Comprehensive Financial Ratio Analysis and Budgeting Systems Report

This report provides a comprehensive analysis of financial ratios, including gross profit margin, operating profit margin, current ratio, quick ratio, inventory holding period, and payable payment period, offering insights into a company's profitability, liquidity, and efficiency. The report also explores traditional and alternative budgetary systems, contrasting their approaches and applications. Furthermore, it delves into working capital management, defining its components and outlining strategies for improvement through equity, asset sales, and operational adjustments. The report examines the relationship between working capital changes and cash flow, illustrating how inventory purchases, asset acquisitions, and debt can impact a company's financial position. This analysis is designed to provide a thorough understanding of financial performance and budgetary practices, crucial for effective financial management. The report is contributed by a student and published on Desklib, a platform providing AI based study tools for students.

FINANCE

Table of Contents
Part 1..........................................................................................................................................3
Financial ratio analysis...........................................................................................................3
PART 2.......................................................................................................................................5
Traditional and alternative budgetary systems.......................................................................8
Recommendations..................................................................................................................9
REFERENCES.........................................................................................................................10
Part 1
Financial ratio analysis
Gross profit margin:

Gross profit / sales * 100
= 1540 / 20510 * 100
= 7.51%
The ratio indicates that the business entity has gained a trading profit of 7.51%. This
demonstrate that the organisation has achieved a better gross profit margin as compare to the
earlier financial year in which the company could obtain the profit margin of 5.6%. This can
certainly demonstrate that the organisation could gain a better return against making the sales
trade in the business (Kamau, Rotich and Anyango, 2017). The earlier ratio was less this
certainly demonstrates that the company could control its cost of goods sold that could also
become the reason behind the increased gross profit margin of the business entity. The
increased sales of company have also become the key reason of achieving the better gross
profit margin of the organisation. This is a positive sign of the business entity as it gained
increased gross profit margins as compare to the earlier financial year.
Operating profit margin:
Operating profit / sales * 100
= 650 / 20510 * 100
= 3.17%
The above mentioned profit margin demonstrates the fact that the business
organisation has gained a net profit margin of 3.17% in the financial year 2019. This is a
profit margin that demonstrates that the organisation has gained more effective operating
profit as compare to the earlier financial year. This is important for the organization to sustain
a proper operating profit ratio that can favour the better results and outcomes against
delivering the business operations of the company.
Current ratio:
Current assets / current liability
= 1570 / 2920
= .54

The current ratio of the company could decrease from .6 to .54. The sudden deduction
under the current ratio of company is due to the fact that current liabilities of company
become more aggressive in comparison to the current assets part of the business entity. The
role of current ratio is significant in process to manage the liquidity situation of organisation.
The liquidity situation is an important and essential element part of the business operations
deliver by the organisation. This is important for the business entity to formulate and develop
balance between the current assets and current liabilities of the business entity. (Hijal-
Moghrabi, 2019) The difference between 2019 figure of current ration and the 2019 figure of
current ratio is not major. This can certainly indicate that company did not achieve a major
difference between the current ratio of both the financial years.
Quick ratio:
Current asset – Inventory / current liability
= 1570 – 850 / 2920
= .25
The quick ratio identified for the financial year 2019 is .25. The same ratio for the
financial year 2018 was .23. This can predict that the ratio become stronger in the financial
year 2019 as compare to the year 2018. This certainly demonstrates that the business entity
has favoured more effectively to its liquidity situation of the business entity. The quick ratio
is very effective in nature in respect to the liquidity situation of the organisation.
Inventory holding period:
Inventory / cost of sale * 365
= 850 / 18970 * 365
= 16.35 days
Inventory holding period of the company is reported as 16.35 days. The earlier period
is 22 days. This is certainly depicted the fact that company is capable enough to stock the
inventory for fewer time period. This certainly indicates that the business entity has
established a better control in its inventory management system. The inventory holding
period of company is a sole indicator of how long the business entity kept its inventory in the
stock of company (Criss and et.al., 2019). The differences are clear and project the better

