses.
Following are the improvements that can be taken up by the business to increase its financial
performance:
 The company may reduce its inventory and this increase in inventory turnover will show
leverage in the working capital requirements.
 By using the resources more effectively and efficiently, the company will be helped in
cutting its extra costs and increasing the prices which would result profits leverage. It
will increase the overall productivity and efficiency of the firm.
 To generate more income, the business may adopt new and efficient marketing strategies
which would be applied in the business to increase its sale. Like, promoting on social
media.
CONCLUSION
It can be concluded from the above report that financial management plays a very significant part
in the working of the business. It allocates the funds, take business decisions, show the
profitability, economic stability and solvency on which the business depends. Financial

statements provide an summary of the company. Financial ratios helps in analysing the solvency
and the efficiency of the enterprise. Hence, from the above calculate ratios of the case study, it is
analysed that the company is earning a high net profit but it can lower its inventory cost which
will help in increasing the revenues and also in the net earnings.

REFERENCES
Books and Journals
Albizri, A., Appelbaum, D. and Rizzotto, N., 2019. Evaluation of financial statements fraud
detection research: a multi-disciplinary analysis. International Journal of Disclosure
and Governance. 16(4). pp.206-241.
Amanova, A.D., 2020. Misrepresentation of financial statements: causes and
consequences. Научно-практические исследования. (5-1). pp.9-12.
Butterbaugh, S.M., Ross, D.B. and Campbell, A., 2020. My money and me: Attaining financial
independence in emerging adulthood through a conceptual model of identity capital
theory. Contemporary Family Therapy. 42(1). pp.33-45.
Camilleri, E. and Camilleri, R., 2017. Accounting for Financial Instruments: A Guide to
Valuation and Risk Management. Taylor & Francis.
Hoque, M.Z., 2017. Mental budgeting and the financial management of small and medium
entrepreneurs. Cogent Economics & Finance. 5(1). p.1291474.
Li, C.W., 2018. The decision model on voluntary review of quarterly consolidated financial
statements. Journal of Statistics and Management Systems. 21(8). pp.1513-1528.
Nkundabanyanga, S.K., Akankunda, B., Nalukenge, I. and Tusiime, I., 2017. The impact of
financial management practices and competitive advantage on the loan performance of
MFIs. International Journal of Social Economics.
Yang, C.C. and Lin, H.J., 2017. The (mis) alignment of health insurers’ efficiency measures
from different perspectives and their (un) linkage with financial ratios and asset
allocation. Journal of Insurance Regulation, Forthcoming.
Zenuni, B.R., 2021. Financial and Fiscal Reporting, the Effect on the Financial Statements: The
Case of Vlora.
Taylor, J. and Meschede, T., 2018. Inherited Prospects: The Importance of Financial Transfers
for White and Black College‐Educated Households’ Wealth Trajectories. American
Journal of Economics and Sociology. 77(3-4). pp.1049-1076.

APPENDICES

Calculations performed for the above case study
4. Net Profit of 2016= Revenue- Cost of goods sold- non-operating expenses
= 189,711 – 108,586 – 38,068 = 43,05
5. Change in profit %= (Current year– previous year profit)/ Previous year Profit
= (43,057 – 18,987) / 18,987 = 126.77%
6. Shareholder's equity = 63,057*32.9% = 20745.75
= 63,057+20,745.75 = 83802.75
7. Current assets as % of current liabilities = 324% - 82% = 222%
8. Gross Profit = Net profit+ non-operating expenses
= 43,057+ 38,068 = 81,125
9. Quick Ratio = Current Assets - Stock/ Current Liabilities
= 84,349 - 28,571/ 37,928 = 1.47:1
10. Current ratio = Current Assets/ Current Liabilities = 84,349/ 37,928 = 2.22:1
11. Debtors Turnover Ratio = (Net Sales/ Debtors)
= 189,711/ 26,367 = 7.19
12. Creditors Turnover Ratio = Cost of Sales+ Stock/ Creditors
= 108,586+ 28571/ 19,493= 7.03