management of inventory in the company’s stock. The period is less is a positive sign for the
business entity. The possible reason behind is the increased sales of company in the
respective market. Sales have a direct connection with the inventory holding period. The
more the sales will generate by company the less the inventory will be hold by the business
enterprises.
Payable payment period:
Average account payable / cost of sales * 365
= (2100 + 2280 / 2) / 18970 * 365
= 42.14 days
The payable payment period of the company is reported as 42.14 days. The earlier
period is 49 days. This certainly indicate that company has maintained better control over the
payable situation. The lesser period depict the positive situation of payable in favour of the
business entity. This is important for the business enterprises to control the inventory payable
situation in a more effective manner.
PART 2
2.1
Profit is the income generated to a business after all its expenses viz. operating,
purchase, marketing costs are duly covered and it signifies the investment made
on a project or a product has been a successful one for its owners and
shareholders. In other words, it can be said that it is the earnings of a company.
Profit can be categorized in three types:
Gross profit: The gross profit can be defined as the difference of cost of goods
sold from revenue gained. It is a way of looking at profitability after deduction of
direct expenses (Bailey, 2017).
Operating profit: This looks at profitability after deducting operating costs from
gross profit. Expenses such as selling costs, administrative costs are excluded.
Net profit: This is the income left after deduction of interest and taxes from
operating profit.

Cash flow represents the money going out and coming in of a business. The
expenses of the company in manufacturing a product, purchase and order costs,
marketing budget , employee salaries are all cash outflow of the business while
the money coming in through customer and dealer payments, account receivables,
interest income, income through bonds and debentures etc. are cash inflow.
The key difference between cash flow and profit is that profit is recorded as
soon as the sales takes place of the product while the cash from opposite party
may not have been received. The cash flow books will be updated as soon as the
party makes the payment. A company making the profit may not thus have enough
cash at the time of recording profit and receive it in delay. This may hamper
company’s budget allotment for other purposes such as production, promotion in
the upcoming future (Schoenmaker and Schramade, 2018).
2.2
(b) Working Capital is the amount which the company utilizes for its operations.
It is the difference between current assets and current liabilities. It is also
sometimes known as net working capital as it takes in consideration operating
assets and operating liabilities. It signifies the liquidity and operational efficiency
of the company and thus denotes the financial health of the company in present
terms.
The steps which can be taken to improve company’s net working capital can be:
Company raise its equity to combat debt by:
(i) Company issuing its bonds and debentures to public and gain income by
their purchase.
(ii) Company issuing its IPO in a successful manner.
(iii) Sale of long term or fixed assets such as land to gain capital.
However, there will be interest income also to be given on bonds to customers but
that may not be a thing of the immediate future so current liabilities will not be
affected. Sale of long-term assets will work the same way adding cash to the

current assets. Thus, working capital and cash flow will get balanced (Bailey,
2017).
Talking of organisation to fulfil its order pending and remove debt, company
can go for production. This will however decrease cash flow but also reduce the
cost of storing inventory in form of raw materials thus balancing it up. Net
working capital will see an increase when sales happen for this production. To
increase cash flow, company can introduce a method of point of sale for some
accessories to its customers through which the pending payments or receivables
can be collected there itself and cash flow can be managed simultaneously
increasing cash in working capital.
Receivables also known as account receivables are the net payments to be
received from parties who have done a deal or purchased products from the
company.
Inventory is the stock withheld in company stores that is needed as per ongoing
operations or a need of stock for future purposes. Inventory is counted as assets
which can generate income in near or distant future. The optimum utilization of a
company’s inventory is gauged in inventory turnover ratio.
Account Payables are those which the company has to make payments such
as purchase of raw materials from a factory, transport of goods etc.
2.3
Changes in working capital can affect cash flow in a way such as purchase of a
fixed or long-term asset such as land, building will decrease cash from current
assets thus reducing working capital and the cash flow too. However, if a
company is purchasing inventory for short term purposes, it will decrease cash but
simultaneously increase current assets thus not affecting working capital but
affecting the cash flow. I the company got inventory with cash, then there will not

be change seen in working capital as inventory and cash are current assets. But
cash flow shall be reduced by purchase of inventory (Schoenmaker, and
Schramade, 2018). If a transaction increase current assets and liabilities by
amount which is same, change in working capital shall not be there. For instance,
company receiving cash from short term debt which is to be paid in 2 months,
then an increase in cash flow statement would be there. But there won’t be
increase in working capital, as the loan proceeds will be current asset and note
payable shall be current liability as it is a loan of short term.
Organisation’s working capital is part of funding regular operations. It is
necessary for analysing working capital and cash flow of organisation for
determining as to whether financial activity is one event of short or long term. An
increase in cash flow may not be good if organisation is taking debt long term
which does not have cash flow enough for paying the same. A decrease in cash
flow and working capital can not be bad if organisation uses proceeds for
investing in long term assets which are fixed that can generate future earnings.
Traditional and alternative budgetary systems
The budget is defined as preparing the account formation predicting about the
possible future related expenses associated with business entity. The traditional budget was
simle as it was a basic formation of all the future expenses company or the business entity
would expectedly incur in the business. The budgetary practices have been associated with
the business unit from past many financial years. This is important for the organisation to
predict the future expenses and based on that prepares the budget that can best keep up the
needs and requirements of the business unit. Traditional budgetary system was like a single
budget that comprises with all the budgetary requirements of the business house. The
alternative budgetary system are the modern era needs and requirements associated with the
business entity (Yashina and et.al., 2019). This involves preparing the budget based on each
individual need and requirements of the business house. This make it more significant for the
business venture to prepare the best level of budget that can cope up with all types of needs
and requirements of the business entity. The alternative budgetary system would involve all
the different areas such as sales budget, purchase budget, fixed cost budget, variable cost
budget and all other potential budget that business organisation can cope up with and require
in against to deliver the different business operations.

Alternative budget practice is always a prioritise function that can favour and
empower the business unit to meet up the various business objectives. The alternative
budgetary practice deal with all types of various needs and requirements associated with the
business house. This is important for the organisation to effectively sustain all its aspects. The
alternative budgetary practice always tries to ensure the best possible return in against to
channelize the business operations in the organization. Company get to deal with all its
different business areas and requirements that can empower and support the best form of
growth and development of the organisation (Tahar and Sofyani, 2020). This budgetary
system empower and allow the company to mitigate all units expenses and finance related
needs and demand. This budgetary practice makes it more reasonable and modified way or
manner to deliver the business objectives. Today the business environment become advanced
and in such a situation this is a key need and requirements of the business that it keep focus
on the alternative budgetary practices and systems.
The above projected areas are the different elements associated with the business
venture. This is important for the organisation to keep focus on the various aspects and
dimensions that is a basic need and requirements of the business venture. This is equally
necessary for the business unit to sustain a good and important flow of operation and
functional areas that can support the best level of growth and requirements of the business
life cycle (Hamidah, 2020). Profit and cash flow statements are the two major financial
records that clearly indicate about the overall performance of organisation under the
respective market. Working capital in another crucial concept that sustain an important flow
of operation and functional practices. This is essential for the organisation consider all these
aspects and elements especially to channelize the business operations in the best way
possible. Working capital impact over the cash flow is also considered as a part of this
project. In the end the budget related information of traditional and alternative budgetary
approach systems are also forecasted by the business unit.
Recommendations
 Company can focus more over the e-commerce trade.
 The business unit should also explore the social media and digital marketing channels.
 This is essential for the business unit to explore and support the marketing,
promotions and sales of company over the digital marketing and social media
promotional channels of the business unit.

 The indirect expenses can control by the business unit so that operating profit ratio
can also increases by the business unit.
 The receivable days can also be monitored in more dynamic manner as the company
can keep a proper balance between inflow and outflow of the receivable turnover rate.
REFERENCES
Books and journals

Bailey, S.J., 2017. Strategic public finance. Macmillan International Higher Education.
Schoenmaker, D. and Schramade, W., 2018. Principles of sustainable finance. Oxford
University Press.
Ozili, P.K., 2018. Impact of digital finance on financial inclusion and stability. Borsa
Istanbul Review. 18(4). pp.329-340.
Block, J.H., Colombo, M.G., Cumming, D.J. and Vismara, S., 2018. New players in
entrepreneurial finance and why they are there. Small Business Economics. 50(2).
pp.239-250.
Yashina, N. I. and et.al., 2019, April. Methodical approaches to analysis of performance of
budgetary obligations on the basis of the risk-oriented approach. In Institute of
Scientific Communications Conference (pp. 662-669). Springer, Cham.
Tahar, A. and Sofyani, H., 2020. Budgetary Participation, Compensation, and Performance of
Local Working Unit: The Intervening Role of Organizational Commitment. Journal
of Accounting and Investment. 21(1). pp.145-161.
Hamidah, S. H., 2020. Controlling Cost Using Budgetary Control and The Firm Financial
Performance: A Case Study of PT Pupuk Kalimantan Timur.
Kamau, J. K., Rotich, G. and Anyango, W., 2017. Effect of budgeting process on budget
performance of state corporations in Kenya: A case of Kenyatta National
Hospital. International Academic Journal of Human Resource and Business
Administration. 2(3). pp.255-281.
Hijal-Moghrabi, I., 2019. Why Is it So Hard to Rationalize the Budgetary Process? A
Behavioral Analysis of Performance-Based Budgeting. Public Organization
Review. 19(3). pp.387-406.
Criss, S. D. and et.al., 2019. Cost-effectiveness and budgetary consequence analysis of
durvalumab consolidation therapy vs no consolidation therapy after
chemoradiotherapy in stage III non–small cell lung cancer in the context of the US
health care system. JAMA oncology. 5(3). pp.358-365.